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Teva Vs Ranbaxy Vs Dr Reddy’s - Views on News from Equitymaster
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Teva Vs Ranbaxy Vs Dr Reddy’s
Dec 20, 2004

The global generics market grew two times faster than the overall international pharmaceutical industry in 2003. Generics have been the buzzword even among Indian pharma majors for some time now. Two Indian majors, Ranbaxy and Dr. Reddy’s (DRL), apart from some others smaller players like Sun Pharma and Lupin Labs, have been increasingly focusing on this market for sustained growth. But what will the future hold for companies that follow this business strategy? What is a generic drug?

Generic drugs are the chemical and therapeutic equivalents of ‘brand-name’ drugs, typically sold under their generic chemical names at prices below those of their brand-name equivalents. These drugs are required to meet similar governmental regulations as their brand-name equivalents and must receive regulatory approval prior to their sale in any given country. There exists significant potential for generics manufacturers in the regulated markets. To get an understanding of the same we have compared two Indian generic companies with a global leader in the generic markets – Teva Pharmaceutical Industries (Israel). The opportunity for generic players is apparent from the table below that highlights the penetration level in several key markets.

To be tapped...
Country Market size (US$ bn) Generics penetration
US 220 12.0%
Germany 28 21.1%
France 25 2.9%
Italy 17 0.5%
UK 17 10.6%
Spain 13 3.2%
Source: Company, Equitymaster research

About Teva

Teva is an Israeli pharmaceutical company specializing in the development, production and marketing of generics. The company registered sales of US$ 3.2 bn in 2003 (December ending), with North America and Europe contributing to about 90% of the same. Teva has also tasted success on the patented drugs front. It is the developer and worldwide exclusive rights holder for ‘Copaxone’, which is used for the treatment of multiple sclerosis. The drug notched revenues of US$ 720 m in 2003.

Let us now briefly compare the three companies on various parameters.

Financial comparison
(US$ m) Teva (Dec 03) Dr Reddy's (Mar 04) Ranbaxy (Dec 03)
Net Sales 3,276 463 969
Sales growth (5 years CAGR) 26.4% 26.3% 24.6%
Operating Profit 877 57 247
OPM (%) 26.8% 12.3% 25.5%
PAT 691 57 167
PAT growth (5 years CAGR) 56.0% 72.0% 48.9%
NPM (%) 21.1% 12.3% 17.2%
R&D as % of revenue 7.4% 9.9% 5.0%
Sales in US (US$ m) 2,055 135 412
Equitymaster Research

Teva, by virtue of being the largest generics company in the world, is larger in terms of revenues and profits. However, this is mainly on account of the sale of patented drug Copaxone and due to higher number of ANDA approvals by virtue of being one of the oldest players in this space. However, in terms of profitability and growth, there is little difference. While DRL led the pack in the previous years, FY04 was bad for the company in terms of operating and net margins due to higher R&D and SG&A expenses.

With respect to R&D spending as a percentage of sales, DRL is way ahead. Ranbaxy has a well-planned R&D strategy and plans to increase R&D as a percentage of sales by 1% every year. This means Ranbaxy will have an R&D spend of 10% of sales by CY07. However, Teva receives grants from the Israel government and third party research participants for R&D spending. If these are excluded, R&D as a percentage of revenues will drop to 6.8% from 7.4%. This indicates that the Indian companies are moving in the right direction.

Moving away from the financials of these three companies, let us now examine the quality of business done by them. US generics market is key to the growth for all the three companies. However, while Teva has 64% of its revenues coming from the US markets, DRL and Ranbaxy have only 29% and 42% respectively of their revenues from the region. This is primarily due to a larger generics portfolio of Teva as compared to DRL and Ranbaxy (as is evident from the number of ANDA filings).

Total ANDA filings
(Nos) Approved Pending approval Para IV Pending
Teva 150 120 67
Dr. Reddy's 12 35 24
Ranbaxy 92 41 23
Source: Company, Equitymaster Research

All the three companies have recognized the importance of New Chemical Entities (NCE) and new drug discovery. Teva has already developed and marketed its first patented drug ‘Copaxone’. DRL and Ranbaxy have started late in this field and hence, most of their NCEs are in the early discovery stage or in the various clinical testing phases. None of their products have yet crossed the most critical stage i.e. phase II. However, a higher number of drugs in the initial research and pre-clinical stages indicate the two companies resolve for improving their position in new drug discovery research.

Valuations

On the valuations front, at current prices, Ranbaxy is trading at a premium over the other two players. The premium to Ranbaxy can be attributed to its strategy in the US of having continuous pipeline of products in generics space as well as branded formulations. The company is planning to generate revenues of US$ 100 m from branded formulations business by end of CY05 (9% of CY04 sales). The premium could also be attributed to the superior return ratios of Ranbaxy. The basic reason behind this is the natural competitive advantage of being an Indian company. While DRL also has such an advantage, poor performance in the US markets and the consequent impact on margins affected its return ratios.

Valuations
Parameter Teva Dr. Reddy's* Ranbaxy
P/E 25.4 25.8 30.5
ROE 21.0% 13.7% 38.6%
ROA 10.5% 10.8% 20.1%
Based on CY03 Fig, *Based on FY04 Fig

Thus, while there is no comparison possible of DRL and Ranbaxy with Teva as far as size is concerned, in terms of efficiency and growth, the three companies are almost at par. DRL and Ranbaxy also have given a direction to their business. While DRL is facing shortage of new products as it has focused on para IV products, which involves lot of litigations and failures, we believe that the company’s future strategy of entering into specialty area and launching me-too generic products will help it to maintain a critical base of revenues and profits to grow in the US markets. On the other hand, Ranbaxy is now the ninth largest company in the US generics market and is growing at a fast pace. Although the two Indian companies are small (in global terms), they have clear plans charted out for the US markets and the size of the Israeli MNC is a good indicator of what DRL and Ranbaxy could achieve in the long term.

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