The Hindu Business Line : Ranbaxy Labs: Buy

Assured revenues from exclusive launches, presence of growth drivers such as oncology and biopharmaceuticals, and benefits from the R&D hive-off are positives.

Mr Malvinder M. Singh, CEO and MD.

Kumar Shankar Roy

An investment can be considered in the stock of Ranbaxy Laboratories, one of India’s most aggressive generics company, with a two-three year perspective. Assured revenues emanating from exclusive launches through first-to-file (FTF) opportunities, presence of new growth drivers in its portfolio, such as oncology and biopharmaceuticals, and the possible benefits from the hive-off of the New Drug Discovery Research business, form the basis of our investment argument.

At the current market price of Rs 415, Ranbaxy trades at 21 times its FY-09 earnings, which is, perhaps, justified given the company’s potential to profit from exclusive US launches of blockbuster drugs, starting 2009.

The company also occupies a position of strength in the 17 FTF prospects through Paragraph IV (180-day marketing exclusivity) drug filings, given its strong litigation skills and the ability to identify weak intellectual property.

This year, for example, Ranbaxy settled with two innovator companies that allows it exclusive launches for two drugs in 2009 and 2010 respectively. Besides monetising its Para-IV pipeline, Ranbaxy has also positioned itself to tap opportunities such as the emerging markets (medium term), biogenerics and oncology portfolio (long term) through the acquisition of a stake in Zenotech Laboratories. Considerable value can also be unlocked from acquired assets, eight of which were added to the portfolio in 2006.

Overall, Ranbaxy seems on course to finish FY-07 close to its guidance of 20 per cent revenue growth (year-to-date 11 per cent) and 16 per cent earnings before interest, tax, depreciation and amortisation (EBITDA) margins (YTD 15 per cent). Though the third quarter has been disappointing, the situation in Romania may improve as recent policy changes take effect.

Ranbaxy has also been consolidating its position in the Indian market (now 5 per cent share) that contributes one-fifth of its revenues. Growth from Asia, CIS, Africa, Latin America and Europe also may hold potential.

Aggressive model

Globally, Ranbaxy has been one of the most persistent pharma companies when it comes to challenging intellectual property. From 2009, Ranbaxy has assured revenues from at least one exclusive launch every year in form of anti-herpes medicine, Valtrex (6 months), in 2009, prostate medicine, Flomax, in 2010 (eight weeks) and the possible US launch of cholesterol pill, Lipitor, in March 2010 (exclusivity for 15 months).

In the Lipitor case, the US Court favours Ranbaxy in one patent while Pfizer has an upper hand on the other. In any case, while it prepares to launch the generic copy in US — Ranbaxy can start off launching generic Lipitor in Norway (2008 on receipt of approval), followed by the UK, Austria, the Netherlands and Germany, where it has had favourable rulings.

Ranbaxy is also in a position to take advantage of opportunities in five other drugs (Clarinex, Avelox, Exelon, Nexium and Imitrex) where it can either win settlement (shorter exclusivity compensated with undisclosed monetary compensation) or shared exclusivity (assured revenues with minimal price erosion).

Drugs which enjoy exclusivity do not see the 70-90 per cent price erosion usual with generics. Ranbaxy has over 120 drug approvals and another sizeable number in the pipeline through which it can maintain profitability. Ranbaxy’s base business portfolio in the US (excluding sales from FTF products) has continued its momentum with a sales growth of 23 per cent in first nine months of 2007.

Enhanced portfolio

Gene-based and cellular biologics are increasingly being used to treat a variety of medical conditions for which no other treatments are available. In this light, Ranbaxy’s 45 per cent equity stake in Zenotech gives it a good platform. Zenotech immediately gives Ranbaxy three bio-pharmaceuticals while seven others are in the pipeline.

In doing so, Zenotech’s pipeline addresses one-third of the $65-billion biopharma market worldwide. In the EU, a specially adapted approval procedure has been authorised for certain protein drugs and using this route a treatment for chemotherapy-induced anaemia has recently been given the nod. However, the US Congress is expected to continue to weigh the issue next year.

In cancer therapy, Zenotech’s oncology portfolio has 10 injectables in the Indian market and has also signed an agreement with Ranbaxy to let it market another 14 injectables, including seven in oncology for the US and Canada in the next few months. Specialty injectables occupy a crucial position in the $35 billion oncology global market.

Ranbaxy will be able to take these products to other emerging markets in the next 18 months and to the developed markets of Europe and the US over the next three years. Some revenues may flow in from the second and third quarters of 2008.

R&D value

Another development is the spin-off and subsequent listing of Ranbaxy’s New Drug Discovery Research (NDDR) division. Ranbaxy has an in-principle nod from its board to demerge its NDDR operations into a separate entity, effective January 1, 2008. Ranbaxy will immediately save around Rs 100 crore from its profit-and-loss account and, thus, be earnings-positive from day one.

The NDDR focuses on select therapeutic segments of infectious and metabolic diseases, inflammatory/respiratory disease and oncology.

The company has eight-10 programmes in the area of NDDR, including one molecule in Phase-II clinical trials and seven in the pre-clinicals.

The two programmes in the respective areas of Chronic Obstructive Pulmonary Disease (COPD) and anti-infectives are also progressing as per plan and the team has identified a development candidate for one of the programmes. The NDDR demerger details, which are yet to be announced, could act as a near-term trigger for the Ranbaxy stock.

Risks and concerns

Major risks to our recommendation include settlements for exclusive drug launches not coming through, adverse ruling in case of the Lipitor drug where Ranbaxy has mixed verdicts and other unfavourable rulings in various patent infringement cases where Ranbaxy is supposed to be in a position of strength.

Any delay in launching oncology drugs by Ranbaxy as well as EU/US not backing biopharmaceuticals could also be negatives for the stock. Also, problems in integrating acquired assets in Europe may hurt the company’s earning prospects.

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