Ranbaxy Vs Teva: Bridging the gap? - Views on News from Equitymaster

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Ranbaxy Vs Teva: Bridging the gap?

Dec 2, 2005

Both Ranbaxy and Teva are the biggest pharmaceutical companies in their respective countries (India and Israel) with a major focus on generics. However, the similarity ends there. In terms of size, the Israeli behemoth is way ahead of the Indian giant. In this article, we compare these companies on various parameters and determine what factors will aid Ranbaxy’s growth prospects going forward. About Ranbaxy
Ranbaxy is the largest pharmaceutical company in India with annual sales having crossed the US$ 1 bn in CY04. The company manufactures and markets branded generic pharmaceuticals products and Active Pharmaceutical Ingredients (APIs). It invests 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 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. Ranbaxy has 9,000 employees.

About Teva
Teva is currently the largest generic pharmaceutical company and among the top twenty pharmaceutical companies in the world. It specializes in the development, production and marketing of generic and proprietary branded pharmaceuticals and active pharmaceutical ingredients (APIs). It also develops technologies, such as fermentation processes. The company has strategic alliances with Biovail Corporation International, Savient Pharmaceuticals Inc., Impax Laboratories Inc., and Andrx Corporation. Teva has approximately 14,000 employees worldwide and production facilities in Israel, North America, Europe and Mexico.

Financial comparison
(US$ m) (CY04) Ranbaxy Teva
Net sales 1,211 4,799
Sales growth (5 year CAGR) 32.9% 28.7%
Operating profit 222 798
Operating profit margin (%) 18.3% 16.6%
Net profit 155 332
Net profit margin (%) 12.8% 6.9%
Net profit growth (5 year CAGR) 39.9% 22.3%
Return on equity (%) 27.8% 6.2%
Return on assets (%) 13.0% 3.4%

Geographical break-up (CY04)
(% of sales) Ranbaxy* Teva
North America 36.5% 63.7%
Europe 16.5% 25.9%
Rest of World 47.0% 10.3%
* Rest of World includes India which contributes 20%
Revenue story: Teva is currently the largest generic company in the world with revenues to the tune of US$ 6 bn in CY04. In comparison, Ranbaxy generated revenues to the tune of US$ 1.2 bn in the same year. Both the companies have tremendously benefited from the huge potential in generics, which can be gauged by the fact that they have grown at a CAGR of 28% to 33% over the last 5 years. If one were to look at the absolute numbers, then Teva clearly beats its Indian rival. However, this is due to the fact that Teva has tasted success on its first proprietary branded drug ‘Copaxone’ and due to its acquisition of the US-based generic company Ivax.

Generics scenario: If one were to look at the revenue profile, while the US and Europe together account for 90% of Teva’s revenues, both these regions account for a relatively lower 53% in Ranbaxy’s case. Both these companies consider the US markets as a significant growth driver going forward. However, while North America, especially the US accounts for 64% of Teva’s revenues, it accounts for a lower 37% of Ranbaxy’s revenues. The generics market, especially the US has witnessed intense competition and price erosion in the past year affecting the revenues of both the companies in 9mCY05. As far as the US is concerned, while Ranbaxy’s revenues fell by 20% YoY, Teva’s revenues from the North American region (US & Canada) fell by 3% YoY. It must be noted that the drop in the latter’s case was lower due to increased sales of ‘Copaxone’ and increase in revenues from the Canadian market. Teva also scored on having more product approvals during 9mCY05 as compared to Ranbaxy.

Taking the inorganic route: Teva’s growth over the years has been largely fuelled through acquisitions, which opened up new markets and enabled it to become a global behemoth. Its latest acquisition has been that of the US-based generic company Ivax, which catapulted its earnings to US$ 6 bn and enabled it to become the largest generic pharma company in the world. While Ranbaxy has yet to make a large ticket acquisition to propel itself into the big league, it must be noted that the company is currently the eighth largest generic player in the world and is looking to close the gap through the inorganic route. Ranbaxy had acquired the French generic company RPG Aventis in CY04, in a bid to boost its presence in France.

Cost break-up (CY04)
(% of sales) Ranbaxy Teva
Cost of sales 39.2% 53.3%
R&D expenditure 6.2% 7.1%
SG&A expenses 24.6% 14.5%
Margins and profitability: There is not much to choose between the companies on the operating margin front. Both these companies have enjoyed margins above 20% over the last 5 years. While the R&D spend of both the companies have remained at 6% to 7% of revenues, on the raw material front Ranbaxy has the clear advantage. This can be attributed to the low cost advantage enjoyed by its Indian operations. Teva’s selling and administrative expenses have also reduced over the years. This could be due to the fact the company has established a strong presence in the developed markets of the US and Europe, requiring the company to spend lesser on the same. In comparison, Ranbaxy’s selling and administrative expenses have increased over the years as the company is gunning to increase its reach in the US market to boost its volumes.

Current ANDA pipeline
  Ranbaxy* Teva
Pending approval 47 145
Para IV filings 32 73
First-to-file (FTFs) 19 39
Branded sales of FTFs (US$ bn) 23 25
* FTF includes Lipitor (US$ 8.2 bn)
R&D success: Teva’s R&D efforts have reaped benefits, which can be gauged by the fact that its first proprietary branded drug for multiple sclerosis generated revenues to the tune of US$ 936 m in CY04. The drug is responsible for about 20% of Teva’s turnover, helping it offset the pricing pressures in the generic markets. Ranbaxy has yet to launch its own patented drug. While its anti-malarial molecule is currently undergoing Phase II clinical trials, its other molecules are still either in the pre-clinical or Phase I trials stage.

What to expect?
At the current price of Rs 400, the stock is trading at a price to earnings multiple of 16.7 times our estimated CY07 earnings. Going forward, the US and the European markets are likely to be the key growth drivers for the company. 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 9mCY05 has been lacklustre, we 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.

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