Ranbaxy Returns to Profit on Back of Valacyclovir U.S. Sales and Foreign-Exchange Gains

Indian generic giant Ranbaxy Laboratories—now part of Japan's Daiichi Sankyo group—achieved consolidated sales for the three months ending 30 September 2010 of 18.9 billion rupees (US$425.2 million), representing an increase of 9.7% year-on-year (y/y). Total operating income rose marginally by 2.6% y/y to 19.3 billion rupees. The Indian firm's profits after tax reached 3.1 billion rupees, a y/y growth of 169% compared to 1.15 billion rupees for the corresponding quarter in 2009. The firm's earnings before interest, tax, depreciation, and amortisation (EBITDA) reached 1.39 billion rupees, a y/y decrease of 35%. Ranbaxy's total expenditure increased by 9% y/y to 18.9 billion rupees during this quarter, while its research and development (R&D) costs fell by 7.8% y/y, accounting for 7.7% of the net sales. The company's rise in net sales and profit after tax was attributed to balanced sales across all its markets aided by foreign-exchange gains of 1.1 billion rupees, while its net margin improved on account of continuing sales of first-to-file product valacyclovir in the U.S. market.

Ranbaxy's major markets and businesses including North America, India, the Commonwealth of Independent States (CIS) region, Latin America and consumer health grew during this quarter with the exception of the rest of the world, Europe, and Africa. Emerging markets registered sales of US$238 million, a y/y increase of 5%, contributing approximately 59% to global sales. Sales in developed markets amounted to US$145 million, growing by 36%.The North American market achieved sales of 4.9 billion rupees (US$105 million) for the quarter, growth of over 70%, largely due to valacyclovir, which continued to have a significant market share of approximately 36%, even after the 180-day market exclusivity.

Europe achieved third-quarter 2010 sales revenues of 2.8 billion rupees (US$60 million), a y/y decrease of 5%. The European market continues to be bolstered by sales in Romania, which posted a 20% increase in revenue during this quarter.

The Indian market registered sales of 4.93 billion rupees (US$106 million) in the third quarter, growth of 18% y/y, thanks to new product launches including prasugrel and continued domestic formulation sales. Sales from the CIS region for the third quarter came in at 1.21 billion rupees (US$26 million), growth of 11% y/y, assisted by increased marketing and competitive drug pricing. Africa and the Rest of the World experienced sales shrinkage of 6% and 12% y/y, with sales of 1.64 billion rupees (US$35 million) and 2.33 billion rupees (US$51 million) respectively during this quarter, due to divestment of certain business in China and Japan. The active pharmaceutical ingredients (API) business recorded sales of 1.08 billion rupees (US$23 million), a decrease of 12% y/y.

Outlook and Implications

Ranbaxy's bottomline results were better than expected following a 48% decrease in profits during the second quarter of 2010. The firm continues to perform worse than its compatriots, which have enjoyed double-digit growth in profits and sales for this quarter. Ranbaxy is still plagued by manufacturing compliance problems, after the U.S. FDA's imposed an import ban on the firm's Dewas and Paonta Sahib plants (both Indian based). Ranbaxy is continuing to work with the FDA to resolve these issues. Consequently, the Indian firm transferred its new drug-discovery research assets to Daiichi Sankyo in order to concentrate on its generics business, as part of the alignment with the parent firm's strategies, leading to decreased R&D expenses and bolstering profit margins for the quarter. Going forward, Ranbaxy looks set to return to profit with sales of Daiichi Sankyo's innovative platelet inhibitor, Prasita (prasugrel) in India, the launch of generic Aricept in the U.S. market, Tavanic (levofloxacin) in Romania and South Africa, and new product launches in India. The company also received 47 approvals for dosage forms in the third quarter, and filed 37 product applications in its markets. The firm continues to leverage its hybrid business model with Daiichi Sankyo, which has seen the firm increase its sales force in India to capitalise on the growing drug demand in rural areas. However, sales in the U.S. market may experience a dip with the loss of exclusivity on valacyclovir.

Indian generic firms including Ranbaxy continue to see lower growth in European markets due to lower margins following drastic cuts to drug prices in order to cope with rising health budgets during the economic recession there—a trend set to continue for the immediate future. Growth in the CIS region will continue thanks to rapidly growing markets such as Russia, while in the African market, the company will return to growth as it continues to expand its product lines, increases its market presence, and as its new South African manufacturing facility becomes fully operational. For the immediate-to-medium term, the Rest of the World markets including China and Japan may not see a sufficient increase in revenues due to the divestment of businesses in these regions. The appreciation in the value of the rupee helped Ranbaxy return to as expected, after exchange rate fluctuations contributed to losses one year ago—but such volatility will mean that Ranbaxy continues to be vulnerable to any significant depreciation. With the promotion of generic substitution by most governments, Ranbaxy's new increased focus on its generics business could see the company increase its market shares globally, which could potentially translate into increased revenues as long as uncertainty pertaining to top management and manufacturing-compliance problems are resolved.