Ranbaxy Laboratories Limited, India’s largest pharmaceutical company, is an integrated, research based, international pharmaceutical company, producing a wide range of quality, affordable generic medicines, trusted by healthcare professionals and patients across geographies. Ranked 8th amongst the global generic pharmaceutical companies, Ranbaxy today has a presence in 23 of the top 25 pharmaceutical markets of the world. The Company has a global footprint in 49 countries, world-class manufacturing facilities in 11 countries and serves customers in over 125 countries.
In June 2008, Ranbaxy entered into an alliance with one of the largest Japanese innovator companies, Daiichi Sankyo Company Ltd., to create an innovator and generic pharmaceutical powerhouse. The combined entity now ranks among the top 15 pharmaceutical companies, globally. The transformational deal will place Ranbaxy in a higher growth trajectory and it will emerge stronger in terms of its global reach and in its capabilities in drug development and manufacturing.
Ranbaxy was incorporated in 1961 and went public in 1973. For the year 2008, the Company recorded Global Sales of US $ 1,682 Mn, reflecting a growth of 4%. The Company has a balanced mix of revenues from emerging and developed markets that contribute 54% and 39% respectively. In 2008, North America, the Company’s largest market contributed sales of US $ 449 Mn, followed by Europe garnering US $ 330 Mn. Business in Asia is going strong with India clocking sales of around US $ 300 Mn with market leadership in several business segments, backed by strong brand-building skills.
Using the finest R&D and Manufacturing facilities, Ranbaxy Laboratories Limited manufacture and markets generic pharmaceuticals, value added generic pharmaceuticals, branded generics, active Pharmaceuticals (API) and intermediates.
The Company remains focused on ascending the value chain in the marketing of pharmaceutical substances and is determined to bring in increased revenues from dosage forms sales.
Ranbaxy’s diverse product basket of over 5,000 SKUs available in over 125 countries worldwide, encompasses a wide therapeutic mix covering a majority of the chronic and acute segments. Healthcare trends project that the chronic treatment segments will outpace the acute treatment segments, primarily driven by a growing aging population and dominance of lifestyle diseases. Our robust performance in Cardiovasculars, Central Nervous System, Respiratory, Dermatology, Orthopedics, Nutritionals and Urology segments, clearly indicates that the Company has strengthened its presence in the fast-growing chronic and lifestyle disease segments.
Introduction to the industry
The Indian pharmaceutical industry currently tops the chart amongst India’s science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. A highly organized sector, the Indian pharmaceutical industry is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks very high amongst all the third world countries, in terms of technology, quality and the vast range of medicines that are manufactured. It ranges from simple headache pills to sophisticated antibiotics and complex cardiac compounds; almost every type of medicine is now made in the Indian pharmaceutical industry.
The Indian pharmaceutical sector is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades. The Pharmaceutical and Chemical industry in India is an extremely fragmented market with severe price competition and government price control. The Pharmaceutical industry in India meets around 70% of the country’s demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectibles. There are approximately 250 large units and about 8000 Small Scale Units, which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units).
Company analysis:-Key Strengths
- Company growing faster than the market.
- One of the largest distribution networks that comprises 2500+ skilled field force. Dedicated task forces for specialized & chronic therapies
- A strong player in the NDDS segment. Key brands include Cifran OD (Ciprofloxacin), Zanocin OD (Ofloxacin) & Sporidex AF (Cephalexin)
- Strong brand building capabilities, reflected in the fact that around 20 brands feature in the “Top-300 brands of the Industry” list. Leading brands are Sporidex (Cephalexin), Cifran (Ciprofloxacin), Mox (Amoxycillin), Zanocin (Ofloxacin) & Volini (Diclofenac)
- A well-built customer interface, with one of the highest customer coverage across India, and an excellent franchise with both Generalists & Specialists. This is proven by Ranbaxy India’s Corporate Image being perceived as ‘Best-in-Class’ by customers (source: AC Nielsen ORG MARG Report, June 2004)
- Great emphasis is placed on Knowledge Management and Medico-marketing initiatives such as Advisory Board Meetings, Post Marketing Surveillance Studies and Continuous Medical Education programs. These have resulted in an excellent customer relationship with the medical fraternity. More than 2000 interface programs (Symposia, CME’s) are conducted and about 20 Clinical Papers published annually
- With a futuristic approach, the India operations attempt to capitalize on the fast- emerging, high-growth segments with innovative products and services:
- A slew of products have been launched in the Dermatology segment: Suncross (Sunscreen lotion), Sotret (Isotretnoin), Eflora (Eflornithine).
- Anti-diabetic franchise has been further consolidated with launch of Insucare (Insulin) with an innovative delivery mechanism – “Controlled Insulin Logistics” This ensures that the cold chain, vital for product efficacy, is maintained.
Dividend Payout Analysis:-
Indicates the proportion of earnings that are used to pay dividends to shareholders. Ranbaxy laboratories dividend payout ratio is comparative reduced from the previous days, in other words they pay a dividend to its shareholders. This is the case for most high growth firms; their profits are better spent by reinvesting in the firms activities rather than as a cash payout to shareholders. In fact a majority of corporations have elected to pay out less of their earnings as dividends, perhaps because corporate rates of return on reinvested capital are higher these days, but it could also be that dividends are doubly taxed in some jurisdictions. The DPR measures what a company’s pays out to Investors in the form of dividends, in this year dividends are not paid to the share holders. As per the data the DPR is comes to 60.06 from 94.
Return on Equity Analysis:
Sometimes ROE is referred to as Stockholder’s return on investment, it tells the rate that shareholders are earning on their shares. Ranbaxy laboratories are earning a very respectable growth rate on shareholder’s equity. Companies that generate high returns relative to their shareholder’s equity are companies that pay their shareholders off handsomely, creating substantial assets for each money invested. These businesses are more than likely self-funding companies that require no additional debt or equity investments.Return on net worth or equity (ROE) is a second useful profitability ratio. If we are getting from investing our own money in the business. If this return is less than the return we could obtain from an equal or less risky investment, then there is a good economic argument that we should leave farming and invest elsewhere. In the case of Ranbaxy laboratories, the ROE is not as good or at their esteemed level because of the earning of the company. The revenue or profit is generated in the current financial year is in the diminishing level
The earnings per share ratio are mainly useful for companies with publicly traded shares. Most companies will quote the earnings per share in their financial statements saving you from having to calculate it yourself. By itself, EPS doesn’t really tell you a whole lot. But if you compare it to the EPS from a previous quarter or year it indicates the rate of growth at companies earnings are growing (on a per share basis). Ranbaxy laboratories EPS have decreased almost 16.56 to -24.85 since last year; it is not an excellent growth rate for the company. Some analysts like to use “projected” EPS to analyze a stock’s current value in respect to these estimates.
Share Market Analysis:
Ranbaxy Labs good for long term investment. There are some issues which are a big concern for the company, however, as the stock markets will stabilize, the Ranbaxy stock will also bounce back.
Ranbaxy Labs has shown decent growth in the past five years. The company has presence in all major markets across the world. The stock used to be a safe bet for last many years. Things haven’t changed in terms of the business of the company; however, much has changed in the stock markets. Investors are worried about the future of the company. And they have a reason to worry; the stock hasn’t offered the returns everyone expected.
The results may be announced by the end of this month and long investors can think of entering the stock at lower levels. Stock Watch expects the stock to touch 350 – 400 levels within a year. The target has been estimated after evaluation of various factors including the business model; US market status and company valuations. The recent fall in the stock price is mainly due to bad news about the company in recent times. Things should start improving after three months as the stock bottoms out. Cash rich Japanese parent will support Ranbaxy and the company will offer decent returns. Investors can start accumulating the stock in range Rs 200 – 220.
The rate RLL Sell/Medium Risk (3M) with a target price of Rs357.40. I expect the stock’s valuations to move in line with the sentiment toward the sector, key to which are price expectations, progress on deregulation, and government decisions on the taxation part of the pharma industry.
Analysis about the overall management of the company:-
- 2Q09 turns into profit, guidance maintained: Ranbaxy’s 2Q09 net profit of Rs6.93bn includes pre-tax gain of Rs8.1bn on hedges and Rs1.9bn on loans. Excluding these adjusted net profit is c. Rs370mn (company estimate of Rs633m) cf. our estimated loss of Rs230mn. Sales were higher at Rs17.9bn (our estimate Rs16.5bn) due to better performance in India and US. EBITDA margin reported at c.7% includes operational forex gain of Rs716mn, termination amount paid to Mr. Singh (Rs480m) and income from settlement with Teva Rs550m. Company has maintained its guidance of no profits for CY09.
- Sales trend unchanged: Sales decline 2% YoY in Re terms, 16% in $. US, EU, CIS and Brazil are down in $ terms. India grew at 21% in Re terms on back of 28 new product launches and tender sales. Newly acquired brands from Ochoa in pain and dermatology segment (full year sales of c.Rs300m) have not contributed yet. Growth across markets in constant currency is similar to 1Q09 YoY trend due to inventory de-stocking. US beat our expectation due to sumatriptan contribution. Mgt guided to a run-rate of $50m for US for 2H09.
- Costs are still high: 2Q09 cost of sales as % to sales at 62.4% is much higher than estimated and 58.6% seen in 1Q09. This could be due to ongoing overheads at Poanta without revenue contribution. SGA expenses ex-termination amount are in line with estimate.
- One major issue in mind of investors in the exit of promoters. Promoters have sold their stake to Pharmaceutical major Daiichi from Japan. Technical experts believe the issues in US markets and pending litigations are behind the promoters exit. The future of Ranbaxy will now depend on the plans Japanese company has for Ranbaxy. The parent company hasn’t given any solid statement about the future plans for Ranbaxy. Once the announcements are made, investor sentiment will turn positive.
Industry analysis: – Porter 5 force model
Today’s business environment is extremely competitive and in economics parlance where perfect competition exists, the profits of the firms operating in that industry will become zero.
However, this is not possible because, firstly no company is a price taker (i.e. no company will operate where profits are zero).
Secondly, they strive to create a competitive advantage to thrive in the competitive scenario. Michael Porter, considered to be one of the foremost gurus’ of management, developed the famous five-force model, which influences an industry.
Pharma industry is one of the most competitive industries in the country with as many as 10,000 different players fighting for the same pie. The rivalry in the industry can be gauged from the fact that the top player in the country has only 6% market share, and the top five players together have about 18% market share.
Many smaller players that are focused on a particular region have a better hang of the distribution channel, making it easier to succeed, albeit in a limited way. An important fact is that pharmacy is a stable market and its growth rate generally tracks the economic growth of the country with some multiple (1.2 times average in India).
The product differentiation is one key factor, which gives competitive advantage to the firms in any industry. However, in pharmacy industry product differentiation is not possible since India has followed process patents till date, with laws favoring imitators.
Going forward, we foresee increasing competition in the industry but the form of competition will be different. Economies of scale will play an important part too. Last but not the least, in a vast country of India’s size, government too will have bigger role to play.
Bargaining power of buyers
The unique feature of pharmacy industry is that the end user of the product is different from the influencer (read doctor). The consumer has no choice but to buy what doctor says. However, when we look at the buyer’s power, we look at the influence they have on the prices of the product.
Bargaining power of suppliers
The pharmacy industry depends upon several organic chemicals. The chemical industry is again very competitive and fragmented. The suppliers have very low bargaining power and the companies in the pharma industry can switch from their suppliers without incurring a very high cost. Companies like Orchid Chemicals and Sashun Chemicals were basically chemical companies, who turned themselves into pharmaceutical companies.
Barriers to entry
Pharma industry is one of the most easily accessible industries for an entrepreneur in India. The capital requirement for the industry is very low; creating a regional distribution network is easy, since the point of sales is restricted in this industry in India.
The barriers to entry will increase going forward. The change in the patent regime will see new proprietary products coming up, making imitation difficult. The players with huge capacity will be able to influence substantial power on the fringe players by their aggressive pricing which will create hindrance for the smaller players.
Threat of substitutes
One of the key reasons for high competitiveness in the industry is that as an ongoing concern, pharma industry seems to have an infinite future. In the Indian context, companies like Cipla and Glaxo are likely to be key players. Though consolidation within the current big names is not ruled out. Smaller fringe players, who have no differentiating strengths, are likely to either be acquired or cease to exist.
Monetary policy affected pharma industry:-The excise duty reduction on pharmaceuticals is unlikely to have any effect on the prices of medicines as the government has, in a parallel move, decided to cut the abatement rate for calculation of MRP based excise duty on pharmaceuticals. The Finance Ministry, in a move to rationalize abatement rates, has brought down the 42.5 per cent abatement enjoyed by the drugs industry to 35 per cent. Almost all domestic majors such as Ranbaxy, Dr Reddy’s and Cipla and multinationals like GSK and Johnson and Johnson have either own units in hill states, or rely on contract manufacturers in the hill states for production for the domestic market.
Budget: – THE BUDGET presented by Finance Minister has brought cheers for pharmaceutical companies. In the current financial year excise duty of 4 per cent has been retained while custom duty has been lowered on some vital life saving drugs and heart contrivances.
The present budget has made an important provision to reduce custom duty from 10 per cent to 5 per cent on medicines and bulk drugs and 7.5 per cent to 5 per cent on life saving devices particularly related to cardiac diseases. With reduction in custom duty on certain selected life saving drugs, the prices of 9 particular drugs that are used for the treatment of fatal ailments namely cancer, HIV,hepatiits b are expected to be slashed. In addition to this, the prices of two vital heart devices are also expected to come down.
MD of Ranbaxy laboratories also sounded positive with the provisions for Pharma Company in the new budget, he said, “Though there were no big moves for pharma, increased government spending on healthcare will have a positive impact. Extension for scope of provisions relating to weighed deduction of 150 per cent on expenditure incurred on in house R&D to all manufacturing business is a positive move.”
Role of Pharmaceutical Industry in India GDP-Facts
- The Pharmaceutical Industry in India is one of the largest in the world
- It ranks 4th in the world, pertaining to the volume of sales
- The estimated worth of the Indian Pharmaceutical Industry is US$ 6 billion
- The growth rate of the industry is 13% per year
- The Pharma Industry in India produces around 20% to 24% of the global generic drugs
- The Indian Pharma sector leads the science-based industries in the country
- Around 40% of the total pharmaceutical produce is exported
- The Indian Pharma Industry includes small scaled, medium scaled, large scaled players, which totals nearly 300 different companies
- There are several other small units operating in the domestic sector
- As per the present growth rate, the Indian Pharma Industry is expected to be a US$ 20 billion industry by the year 2015
- With the large concentration of multinational pharmaceutical companies in India, it becomes easier to attract foreign direct investments
- The Pharma industry in India is one of the major foreign direct investments encouraging sectors
Foreign direct investment:-The Indian pharmaceutical industry has been a successful player in global markets over the last couple of decades. Along with sectors like software and autoauxiliaries, it has spearheaded India’s progress in “knowledge intensive and technologically sophisticated markets” (Ramachandran et. al, 2006). It contributes to 8% of world production by volume and 1.5% by value (Aggarwal, 2004). It is a highly fragmented industry with more than 20,000 registered units (Indian Pharmaceutical Industry: An Overview, n.d.). It is becoming a major force in outsourced clinical research and has almost 74 U.S. FDA approved manufacturing facilities, the most for any country outside the US (Pharmaceuticals in India.
- Investment and portfolio analysis; third edition, Prasana Chandra