Ranbaxy seesaw : Market sentiment up but challenges remain

The street now eyes steady growth in firm's base biz margins helped by Absorica sales, currency movement and leash on costs

Drug maker Ranbaxy Laboratories has surprised many in the street over the past month with a spectacular rally of 62 per cent. After a one-year low of Rs 253.95 on August 2, the stock has recovered almost all the losses between May and July, in just a month. On Friday, the scrip closed at Rs 444.50 on the BSE exchange, up 1.1 per cent from its previous close. The brokerages are expecting a 12-month target price of Rs 500-550 on the stock.Though the company's management has failed to provide guidance regarding its ongoing issues with the US Food and Drug Administration (FDA) and product approvals there, investors are positive on the stock. This is primarily because of the good margins earned by it in the US during the June quarter.

“There are initial signs of turnaround, with improving sustainability in US earnings, recovery in the Ebitda (earnings before interest, taxes, depreciation and amortisation) margin (eight per cent), increasing visibility of the US pipeline and peaking of remediation expenses. A sharp correction in the stock price offers favourable risk-reward, despite uncertain timelines,” says brokerage Kotak Institutional Equities.

The street is expecting consistent growth in the company’s base business margins, helped by sales of Absorica (its new capsules in the US market for treatment of severe acne), favourable currency movement and the tight leash on costs.“We expect base business margins to improve on the back of further ramp- up in sale of Absorica, greater impact of rupee depreciation and reduction in costs related to the consent decree,” according to another brokerage, Nomura, in a recent report.

US developments
Nomura says the company reported a loss during the June quarter but its US performance was a key positive. During April-June, sales were Rs 770 crore in the US, the world’s largest drug market, helped by strong base business sales, encouraged by prescription growth in Absorica. The company’s market share of Absorica in the US has risen consistently and is currently 15.3 per cent. Kotak estimates the drug is likely to garner sales of $70 million in 2013, with peak sales of $100 mn in 2014. Besides, investors are hopeful that the company will soon launch major drugs in the US such as Diovan and Valcyte, with sole exclusive marketing rights of 180 days.

“There’s anticipation that the company will launch these two drugs very soon, which has given a huge upside to the stock in recent times, as it will help the company’s revenues and margins,” said Praful Bohra, senior research analyst, Nirmal Bang.According to Bohra, the stock had come under pressure earlier in the year when the company decided to plead guilty (to US federal drug safety violations and to resolve claims that it sold sub-par drugs and made false statements to the FDA about its manufacturing practices in India), leading to over-selling in the market. “There was too much negativity and the stock was hammered. Now, investors feel the valuations are reasonable and, therefore, the buying,” he said. Some other analysts also believe the stock is now reasonable, while the company is recovering in terms of performance.

Strategy
The increased focus in emerging markets and restructuring exercises, along with a change in US strategy, has also helped sentiment among investors. According to official sources, the company is undertaking cost rationalisation processes, including withdrawal of operations from smaller markets and consolidating in others.

The company did not respond to queries sent by Business Standard for this story.Earlier, a Ranbaxy spokesperson had said, “The company’s overall strategy will be to secure leadership in select therapeutic areas and emerge as a leading company in certain key markets that we have identified.” For instance, according to Ranbaxy, apart from India, it will focus in the Asia-Pacific region on Malaysia, Australia and New Zealand, Japan and China.

While the company has also tried to put issues with the FDA at rest after paying the $500 million penalty, many still believe that as far as the ailing units of the company – mainly Paonta Sahib and Dewas – are concerned, it will take time to recover. “I am not sure if the bad news for the company is over because those units (Paonta Sahib and Dewas) are still under the US import alert. Besides, other facilities like Mohali have also received (FDA) observations. Having said that, if the company manages to keep its margins up through other approvals like Diovan and Valcyte, that will boost the sentiments,” said Bohra.

“We believe Ranbaxy’s challenges remain,” the Kotak report argued. “The lower multiple reflects the uncertainity in approvals and pending regulatory challenges. We believe US approvals for ANDAs (abbreviated new drug applications) from the Mohali or Ohm facilities and launch of first-to-file opportunities are key triggers for the stock.”