>RANBAXY LABORATORIES (GOLDMAN SACH)

Further slide in US base business, consensus forecasts at risk; Sell

What's changed
IMS prescription data indicate that US sales for Ranbaxy have steepened their decline since our last channel checks (from -40% in January 2009 vs. September 2008 to -57% at end-April 2009 vs September 2008). This decline is not restricted to drugs affected by the FDA import alert (-83% by April 2009 vs September 2008) but extends to the rest of Ranbaxy’s portfolio as well (-50% by April vs September). This continued loss of market share will likely make recovery harder, even if Ranbaxy is able to resolve its ongoing manufacturing issues with the FDA.

Implications
Ranbaxy’s recent price rise (up 67% over the last three months) has been driven by broader market strength (Sensex up 49% over the same period) and optimism that Daiichi Sankyo’s (Ranbaxy’s majority shareholder) regulatory experience could help in resolving Ranbaxy’s issues with the FDA. Nevertheless, we note that the implied pace of erosion in the base business creates further downside risk to Reuters consensus forecasts for 2009 (flat group sales) and could make consensus forecast of 13% revenue growth in 2010 hard to achieve. Note that our 2010 EPS forecast are 30% below consensus.

Valuation
On our estimate, Ranbaxy is currently trading at one-year forward P/E of 33.8X (vs. the sector’s 15.8X) and one-year forward EV/EBITDA of 14X (vs. the sector’s 9.6X). Maintain Sell and our Director’s Cut-based 12-m target price of Rs196, implying potential downside of 28%.

Key risks
Upside risk: Favorable resolution of the issues with the FDA. Downside risk: Restrictions by other regulatory agencies.

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