Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs423
Strong triggers for an upgrade
Key points
*The management of Ranbaxy Laboratories (Ranbaxy) has been emphatic in stating that going forward, they will avail of atleast one exclusive product opportunity in the USA every year. While the opportunities for CY2009 and CY2010 have already been lined up, the management plans to announce the CY2008 opportunity in January 2008. The announcement of a product launch under exclusivity in CY2008 could lead to a significant earnings upgrade to Ranbaxy's current CY2008E earnings.
*While 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 yet awaited. While the de-merger will unlock value of the discovery R&D assets, it will also enable the parent company to save about $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.
*In a recent media interview, Malvinder Singh, Managing Director and CEO of Ranbaxy has indicated that 2008 will be a stronger year for Ranbaxy as compared with 2007, as the company will strive to focus on more profitable growth through expansion of margins. This would basically come with a more optimum geographic and product mix including niche product opportunities. In light of this, we look forward to a strong vision and guidance given by the management for CY2008 post the announcement of the CY2007 results in January 2008.
*With the acquisition of a significant stake in Zenotech Laboratories (Zenotech), Ranbaxy plans to market Zenotech's oncology and biopharmaceutical pipeline across emerging markets immediately and developed markets over the next two-three years using its strong global reach and regulatory expertise. We may see some revenues from these avenues to flow in from the second/third quarter of 2008.
*At the current market price of Rs423, 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. For now, we reiterate our Buy recommendation on the stock with a price target of Rs500.
