Ranbaxy: Sustainable turnaround or a blip?

September quarter numbers ahead of estimates, driven by Diovan exclusivity benefits

Ranbaxy’s performance for the quarter ending September 2014 hit a sweet spot, led by strong contributions from anti-hypertensive Diovan generic, launched in the US on exclusivity basis. During exclusivity period, there is limited competition, allowing makers of these drugs higher pricing power and margins. The contribution from Diovan, along with lower price erosion in the base business, is estimated to have led to much better US sales.

Hitesh Mahida, analyst, Antique Stock Broking, feel Diovan sales would have been close to $115-120 million during the quarter versus expectations of $74 million. In this backdrop, US sales at $236 million (Rs 1,355 crore) came ahead of expectations of $191 million.

  Consolidated revenues at Rs 3,261 crore (16.4 per cent year-on-year), Ebitda (earnings before interest, tax, depreciation and amortisation) at Rs 807 crore and net profit at Rs 477 crore, thus, were way ahead of consensus estimates of Rs 2,986 crore, Rs 479 crore and Rs 279 crore, respectively. And, Ebitda margins at 24.75 per cent were well higher than 9.8 per cent seen in June 2014 quarter and 7.1 per cent in the year-ago period. This comes after five consecutive quarters of losses totalling nearly Rs 1,400 crore.

Ranbaxy’s domestic sales grew by 12 per cent to Rs 644 crore. After the start of supplies from the Toansa unit to rest of the world (except the US), API also saw pick up with sales at $16 million. In the US, too, Ranbaxy continues gaining traction from Absorica generics.

As a result, the stock gained more than six per cent on the bourses to close at Rs 634 levels.

Is this turnaround sustainable? Excluding Diovan, Ranbaxy’s Ebitda margins are likely to have been 9.5-10 per cent, almost in line with the first quarter of FY15, says Mahida.

But, for future growth, approval of new products on exclusivity is essential. Hence, moving forward, all eyes will be on approval of Nexium generics (acid reflux medication) and Valcyte (an anti-viral) and other launches on exclusivity. Though investors have become more optimistic on these approvals after Ranbaxy’s acquisition by Sun Pharma, the same is priced in. It is, thereby, the approvals and resolution of US Food and Drugs Administration issues regarding Ranbaxy’s manufacturing units that can drive earnings and stock prices higher.