Booster shot

POUND WISE

Acquisitions across the globe, strong results and a buzz of taking over Merck's generics business have brought Ranbaxy to the centre stage.

What do you do when you are the largest pharmaceuticals company in India, you have almost doubled your profits in the past year, acquired some of the highly sought after generics businesses in Europe and South Africa and figure in the top ten generic drug-makers globally?

You want to be among the top five in the world, and that's what Ranbaxy is trying to do. It aims to be a $5 billion company by 2012, a target which it might just achieve well before the projected date. Already on a fast track, Ranbaxy made eight acquisitions in 2006.

As a result, Ranbaxy now figures as a well-positioned pharmaceuticals company with a presence in 23 of the world's 25 largest generic drug markets. Now the company plans to bid for the generics business of Merck KGaA, which is based out of Germany.

Adding to the glory are the quarterly results for December 2006, which saw a rise of over 22 per cent in net sales, and a whopping 167 per cent surge in net profit over the same period last year, albeit on a low base. Year 2006 ended with Rs 6022 crore of revenues, an 18 per cent increase over the past year as well as Rs 520 crore in net profit, a 97 per cent growth.

All-round growth
In CY06, growth in sales was spurred by an increase of about 22 per cent in exports to over 70 per cent of total sales from a contribution of about 68 per cent in CY05.

Over the past year, sales of domestic formulations grew by 10 per cent. In the December quarter alone, exports grew by more than 28 per cent to contribute to almost 76 per cent of the overall sales, while domestic formulations sales grew by 5.8 per cent.

A majority of Ranbaxy's export revenues come from the North American markets, followed by the European countries.

In the year 2006, US sales grew 15 per cent to $380 million, while in European markets the sales declined by 4 per cent to $194 million. Another shot in the arm came from the emerging markets (BRICS), where the company witnessed a growth of over 30 per cent for CY06 to $447 million.

Ranbaxy is also set to make its presence felt in other international markets like Japan, the second largest market for generic drugs at $700 million by entering into a joint venture with Nihon Pharmaceuticals.

The key growth drivers for Ranbaxy remained the US, east European markets as well as the emerging countries of the BRICS markets.

Sales in the CIS markets increased about 115 per cent to touch $ 137 million, thanks to the contribution from its Terapia acquisition. Sales in western European markets of the UK, France and Germany saw a decline of over 10 per cent in CY06. 
 

THE ROAD AHEAD
Rs crore	CY06	CY07E	CY08E
Net Sales	6022.00	6890.20	7980.00
Operating Profit	943.30	895.73	877.80
Net Profit	520.00	650.00	885.00
EPS (Rs)	13.98	17.47	23.79
P/E (x)	28.66	22.93	16.84
Figures are for 12 month ended December

Drug windfall
Analysts attribute the company's success in 2006 to the 80 gm simvastatin tablet, a drug used to reduce cholesterol.

In June 2006, the company had received an approval for the 80 gm simvastatin tablets with a 180 day marketing exclusivity, which has brought a top line of $62 million. The end of exclusivity has resulted in a 95 per cent fall in the price, and now the company needs to find new growth drivers.

In Q4 CY06, Ranbaxy received United States Food and Drug Authority (USFDA) approvals to manufacture and market three new drugs, atenolol tablets, cefprozil tablets and cetirizine hydrochloride syrup, but these are not going to be blockbusters for the company as the combined opportunity in these three drugs is just $357 million a year.

Analysts are not bullish on the 180-day exclusivity for atorvastatin either, which is going to be launched by 2010. Though the current market for the drug is at $605 million, prices are down almost 70 per cent. Hence, Ranbaxy needs a high-volume drug like simvastatin to bring the impetus.

Simvastatin also gave a boost to Ranbaxy's overall US generics market share, which increased to 15.4 per cent from 13.9 per cent last year.

"The coming year is expected to bring a host of new generic product launches for Ranbaxy in the US pharmaceutical markets, owing to a large number of patent expiries," says Sarabjeet Kour Nangra, vice-president, research, Angel Broking.

Apart from this, Ranbaxy has 197 cumulative abbreviated new drug application (ANDA) approvals filed till date, of which 121 have been approved. Back home, Ranbaxy is the largest novel drug delivery system (NDDS) marketing company with a share of 8 per cent of the total NDDS market.

Organic and inorganic growth
The acquisition of Terapia SA of Romania in Q3 CY06 was the largest acquisition Ranbaxy has ever made.

Among the other acquisitions during 2006 were Mundogen of Spain and Allen SpA of Italy, the generics businesses of GlaxoSmithKline, Ethimed of Belgium and BeTabs of South Africa.

Terapia, Romania's largest independent generic drug-maker, has operating margins in the range of about 35 per cent, which results into a significant addition to Ranbaxy's bottom line. The BeTabs acquisition, however, will yield results only in the second quarter of CY07, after the integration of the company is complete.

"BeTabs, is not expected to contribute more than Re 1 per share to the earnings of the company," says Angel's Nangra. The performance of the other acquired entities remains to be seen and depends largely on the sustainability of margins.

Earlier this month, the company acquired a 14.9 per cent stake in Krebs Biochemicals, a manufacturer of active pharmaceutical ingredients (API) which would act as a strategic sourcing partnership for Ranbaxy's simvastatin and pravastatin product lines.

It has also tied up with Ipca Labs, where it will market the latter's generic products in the US. There may be more such deals going forward, where Ranbaxy uses its global marketing muscle, adding to its revenues.

The company is also likely to buy Merck's generic business, which is the fifth largest generics company in the world.

"Merck has synergies with Ranbaxy, as the former is a global generic company well diversified across products and markets and would enhance Ranbaxy's presence in the global generic space significantly. On the operating front, the acquisition should not be dilutive on EBDITA as both the companies have similar operating margins," says Nangra of Angel.

Its new plant at Paonta Sahib is awaiting US FDA approval, which should happen in the second quarter of CY07. This plant will enable the company to manufacture more products for the high value US markets.

Valuations
The performance of the stock has remained in line with that of the markets, and it appears to be fairly valued.

"At the current price, the stock is trading at about 23 times its CY07 earnings, and about 17 times its CY08 earnings, factoring in the potential improvement in performance from BeTabs operations as well as the profits arising from atorvastatin in CY2010," says Nimish Mehta of Edelweiss Securities.

"The stock may have some upside, if the US FDA issue over Ranbaxy's Paonta Sahib facility resolves, which is likely by June 2007," adds Mehta.