Order boost, but FDA overhang remains

The Ranbaxy scrip has gained 6 per cent over the last one week to reach Rs 588.65. The stock got a boost recently after receiving a Rs 605-crore order for anti-retroviral drugs last week. This order will provide some upside to the earnings estimates.

However, a major boost for the stock is likely to come with the resolution of the FDA issues related to the Poanta Sahib and Dewas manufacturing facilities.

While the management is confident of an early resolution of these issues, it has not given any time-line. Despite the FDA overhang, recent approvals such as that for Donepezil inspire confidence that growth in the US revenues is on track.
 

ROBUST OVERSEAS, DOMESTIC GROWTH
In Rs crore	CY09	CY10E	CY11E
Revenues	7,557	8,672	9,497
Ebitda %	17.90	20.40	19.80
Net profits	311	1415	1258
PE (x)	80	20	19
E: Estimates                                        Souce: Bloomberg

Its domestic business too is exhibiting good growth. This has led 50 per cent of the analysts to maintain their positive rating on the stock, while 25 per cent maintain hold ratings. Only 25 per cent have given a sell rating due to the FDA issues.

South African order
The South African joint venture company, Sonke Pharmaceuticals, in which Ranbaxy has a 70 per cent majority stake, clinched a rand 913.5-million order from the South African government. Sonka has launched 16 products till date in the South African market, out of which eight are manufactured locally. The recent order will see Sonka launch another nine anti-retroviral products that will be manufactured by its facilities in South Africa and Ranbaxy’s facilities in India.

Sound prospects for US business
For Ranbaxy, the resolution of the FDA issues remains crucial. While the resolution of issues related to the Poanta Sahib and Dewas plants was expected by the year-end, hopes diminished as no concrete time-line for the resolution was given by the management. This led to the stock falling in November. Ranbaxy has managed to see through some approvals with site change filings, raising expectations on salvaging other first-to-file opportunities too.

Considering that the launch of the Valacyclovir generic has been driving earnings for the last three consecutive quarters, FTF launches (like that of Aricept generic) remain crucial for Ranbaxy’s US business.

The recent FDA approval for the launch of Donepezil (Alzheimer’s drug) is positive but has been possible through a change in manufacturing sites. While the Valacyclovir launch on exclusivity has driven revenues in CY10, the Donepezil launch will drive revenues for CY11.

However, approval for the launch of the Atorvastatin generic in November 2011 will have to be carefully watched.

Domestic growth on a steady wicket
In other segments, domestic sales have benefited from improved penetration achieved by expanding the field force under project Viraat. Ranbaxy has also been able to resume Nexium API supplies in Q4CY11 after they remained suspended since May 2009 over the FDA issues. This is positive for the API segment, which has seen sluggish sales in the past few quarters.

With good prospects in the domestic segment and robust US growth, the FDA issues remain to be sorted out. The stock trades at 20.34 x the CY10 earnings estimates.