After witnessing a downtrend for nearly 17 months from its November 2010 highs of Rs 625, Ranbaxy’s stock has had a good run since April 2012 and scaled a 52-week high of Rs 572.90 on Monday. However, hereon, gains may be limited given fair valuations and that most known positives are priced in. Analysts say further upside would depend on faster-than-expected approval of its two key plants by USFDA, successful launch of dermatology products in early 2013 and approval of three pending products under consent decree.
The stock’s recent rise can be attributed to good operational performance (driven by exclusivity sales) and expected gains from planned new launches. Ranbaxy’s huge loss in the June quarter was largely related to forex issues. Contributions from atorvastatin (Lipitor) generics continued to be robust, while the generics of anti-diabetic product Actos has also been successfully launched and the competition faced is lower than expected. Moving forward, Ranbaxy has a good pipeline of products to be launched, and the base business is also likely to grow at a healthy pace.
While its recent withdrawal of 27 ANDA’s (abbreviated new drug abbreviations) indicate the resolution of FDA issues related to Ponta Saheb and Dewas plants, analysts believe the complete clearance may be seven to nine months away. They also estimate that overall growth and margins in CY13 may not be as robust as in CY12 (which got a major boost from one-offs like Lipitor generics). Hence, at Rs 570 (PE of 16 based on estimated CY2013 earnings), valuations are fair and comparable to its peers (like Dr Reddy’s).
| CY13: LOWER GROWTH AS LIPTOR EFFECT FADES | |||
| In Rs crore | Q2' CY12 | CY12E | CY13E * |
| Net sales | 3,229 | 12,765 | 12,669 |
| % change y-o-y | 54.2 | 25.6 | -0.1 |
| Ebitda | 985 | 3,359 | 2,182 |
| Ebitda (%) | 30.5 | 26.3 | 17.2 |
| Net profit | -586 | 2,536 | 1,521 |
| % change y-o-y | NA | 25.6 | -40.0 |
| EPS (Rs ) | - | 60.2 | 36.1 |
| PE (x) | - | 9.5 | 15.8 |
| E: Estimates * Does not include potential contribution of two dermatology products (Absorica and Ximino) lined up for launch, Source: Emkay research | |||
Gains from Actos, new products
Ranbaxy recently launched the generics of blockbuster anti-diabetic drug, Actos. This drug had $270 million sales in the US as per IMS data. Initially, the launch on exclusivity had to be shared amongst four players namely, Mylan, Watson, Teva and Ranbaxy. However, Watson could not get USFDA clearance for the launch, which indicates a larger share of the pie for the other three companies as well as lower price erosion. Assuming 75 per cent price erosion with 25 per cent market share, analysts at Edelweiss Securities had earlier estimated $62 million sales for Ranbaxy during the first six months of exclusivity. However, analysts now see lower price erosion (65 per cent) and higher market share (30 per cent) for Ranbaxy leading to a revenue potential of $130 million.
Besides Actos, the cardiovascular product Diovan also sees its patents expiring in September 2012. Diovan generated $5.1 billion in US sales for Novartis in 2011. Ranbaxy is likely to launch the product on sole exclusivity. Malik on conservative basis had estimated $145.8 million sales from generics for Ranbaxy during 2012 and $72.9 million during 2013, which he now feels can be revised upwards. The generics of cholesterol lowering drug Tricor are also to be launched by end-December. While two dermatology products (Absorica and Ximino) are lined up for an early-2013 launch, analysts are yet to update their estimates for CY13 and are awaiting clarity on the number of players that will tap this opportunity.
Ranbaxy saw its India sales growing at 13 per cent. However, led by better growth in the chronic segment and increased sales force productivity, the management expects growth to improve to around 16 per cent during the second half of CY2012 (ending December). Ranbaxy’s base business too is likely to see better growth on the back of atorvastatin launch in emerging countries, Nexium supplies to Teva and improvement in India business. In this backdrop, Emkay analysts expect base business earnings to register nine per cent CAGR over CY11-13 to Rs 1,150 crore clocking an EPS of Rs 27 in CY13.
FDA issues
With regard to settlement of USFDA issues related to its Ponta Sahib (Himachal Pradesh) and Dewas (Madhya Pradesh) plants, the company had already set aside $500 million during the December 2011 quarter. It recently also withdrew 27 products as part of its January 2012 consent decree. While it has hired consultants for plant assessments, Ranbaxy expects to get timeline for plant inspection by end-September.
Though an early clearance would boost sentiments, there is a word of caution. Analysts at Edelweiss observe that out of pending approvals, forfeiture of three pending first-to filings, which are high-value opportunities, could have a bearing on valuations. They observe that “though withdrawal of 27 ANDAs as a part of consent decree brings Ranbaxy a step closer to FDA resolution even though a complete resolution seems seven to nine months away, product by product validation can consume time and thereby could lead to high costs”.