Monday, December 19, 2011

>RANBAXY:Alert: Lipitor Launch-Another Milestone on the Road to Recovery

  Road to recovery — The US FDA approval for generic Lipitor gives us more comfort on Ranbaxy's ability to recover lost ground in the US. Besides the material upside during the exclusivity period (we believe the disquiet over profit sharing to Teva is overdone) & reasonable recurring upside thereafter, it provides Ranbaxy leverage with the trade & should rub off favourably on its underlying biz. Moreover, approval for the ANDA, originally filed from Paonta Sahib, via a site transfer points to the progress made in the remediation process. Maintain Buy (1H).

 Lipitor comes through as well — Ranbaxy continued its near 100% track record of launching its FTF products, despite FDA issues at its plant - Flomax (also monetized) being the only exception. The Lipitor approval follows approvals for Imitrex (albeit delayed), Valtrex & Aricept - all through site transfers to its plant in New Jersey. However, the Lipitor approval is more encouraging, as we believe the original filing was made from the Paonta Sahib site that is subject to an AIP.

 Our take on Teva's involvement — Ranbaxy indicated that it would share some portion of profits on Lipitor with Teva, during the exclusivity period. Based on Teva's guidance, this appears to be cUS$100m at the higher end - i.e. cRs9-10/sh (one time) for Ranbaxy. We do not see this as very material in the overall context. We would have been concerned, had a tie-up involved Teva distributing the product - as that would
mean it retains market share beyond exclusivity as well & Ranbaxy just gets a one time monetary upside (a la Flomax). However, in this case, Ranbaxy will be one of the leading players in generic Lipitor post exclusivity as well..

 Our US analyst says — (Alert: TEVA: Teva Entitled to a Portion of Generic Lipitor Profit) Terms of the agreement between the parties remain undisclosed; however, we believe it likely contained a range of scenarios incorporating different levels of service provided by Teva (e.g. API manufacturing, fill finish, distribution). We believe that Ranbaxy entered into an agreement with Teva as a contingency to accommodate the uncertainty created by its ANDA filing in order to ensure it fully monetized the Lipitor
opportunity .We assume that the $0.10 referenced by Teva in its 3Q11 call implied that Teva provided a wider range of services to support Ranbaxy’s generic Lipitor launch.

■ Financial Impact — We understand that price discount for generic Lipitor is c50%. Assuming 30% market share, we calculate generic Lipitor could add cRs35 (cRs25 excluding payoff to Teva) to Ranbaxy's EPS during exclusivity. Post this period, we expect higher price erosion (c90-95%) & lower market share (c20%), potentially translating to recurring EPS upside of cRs2 (c12% of CY11E core EPS).

■ What’s Next — We believe investor focus will now shift towards Lipitor market share data (Ranbaxy to ramp up slower than Watson), reflection of Lipitor in earnings, closure to FDA/DoJ issues (potentially imminent), commencement of Nexium formulation sales to Astra and trends in core biz (expect margins to keep improving). Confidence in rest of the FTF pipeline (Actos, Valcyte, Nexium) should be higher.

To read the full report: RANBAXY