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Sanjiv Shankaran

Mr D. S. Brar, CEO and MD, Ranbaxy Laboratories.

ROBUST growth in the US operations helped Ranbaxy register an impressive financial performance in the first nine months (January-September) of 2002.

High stakes strategy...

The highlight of Ranbaxy's performance in the first nine months of 2002 has been the sharp growth in the US operations. Turnover from the American operations in 2002 more than doubled over the corresponding previous period. Consequently, the US operations contributed about 36 per cent of its consolidated sales — aggregate sales of all of Ranbaxy's affiliate companies.

Research and Development (R&D) skill underpins the US strategy of Indian companies such as Ranbaxy and Dr. Reddy's Labs.

The implication is that these companies are in a position to challenge the validity of existing patents on drugs, and, if successful, realise enormous gains in a short period.

For instance, by virtue of being the first generic entrant into a segment of Cefuroxime Axetil (a drug to combat infections) in March 2002, Ranbaxy's Cefuroxime sale was about 13 per cent of the consolidated sales over nine months of 2002.

Exports contributed about 62 per cent of sales in the nine months of 2002 against 49 per cent in the corresponding previous period. The increasing share of exports in sales is the outcome of Ranbaxy's endeavour to spread itself geographically.

Exports, generally, yield higher returns for Indian pharmaceutical companies. In the first nine months of 2002, Ranbaxy's expenditure towards raw materials was 43 per cent (48 per cent) of net sales.

The PAT was Rs 393 crore in the first nine months of 2002, up 107 per cent over the corresponding previous period.The earnings per share (EPS) for the same period was Rs 33.82.

Investment outlook

Ranbaxy's share price is around Rs 565 (October 17, ex-bonus). Over the last 16 months, the stock price has more than doubled, reflecting the growing profitability on the heels of the strong showing in the US.

The US operations are likely to provide a significant proportion of turnover and profit in the next few years and the company's profitability is likely to settle around a level seen in the first nine months of 2002.

Basic research (discovery of new drugs) and research in new methods of drug delivery hold the potential for providing a sharp upward thrust to profitability. But the venture is fraught with risk because of the high failure rate of new compounds to hit the shop shelf.

Talking of risk, Ranabaxy's high stakes drive in the US generic market is also fraught with risks. Patent-holders of drugs use legal recourse as an entry barrier on account of the high profitability associated with the continuation of a patent on a successful drug. Top Indian companies such as Ranbaxy and Dr. Reddy's have met with success as well as delays in generic drug launches.

While Ranbaxy's operations may have turned the corner, the equity valuation appears delicately balanced. The share price is about 20 times its annualised EPS for 2002. A couple of adverse developments in the high stakes generic strategy can easily lead to sharp falls on the heels of new evaluations. The situation is compounded by the risk associated with basic research.

An assessment of operational risk in Ranbaxy's valuation suggests that the time may be ripe to book profit in Ranbaxy. Now, or during the course of any short rally.

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