FDA overhang persists

While Lipitor generic launch will drive Ranbaxy’s revenues in 2012, the resolution of FDA issues is key trigger for the stock. The Ranbaxy management last week stated that launch of the generic version of the cholesterol-lowering drug, Lipitor (Atorvastatin), would be undertaken on schedule, which is at the end of November.

The launch is crucial, considering the potential of the drug and the concerns over the launch in the backdrop of issues related to Ranbaxy’s Indian facilities, earlier put under severe scrutiny by the US Food and Drug Administration (FDA). The generic of the global blockbuster drug is expected to generate Rs 2,600 crore in sales in the 180-day exclusivity period, roughly 30 per cent of calendar year 2010 sales. The stock thereby gained almost six per cent last week.

 

While the launch of the Lipitor generic is likely to give a major push to US revenues for Ranbaxy, most analysts say the benefits are already factored in the current prices. According to Sushant Dalmia of PINC Research, resolution of FDA issues related to Indian manufacturing facilities with minimal penalties will be the most important trigger for the stock. Nomura analysts share similar views and say two key uncertainties on the stock are the amount of penalty and ramp-up in the base business.

The company also announced the generic launch of anti-ulcer drug Nexium (Esomeprazole) in Britain. Analysts feel it will not have much impact on earnings. On the other hand, the resumption in Nexium active pharmaceutical intermediate (API) supplies to Astra Zeneca that had been disrupted from May 2009 due to USFDA issues has given a boost to API sales in the current calendar year.
 

UPSIDES AHEAD?
In Rs crore	CY2010	CY2011E	CY2013
Net sales	8,961	9,194	10,626
Change (%)	18.0	2.6	15.6
Ebitda	1,865	1,576	2,155
Margin (%)	20.8	17.1	20.3
Net profit	1,497	1,076	1,417
Change (%)	404.8	-28.2	31.7
EPS (Rs)	35.6	25.5	33.4
PE (x)	13.7	19.1	14.6
Source: Capitaline, Bloomberg, Analyst reports

LIPITOR LAUNCH
Lipitor is a blockbuster drug that had global sales of $10.73 billion during 2010, while sales in the US alone were $5.33 billion. Ranbaxy will be undertaking the launch of the Lipitor generic with 180-day exclusivity, which is estimated to generate revenue of $500 million (Rs 2,580 crore on the current exchange rate) during the exclusivity period alone, reckon analysts. Nomura analysts also see minimal competition after the exclusivity period expires. Ever since the FDA issues related to Ranbaxy’s Indian plants at Paonta Sahib and Dewas started in 2008, concerns persisted on the monetisation of the filings from these plants. Ranbaxy had been able to monetise some opportunities, such as the Aricept generic (an Alzheimer’s drug) that was launched on exclusivity during the December 2010 quarter by shifting manufacturing to the New Jersey plant. Analysts see the Lipitor launch also coming through manufacturing facilities at New Jersey, for which Ranbaxy must have already made “site-change” filings and thereby anticipating the approval.

EXCLUSIVITY
The launches at exclusivity remain crucial for Ranbaxy’s growth in the US business. The launch of the generic anti-viral drug, Valtrex, on exclusivity at the end of 2009 had driven earnings during calendar year 2010. The US sales at $660 million had grown 66.2 per cent y-o-y and net revenues at Rs 8,961 crore grew 18 per cent during 2010. However, launch of the Aricept generic at the end of 2010 on exclusivity had not been able to bring in the desired results. US-based Greenstone launched another authorised generic version of Aricept, as a result of which Ranbaxy was able to garner lower market share and had to suffer price erosion. US revenues during the first two quarters at $170 million and $112 million declined 35.4 per cent and 30 per cent y-o-y, respectively. The net revenues at Rs 2,181 crore and Rs 2,093 crore declined 19.2 per cent and 2.7 per cent, respectively. Thus, the launch of Lipitor during the last quarter of 2011 is being eagerly awaited and could lead to a jump in the US revenues of Ranbaxy.

ASTRAZENECA
While Lipitor generics in the US is still awaited, last week’s launch of the anti-ulcer Nexium generic in the UK is not likely to add much to Ranbaxy’s earnings. Says Dalmia of PINC Research, “There are already many generic players selling the drug in the UK market. However, the only positive that can be seen is Ranbaxy being able to launch generics in the UK despite FDA issues.” Earlier in the year, they had tasted success with the resumption of Nexium API supplies to AstraZeneca in November 2010 (deferred since May 2009 due to FDA issues). This supply resumption pushed API segment revenues to $25 million and $40 million during the first two quarters, growing at 50 per cent plus over the corresponding period in the previous year.

DOMESTIC GROWTH
On the domestic front, Ranbaxy has seen double-digit growth in sales during the first two quarters of 2011, which should get a boost with expanded field force and enhanced rural penetration under Operation Viraat. The India business accounted for around 25 per cent of Ranbaxy’s revenues. Further, the base businesses in developed countries remains crucial, while additional boost may keep coming from launches on exclusivity. Despite the positives that may accrue due to the launch of Lipitor, analysts at ICICI Securities say a major risk is in the form of higher-than-expected penalties for resolution of FDA issues. By Bloomberg data, 33 per cent of analysts have a buy rating, while 25 per cent have a hold rating. The consensus target price for the stock is Rs 490, which means little upside from current levels.