Ranbaxy: Outlook seems cloudy

Performance of generic Aricept during the period of exclusivity is a negative surprise.

Ranbaxy is already preparing the Street for some bad news, before the fourth quarter results. One of the key reasons for the company’s disappointing numbers stems from lower-than-expected sales of its generic drug Aricept. According to IMS data, Ranbaxy’s monthly sales of Aricept is below the estimated revenue forecasts for the six-month exclusivity period (December 2010 to May 2011). While analysts had expected a price erosion of only 30 per cent, as it was an exclusive launch, the company has cited significant pricing pressures during its recent fourth quarter call.

Goldman Sachs estimates that the sales of Aricept could be around $35 million for December 2010, which imply net revenue of around $200 million over the six-month exclusivity period compared to an initial estimate of $397 million. A report by Elara Capital says, the company has reported six per cent year-on-year fall in sales, 510 basis points drop in earnings before interest, taxes, depreciation and amortisation margins and 137 per cent fall in profit after tax during the fourth quarter in 2010.

Analysts believe the pricing pressure on Aricept is specific to Ranbaxy, owing to continued uncertainty around resolution of its FDA issues. According to Goldman Sachs, Ranbaxy may need to incentivise distributors by providing higher discounts to offset any supply-related concerns. However, this should not be generalised to the opportunities for Indian generics. Also given the current scenario, brokerages are adopting more conservative approach on the pricing for the potential generic Lipitor launch in November 2011.

Hence, sales and earnings estimates for 2011 are being lowered to 16 per cent and 10 per cent, respectively. The report says: “We change our 2011-13 EPS estimate by —4 per cent, 23 per cent, 4 per cent owing to our relatively weaker outlook for the base business higher margins in 2012E, and lower diluted share count of 421 million (we expect FCCBs redemption of $560 million vs equity dilution previously).”