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Rx: Ranbaxy or Dr. Reddy's?

| 3/8/2012 9:04 PM Thursday

The patent expiry on blockbuster innovator drugs in the US has come as a huge opportunity for the Indian Pharma sector, giving a global identity to many Indian companies. Two companies which have been major gainers of the patent expiry game are Ranbaxy and Dr Reddy’s Laboratories (DRL). Touted as highly competitive international generics players, we believe that both companies are strong pillars of the Indian Pharma sector. Ranbaxy has crossed the Rs 10000 crore revenue mark in CY2011 and DRL is expected to cross this mark soon (9M FY12 revenues of Rs 7015 crore).

At a time when both the companies have launched blockbuster drugs in the USA and have shown a fiery topline growth, investors would be looking forward to good results ahead. Here is a comparative analysis of both the companies, which will provide an insight about their future prospects.

Ranbaxy’s landmark achievement of crossing Rs 10000 crore in revenues has come after over 50 years of operations. DRL, on the other hand, is a comparatively younger company than Ranbaxy (by 27 years), and hence crossing Rs 10000 crore in revenues will surely be a very significant achievement for the company.

Ranbaxy derives 80 per cent of its revenues from exports and the remaining 20 per cent from its domestic business. DRL is also on the same trajectory, with about 18 per cent of its revenues coming from the domestic market and 82 per cent from exports. The domestic market conditions remain very competitive, with high pricing pressure as well as the crowding of manufacturers.

On the back of their moderated growth on the domestic front, we believe that the international market will decide the growth of both of these companies in the future. The market for off-patent drugs is expected to be well over USD 70 billion by 2012, which is why the generics market is witnessing a rapid growth internationally. Besides, the governments in regulated markets are favouring the use of generics in a bid to cut healthcare costs, which is another factor that will bring in growth for companies operating on the global level.

However, we expect a slower growth in the European markets, as government spending in those countries is expected to be slower due to the ongoing debt crisis. We believe that this may result in aggressive bidding by local governments to control expenses, which will in turn result in low priced tenders. The North American market (prominently USA) remains a key growth market due to the patent expiry regime as well as the increased use of generics. Among other markets, Africa and Brazil will continue growing in double digits going ahead.

In this background, it is interesting to note that both these companies have operations in the regulated markets (US, Europe, Japan) as well as in emerging markets (the Asia Pacific region, Brazil, Russia, African countries, etc.). Ranbaxy’s revenues in exports have gone up at CAGR of 11 per cent (by December 2011) in the past four years, as compared to the 15 per cent CAGR reported by DRL by FY11. The growth rate of DRL in the North American market including USA (26 per cent) looks even better when compared to that of Ranbaxy (20 per cent). USA is the most important market for both the companies, as they earn one-third of their revenues from this market, and this has been increasing over the years.

 

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