Lipitor is biggest catalyst to Ranbaxy's growth: Expert

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Ranbaxy is down nearly 3% at Rs 437 today. The market seems to have apprehensions about what will eventually happen with the company's strategy on the Lipitor generic. Chirag Talati, pharma analyst at Espirito Santo Securities tells CNBC-TV18 that the company is most likely set to go ahead with the launch of the generic version, but how much market share it commands needs to be watched.

He says that the event of Ranbaxy selling out or pulling in a partner for the drug seems very unlikely, but in case it does happen, valuations for the company will be cut by nearly 50%.

Below is the edited transcript. Also watch the accompanying video.

Q: What do you think Ranbaxy's strategy will be and do you think there are reasons to be worried for investors now in case they overestimated the earnings from Lipitor?

A: We see this as the biggest catalyst, not only for Ranbaxy, but for the global pharma industry as a whole. Following the Q3 results and going into the Lipitor catalyst, we turned neutral on this stock for the first time in around 14 months.

Our base case assumption always has been that we expect Ranbaxy to be able to launch Lipitor on November 30th, but we has apprehensions over its ability to win market share.

Come today, it still remains kind of a buying rewind and there is lot of apprehension about what is going to turnout. However, we still think that Ranbaxy should be able to launch Lipitor today, most likely from its own lab facility.

The exact details in terms of how the launch would pan out, there are range of possibilities that could play out:

First, we could see a broad agreement being reached over the contours of the comprehensive settlement; even here, we don't know what is the quantum of penalties that Ranbaxy could have, but this could be the best case scenario for Ranbaxy.

Secondly, there is likelihood that there will be low comprehensive settlement but if they approved Lipitor on a case-by-case basis, and while Ranbaxy should be able to monetise Lipitor in this case, this is bad because it still leaves the base business in a state of limbo. Finally, there still remains a likelihood that we might not see any news coming out from the FDA and Pfizer, and Watson just proceeds on with their launches. This is a bad case for Ranbaxy, but not a gloom and doom scenario because we still expect Ranbaxy to be able to hold on to its exclusivity, given the kind of legal framework that plays out in the US.

So our take is that we do expect some announcement coming out from Ranbaxy and FDA later today, and in most likelihood, we should be able to see Ranbaxy being able to launch Lipitor over the next two-three days. After that, all eyes will shift on to market share and we have our apprehensions on how they will be able to win market share for Lipitor.

Q: What about the worse case scenario that Ranbaxy is forced to sell the rights... how probable is that and how would that affect estimates for Ranbaxy?

A: There is a very minor likelihood in our opinion that Ranbaxy will be forced to selloff its rights to somebody else. If you look at the legal framework, even in Ranbaxy does not get an approval today but they get it in next two-three months, the exclusivity still plays out. There is a very little likelihood that will lose out their exclusivity. So for Ranbaxy to partner or sell out its rights for next two-three months, it is very low. If that were to happen in still there would be some kind of profit sharing that would play out but that would lead to 50% cut in terms of our valuation for Lipitor as a whole.

What is more important over here is that how it impacts our estimates or even expectations of its other Paragraph IV pipeline products and that is where market will start to have apprehensions about. So if this is a kind of scenario, then we could clearly see Rs 150 valuation for its Paragraph IV pipeline turning out to close to Rs 75, so you could see a dramatic cut happening, but that is not something we anticipate will happen.

Q: What is your sense of how prickly relationship is right now between Ranbaxy and the US FDA?

A: The exact state of what is going on with the FDA and Ranbaxy is something nobody has a clue about. The relationship has clearly been frosty, and time and again, we have seen FDA countering Ranbaxy or Ranbaxy appointing its own people to negotiate and lobby with the FDA, so relationship is not at its best. However, let's not forget that this is a drug that is the largest selling drug in the world, and if US FDA doesn't approve the drug at this point in time, it would result in a significant loss to the medicare and medicare agencies as well as the insurers. So in all probabilities, Lipitor will be launched by Ranbaxy at some point.

In terms of the settlement, that is where there are concerns over whether they will be able to get Devas and Poanta Sahib back on track. It's difficult to predict what is going to play out because some the issues that were pointed out in Devas with regards to cross contamination and stuff, those were pretty serious issues and Ranbaxy went on an offensive mode rather than taking it lightly with the FDA. That has not worked too well.

So at this point in time, we don't know how the lobbyists or the consultants are working with the FDA, but a settlement would be very favourable for Ranbaxy. It just remains to be seen how it gets worked out.

Q: There is divergence in estimates on what kind of market share Ranbaxy might eventually get given the response from Pfizer, and secondly, on the quantum of penalties that Ranbaxy might have to pay eventually, can you give us your thoughts?

A: For past 12 odd months, we have been saying that Ranbaxy is likely to disappoint on analyst expectations as far as market share is concerned, and our thesis was based on the channel dynamics that play out in the US market. If you look at how the US market has played out in terms of prescriptions, over the past ten years, the percentage of prescriptions dispense through the main order pharmacy channel has gone up from 10-20%, but at the same time it is as high as 40% for Lipitor. This is a segment where Ranbaxy historically has virtually zero sales coming out. So this is an area where we have had our concerns and that's why we have been expecting market share of close to only 25% for Ranbaxy with a six month time period.

Over the past six odd months, we have seen moderation in analysts and investor expectations in terms of market share, and the kind of optimism that was built with regards to Ranbaxy winning 40% market share, I think that has now come down to 25-30%.

So we hold the view that Ranbaxy should be able to win only close to 25% market share, which in this case, would turn out to be close to Rs 28 in PAT in terms of its EPS over six months.

With regard to your question about penalties, there is a range of outcomes here, but what we have been saying is that let's not forget that this was a whistleblower-led investigation that took into place, and our analysis indicates that when it's a whistleblower-led investigation and where is department of justice is involved, you see the quantum of penalties on the higher side. Our base case assumption at this point is that we could see USD 300-400 million penalties, but then, the range of outcome remains very high over here.