Buy Ranbaxy Laboratories, target Rs 500:Sharekhan

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Sharekhan is bullish on Ranbaxy Laboratories and has maintained buy rating on the stock with target price of Rs 500.

 

Sharekhan Stock Broking firm research report on Ranbaxy Laboratories.

 

Key points

 

Ranbaxy Laboratories (Ranbaxy) is increasing its stake in Zenotech Laboratories (Zenotech) from 7% currently to 45% at a price of Rs160 per share, resulting into a total investment of Rs214 crore. The above increase in stake in Zenotech to 45% will trigger a mandatory open offer by Ranbaxy to other shareholders of Zenotech, at a price of Rs160 per share or as determined by the Securities and Exchange Board of India (SEBI) regulation. 

 

Zenotech is a Hyderabad-based research driven pharmaceutical company that develops new biological entities in the areas of cancer and neurology. The company currently has a portfolio of ten oncology injectables and five anesthesiology injectables developed and marketed in India. Zenotech also has an existing agreement with Ranbaxy for developing and marketing 14 injectables (Abbreviated New Drug Applications [ANDAs]) including seven in oncology in the US and Canada. 

 

By increasing its stake in Zenotech, Ranbaxy is preparing to capitalise the huge opportunity that awaits pharmaceutical companies in the field of biologics and oncology. The opening up of biosimilars or biogenerics in the regulated markets of the USA and Europe further enhances the attractiveness of this segment. Ranbaxy aims to enter the European Union biologics market through this acquisition by end of 2010-11. With the Zenotech acquisition, Ranbaxy plans to file seven ANDAs in the oncology segment for the US market in the coming months. 

 

As per media reports, Ranbaxy is in advanced stages of negotiation with numerous private equity players to hive off its new chemical entity (NCE) research division into a separate entity by 2008. Ranbaxy's current pipeline consists of two molecules in the clinics and another six-seven molecules in the pre-clinical stages. The demerger of the NCE division will unlock value for investors, generate new funding options for discovery research and de-risk the company's main generic business. 

 

We maintain our positive outlook on Ranbaxy and feel that it is among the best placed companies to leverage the global generic opportunity with its extremely diversified business model and a large product portfolio. At the current market price of Rs439, Ranbaxy is trading at 23.7x its estimated CY2007 and 24.8x its estimated CY2008 earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs500.

 

Ranbaxy to increase stake in Zenotech

 

Ranbaxy is increasing its stake in Zenotech from the current 7% to 45% at a price of Rs160 per share, resulting into a total investment of Rs214 crore. This involves: (a) Preferential offer to Ranbaxy by Zenotech: Zenotech will issue 54,89,536 shares of Rs10 each on a preferential basis to Ranbaxy at a price of Rs160 per share (including premium). (b) Purchase of shares from the existing promoters: An increase in stake to 45% will trigger a mandatory open offer by Ranbaxy to other shareholders of Zenotech at a price of Rs160 per share or as determined by SEBI regulation. Post the offer, the existing promoter group of Zenotech will have a 25% stake in its expanded equity capital. Ranbaxy plans to fund the acquisition through internal accruals and debt.

 

Valuation and view

 

We maintain our positive outlook on Ranbaxy and feel that it is among the best placed companies to leverage the global opportunities. Through this acquisition, Ranbaxy will be well placed and probably amongst the few Indian companies (other than Wockhardt and Biocon) to capitalise on the USD 65 billion biopharmaceutical market and the USD 35 billion oncology segment. Any definitive announcement on the demerger of the NCE research division will be a further value unlocking trigger as the demerger will not only generate new funding options for discovery research but also insulate the company's base generic business from the uncertainties and risks of innovative research. At the current market price of Rs439, Ranbaxy is trading at 23.7x its estimated CY2007 and 24.8x its estimated CY2008 earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs500.