Ranbaxy hit, low U.S. prices pinch Indian drugmakers

Posted AtReuters

India's top drug maker, Ranbaxy Laboratories Ltd., will show a sharp drop in quarterly earnings amid price pressure in the generic market abroad and high costs, while its rivals will post varied results, a Reuters poll showed.

These companies have targeted higher revenue contributions from the United States and Europe to tap the growing market for generic medicines, which Indian drug makers are skilled at developing, although they are feeling the pinch of competition.

The median forecast in a Reuters poll of 10 analysts showed Ranbaxy Laboratories Ltd., India's biggest drug maker by sales and market capitalisation, will register a 72 percent drop in net profit.

The company, a top U.S. generic player that earns most of its revenue outside India, has been hit in the past year by pricing pressure and poor new product launches. It has already warned that 2005 earnings will be lower than a year ago.

But Dr. Reddy's Laboratories Ltd. is set to report quarterly earnings more than 11 times last year's 40 million rupees. U.S. generic sales face pricing pressure, but it will report savings in research and development expenditure due to last year's cost-sharing deals with venture capitalists.

Dr. Reddy's sold its drug plant in Goa to Watson Pharmaceuticals Inc. for an undisclosed amount and struck a deal to buy Roche's active pharmaceutical ingredients business in Mexico for $59 million during the quarter.

Mumbai-based Cipla, a strong domestic player, will show a small dip in profit despite growing export revenues as its other income, which boosted profit last year, will be lower.

Sun Pharmaceutical Industries Ltd., India's third-largest pharma firm by value with a strong domestic market presence, is seen posting a 25 percent rise in net profit.

VALUATIONS STRETCHED

Ranbaxy is expected to show better results over the next few quarters as it launches new products, but analysts say its valuation looks stretched.

According to Reuters Estimates, Ranbaxy is now trading at 25 times its 2006 earnings.

Ranbaxy expects to sell 15 new products in 2006 and has said sales will rise 18 percent compared with low single-digit growth forecast for 2005. It is also following an aggressive patent challenge strategy in a bid to win exclusive marketing rights for drugs, although this has inevitably increased legal costs.

Ranbaxy lost a challenge to Pfizer Inc.'s patents on blockbuster cholesterol drug Lipitor in December, dashing investor hopes of a windfall from selling a copy of a drug with $12 billion in annual revenue. Ranbaxy has appealed.

The loss was not expected to affect its financials as a victory had not been factored into earnings forecasts, Ranbaxy and analysts said.

In November, a U.S. court upheld a ruling blocking sales by Ranbaxy and world-leading generic maker Teva of generic alternatives to Pfizer's Accupril blood pressure drug.

"Valuations are stretched even after factoring in some premium for Ranbaxy's strong product pipeline and distribution strength in regulated markets," brokerage Motilal Oswal said in an earnings preview.

"Near-term catalysts are very few and the reward-risk equation is unfavourable," said the firm, which has a "sell" recommendation on the stock.

Both Ranbaxy and Cipla have been in talks with Roche on a licence to produce the Swiss company's bird flu drug Tamiflu.

The BSE healthcare index gained 1.2 percent in the past quarter, underperforming the broad market index, which gained 8.8 percent in the same period.

But analysts say Indian pharma stocks are overvalued, trading at 21 to 28 times one-year forward earnings.

"From a macro perspective, India has the competitive advantage and so a long-term investor can hold on. Indian drug makers have got strong pipelines and if they do get a large product on the market, earnings can get boosted multiple times," said Shahina Mukadam, analyst with IDBI Capital Markets.

January 17, 2006