Ranbaxy's R&D spend goes up by 37%, net profit down by 31% in 2004

Ranbaxy Laboratories, India's largest pharmaceutical company with a turnover of Rs 3,551 crore, is heading for tough times in the years ahead. The company is facing tough generic competition with poor margins both in the domestic and international markets. Despite theses odds, the company is continuing its plans of hiking investments in R&D and marketing tie-ups to meet the future challenges. No doubt, R&D expenditure is putting severe pressure on its profits but company's stand appears to be that R&D investment is the only option for its future growth. Currently, Ranbaxy is marketing its products in over 100 countries and conducting manufacturing operations in 7 countries. Its vision of $ 2 billion (approximately Rs 9000 crore)-turnover company by 2007 and become a $ 5-billion (approximately 23000 crore) pharma entity by 2012 will entirely depend on rise in export turnover, basically to the US and other regulated markets. Currently, 50 per cent of its revenue is coming from the US, 20 per cent from Europe and remaining from other countries. Though the company is taking steps to fulfill its vision, the current growth rates are not giving any positive signals toward its goal. Further, the company will be under pressure to increase its profits along with rise in turnover, which is likely to be more difficult considering the present working. Ranbaxy's un-audited standalone net profit came down sharply by over 31 per cent during the year ended December 2004, which has shaken the investors' confidence and scrip lost ground heavily. During the last week, its share price was under pressure in line with the pharma segment movements. Sliding growth in profitability further impacted the scrip movements. Its share quoted below Rs 1000-mark on January 19 after the announcement of its financial result for the year ended December 2004. Currently, it is quoted at Rs 1,073 as against its 52 weeks peak level of Rs 1300 and lowest of Rs 860. Thus the shareholders are loosing sizeable amounts as the market capitalization has depleted heavily. The 31 per cent fall in net at Rs 547 crore was the highest during the last ten years. The previous largest fall was during the year 1998 of 16.4 per cent on an annualized basis to Rs 156 crore from Rs 186.65 crore during 1997. Similarly, its net profit for the year ended December 2000 also declined by 7.3 per cent to Rs 182.44 crore from Rs 196.88 crore. The compounded growth rate (CAGR) in sales as well as profit during the last ten year is almost similar at 14.8 per cent and 15 per cent respectively. Few important factors like slowdown in export earnings, almost stagnant growth in sale of pharmaceutical products, lower than expected returns from R&D investment and mounting cost of R&D, staff, marketing and approvals impacted the profit margins. The net profit margins that is net profit as percentage of net sales, declined to 15.7 per cent during the year 2004 from 23.4 per cent in the previous year. The operating margins i.e. operating profit before interest, depreciation, exceptional items and taxation, also went down to 20.4 per cent from 28.4 per cent. The company's standalone domestic sales increased faster than its export sales during 2004. And this is one of the main cause of concern for the growth in profitability. The domestic sales increased by 7.7 per cent to Rs 1116 crore from Rs 1036 crore and its export sales moved up only by 0.3 per cent to Rs 2436 crore from Rs 2429 crore. Thus the overall standalone net sales increased only by 2.2 per cent to Rs 3474 crore from Rs 3398 crore in 2003. The revenue from pharmaceuticals declined by 2 per cent to Rs 3593.71 crore from Rs 3665.35 crore. The stiff competition is putting pressure on price range also. Its profit before interest and tax of pharmaceutical segment declined to Rs 953.24 crore from Rs 1120.65 crore. Other operating income also lowered to Rs 217.92 crore from Rs 345.51 crore, a fall of 36.9 per cent. The company's investment in R&D is putting pressure on bottomline. The R&D expenditure increased by 37.3 per cent to Rs 326.76 crore during the year ended December 2004 from Rs 238.05 crore. Further, its staff cost has also gone up substantially by 21.7 per cent to Rs 301.60 crore from Rs 247.92 crore. Though interest burden is as small as compared to company's business size, the depreciation provision went up by 17.5 per cent. Despite lower taxation by more than 23 per cent, the profit margins could not move upward. This gave a major jolt to earning per share, which touched to Rs 29.47 from during the year 2004 from Rs 41.81 in 2003. The company's R&D expenditure is highest among the Indian pharma companies. The R&D expenditure for the year ended December 2004 went up to Rs 326.76 crore from Rs 238.05 crore in the previous year. The R&D as per cent of total turnover worked out to 9.2 per cent. The company spent Rs 168.63 crore, Rs 77.05 crore and Rs 73.40 crore on R&D during the year 2002, 2001 and 2000 respectively. Ranbaxy is now investing substantial amount for setting up New Drug Discovery Research facility near Delhi within next six months. Further, its collaborative research programme with Medicines for Malaria Venture (MMV) achieved a potential breakthrough in its anti-malarial drug. Its R&D arrangement with GlaxoSmithKline, plc. is going ahead with two research programmes in different therapeutic areas. With the help of R&D investments, the company received approval for 4 ANDA in the last quarter of 2004 and it made 26 filings to the US FDA during 2004, of which it received approvals for 16 products. The cumulative product filings reached at 146 with 96 approved and awaiting for 50 approvals. The company launched Loratadine and Pseudoephedrine extended release tablets, an OTC, ANDA, in the US market during 2004. Ranbaxy is expanding its marketing activities by setting up subsidiaries in Spain, Portugal and Canada. The company is also undertaking R&D for developing Herbal Drugs and during 2003 it developed three herbal products under OTC segment. With extensive R&D activity, the company received some important US FDA approvals during 2004. It received approvals for Topiramate tablets for the treatment of seizures, Fluoxetine capsules used for treating depressions, Gabapentin tablets for the treatment of epilepsy, Carvedilol tablets for a treatment for cardiovascular, Flotral for a urological disorder and Fenofibrate tablets for cholesterol drug. After defending the legal battle with Abbott Laboratories, the company launched Clarithromycin in the UK in November 2004. Ranbaxy made 39 national filings for 25 products in 11 EU Reference Member States and 71 mutual recognition procedure applications for 6 products in 21 EU concerned member states. In the domestic market, the contribution of the Novel Drug Delivery Systems portfolio sales increased by 6 per cent in 2004 from 5 per cent in the last year. The company has discontinued all its rofecoxib formulations sales from domestic and international market during October 2004 due to adverse side effects. Ranbaxy is also setting up new manufacturing facilities in Batamandi (Himachal Pradesh), Mohali & Lalru in Punjab. It has also set up a plant in Brazil to cater to the growing needs of that region. The company has manufacturing facilities in seven countries namely India, USA, China, Ireland, Malaysia, Nigeria and Vietnam. The company entered into a deal with Teva Pharmaceutical, Israel, for anti bypertensive drug recently and also concluded agreement with Andrx Corporation, US, for the hypertensive drug Monopril. The company's operations in the China are putting pressure on bottomline and its subsidiary is still incurring losses in the first half of 2004 despite launching few high value products. The company also entered into pact with Avesthagen Gengraine Technologies Pvt Ltd to conduct collaborative research in the area of new drug discovery. Ranbaxy received minor setback during November 2004 due to withdrawal of all its anti-AIDS drugs voluntarily from the WHO pre-qualification list as it found discrepancies in the documentation relating to proof of the products' bio-equivalence with originator medicines. Meanwhile, the company also impacted by the decision of stoppage of the clinical phase II trial of prostate drug Pamirosin by Schwarz Pharma AG due to unclear results in pre-clinical tests. Though the company has developed excellent marketing or R&D tie-ups with the international giants, the competition in generic field is hampering the growth. The investments in R&D will start yielding returns after some more time. Unless the company implement mergers and acquisition rapidly in the international market, it would be difficult to meet its vision of $2- billion company by the year 2007.