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Nursing back to Health

India’s largest pharmaceutical company, Ranbaxy’s topline growth has slacked, but it is showing signs of improvement…

Ranbaxy has been in the news ever since brothers Malvinder and Shivinder Singh sold their stake to Japan’s Daiichi Sankyo for $2 billion in June 2008. By August the same year the USFDA banned imports of 30 generic drugs manufactured by Ranbaxy after two of its plants did not meet set standards. (As an aside, the short gap between the two events rustled up rumours that the Singh brothers knew what was coming!) Ranbaxy’s stock was pilloried. It lost 25 per cent in the two weeks following the announcement. A year later, topline growth tanked to 2 per cent.

Why does Ranbaxy feature here? Topline growth has been slacking - at nine per cent (CAGR) in the last five years. This slowdown is not an industry-wide phenomenon though. Sun Pharma reported an annual revenue growth of 28 per cent during this time. Also, from an average of 8 per cent of sales in the beginning of the last 10 years, employee costs have ballooned to 13 per cent in the last three years. Look at it another way: sales in the last 5 years are up 41 per cent, employee costs are up about 3.5 times in the same period.

Where does it go from here? A slew of positives have revived Ranbaxy’s fortunes. It has passed all legal hurdles to be able to sell its generic version of Lipitor. In December 2011, the ban on its US sales was lifted. Around 50 new product launches are slated for domestic market, expected to ease its overhead costs.

What should you do? The prospects have improved. Its 180-day Lipitor exclusivity is expected to generate sales around $500 million and EPS of `16. Two more FTFs follow in August and September this year. Hold.