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Ranbaxy: Conference call excerpts - Views on News from Equitymaster
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Ranbaxy: Conference call excerpts
Nov 2, 2005

Ranbaxy held a conference call post the declaration of its results for the third quarter and nine months ended September 2005 to discuss its 3QCY05 performance and growth prospects for the future. Here are the key extracts.

About the company
Ranbaxy is the largest pharmaceutical company in India. Its annual sales crossed US$ 1 bn in the year 2004. The company manufactures and markets branded generic pharmaceuticals products and Active Pharmaceutical Ingredients (APIs). The continued focus on R&D has resulted in several approvals in developed markets and significant progress in New Drug Discovery Research. It invested 6% of revenues in R&D during CY04. Ranbaxy's continued focus on the US and European markets has helped it build deep product pipelines. The company has about 154 ANDA filings out of which 111 have been approved by the USFDA and 43 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.

The US scenario: The US region was bogged by intense competition and price erosion, which severely dented the topline of the company during 9mCY05 (down approx. 20% YoY). This market, which contributed above 35% to Ranbaxy’s topline in CY04, saw its share come down to 29% in 9mCY05. It must be noted that product launches in the year so far were low as there were not too many patent expiries. This coupled with increasing competition led to large-scale price erosion, which is most likely to continue for the remainder of the year as well.

However, the company expects performance in CY06 to be better on the back of an increased product flow. Ranbaxy is looking to launch Pravastatin, Simvastatin and Modefenil in the US markets next year. The company has also stated that ‘authorised generics’ are here to stay and the key to survival will depend upon how a company can level its product through the marketing and distribution network.

European drivers: The European region too has faced significant price pressure on account of competition. However, in this region too, Ranbaxy expects an increase in product filings to be the key growth drivers going forward. It must be noted that Ranbaxy currently has a presence in 21 out of the 25 EU countries.

Widening geographical reach: Though Ranbaxy maintains that US will fundamentally be their key market going forward, in a bid to de-risk its business profile, the company will also be focusing on expanding its geographical reach. During CY05, it established a presence in Canada (eighth largest pharma market in the world), Italy (fourth largest pharma market in Europe) and Bulgaria. It also intends to expand activities in the Asian region.

Research and litigation to continue: During 9mCY05, while R&D expenditure accounted for 9% of revenues, litigation costs stood at 3.5% of revenues. Litigation costs have significantly increased due to the various ‘first-to-file’ filings made by the company and also due to rising ‘atorvastatin’ (Lipitor) expenses. It must be noted that litigation costs are dependent upon the number of ‘first-to-file’ filings made. The company, as part of its strategy, will continue to invest in research and litigations going forward.

The following are some of the litigations being pursued by Ranbaxy:

  1. The court decision for 180-day exclusivity on Merck’s blockbuster drug ‘Zocor’ (Simvastatin, 80 mg tablets) is expected to come out in December 2005 or January 2006. However, since Simvastatin is anyway going off patent in CY06, Ranbaxy will still be able to launch the drug even if does not win the exclusivity period. But the upside will be relatively lesser due to competition.

  2. The ‘Quinapril’ (generic version of Pfizer’s ‘Accupril’) trial is likely to be held in CY07, after which there will be the appeal hearing. Ranbaxy does not expect any impact from the same till CY07.

  3. Ranbaxy has challenged AstraZeneca’s blockbuster anti-ulcerant drug ‘Nexium’. This drug is currently the third largest drug in the world having garnered revenues to the tune of US$ 4 bn in CY04.

  4. Recently, a UK court dealt a blow to Ranbaxy’s challenge to Pfizer’s blockbuster drug ‘Lipitor’, when it found the latter’s patent on the main patent ‘Atorvastatin’ to be valid. This patent expires in 2011 in the UK. However, the court ruled in favour of Ranbaxy with regards to the other related patent on the salt of ‘Atorvastatin’. However, since the related patent expires in 2010, Ranbaxy will not be able to launch a generic version until the expiry of the main patent in 2011.

The US decision on the same (lipitor) is expected either towards the end of CY05 or in early CY06. Here, it must be noted that the main patent expires in 2010, while the related patent expires in 2011. This means that if the US comes out with the same ruling as that of UK, then it is likely that Ranbaxy will be granted a 180-day exclusivity after 2010 (when the main patent expires) but before the expiry of the related patent in 2011.

Margin enhancing measures: While Ranbaxy will continue to invest in research and litigation going forward, it nevertheless expects litigation costs to decline as compared to CY05. The company is also planning to undertake cost rationalization measures on the raw material and selling and administration expenses front, which is likely to improve margins going forward.

Consolidation to play a key role: As competition hots up in the generics space, consolidation will play a key role in attaining critical mass going forward. The acquisition wheel has already been set in motion as can be evinced by Teva’s acquisition of Ivax and Sandoz’ acquisition of Hexal and Eon Labs. These companies are now the top two generic companies in the world and the gap between them and the rest in the pack has considerably widened. In this scenario, Ranbaxy is also very open to acquisitions. The acquisition target will depend upon the strategic fit, value addition and the value. The company is already looking to raise US$ 1.5 bn through an ADR issue to fund its acquisition plans.

What to expect?
At the current price of Rs 350, the stock is trading at a price to earnings multiple of 9.4 times our estimated CY07 earnings. Going forward, considering the fact that Ranbaxy is a truly global company, the US and the European markets will be key growth drivers for the company. Increased focus on R&D will augur well for the company in the long run in the light of the product patent law with effect from January 1, 2005. With its global presence and strong R&D capabilities, Ranbaxy will look to garner a substantial pie of the generic market in the next 2 to 3 years when a large number of products go off patent. While we anticipated a lacklustre CY05 with no growth in profits, the company has performed much below our expectations and we will be downgrading our numbers accordingly. We, however, expect a pick up in growth in CY06 and CY07 led by its generics business in the US, an increased product pipeline and its wide and expanding geographical reach. Despite the severe pricing pressure witnessed this year, the management remains steadfast on attaining US$ 2 bn revenues by CY07. While we will be revisiting our numbers, we are positive on the company’s prospects from a three-year perspective and maintain a ‘Hold’ on the stock.

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