Ranbaxy Is A Risky Bet

The country’s largest pharmaceutical company by sales, Ranbaxy yesterday disappointed the street with its June quarter result. The company has reported 55per cent rise in its sales to Rs 3,174 crore. Owing to the huge forex loss of Rs 966 crore, the company reported net loss of Rs 580 crore which is against the market expectation of a profit of Rs 235 crore. The shares of Ranbaxy have lost by nearly 5 per cent in the last two trading days.

Also, rupee depreciation has taken a toll on the profitability of this generic giant. The topline witnessed a rise of 55 per cent due to rupee depreciation (in constant currency terms the growth is 28 per cent). The forex loss, however, was a huge Rs 966 crore of which Rs 250 crore was on account of expenses, Rs 600 crore was due to mark to market loss on derivatives and Rs 116.5 crore was due to the interest cost.

Ranbaxy, during the quarter, clocked only 13 per cent growth in its domestic business with a whopping 68 per cent growth in exports .The exports growth has been mainly due to ‘Lipitor’ that the company had launched in December 2011. On a sequential basis i.e. in comparison to the March quarter, the export revenues have declined by 18 per cent. The exclusivity of the ‘Lipitor’ brand has ended in May 2012. The company said that it held a market share of 55 per cent towards the end of the exclusivity. It is also hopeful of maintaining its market share of 40-45 per cent going ahead. It should be noted that after the end of the exclusivity period the market is crowded by four more manufacturers, including another Indian generic giant, Dr Reddy’s Lab. With that there would be some shift of the market share towards the lower side, thus reducing Ranbaxy’s revenues.

The company witnessed 140 per cent rise in its North American revenue. In the June quarter of the last fiscal the U.S. sales amounted to USD 95 million, growing by 2.68 times to USD 255 million. From this calculation it can be said that over 50 per cent of the U.S. sales came from Lipitor. Now with the exclusivity of Lipitor gone, one has to see how the company fares in its base business growth in the U.S. The growth in Europe and CIS region was 19 per cent. It is however facing a few issues in Romania. This has been so in the emerging markets also due to the high exchange rate variations.

During the quarter the company launched an anti-malarial drug called Synriam in India. It will also launch a new product called Sevikar in Romania. The quarter also saw two USFDA approvals in the dermatology segment i.e. Absorica and Ximino. Absorica is expected to be launched by the end of 2012. We believe that there could be few product launches in the USA this year which may include a generic of Actos (anti-diabetic) and Tricor (anti-chloresterol).

Another branded drug called Diovan is also expected to lose its patent by September this year Ranbaxy may take this opportunity to launch its own generic version. While Lipitor has lost the exclusivity, these products can help the company to clock good revenues. The place of Lipitor cannot be filled in as it was the biggest drug of the pharmaceutical sector. It therefore needs to be seen how the company performs in the next quarter when we would see normalised earnings sans the Lipitor exclusivity.

On the consent decree front there is no timeline given by the company as yet. Investors are now getting worried as we believe that the three above-mentioned FTFs are also linked with the resolution of the consent decree. By closing time yesterday the stock had lost 3.35 per cent. We initially had tagged an ‘avoid’ rating for the scrip but will keenly watch the progress of the company in this quarter which will provide some cues. Nevertheless, investors with some appetite for risk can take a cautious low exposure to the stock.