Friday, March 2, 2012

>RANBAXY LABORATORIES: Exceptionals wipe off operating gains

Ranbaxy’s 4QCY11 numbers were a mixed bag. The company capitalized on its launch of generic Lipitor and AG version of Caduet to clock net sales slightly ahead of our estimates at Rs37.3bn (up 79.2% YoY). While operating EBITDA was up 273.6% YoY at Rs8.6bn, the pre-exceptional PAT of Rs5.0bn was more than offset by extraordinary items – the DoJ settlement provision of Rs26.4bn and loss on derivative positions of Rs8.3bn - resulting in a net reported loss of Rs29.8bn.

We raise CY12 EPS estimates to Rs36.6 due to higher market share garnered in generic Lipitor (currently at ~42%) and introduce our CY13 EPS estimate at Rs29.9. This assumes Ranbaxy will be able to launch generic Provigil and Diovan during CY12. We upgrade the stock from a Sell to a Hold with a target price of
Rs419, valuing the company at 14x CY13.

Key highlights
 Ranbaxy wrote off inventory amounting to Rs621mn during the quarter. Other expenses increased significantly by ~123% YoY to Rs14.3bn, as a result of payments made to Teva in connection with generic Lipitor sales (details not disclosed). However, the impact on EBITDA was mitigated by higher margin sales from FTF opportunities. The company recorded an impairment charge on a fermentation facility of Rs820mn, which resulted in depreciation spiking up by 63.2% YoY to Rs1.6bn.

■ Sales in the domestic market were up 16% YoY to Rs3.9bn i.e. marginally above market growth. The OTC business, which is 16% of total domestic sales, grew at a brisk 20% YoY during CY11; however, Ranbaxy saw lower than anticipated growth in its anti-infectives portfolio.

 The North America region sales grew at a staggering 201.5% YoY to US$407, on the back of generic Lipitor and Caduet sales. Management stated that price erosion in Lipitor was ~65% and the company had a market share of ~42% at end-CY11.

 Pursuant to its consent decree with US FDA/ Department of Justice (DoJ), Ranbaxy made a provision of Rs26.4bn and agreed to forfeit three FTF opportunities. However, management claimed that the loss of these opportunities would not impact sales growth significantly.