Merrill Lynch has come out with a report on Ranbaxy Labs. The research firm has maintained buy rating on Ranbaxy with price objective of Rs 492.
The Canadian Federal Court today dismissed Pfizer's application for a prohibition order on the amorphous form of Lipitor (‘455 patent) while ruling in favor of Pfizer on the crystalline form of Lipitor (‘018 patent). Note that this ruling on Lipitor polymorph forms is different from the main Lipitor patent (‘456 patent) which Ranbaxy is contesting on grounds of invalidity. Given the precedent of similar issue on Lipitor patents in Norway (Appeals Court overturning the lower Court ruling), we view the event as low risk for the main Lipitor patent verdict in Canada.
The Federal Court ruling on the main Lipitor patent (patent ‘546) in Canada is expected by year-end/early 2008. Ranbaxy already has received a favorable verdict for ‘546 patent invalidation from the lower court. A favorable appeals verdict is estimated which could result in Rs 3-5 EPS upside (14-23% upside) in CY08E.
The research firm estimates robust core earnings growth of 24% in CY07E and 32% in CY08E (Rs 21.5), driven by higher growth and EBITDA margin in the coming quarters from the US and emerging markets. Further, there is a possibility of 14-23%+ EPS upside in CY08E from generic Lipitor launch in Canada and possible unlocking of R&D value through spin-off. The stock trades at 19.4x CY08E EPS, 16% discount to its historic 1 yr P/E average.
The research firm recommends a Buy with a Price Objective of Rs492 per share implying potential upside of 18%. The recommendation is driven by a forecast robust 27% EPS CAGR (CY06-08E) given higher visibility in scale-up of international operations and US products/R&D milestone upsides. The PO includes Rs30 per share for Lipitor’s early entry into the US.
Risks to the PO: regulatory delays in product launches, litigation risks, higher than expected US generic pricing pressure, prolonged FDA manufacturing issues and EU healthcare reform pressure.
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