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Given the recall, write-offs and forex losses, the company’s earnings before interest, tax, depreciation and amortisation (Ebitda) margins thus plummeted to a mere 1.94 per cent compared to the previous quarter’s 15.43 per cent on the back of rising costs. The rise in costs can be attributed to the increase in research and development expenses, Atovastatin (Lipitor generics) recall, organisational structuring and productivity expenses. While some of these are one-offs, the company is likely to continue to see higher expenses in the coming quarters as it will continue to incur expenses towards organisational structuring and productivity. Further, Ranbaxy is likely to keep paying hired consultants for resolution of issues related to its Dewas plant, which can keep costs on the higher side for a few quarters and thus margins under pressure. The company has not given any timeline for the resolution of the issues related to Ponta Saheb and Dewas plants which is another overhang for the stock, that is likely to remain under pressure in the near-term.
The stock had started declining after scaling its 52-week high of Rs 578.3 in the first week of September 2012. The market expectation at that time had increased with Lipitor generics continuing to maintain good market share even after the end of exclusivity in the month of May 2012. The expected launch of cardio-vascular product, Diovan Generics on exclusivity had also enthused the markets. Diovan, the drug with $2 billion in US sales, was estimated to garner around $200 million revenues during exclusivity, for Ranbaxy.
However, the setbacks started post-September. While Ranbaxy has been unable to get the approval from the USFDA for the launch of Diovan generics till date, it also had to recall batches of Lipitor generics. The product, which contributed around $28 million in sales in the September 2012 quarter, was anticipated to contribute $25 million in the December quarter. Analysts at Angel Broking observe that the product recall initiated in November 2012 caused Ranbaxy’s Lipitor market share to fall from a peak of 45 per cent to less than five per cent. All these added to the woes and the stock continued to plummet to closing lows of Rs 409.05 on February 14, 2012, a decline of almost 30 per cent from its 52-week high.
The impact of Lipitor recall was well evident on Ranbaxy’s December quarter results. Although the resumption of Liptor generic’s production by Ranbaxy on Monday did provide some boost to the stock, analysts do not expect it to have much impact on earnings now given the large amount of competition, price erosion and loss in Ranbaxy’s market share. According to Nomura Research, the Lipitor market share now stands at just 1.6 per cent. Analysts at Angel Broking observe, “We believe that Lipitor will not make any difference to the overall numbers of the company and the improvement in the core business profitability is crucial for the stock outperformance.”
Meanwhile, the company’s launch of diabetic care product, Actos generic, in the month of August 2012 is likely to have contributed $38 million in the quarter. The launch of dermatology product, Absorica, in the December quarter is also estimated to have contributed about $20 million and is likely to see sales rising to $40-50 million in the quarters to come. However, the launch of Diovan is key to any major upside. The market is looking for the launch of Diovan generics, for which the company has not given any clarity on the timeline.
Overall, although the inventory write-offs will be absent in the coming quarters, analysts expect profitability to remain subdued. Also, unless Ranbaxy provides clarity on the launch of Diovan and is able to resolve the USFDA issues related to Paonta Sahib and Dewas plants, its stock is likely to remain an underperformer.
