Dr Reddy's, Lupin score over Ranbaxy Labs

Though Ranbaxy gained well from launch of blockbuster generics of Lipitor, short-term concerns cloud its performance, whereas triggers are in place for other 2 pharma majors

Indian pharma majors namely, Dr Reddy’s, Lupin and Ranbaxy marked good performances in the US markets, a major revenue contributor for all the three, which boosted their overall revenues for the quarter ended March 2012. However, there were some weak links, too. German performance continued to be disappointing for Dr Reddy’s, pulling down its European revenues and profitability. European and Latin American sales also took away the sheen from Ranbaxy’s stellar show in the US, led by Lipitor exclusivity. Lupin stole the show with good performance in all geographies. However, rising costs leading to margin compression and decline in profits disappointed the Street.

 

Thus, the stocks corrected as a knee-jerk reaction post-results last week. However, they gained lost ground on Monday as overall prospects of the companies still continue to be good, though Ranbaxy is still coming out of the woods and some concerns continue to be associated with it.

Dr Reddy’s Laboratories
For the March 2012 quarter, the performance of Dr Reddy’s in the US remained strong, led by anti-psychotic Zyprexa (olanzapine) generics launched on exclusivity basis in October 2011 and supported well by other products. US sales, which account for almost 40 per cent of total revenue, grew by a strong 48 per cent as market share in limited competition products lanzaprazole, tacrolimus, fexofinadine and fondaparinux increased. Antibiotic sales from the acquired Glaxo’s Bristol plant, too, grew well. The Alegra D-24 and omeprazole in the US contributed a good $130 million to overall over-the-counter (OTC) revenues. Olanzapine sales in the quarter though, declined sequentially but is understandable looking at the higher shelf stocking during the previous quarter.

ROBUST SALES GROWTH
March quarter, 2012	Dr Reddy’s	Lupin	Ranbaxy*
Net sales	2,658	1,883	3,695
% change y-o-y	31.8	24.6	72.6
Ebitda	746	332	1,015
% chg y-o-y	69.7	23.6	138.2
Ebitda (%)	28.1	17.6	26.8
Net profit	343	156	125
% change y-o-y	2.5	-31.5	309.6
FY2011-2012
Net sales	9,674	6,960	9,958
% change y-o-y	29.5	22.0	16.7
Net profit	1,426	868	-2,890
% chg y-o-y	29.2	0.6	–

P/E (x) (FY2012-2013)17.519.813.1 Figures in Rs  crore, * March quarter and CY12 figures include one-offs 
Source- Capitaline plus, Analyst reports

The domestic business marked a major improvement with a 16 per cent growth during the quarter, crossing industry growth of 14 per cent for the first time in the fiscal. For 2011-12, domestic growth came in at 11 per cent. The field force adjustments and new product launches are paying off and analysts feel domestic growth will be consistently above industry growth by second half FY13.

Lower realisations in Germany (Beta Pharma; which accounts for about 15 per cent of total revenue) and provision on German tender business impacted revenues, which at Rs 118.8 crore were almost flat during the quarter. For 2011-12, European revenues (Rs 826 crore), thus, declined two per cent year-on-year. For the quarter, an impairment charge of Rs 104 crore, along with a 48 per cent rise in tax outgo, restricted growth in net profit.

Going ahead, Dr Reddy’s business prospects in the US still remain strong. It has already launched two new anti-psychotic drugs, Geodon and Seroquel generics. The limited competition products and a good pipeline of new launches on exclusivity strengthen future prospects further. The pharmaceutical services and active ingredients (PSAI) segment is growing well (35 per cent growth in March quarter and 21 per cent growth in FY12) and analysts expect better growth in FY13, led by higher contributions from Indian plants. Surjit Pal at Elara Capital says rich Para (IV) portfolio and lower base in Indian formulations with strong Russian OTC growth keep him positive on the stock. Almost 73 per cent of analysts, according to Bloomberg data, have a ‘buy’ rating on the stock with a one-year consensus target price of Rs 1,860.

Lupin
Lupin, too, reported a strong 21 per cent growth in the US, the market contributing 36 per cent to its revenues during the March 2012 quarter. As the newly-launched psychotic drug, Geodon (launched under shared exclusivity), provided a boost, the antibiotic Suprax too, grew a good 30 per cent. Japan business, which contributes 12 per cent, also grew by a strong 66 per cent led by the acquisition of Irom. Lupin’s domestic sales also grew faster than its larger peers. Domestic sales, contributing around a third of revenues, grew 23 per cent, compared to Dr Reddy’s 16 per cent growth and Ranbaxy’s 10 per cent.

Lupin, however, disappointed the Street on costs, which led to decline in margins. Depreciation increased due to the newly commissioned Indore SEZ. Interest cost also jumped 86 per cent year-on-year as debt increased Rs 440 crore. The additional inventory of Geodon and Fortamet (reflecting in higher sales) led to a Rs 56-crore increase in tax. Tax outgo further increased with Goa and Mandideep plants losing their tax benefit status; total tax was up 333 per cent to Rs 134.77 crore. Hence, consolidated net profit at Rs 155.64 crore for the quarter dipped 31.5 per cent year-on-year.

Moving forward, the company plans launch of 20 new products, including 10 oral contraceptives during FY13. During the next three years, it plans to launch 120 new products. Analysts at Emkay Global estimate new launches in the US like Solodyn (45, 90 and 135mg), Tricor, Combivir and Seasonale will lead to 33 per cent compounded annual growth rate (CAGR) in base US business over FY11-14. They estimate domestic business to grow at 15 per cent CAGR during FY12-14. Overall, most analysts are bullish on the stock. More than 70 per cent of them, as per Bloomberg data, have a ‘buy’ on the stock with a consensus one-year target price of Rs 574.

Ranbaxy
Ranbaxy’s strong US growth, driven by Lipitor launch on exclusivity, drove its performance in the March quarter. However, it is now getting overshadowed with near-term concerns. The Lipitor exclusivity is likely to end soon (estimated May-end) and competition is expected to increase, leading to price erosion. The European and Latin American businesses are being impacted by adverse currency movements and regulatory problems are likely to remain. The domestic growth, too, has been below industry trend. Thus, in the near-term, the stock has limited upside, feel analysts. For investors with a medium-term perspective, they could add on significant declines as analysts’ expect Ranbaxy’s performance to improve, led by new launches on exclusivity over the next few quarters.