Buy Ranbaxy, target Price Rs 505: Citigroup

RELATED NEWS Buy Cairn India; target Rs 163: Motilal Oswal Wipro a market performer: Prabhudas Lilladher Buy RIL; target of Rs 2206: Motilal Oswal JK Cement a market outperformer: P Lilladher Buy ICICI Bank; target Rs 931.90: ABN AMRO ALSO READ News and Notices about Ranbaxy Labs See interviews with Ranbaxy Labs Management See what other Experts & Brokerages are saying about Ranbaxy Labs See previous Results of Ranbaxy Labs Ranbaxy Labs BSE | NSE 25/05/12 Are Mutual Funds betting on Ranbaxy Labs?

Citigroup is bullish on Ranbaxy Laboratories and has maintained buy rating on the stock and expects a target price of Rs 505.

 

Citigroup research report on Ranbaxy

 

Pfizer's reissue bid rejected 

 

The US PTO has preliminarily rejected Pfizer's application to reissue the '990 patent on Lipitor that Ranbaxy had invalidated. While the rejection is "non-final" - i.e. Pfizer can try to get it changed, it improves the probability of early exclusivity (March 2010) for Ranbaxy. 

 

Exclusivity likely in 2010 

 

In its patent litigation with Pfizer over Lipitor, Ranbaxy had invalidated the '990 patent (expiring in Jun '11) but lost out on the '893 patent (expiring in Mar '10) - thus allowing it to launch with exclusivity on 25 Mar 2010 (after the '893 patent expired). Had Pfizer been able to get the '990 patent reissued, Ranbaxy's exclusivity would have been postponed by 15 months. The US PTO's decision reduces the probability of such a delay. 

 

Potential upside 

 

Lipitor is a drug with US sales of USD7.8billion. Besides the one-time upside from the 180-day exclusivity (we estimate Rs40-45/share), its exclusive presence in such a key product would provide Ranbaxy significant leverage with the trade, thus benefiting its overall US generics franchise. The c.USD400million cash flow would also come in handy in case Ranbaxy's USD440m FCCB does not get converted and has to be redeemed. 

 

Another catalyst 

 

Ranbaxy's fundamentals have been improving, as reflected in: a) rising share of high margin emerging market sales; b) tie-ups to enhance pipeline in niches like biogenerics, oncology & peptides; c) robust growth in base US business. But the stock has lacked catalysts, leading to it being out of favour on the bourses. However, with the recent settlement of the Valtrex litigation, the improved probability of an early generic Lipitor launch and more p atent settlements likely, we retain our Buy (1M) rating.  

 

Valuation

 

We prefer to value Ranbaxy using EV/Sales methodology to reflect a much fairer value of Ranbaxy's business today. We believe that Ranbaxy's current cost structure and profitability are not normalized. Its cost structure is highly fixedcost oriented and is a legacy of the heady days of very high profitability in global generics. We believe this is being corrected now, and the benefits of the aggressive cost reduction initiatives have started coming through in the financials in CY06. With its presence across multiple geographies and wide basket of products, we believe the business is not fairly valued at 2.5x sales - this is primarily on account of profitability being under par. A large part of the costs are discretionary and related to pipeline building measures for future growth, which do not contribute to revenues in the near term. Our fair value multiple of 3x Sept 07 EV/Sales is at a discount to its peers such as Cipla and Sun and towards the lower end of the company's EV/Sales range of 2-4.6x over the past five years. Because the company is still emerging from a period of poor sales growth and sub-optimal profitability, we will wait for growth to return before considering applying a higher multiple. At 3x Sept 07 EV/Sales, our target price is Rs505.