Sunday, November 2, 2014

>RANBAXY LABORATORIES: Q2 – ahead of expectation driven by gDiovan (NOMURA)

Ranbaxy’s Q2 performance was better than our and consensus expectations on account of better-than-expected sales in its US business. In July 2014, the company launched generic Diovan in the US with six-month exclusivity, which was the key reason for the positive surprises on sales (~5%) and
EBITDA (~33%), in our view. We estimate Diovan sales at ~USD 110-120mn for Q2 vs our expectation of USD 76mn. Sandoz has also indicated generic Diovan sales at more than USD 100mn for the quarter, which holds similar market share as Ranbaxy. Also, we think that the EBITDA margin of Diovan came in significantly higher vs our estimates.

Sales in most of the other geographies ex India were below expectation, mostly on account of (a) API supply constraints from the Devas and Toansa facilities, and (b) lower tender (ARV) business.

With the announced merger with Sun Pharma (every shareholder of RBXY will receive 0.8 shares of SUNP), its share price is more linked to SUNP’s share price. Our target price of INR 694 is on based on 0.8x SUNP’s TP (based on the merger ratio) of INR 868.

Key highlights from Q2 results
 Consolidated revenue was ~5%/9% ahead of our/consensus expectations. This was on account of better-than-expected sales in the US driven by gDiovan.

 Material cost as a % of sales came in at 31.3%, lower than our expectation of 33.9% on account of higher sales of gDiovan having high gross margin. Other expense was ~4% below our expectation on account of cost control measures taken by company.

 EBITDA came in at INR 8.79bn, which was significantly above our estimate of INR 6.6bn and consensus expectation of INR 4.8bn on account of higher sales and lower other expense. Reported EBITDA implies margin of 27.3% vs our expectation of 21.5% and consensus of 16.1%.

 Reported PAT at INR 4.8bn was ~31% ahead of our expectation of INR 3.66bn and significantly ahead of consensus of INR 2.7bn.

 Regional performance –
o US business – US reported strong sales-driven launch of generic Diovan with six-month exclusivity in July 2014. US sales were ~24% ahead of our expectation. Q-Q, US sales were up USD 109mn, which we believe was largely driven by gDiovan. This corresponds to our estimate of USD 76mn.
We believe a significant part of the exclusivity sales is booked in the quarter.

o India business (including consumer healthcare) reported sales growth of 12% y-y, better than IPM growth. Company India sales were in line with our expectation. Though sales of consumer healthcare has declined y-y over last three quarters, management expects sales to pick up as excess inventory in the channel gets consumed.

o Eastern Europe and CIS - Sales in Q2 declined ~15% y-y and were ~15% below our expectation. This was on account of lower ARV sales in Russia and Romania. Geopolitical instability affected sales in Ukraine.

o Western Europe – Sales in this region grew ~15% y-y and was marginally below expectation. The company reported strong growth in UK, Germany, Spain and North Europe.

o APAC and Latin America reported sales declined ~18% y-y and were ~22% below our expectation. This was on account of (a) change in business model in Thailand, and (b) API supply constraints from the Toansa and Devas facilities, which affected sales in Malaysia and Brazil.

o Africa and ME reported sales declined ~4% y-y and sales were ~8% below expectation. As per management, this was on account of lower tender (ARV) business.

Key takeaways from the conference call
Nexium exclusivity – Company has reiterated it has six-month exclusivity in Nexium and will launch in the US market after approval.

Derivative position – Total outstanding derivative contracts stand at USD 373mn at end of Q2FY15 vs USD 470mn at end of Q1FY15. As per the company, currently contracts worth ~ USD 32mn mature every month, but this run rate will decline going forward.

Mohali facility – As per management, the Mohali facility will be the first facility to be remediated. The Mohali facility is currently under import alert from the US FDA.

Toansa and Devas facilities – As per management, API production at these two facilities have started after company voluntarily suspended supply to all markets in February 2014. These two facilities are under import alert from the US FDA.

 Net debt stood at USD 739mn at end of Q2FY15.