The Hindu Business Line : Ranbaxy

Shareholders of Ranbaxy may use Daiichi Sankyo’s open offer (slated to begin from August 16) to book profits on the stock as the offer price is attractive. Japanese innovator drug company Daiichi Sankyo, in June this year, agreed to buy a majority stake in Ranbaxy through a combination of purchase of shares held by the Singh family, preferential allotment of fresh shares, subscription to convertible warrants and the ensuing open offer.

The open offer price of Rs 737 values Ranbaxy at nearly 40 times it 2008-09 earnings per share; which is at a hefty premium to large-cap pharma peers of similar size and reach.

Given Daiichi’s open offer for the control of 20 per cent of fully diluted equity in Ranbaxy, the acceptance ratio for a shareholder in Ranbaxy works out to be 38 per cent — 38 shares of every 100 held.

This acceptance ratio could improve for public shareholders if some institutional shareholders decide not to tender to the offer. But even with the current acceptance ratio, investors stand to gain by tendering, as the offer price is at a 45 per cent premium over the stock’s current market price of Rs 499.

Historically, share prices fall after an open offer closes and long-term investors who would like to take an exposure may again find suitable entry points to Ranbaxy. The Ranbaxy stock has historically underperformed the Sensex over the past six years. In the past two quarters, the stock witnessed a strapping out-performance on the bourses helped by strong news-flow (exclusive product settlements) and stake sale to Daiichi.

However, the latest quarterly performance and the storm by way of US FDA investigation have not blown over. Plus, most of the news regarding exclusive product launches over the next few years is already out in the public domain.

Changing business

By joining hands with Daiichi Sankyo, Ranbaxy has further strengthened its business model, which currently hinges on generic drugs.

The coming together of innovator-generic companies provides a larger product basket for Ranbaxy to leverage, cleans up its balance sheet of major debt and provides an opportunity to capitalise on Daiichi Sankyo’s strength as an innovator company.

For Daiichi Sankyo, the investment in Ranbaxy gives it an opportunity to improve revenue model. Daiichi’s drug pipeline may not bear fruit for another five years and in the meanwhile

Ranbaxy will expand its revenue base and enhance its market access to 60 countries. Low-cost manufacturing facilities and solid presence in emerging markets may have prompted Daiichi to pay such a hefty control premium. Japan, which is opening up to generics, may also be better tapped by Daiichi with Ranbaxy in its fold.

Outlook

For Ranbaxy, near-term triggers such as R&D demerger (which has been put off), and visibility on strong earnings, aided by exclusive launches of Imitrex, Valtrex followed by Flomax, Lipitor, and Nexium in later years, have already been priced in.

Additional triggers are also possible from other potential exclusivities in Ranbaxy’s First-To-File pipeline as drugs such as Actos, Diovan and Ariceptmay be settled; this given Ranbaxy’s willingness to settle patent lawsuits.

While Daiichi is yet to divulge details on its business plans for Ranbaxy (after conclusion of open offer), Ranbaxy’s near-term earnings may continue to be impacted by losses on outstanding forex hedges and translation losses on outstanding foreign liabilities. For the second quarter of 2007-08, in spite of operating margins increasing,

Ranbaxy’s net profit plunged by over 91 per cent; mainly on back of Rs 193 crore forex translational losses. Adjusting for forex, net profits were flat on a year-on-year basis.

The synergies with Daiichi will take some time to evolve and Ranbaxy’s stakes in smaller Indian companies (for oncology, biogenerics, peptides, etc,) may offer growth potential, sustainable earnings and healthy margins over the medium-term.

However, the substantial premium built into the open offer price appears to take into account benefits from exclusivities and related products.

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