Ranbaxy Laboratories - Launch of Absorica – A new beginning - Prabhudas Lilladher

- Launches Absorica (Isotretinoin) in the U.S: Ranbaxy's launch of Absorica (Isotretinoin) in the US is a key event as we believe that the product will become the largest selling product for the company in the US latest by 2014 (excl. FTF products). The company has licensed this product from Cipher, a Canadian company. Absorica is indicated for the treatment of severe recalcitrant nodular acne in patients who are 12 years of age and older.

- Absorica is a beginning in the quest to regain loss of revenue in US due to USFDA issues: Apart from FTF launches, Absorica is a major product launch since the company's US business was impacted by USFDA 'Import Alert' in 2008. Before the USFDA issues cropped up at Ranbaxy, Isotretinoin was the largest selling product for the company, with annual revenue of ~US$100m in 2007. However, the company had to discontinue the product due to import alert on Dewas and Paonta Sahib facilities in 2008. Apart from being the largest selling product, it was one of the most profitable one for the company due to limited competition and branded nature of the product

- Even after four years, the opportunity remains attractive: Despite Ranbaxy being out of this product market for the last four years, Isotretinoin remains a lucrative market with limited competition due to complexities involved in the development and manufacturing of the product. Currently, there are only three generic companies selling Isotretinoin in US viz. Teva, Mylan and Douglas Pharma, with Teva holding majority market share. The total market size of the product is ~US$400m. Now with the entry of Ranbaxy, it becomes a four-player market.

- Expect revenue of US$125m from Absorica in CY15, margin improvement: We expect Ranbaxy to get revenue of US$60m, US$90m and US$125m from this product in CY13, CY14 and CY15, respectively. We are assuming a peak market share of 50% for Ranbaxy in CY15. Here we are assuming no significant change in the market size of Isotretinoin. We feel that garnering US$125m revenue won't be a tough task, given limited competition, Ranbaxy's previous experience of marketing Isotretinoin and a superior product profile of Absorica compared to other Isotretinoin products on the market. Ranbaxy has sales-force of ~ 60 reps in dermatology segment in the US which currently promotes the derma brands acquired from BMS. Now with the launch of Absorica, the field force can be utilized to its potential, thereby, improving the margins of the base US business. As the product development partner, Cipher is entitled for US$24m in milestone income from Ranbaxy, out of which, Ranbaxy has already paid ~US$10m. Further, Ranbaxy will pay mid-teen royalty to Cipher based on revenue generated by the product. We expect EBITDA margins of ~25% for Ranbaxy on this product when it achieves peak sales.

- US will be a key growth driver for the company over next three years: US will be a key growth driver for the company over next three years as the company has a strong product pipeline of FTF and niche products to be launched in US over next three years. We expect incremental contribution from Dewas and Paonta Sahib plants starting CY14. Further, shifting of products from US facilities to Mohali and incremental revenues in the US will ensure the benefit of operating leverage for the company. We expect margin improvement for Ranbaxy to primarily come from US business as the company has a very high fixed cost base in US. As indicated in the graph above, we expect the base business revenue from US business to more than double over the next three years. Further, we expect revenue of more than US$1bn from FTF opportunities over CY13/14.

Valuation and View: Resolution of USFDA issues remains a key for the company to improve its revenues in US and overall profitability. However, large hedges on the books and uncertainty related to monetization of FTF pipeline are likely to remain an overhang on the stock in the medium term. Though the company is showing improvement in core margins, the improvement should be sustainable to regain investor confidence. At the current price, the stock trades at 26.5x CY12 and 22.8x CY13 (adjusted for DCF value of FTF at Rs77/share). We maintain 'Accumulate', with target price of Rs579.

Source : Equity Bulls

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