Ranbaxy Laboratories Ltd

Industry

The Global Pharmaceutical market audited sales grew by 7% (at constant exchange rates) to reach US $ 608 billion. North America, Europe and Japan continued to remain the key markets accounting for 87% of the worldwide pharmaceutical sales. The buoyant growth recorded in the US pharmaceutical market, led by an increase in   prescribing volume due to Medicare Part D, and a strong growth in the oncology products globally, were the key contributors to market expansion.

The North American pharmaceutical sales grew by 8.0% to reach US $ 290 Billion, constituting 48% of the global sales. Growth was fuelled by the Medicare Part D prescription benefit, the increased utilization of generics within new therapy classes and the launch of drugs targeted at specific diseases, e.g. cancer and diabetes. Europe clocked sales of US $ 182 Billion, a growth of 4.8%, and contributed 30% to total global pharmaceutical sales. Japan, the world's second largest market, which has historically posted slower growth rates, continued its weak performance with de-growth of 0.7% at US $ 57 Billion. Sales in Latin America grew by 12.9% to reach US $ 28 Billion, while Asia, Africa & Australia grew by 9.8% to US$ 52 Billion. Emerging markets, including Turkey, Korea, Russia and India, all experienced double digit growth, outpacing global performance and signaling important shifts in the market place. With these markets recording higher growth rates than markets in North America and Western Europe, the geographic mix of growth has leaned towards these emerging economies.

The Top 10 products in the market contributed approximately 10% to Global Pharmaceutical Sales, with combined sales of US $ 60 Billion. Atorvastatin (Lipitor US $ 14 Billion) followed by Esomeprazole (Nexium US $ 7 Billion) and Fluticasone - Salmeterol combination (Seretide / Advair US $ 6 Billion) was the 3 top-selling products worldwide. Lipid Regulators, Oncologics and Respiratory Agents held the top three positions in terms of therapeutic classes worldwide. Lipid Regulators grew by 7.5% to US $ 35 Billion, while Oncologics was the fastest growing therapeutic class at US $ 34 Billion, a growth of 20.5%. Respiratory agents were the third largest therapy class with 10.4% growth in sales to US $ 25 Billion.

The Generic segment growth continued to outpace the global pharmaceutical market growth fuelled by the fundamental drivers of growth, that is, the increasing ageing population and government's efforts to reduce their healthcare expenditures. Generic medicines are increasingly being prescribed by general practitioners as more affordable alternatives to higher-priced originator brand-name drugs. Generics represent more than half of the volume of pharmaceutical products sold in 7 key world markets viz. US, Canada, France, Spain, Italy, Germany and the UK. US witnessed significant patent expiries for products with sales in excess of US $ 14 Billion, key markets in Western Europe saw government induced healthcare reforms impacting growth in these markets. As with the global pharmaceutical market, the branded generic markets in emerging economies witnessed robust growth rates, indicating a substantial change in the geographical mix of generic market growth.

The year witnessed pricing pressure in certain key geographies, led by a mix of market factors and government led healthcare policy changes. The pricing pressure in the US market continued, but was alleviated by the opportunity presented by a number of high value products going off patent.

The trend towards consolidation was a key highlight in the year with several mergers and acquisitions taking place across the developed and emerging markets. Indian companies have actively taken part in the consolidation drive, led by a need to broad base their presence, enhance their competitive advantages and widen their product portfolio.

 Pharmaceutical Industry in India is one of the largest and most advanced among the developing countries. It provides employment to millions and ensures that essential drugs at affordable prices are available to the vast population of India. Indian Pharmaceutical Industry has attained wide-ranging capabilities in the complex field of drug manufacture and technology. From simple painkillers to sophisticated antibiotics and complex cardiac compounds, almost every type of drug is now made indigenously.

Indian Pharma Industry is playing a key role in promoting and sustaining development in the vital field of medicines. Around 70% of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and vaccines are met by Indian pharmaceutical industry. A number of Indian pharmaceutical companies adhere to highest quality standards and are approved by regulatory authorities in USA and UK.

Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units and is very top heavy. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. There are also 5 Central Public Sector Units that manufacture drugs. These units produce complete range of pharmaceuticals, which include medicines ready for consumption by patients and about 350 bulk drugs, i.e., chemicals having therapeutic value and used for production of pharmaceutical formulations. India is largely self-sufficient in case of formulations. More than 85% of the formulations produced in the country are sold in the domestic market. Some life saving, new generation under-patent formulations are imported, by MNCs, which they market in India. Over 60% of India's bulk drug production is exported. The balance is sold locally to other formulators.

Pharmaceutical Industry in India has been de-licensed and industrial licensing for most of the drugs and pharmaceutical products has been done away with. Manufacturers are now free to produce any drug duly approved by the Drug Control Authority. Indian pharmaceutical industry got a major boost with the signing of General Agreement on Tariffs and Trade in January 2005 with which India began recognising global patents. After recognizing the global patent regime the Indian pharma market became a sought after destination for foreign players.

India holds the lion's share of the world's contract research business as activity in the pharma market continues to explode in this region. Over 15 prominent contract research organisations (CROs) are now operating in India attracted by her ability to offer efficient R&D on a low-cost basis. Thirty five per cent of business is in the field of new drug discovery and the rest 65 per cent of business is in the clinical trials arena. India offers a huge cost advantage in the clinical trials domain compared to Western countries. The cost of hiring a chemist in India is one-fifth of the cost of hiring a chemist in the West.

The future of Indian pharmaceutical sector looks extremely positive. Indian pharma companies are vying for the branded generic drug space to register their global presence. Several Indian pharmaceutical companies have acquired companies in the US and Europe and many others are raising funds to do so. For example, Ranbaxy acquired Romania's Terapia, Ethimed NV of Belgium and GSK's generic business Allen SpA in Italy. Dr Reddy's acquired German generic drug maker Betapharm. Companies like Glenmark Pharma, Lupin, Aurobindo and Jubilant Organosys are on the lookout for lucrative acquisitions.

Company Background

Ranbaxy Laboratories Limited is an integrated, research based, international pharmaceutical company, producing a wide range of quality, affordable generic medicines. Ranbaxy is ranked amongst the top ten global generic companies and has a presence in 23 of the top 25-pharma markets of the world. The company is headquartered in India. It has presence in 49 countries, with manufacturing facilities in 11 and a diverse product portfolio.

Ranbaxy was incorporated in 1961. Bhai Mohan Singh was the founder of the company. He bought the company from his cousins Ranjit Singh and Gurbax Singh. Ranbaxy's name is a fusion of Ranjit and Gurbax's names. Ranbaxy went public in 1973. Ranbaxy's first joint venture was set up in Lagos (Nigeria) in 1977. In 1985, Ranbaxy Research Foundation was established and Stancare, Ranbaxy's second pharmaceutical market division started functioning. In 1987, production started at Ranbaxy's Toansa Plant (Punjab) and with this Ranbaxy became India's largest manufacturer of antibiotics/antibacterials. In 1988, Ranbaxy's Toansa Plant got US FDA approval. In 1990, Ranbaxy was granted its first US patent, for Doxycyline. In 1993, Ranbaxy set up a joint venture in China. In 1994, Ranbaxy established regional headquarters in UK and USA. In the same year its GDR was listed in Luxembourgh Stock Exchange. In 1995, Ranbaxy acquired Ohm Laboratories, a manufacturing facility in the US and inaugurated state-of-the art new manufacturing wing at Ranbaxy's US subsidiary Ohm Laboratories Inc. In 1997, Ranbaxy crossed a sales turnover of Rs. 10,000 million.

In 1998, Ranbaxy entered USA, world's largest pharmaceutical market, with products under its own name. In the same year, Ranbaxy filed its first Investigational New Drug (IND) application with the Drugs Controller General OF India for approvals to conduct Phase 1 Clinical trials. In 1999, Ranbaxy commenced trials for its NCE. In 2000, Ranbaxy acquired Bayer's Generic business in Germany, and entered into Brazil, the largest pharmaceutical market in South America. In 2001, Ranbaxy set up a manufacturing facility in Vietnam. In 2003, Ranbaxy launched Cefuroxime Axetil after approval from USFDA. It was the first approval granted to any generic company for this product. In 2003, Ranbaxy and Glaxo SmithKline Plc entered into an alliance for drug discovery and development. In 2004, Ranbaxy acquired a wholly owned subsidiary RPG (Aventis) SA and began operations in France as a Top 10 generic company. In 2005, Ranbaxy launched operations in Canada and acquired generic product portfolio from EFARMES of Spain. In 2006, Ranbaxy acquired Be Tabs pharmaceuticals of South Africa, unbranded generic business of GSK in Italy & Spain, and Terapia of Romania.

Financials

Ranbaxy Laboratories Ltd announced the following Consolidated results (as per Indian GAAP) for the quarter & year ended December 31, 2007: The consolidated results for the Quarter ended December 31, 2007 The Group has posted a profit after tax of Rs 1878 million for the quarter ended December 31, 2007 as compared to Rs 1859 million for the quarter ended December 31, 2006. Total Income has increased from Rs 17793 million for the quarter ended December 31, 2006 to Rs 19110 million for the quarter ended December 31, 2007. The consolidated results for the Year ended December 31, 2007 The Group has posted a profit after tax of Rs 7901 million for the year ended December 31, 2007 as compared to Rs 5153 million for the year ended December 31, 2006. Total Income has increased from Rs 61913 million for the year ended December 31, 2006 to Rs 69652 million for the year ended December 31, 2007.

Valuation

Ranbaxy has already announced its intention to de-merge and subsequently list its Novel Drug Discovery Research (NDDR) operations into a separate entity effective from January 1, 2008, the specific framework and other details of the de-merger are awaited. While the de-merger will unlock value of the discovery R&D assets, it will also enable the parent company to save about USD 20-25 million in expenses, which are incurred on NDDR projects annually from CY2008 onwards. This will boost the overall profitability of the core business. 

At the current market price Ranbaxy is available at 23.9x its CY2008E earnings. However, the announcement of the exclusive opportunity for 2008, the strong guidance provided by the management post CY2007 results and the disclosure of the NDDR de-merger details could lead to significant earnings upgrades and hence generate strong buying interest from investors in the near-term.

Outlook

The global generics business is becoming more competitive with the entry of newer players from the emerging economies. On the other hand, the government induced changes in select markets and the ongoing consolidation in the industry is bringing forth new challenges in the marketplace. The generic segment has inherent risks of patent litigations, product liability, increasing regulations and compliance related issues, particularly in the developed markets.

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.