Ranbaxy Lab: Hold

Recommendation: Hold

Sanjiv Shankaran

ACCESS to drugs, drug prices and an uniform patent law were dealt at length at the Doha Ministerial of the World Trade Organisation.

The manner in which these issues unfold will be critical for pharmaceutical companies in India. More so for a company present in many markets such as Ranbaxy Laboratories.

It is not just the future course of events that will have a bearing on Ranbaxy's shareholders. The company's share price rose 58 per cent to the current Rs 710, leading to the question if the market has factored in the likelihood of positive developments.

Background: Ranbaxy is a large pharmaceutical company that has noteworthy presence in overseas markets. Though the company is a dominant player in the domestic dosage market, its growing exports, especially to the US, set it apart.

Strenghts: The developed world's generic segment *-- drugs that lose patent protection -- is the key to Ranbaxy's success. Ranbaxy was among the earliest Indian companies to recognise the opportunities there and take steps to capitalise on them.

The years of experience in dealing with regulatory requirements in developed markets and the in-house R and D strengths have endowed Ranbaxy with the necessary ingedients to be a global generics player. The company's profitability is likely to improve significantly as its presence in the global generics market grows.

In the overseas market, the US is most important because of its size and profit potential. Ranbaxy was among the earliest domestic companies to enter the US. Today, it is arguably the best placed to get the most out of the US market, and over the next couple of years, profitability should improve on the heels of the performance in the US.

Weakness: The sharp rise in Ranbaxy's price over the last five months has led to a price earnings multiple (PEM) of 33 times the annualised 2001 earnings per share (EPS). The current valuation makes the company one of the highest valued among its peers.

*Investment recommendation: Developments at Doha led one to believe that Indian pharmaceutical companies, especially the top-rung ones, may get a little more breathing space even after India adopts a more stringent patent regulation in 2005. That, in turn, may lead to a firm trend in the near future in Ranbaxy's share price.

The significant trigger for Ranbaxy will be its performance in the US generics market and success in its R and D endeavour. The generics market, in particular, promises a fair bit and Ranbaxy's profitability may improve over the next two years.

The recent rally in the stock, however, leaves little scope for a significant increase in share price. Therefore, sharholders may hold on a while longer because a small uptrend appears likely. But fresh investments may be avoided because the current valuation makes it too risky to take an exposure.