>RANBAXY: Integrating R&D with Daiichi – Margin Accretive

Daiichi & Ranbaxy’s move to integrate its NDDR efforts was expected, given their respective strengths. Besides some cash inflow, we believe this could be accretive at the EBDITA (by c140bps) & net income (by c8%) levels. This is the first tangible sign of the synergies that Daiichi could bring in & should help bring margins closer to the normalized range from current low levels. Maintain Buy.

■ Integrating NDDR division into Daiichi – Ranbaxy has transferred its New Drug Discovery Research (“NDDR”) division to Daiichi Sankyo India Pharma Pvt Ltd. This is on expected lines, as it made sense for Daiichi, given its strengths, to spearhead the group’s new drug discovery efforts. Ranbaxy would remain active in R&D for drug delivery systems and generics.

■ Deal Contours – Ranbaxy would transfer all its NDDR assets and around 150 employees to Daiichi. In return, it would receive some upfront consideration (undisclosed).

■ Margin & Net Income Accretive – Ranbaxy spends c7% of its sales on R&D – we estimate c20% of this spend is on new drug discovery. This move could potentially lead to EBIDTA margins expanding by c140bps (c13% of our CY10E EBIDTA estimate). It remains to be seen whether the entire saving would flow down toEBIDTA or Ranbaxy chooses to step up its efforts on generics & NDDS R&D. The upside at the net income level would be lower, as Ranbaxy loses some of its tax shield (R&D gets a 200% weighted deduction for tax purposes). We estimate that if the savings are not redeployed, our CY10E recurring net income could increase by c8%.

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