Stock Idea - Ranbaxy Laboratories

Recommendation: Buy

CMP = Rs 482

Price target: Rs 625

Key points:

• Ranbaxy Laboratories (Ranbaxy) has entered into an out-of-court settlement relating to the launch of generic Nexium, Astra Zeneca's blockbuster drug for gastroesophageal reflux disease. Under the terms of the settlement, Ranbaxy can launch generic Nexium in the USA on May 27, 2014 with 180-days exclusivity. This is ahead of the drug's patent expiry in 2018. Further, Ranbaxy will also supply a significant portion of Astra Zeneca's requirement for Nexium in the USA from May 2010 onwards and supply esomeprazole magnesium (the active pharmaceutical ingredient for Nexium) from May 2009 onwards. 
• In a separate agreement, Ranbaxy has also been designated as the authorised generic player for two older Astra Zeneca products – the heart drug Plendil, or felodipine, and the 40mg version of ulcer pill Prilosec, or omeprazole. Ranbaxy will be compensated for its distribution services on standard commercial terms.
• Nexium clocked revenues of $5.2 billion in 2007 and is Astra Zeneca's biggest product. Using the discounted cash flow (DCF) approach, valuation of Ranbaxy's Nexium deal with Astra Zeneca comes to Rs 70 per share. 
• Clarity on the launch of generic Lipitor both in the USA as well as in the other world markets, along with news flow on further Para IV first-to-file (FTF) opportunities, would act as trigger for the stock. At the current market price of Rs 482, Ranbaxy is trading at 22.5x its base CY2008E and 19.7x its base CY2009E earnings (excluding exclusivity opportunities).
• I maintain Buy recommendation on the stock with a revised price target of Rs 625.

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