>RANBAXY (CITI)

■ Lower Risk & Lower Value — We believe the impact of Astra’s settlement with Teva (for Nexium) on Ranbaxy should be viewed from the risk & valuation perspectives. While it could entail a modest impact (cRs11/sh) on fair value, it also significantly lowers the risk of Ranbaxy’s exclusivity being triggered earlier. This protects the more valuable leg (4.5 yr supply contract) of Ranbaxy’s deal with Astra. We believe the lower risk more than makes up for the lower value. Maintain Buy.

■ Teva settles patent litigation with Astra — Teva & AstraZeneca have settled all patent disputes for generic versions of Astra's Nexium. Astra has granted Teva with a license to launch generic version of Nexium delayed release capsules, subject to regulatory approval, on or before May 27, ‘14.

Buy: Teva’s Nexium Sett. – Lower Risk Offsets Valuation Impact

■ How does it affect Ranbaxy? — Ranbaxy’s settlement with Astra allows it to launch
generic Nexium on or before May 27, ‘14, with 180 days exclusivity. The settlement with Teva essentially means that there will be two players (Ranbaxy & Teva) in the market during the exclusivity period. We had assigned Rs22/sh in our valuation towards the 6m exclusivity. This would have to be shared with Teva.

■ Risk overhang lifted — While the exclusivity upside could be lower, we believe this also lowers one key risk w.r.t. the Nexium settlement. Ranbaxy’s deal with Astra includes a supply contract (upto May ’14, valued at Rs35/sh) and a launch with 180 days exclusivity (in May ’14, valued at Rs22/sh). If Teva had won its litigation with Astra, it would have triggered Ranbaxy’s exclusivity earlier – thus impairing the supply part of the deal. It also ensures that Ranbaxy has time on its side to get approval for Nexium (relevant, given its issues with the FDA).

■ Potential impact on valuation is modest — Our target price includes Rs22/sh towards exclusivity sales of Nexium. If one assumes that this is shared with Teva, it could entail an impact of Rs11/sh (assuming Teva takes away half of the upside) or c2% on our fair value for the stock.

To read the full report: RANBAXY