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Ranbaxy: Analyst meet extracts
Nov 23, 2005

Ranbaxy had organised a meeting for analysts on Friday (November 18 2005) to discuss the future growth prospects of the company after the dismal performance in 9mCY05. Here are the key extracts of the meeting.

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 158 ANDA filings out of which 111 have been approved by the USFDA and 47 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.

Generics market scenario: Ranbaxy maintains that despite the pricing pressure witnessed in the generic markets, the fundamental factors driving the generics industry remain strong. In the US and Europe, the aged population as a percentage of total population is on the rise and is expected to rise further by 2025 resulting in a strain in the healthcare budgets. To give a perspective, the ageing population of Europe (as a percentage of regional population) is expected to rise from the current 20% to around 26% by 2025. Similarly that of the US is expected to rise from the current 16% to around 25% by 2025 (Source: Ranbaxy presentation). At the same time, the governments in these regions are under pressure to reduce healthcare costs, which can be achieved through relatively cheaper generics.

ANDA status: Ranbaxy has made a total of 158 ANDA filings, out of which 111 have received approval. The remaining 47 pending approvals represent a market size worth US$ 39 bn. Out of these 19 are potential ‘first-to-file’ (FTF) opportunities representing a market size worth US$ 22.6 bn.

Increased product flow in the US: In recent times, the US generics market has been bogged by severe pricing pressure, which has severely dampened Ranbaxy’s revenues. Despite this, the company expects a stronger product flow in CY06 and CY07. It plans to launch around 15 products in each of these years. The value of these drugs is pegged at US$ 27 bn. Especially in CY06, the company is looking to launch three products i.e. the two blockbuster cholesterol reducing drugs ‘Pravastatin’ and ‘Simvastatin’ as well as ‘Modafinil’ (memory-enhancing psychostimulant, which enhances wakefulness).

It must be noted that Teva Pharmaceuticals (Israel) has been granted the exclusivity period for ‘Pravastatin’ 10 mg, 20 mg and 40 mg tablets. Ranbaxy, however, is aiming for exclusivity on the 80 mg tablet, which represents a market of US$ 220 m. This product is going off patent in April 2006. Ranbaxy is also looking for exclusivity on ‘Simvastatin’ 80 mg tablets (US$ 494 m) and ‘Modafinil’ (US$ 496 m), both of which are subject to litigation. Ranbaxy will have to share the exclusivity, if any, on ‘Modafinil’. The likely launch of both these products will be in June 2006.

European story: As far as Europe is concerned, drugs worth US$ 3.8 bn and US$ 4.9 bn are scheduled to go off patent in CY06-07 and CY08-09 respectively. The company is looking to increase its Day 1 launches from 2 in CY05 to 7 in CY06 and 14 by CY07. It launched anti-depressant ‘Sertraline’ (Pfizer’s ‘Zoloft’) on Day 1 in the German and UK markets. In Germany, the company is actively looking at growth through the inorganic route.

Entering newer markets and newer product segments: In a bid to de-risk its business profile, Ranbaxy will be focusing on entering newer markets. During 9mCY05, it established a presence in Canada, Italy and Bulgaria. The company is also looking to establish a significant presence in Japan, which is the world’s second largest pharma market. It recently hiked its stake from 10% to 50% in its joint venture with the Japanese company Nippon Chemiphar. While the first product ‘Vogseal’ gained market leadership, Ranbaxy is planning to launch two products in each of the years CY06 and CY07. As far as newer product segments are concerned, Ranbaxy is looking to foray into immunosuppressants (used to prevent tissue rejection during organ transplant) and injectables, which are niche areas. The patents on immunosuppressants are scheduled to expire 2008 onwards.

R&D progress: Ranbaxy’s R&D focus areas include metabolic diseases, anti-malaria, urology, anti-infectives and asthma. Its anti-malarial molecule RBx 11160 has completed Phase II-a clinical trials and will be entering Phase II-b clinical trials. RBx 9841 for overactive bladder has completed Phase I clinical trials. The company is planning to file an IND (Investigational New Drug) for its third molecule RBx 10558 (for reducing cholesterol) by the end of CY05.

Margin enhancing measures: Ranbaxy is aiming to rationalize costs on the manufacturing, selling and marketing and R&D front. As far as R&D is concerned, it is planning to shift its clinical and bio-analytical studies in-house. Currently a majority of these is outsourced to contract research organisations overseas.

CY06 guidance:Ranbaxy’s management expects its revenue growth for CY06 to be above 18% YoY and its margins to expand above 16%. The company also maintains its stand of achieving US$ 2 bn in revenues by CY07. As per our assumptions, we expect CY06 revenues to grow by 13% YoY and margins to improve to around 14% to 15%. We believe that Ranbaxy will generate revenues to the tune of US$ 1.5 bn by CY07. Currently it stands at US$ 1.2 bn. As a result, we believe that its target of US$ 2 bn in revenues can be achieved only through the inorganic route.

What to expect?
At the current price of Rs 369, the stock is trading at a price to earnings multiple of 15.4 times our estimated CY07 earnings. Going forward, considering the fact that Ranbaxy is a 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 two to three years when a large number of products go off patent. While we anticipated a lacklustre CY05 with no growth in profits, the company performed much below our expectations and we have downgraded 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. We remain positive on the company’s prospects from a three-year perspective.

Please view our updated research report on the company.

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