Ranbaxy Laboratories

Ranbaxy Laboratories is increasing its stake in Zenotech Laboratories from 7% to 45% for Rs 214 crore (Rs 160 a share). This will involve purchasing 22% stake from the current promoters and a preferential offer of 16% equity by Zenotech to Ranbaxy.

The mandatory open offer for another 20% stake, if fully subscribed, will lead to an additional outflow of Rs 92.20 crore. The buyout is expected to be funded through internal accruals and debt.

For Zenotech, with annual revenues of Rs 13 crore and net profit of Rs 3.63 crore, the market value works out to Rs 460 crore at Rs 160 per share. A scrutiny of the synergies and the space in which Zenotech operates may provide an insight into its valuation and Ranbaxy's interest in it.

Zenotech is present in the niche area of biosimilars, wherein the global market size is estimated at $65 billion. These are generic, non-proprietary versions of drugs produced through biotechnological processes using living cell-based material. Ranbaxy does not have major presence at the moment in biosimilars and hence the stake hike will strengthen its foothold here, particularly since Zenotech's pipeline of offerings addresses a third of this global market.

Zenotech is also present in the oncology (cancer treatment) therapeutic segment (55% of its product portfolio), which is one of the fastest growing with the global market size estimated at $35 billion. This segment is expected to grow at a CAGR of 18% till 2010 (biologics included), which is a huge opportunity.

Other key areas the company caters to are anesthesiology and neurology. Ranbaxy may also benefit from the approval received for Zenotech's oncology biopharmaceuticals.

Zenotech also has a strong pipeline with seven biologics in the pipeline and two monoclonal antibodies ready to enter clinical trials. This will be synergistic with Ranbaxy's global presence, as the products, if successful, will be marketed through the latter's marketing and distribution network spread over 125 countries. Also, with Ranbaxy's backing, funding prospects of Zenotech will only be enhanced.

The prospects of biosimilars have been further enhanced with the opening up of developed nations like the US and in Europe, though in the absence of regulations for biogeneric products, how soon these revenues can flow in is a big question and remains a major risk.

Litigation (relating to patents, as seen in the past), too, remains a risk for companies like Ranbaxy.

Meanwhile, the company plans to hive of its own new chemical entity research division into a separate entity by 2008 and its current pipeline consists of two molecules in the clinics and six-seven other molecules in pre-clinical stages.

This clear risk demarcation, associated with R&D and the generics business, will bring greater clarity to its valuations.

Ranbaxy has also announced the receipt of final approval from the US FDA to manufacture and market clarithromycin for oral suspension, which is a positive.

Ranbaxy has been an underperformer on the bourses and currently, at a PE of 25, the stock may be prescribed, only for those with a high risk appetite and a long-term perspective.