First-to-file launches are key triggers for Ranbaxy

The FDA clearance for its 2 units, an overhang currently, should also help narrow the valuation gap with peers

Ranbaxy Laboratories has outperformed its peers and the broader benchmarks by a wide margin, gaining 50 per cent in August. However, it is still trading at a 30 per cent discount to its peers (Dr. Reddy's and Sun Pharma). This gap, analysts believe, can narrow following the timely approval and launch of first-to-file drugs and if the company gets the go-ahead from the US Food and Drug Administration (FDA) to start production at two of its affected plants.

While it has substantial operations across the globe, the primary trigger for the recent up uptick in the stock has been improving growth visibility in its biggest market - North America - which accounted for 43 per cent of its 2012 (calendar year or CY) revenues. The biggest lever for base business margins in the coming quarters, according to Macquarie Research analysts, is the ramp up of acne treating drug Absorica, which can add about $100 million to the company's CY15 earnings before interest, depreciation, taxes and amortisation (Ebidta). In fact, the latest numbers indicate the product continues to gain market share (at 14 per cent, up 140 basis points over the last month) and is the key growth driver for the firm's US sales. At 14-16 per cent (CY13 and CY14), it is by far the biggest contributor to the earnings per share (among current basket of products in the US).

Macquarie Research in its recent report expects Ebidta run-rate to grow by over 150 per cent to reach $350 million by CY15. Margin improvement over the next couple of years is expected to be driven by its dermatology formulation sales, better asset utilisation after FDA issue resolution and operating leverage in emerging markets. The research firm pegs the target price for the stock at Rs 470.

The other trigger for Ranbaxy is the launch of first-to-file drugs, which give exclusive rights to market drugs in the US for a fixed period with limited competition. Over the next one year, the company will be banking on three such products - Diovan, Valcyte and Nexium. Diovan (controls high blood pressure) and Valcyte (an anti-viral) are expected to be launched by the end of 2013 and gross about $300 million in sales. Nexium, an antacid, is the largest opportunity for Ranbaxy with expected sales during the exclusivity period at $275 million and could be launched by May of 2014.

All three drugs could boost net profits to the tune of $400 million over the next two years. The follow-on sales (after the exclusivity period) are also likely to bring in steady revenues. Fortune Research's Hitesh Mahida says Ranbaxy has carved out a significant market share in all its first-to-file launches (excluding Lipitor) after the exclusivity period, despite intensifying competition.