Ranbaxy Laboratories Limited - Restarts Liptor production; +ve for Ranbaxy - Anitque

Ranbaxy Laboratories Ltd. (Ranbaxy) has resumed production of generic Lipitor for supply to the US market. This comes almost three-and-half months after it recalled the drug from the American retail market as it feared some of its drugs may be containing tiny glass particles. Ranbaxy has apparently fixed the manufacturing problems that lead to the recall at the first place. Ranbaxy lost 3.5 months of sales so far on the key product.

Background

Ranbaxy had recalled Atorvastatin/Lipitor from the US market and discontinued the supply to the market on account of quality standards violation (Glass particles found in the packing). The recall from the US market caused temporary disruption in the US market for the product. The nature of violation does not involve the tablets and is packaging related issue. The recall is restricted to just Atorvastatin.

Impact and our view

We estimate that the annual revenue for Atorvastatin for Ranbaxy would be around USD80m. This implies that 7% of Ranbaxy's overall core earnings (ex-forex) CY12, 20% of base business earnings and 20% of the US business comprises Atorva/Lipitor. A total recall therefore would have hit Ranbaxy's earnings outlook by 7%. Post the restart of the manufacturing, we believe that the total recall is not a possibility which the market had started discounting.

While the exact impact on earnings will depend on: 1) inventory write off on account of recall of the product; 2) market share loss as a consequence of discontinuation of the product; we believe that the manufacturing resumption and regaining market share can lead to a positive earnings impact relative to market expectations by 3-5%.

The competitive landscape for Lipitor is very tough so we assume that Ranbaxy will be able to recoup only 15-30% of the overall Lipitor market share. The positive earnings impact of the Lipitor relaunch can therefore be in the range of 3-5%.

Valuation and outlook

We maintain our SELL recommendation on the stock with a price target of INR425, valuing the stock at 16x CY13e EPS. We would review our recommendation post 4QCY12 result; pending clarity on base business margins and launch of Diovan to turn more constructive on the stock. that the company is improving return metrics and incremental product opportunities will sustain momentum. Our price target (23x FY14e EPS + One time opportunities = 8) of INR720 implies 20% upside from current levels.

Source : Equity Bulls

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