The US FDA tangle, deteriorating sales in Europe and forex losses have put Ranbaxy in a bit of a spot.
The US FDA import ban, competitive pressures in the European business, higher costs on US expansion and forex losses will keep Ranbaxy Laboratories’ revenues and profits under pressure in 2009. Its US woes, which started in September last year, have been further compounded by the recent recall from the US market of its antibiotic nitrofurantoin.
While there are positives such as the two first-to-file (FTF) opportunities and the Nexium active pharmaceutical ingredient (API) supply deal to AstraZeneca in the current year, the resolution of the FDA issue continues to be the single most important trigger for the stock.
Shifting production
Ranbaxy has been looking at alternatives such as the expansion of its Ohm Laboratories facility in the US to de-risk its North American business, which contributed over a quarter to its global sales of Rs 7,250 crore in CY08.
The expanded Ohm facility is expected to supply a part of the US requirement of 30 drugs, which were being manufactured at the Paonta Sahib and Dewas facilities. It was the import ban on these key facilities that led to a 14 per cent y-o-y drop in sales to Rs 340 crore from the US in the first quarter of CY09.
Further, lower volumes due to the ban, high fixed costs in India and the US have dented profitability for the quarter.
The management believes that inspections of the facilities would be completed in the current fiscal and supply could resume from the Dewas facility by September if the FDA finds it compliant with good manufacturing practices.
The application integrity policy stricture imposed on the Paonta Sahib plant in February this year might take longer to resolve. The suspension of product reviews from this site has forced the company to look at alternative facilities for the manufacture of Valtrex (Valaciclovir), an anti-viral medication.
| STAGNATING GROWTH | ||||
| in Rs crore | CY06 | CY07 | CY08 | CY09E |
| Net sales | 6,069 | 6,692 | 7,250 | 7,000 |
| % change | 17 | 10.27 | 8.34 | -3.45 |
| EBIDTA | 943 | 946 | 616 | 802 |
| Net profit | 515 | 786 | -914 | -800 |
| EPS (Rs) | 13.17 | 15.3 | -- | -- |
| E: Analyst Estimates | ||||
Betting on FTFs
The company is banking on the supply of Nexium API in the second half of CY09 and its two FTFs – Valtrex and Flomax –over the next 12 months to boost its revenues. Analysts estimate that these opportunities could fetch Ranbaxy revenues of over Rs 800 crore on a conservative basis over this period.
Restructuring operations
In Europe, barring France, the company is cutting down its presence. The company's chairman and managing director Malvinder Mohan Singh said that the 14 per cent decline in Europe sales for the first quarter was due to a weaker operating environment where it saw significant price erosion, increasing competition and high fixed cost.
As a result, Ranbaxy began targeting a "more bottom line approach" instead of focusing on improving volumes.
Growth from emerging markets
Ranbaxy believes that going ahead, volume growth will come from businesses across emerging markets on account of existing products and new launches. Of the five geographies Ranbaxy operates in, India and Asia Pacific were the only ones that had shown growth in the first quarter.
In India, where the company is the second largest player with a market share of 4.8 per cent, sales grew 9 per cent y-o-y to Rs 325 crore on the back of a Rs 74 crore order for the supply of anti-retroviral drugs from the National AIDS Control Organisation.
With a push coming from new product launches (such as Daiichi Sankyo's hypertensive drug Olvance), the company hopes to achieve a domestic sales growth in the range of 12-15 per cent in the coming quarters.
The pain will persist
While analysts concur with the management projections of sales at Rs 7,000 crore (a fall of 3.5 per cent over CY08) and a loss of Rs 800 crore for CY09, the figures would change if the rupee weakens further and if there is a delay in FDA inspection and approval.
While the company booked Rs 1,045 crore of mark-to-market (MTM) loss on receivables and outstanding FCCBs in the first quarter, the management believes that it would break even for the balance three quarters if the rupee were to stay at Rs 50.50.
Despite the uncertainties, the stock has spurted 34 per cent since March. It gained 10 per cent over the last week on news that the company would be commencing phase III of its anti-malarial NCE.
Most analysts have cut their price targets for the stock due to the lack of clarity on the FDA issue, scaling down of European operations, higher overheads and forex losses.
A Citigroup sum-of-parts estimate pegs the target price at Rs 141 a share (21 per cent lower than current price of Rs 178) comprising core business earnings at Rs 58, FTFs at Rs 99 and a loss of Rs 16 on account of MTM adjustments.
