Ranbaxy Laboratories

Recommendation: Buy
Price target: Rs558
Current market price: Rs374

Generic Nexium—a potential exclusivity opportunity

Key points

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Ranbaxy Laboratories (Ranbaxy) has received tentative approval from the US Food and Drug Administration (US FDA) for generic Esomeprazole Magnesium Delayed-Release Capsules, 20 mg (base) and 40 mg (base), the generic version of Astra Zeneca's blockbuster drug Nexium. Annual sales of Nexium is around $5.5 billion (IMS - MAT: December 2007).
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Ranbaxy was the first to file a Para IV abbreviated new drug application (ANDA) with the US FDA, seeking approval to market Nexium in the USA. It will thus gain from being awarded a 180-day period to exclusively market the product in the USA upon final approval from the USFDA. We expect the final approval for Ranbaxy's version of generic Nexium to come by April 2008, when the 30-month stay expires, thus allowing Ranbaxy to launch the product 'at-risk' in the USA with 180-day exclusivity.
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Based on our calculations, we believe the Nexium opportunity could yield $550 million in revenues and $220 million in profits for Ranbaxy during the 180-day exclusivity. This will translate into incremental earnings of Rs21 per share for Ranbaxy. However, we do not believe Ranbaxy would launch the product 'at-risk' in the USA before the outcome of the litigation. In such a case, Ranbaxy could attempt to enter into an out-of-court settlement with Astra Zeneca for the launch of generic Nexium.
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Ranbaxy has already announced four exclusivity opportunities until 2010, collectively valued at Rs68 per share. Further, Ranbaxy has in its kitty, 18 more Para IV filings with potential first to file (FTF) status, representing a market size of about $27 billion. The company expects to monetise at least one FTF opportunity every year. We expect the news flow on Para IV challenges and associated exclusivity opportunities to continue.
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We expect the announcements on de-merger of the new drug discovery research (NDDR) division, clarity on the Lipitor launch in Canada and other countries across the world and news flow on potential FTF opportunities to act as positive triggers for the stock. At the current market price of Rs374, Ranbaxy is trading at 17.5x its estimated CY2008E and 15.3x its estimated CY2009E earnings. We maintain our Buy recommendation on the stock with a sum-of-the-parts price target of Rs558 (20x CY2009E earnings of base business plus Rs68 for exclusivity opportunities).