Ranbaxy Laboratories - A new innings - Elara Capital

Slew of FTF launches in the near-term

We are expecting that Ranbaxy may receive the final approval on Diovan by 25th March 2012. On revisiting the Consent Decree's preconditions of non-descriptive label of ANDAs for exclusivity and US FDA's clarification on justification for Ranbaxy's exclusivity in Diovan, we believe that the probability of Ranbaxy receiving an approval is higher. We expect Ranbaxy's sales to reach USD313mn and net profit USD203mn during the exclusivity. With reference to Ranbaxy's ANDA on new formulations of Oxycontin in January 2013 and patent expiry of the drug in April 2013, we believe that Ranbaxy's settlement with Purdue Pharma could lead to AG launch of the drug on 17th April 2013. We expect Ranbaxy's AG to gain better than Actos as the drug would most likely to be limited competition product with 2-3 generic launch post patent expiry.

US: Progress in NDAs, brands to signal strong turnaround

With re-launch of Lipitor from Ohm Labs, approvals of new NDAs in Derma products-Absorica and Ximino and partnership with Alembic for Pristiq NDA, Ranbaxy's core generic business in US is poised to gain strong turnaround in near to medium-term. We expect current marketing team of 50-60 sales representatives would increase sales from branded and NDA drugs without incurring additional operational costs. Thus, improvement in base business implies core operating margin to rebound at 12%-14% in 2013E-14E. We expect minimum base business sales in US to grow at USD440mn in 2014E. Given the increasing synergy of the hybrid model, Ranbaxy would likely to be AG for all branded drugs of DS in US, begun with launch of Evoxac AG (eight months before generic launch in July 2013) Q4 2012.

Valuation: Upgrade to Buy, TP hiked to INR560

The 33% price run-up from Sep'12-Feb'13 is partially pricing in improvement in the core generics business, while in our view the FTF opportunities are largely undiscounted. We expect the core business operating margin to improve to 12.7% in 2013E and 14.1% in 2014E from 9.3% in 2011. With better cash flow from visible FTF opportunities till 2014E, we assign higher 16x PE to core earnings to 2014E and 1x PE to FTF earnings. In FCFF, we value core business with assumption of risk-free rate at 8.8%, risk-premium at 3%, cost of capital at 10.6% and terminal growth rate at 2%. With average of valuations in PER and FCFF, we derive target price at INR560, implying a 39% return at current market price. We upgrade our recommendation to Buy.

Source : Equity Bulls

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