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Ranbaxy: Europe, ROW drive growth

Oct 18, 2007

Performance summary
  • Revenues grow by 10% YoY in 3QCY07, driven by the strong performance in Europe and Rest of the World.

  • EBDITA margins expand marginally by 60 basis points (0.6%) during the quarter, largely due to the reduction in SG&A and R&D expenditure (as percentage of sales).

  • PAT grows by 48% YoY in 3QCY07, led by higher forex gains and extraordinary income. Excluding this impact, net profits have fallen by 3% YoY.

  • The board of directors approves an in-principle de-merger of the Drug Discovery Research set-up into a separate company.

  • Reaches an agreement with GlaxoSmithKline Plc to settle the patent litigation suit for the latter’s blockbuster drug ‘Valtrex’ as per which Ranbaxy will get 180-day exclusivity in late CY09.

  • Declares an interim dividend of Rs 2.5 per share (dividend yield of 0.6%).

Financial performance: A snapshot
(Rs m) 3QCY06 3QCY07 Change 9mCY06 9mCY07 Change
Net sales 16,087 17,730 10.2% 43,571 50,404 15.7%
Expenditure 13,616 14,899 9.4% 37,029 43,400 17.2%
Operating profit (EBDITA) 2,471 2,831 14.6% 6,542 7,004 7.1%
EBIDTA margin (%) 15.4% 16.0%   15.0% 13.9%  
Other income 106 543 412.3% (135) 3,198  
Interest (net) 299 394 31.8% 833 1,058 27.0%
Depreciation 496 613 23.6% 1,380 1,735 25.7%
Profit before tax 1,782 2,367 32.8% 4,194 7,409 76.7%
Tax 378 516 36.5% 849 1,609 89.5%
Extraordinary items - 223   - 223  
Profit after tax/(loss) 1,404 2,074 47.7% 3,345 6,023 80.1%
Net profit margin (%) 8.7% 11.7%   7.7% 11.9%  
No. of shares (m) 375.4 379.2   375.4 379.2  
Diluted earnings per share (Rs)*         20.6  
Price to earnings ratio (x)*         21.1  
(*on a trailing 12-months basis)

What is the company’s business?
Ranbaxy is the largest pharmaceutical company in India. It manufactures and markets branded generic pharmaceuticals products and Active Pharmaceutical Ingredients (APIs) and invests around 6% of revenues in R&D. Ranbaxy's continued focus on the US and European markets has helped it build deep product pipelines. The company has 199 ANDA filings out of which 111 have been approved by the US FDA and 88 are awaiting approval. The company sells products in over 70 countries and has an expanding international portfolio of affiliates, joint ventures and alliances, ground operations in 44 countries and manufacturing operations in 7 countries.

What has driven performance in 3QCY07?
The US scenario: Revenues from the US registered a 7% YoY growth (in dollar terms) during the quarter. However, if one were to exclude the first-to-file opportunities (i.e. ‘Pravastatin’ 80 mg in this quarter and ‘Simvastatin’ 80 mg in 3QCY06), then the base business portfolio has recorded an impressive sales growth of 35% for the quarter.

On the ANDA front, Ranbaxy received 10 ANDA approvals, out of which 9 were final approvals and 1 was a tentative approval. While final approvals were received for ‘Metformin’, ‘Amlodopine Besylate’ and ‘Carvedilol’ among others, tentative approval was received for ‘Galantamine’ for which Ranbaxy has 180-day shared exclusivity. This drug is indicated for the treatment of mild to moderate dementia of the Alzheimer’s type and the total annual market sales for the same were US$ 130 m. Another important development during the quarter was the agreement that Ranbaxy reached with GlaxoSmithKline Plc to settle the patent litigation suit for the latter’s blockbuster drug ‘Valtrex’. As per the terms of the agreement, Ranbaxy will enter the US market in late 2009 as the first generic with a 180-day exclusivity period. As per IMS, the total market size of ‘Valtrex’ is around US$ 1.3 bn.

Besides this, Ranbaxy has been making increasing strides in the branded generics business and its leading brand in the dermatology segment ‘Sotret’ has doubled its market share from 24% in 3QCY06 to 48% as at the end of August. The company recently acquired the dermatology products portfolio from BMS and this is further expected to bolster its dermatology portfolio in the US market going forward.

Europe – UK and Germany deliver: The European region recorded an 8% YoY growth (in dollar terms) during the quarter largely led by strong performances in the markets of UK and Germany. Revenues from the UK market grew by 16% YoY in dollar terms, which was driven by a mix of growth in the existing product basket and new product launches. For instance, ‘Gabapentin’, which was launched in 1QFY07 posted a strong performance with the 600 mg dosage strength garnering a 40% market share. The company’s branded business, mainly the respiratory portfolio also contributed to growth during the quarter.

The German business grew by 53% YoY due to the fact that 11 products were listed with AOK, Germany's largest health insurance company, representing 35% of all health insurance policyholders in the country, consequently leading to higher volumes.

Investors should note that Ranbaxy’s revenues from the European region for this quarter includes those from Romania (Terapia) as the country has become a member of the European Union since January 2007. However, while the sales from Terapia remained flat during the quarter (due to lack of new product launches in anticipation of regulatory changes), the same recorded a 20% YoY growth during 9mCY07. Similarly, as far as Rest of Europe is concerned (includes countries of Central Europe, Poland, Spain, Italy & Belgium), sales were flat for the quarter but registered a 26% growth during 9mCY07.

Geographical snapshot
(US$ m) 3QCY06 3QCY07 Change 9mCY06 9mCY07 Change
India & Middle East 83 97 16.9% 222 268 20.7%
CIS (Russia and Ukraine belt) 21 23 9.5% 46 59 28.3%
Rest of Asia Pacific 20 20 0.0% 52 62 19.2%
Asia Pacific total 124 140 12.9% 320 389 21.6%
North America (US & Canada) 99 109 10.1% 278 302 8.6%
Europe (including Romania) 73 78 6.8% 180 257 42.8%
Africa 20 34 70.0% 58 89 53.4%
Latin America 13 18 38.5% 33 44 33.3%
Sub total 329 379 15.2% 869 1,081 24.4%
APIs 26 26 0.0% 89 74 -16.9%
Net sales 355 405 14.1% 958 1,155 20.6%

Chronic segment drives India: Revenues from the domestic market clocked a 15% YoY growth (in dollar terms) during the quarter with the company attaining a 4.9% market share (as per ORG-IMS data on August 2007). Growth was largely driven by the chronic segment (up 20% YoY), while the acute segment grew by a relatively staid 9%, the latter being on a higher base. The contribution of the chronic therapy portfolio (as percentage of total sales) increased to 25% (at the end of August 2007) as against 21% in the corresponding period last year. During the quarter, Ranbaxy’s Global Consumer Healthcare business recorded a 21% YoY growth in sales led by the strong performance of the company’s flagship brand ‘Revital’, which captured a market share of 79%.

Rest of the World also shines: This includes the regions of Africa, South Africa and Latin America. While revenues from Africa grew by 23% YoY, South Africa also registered a 23% YoY growth. It must be noted that the revenues from South Africa include the revenues of the acquired company Be-Tabs. Latin America also posted a healthy 34% YoY growth during the quarter led by the Brazilian market, which clocked a 63% YoY growth in sales.

Margins and profitability picture: Operating margins improved marginally from 15.4% in 3QCY06 to 16.0% in 3QCY07 largely due to the reduction in SG&A and R&D expenditure (as percentage of sales). As far as R&D is concerned, the board of directors of Ranbaxy have approved in principle to de-merge its drug discovery research into a separate company. The details of the demerger are expected to be finalised by the end of this year. While the bottomline has grown by a robust 48% YoY, the same has been favourably impacted by forex gains and extraordinary income received on the sale of surplus land and buildings. Excluding the effect of both, the bottomline has declined by 3% YoY for the quarter.

Cost break-up
(% of sales) 3QCY06 3QCY07 9mCY06 9mCY07
Raw material costs 47.8% 49.1% 49.4% 51.7%
Selling, general & admin costs (SG&A) 30.1% 28.7% 29.5% 28.7%
R&D expenditure 6.8% 6.2% 6.1% 5.7%

Over the last few quarters: After a slew of poor quarters, Ranbaxy’s performance at the topline level has considerably scaled up, especially in the last five quarters, which is commendable. Led by its geographical reach and ramp up in product launches, we expect the company to report strong numbers in the coming quarters as well. While the operating margin performance has been a bit inconsistent, we expect the same to improve going forward largely led by a much stronger focus on the emerging markets (where products can be branded and thereby enjoy higher margins) and its efforts to control costs.

Over the last few quarters
(%) 2QCY06 3QCY06 4QCY06 1QCY07 2QCY07 3QCY07
Net sales growth 6.9% 18.4% 22.7% 22.4% 15.7% 10.2%
Operating profit margin 18.2% 16.8% 15.0% 12.1% 13.4% 16.0%
Net profit growth 19.5% 657.1% 167.2% 78.7% 117.6% 47.7%

What to expect?
At the current price of Rs 434, the stock is trading at a price to earnings multiple of 14.1 times our estimated CY09 earnings. Despite the fact that the pricing pressure in the US market is expected to continue going forward, backed by increased competition, we expect Ranbaxy to counter the same led by an increased product flow. As far as Para IV filings are concerned, the company has adopted a strategy that will provide some semblance of certainty in terms of product launches going forward. For instance, Ranbaxy is sure of getting 180-day exclusivity for the blockbuster drugs ‘Valtrex’ in CY09 and ‘Lipitor’ in CY10. The company is also confident of garnering the exclusivity period for one more product in CY08, details of which have yet to be divulged. In this way, Ranbaxy has ensured that it gets the exclusivity window for at least one product every year till CY10.

Besides this, we believe its focus on the branded and emerging markets will play a significant role in offsetting the difficult conditions in the US and UK and thereby bolstering its overall performance. While regulatory changes in various countries are a key risk that could impact performance going forward, Ranbaxy is countering the same by increasing its geographical reach worldwide. The sorting of issues with the US FDA with regards Ranbaxy’s plant at Paonta Sahib, Himachal Pradesh will further be a key development to watch out for in terms of likely impact on product launches from this plant in the US market. We maintain our positive view on the stock.

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