With almost US$ 55 billion worth of drugs going off patent in next 5 years, there is a huge opportunity for pharma companies in the generic space. Indian companies will compete with the world's very best for this pie.

After looking at the US generics space, we found that Watson Pharma can provide a good comparison to Ranbaxy.

While Ranbaxy is the leading pharma company of India, Watson - a US$ 1.5 bn pharmaceutical company is amongst the top generics player in the US.

The company has about 44% of its sales coming from generic drugs, while about 50% of sales come from branded pharmaceutical products.

Let's briefly compare these two companies on various parameters.

While Watson is a larger company when compared to Ranbaxy, it must be noted that the generics business of Watson in the US is only slightly bigger than that of Ranbaxy. While Ranbaxy sold generics worth US$ 400 m in 2003 in the US, the generics sales for Watson were about US$ 550 m. However, the revenue pie of Ranbaxy is more diversified geographically, while Watson is present only in the US markets. If generics sales from Europe are also included, Ranbaxy's total generics business comes to about US$ 500 m.

Also, the margins of Watson have been under pressure due to increasing competition from the generics manufacturers from low cost countries like Israel and India. However, Watson has taken a concerted effort to reduce its cost structure by entering into a contract with Indian drug major Cipla.

The latter will provide Watson with essential bulk drugs for the generics, and Watson will focus on marketing and legal activities.

Larger sales of Watson can also be attributed to its longer presence in the US market and a larger number of ANDA's filings and consequently more approvals. While Ranbaxy has 65 products in the generics space, Watson has about 120 products. However, Ranbaxy is catching up with the number of filings and approvals at a faster pace.

Currently, Ranbaxy has about 90 approvals in the US generics, while Watson has about 140 approvals. Going forward, if Ranbaxy continues to pace itself as in the past, it is most likely to catch up with Watson, as the latter has been slower in filing ANDA's for new products.

ANDA filings and approvals in 2003

	Approved	Filings
Watson	22	14
Ranbaxy	24	26

While both companies have investments in New Chemical Entity (NCE) research, none of them have received any significant success in this field. While one of the molecules of Ranbaxy is in later stages of phase II clinical trials, Watson has one molecule in the phase III clinical trials.

Valuations

	Watson	Ranbaxy
P/E (x)	14.7	22.7
ROE (%)	10.1	38.5
ROA (%)	6.2	20.6

On valuations front, Ranbaxy has been certainly given thumbs up by the market, due to its higher margins and better capital efficiency. While Ranbaxy is trading at a P/E of 22.7x its CY03 earnings, Watson is trading at P/E of 14.7x its CY03 earnings.

While Watson is a near comparable to Ranbaxy in terms of the generics business in the US, on margins and capital efficiency front, Ranbaxy is way ahead of Watson, owing to its low cost manufacturing.

Going forward, Ranbaxy is filing ANDAs aggressively, while Watson has slowed down its ANDA filings. This means that Ranbaxy may come closer in terms of generics sales going forward.

However, the tie up with Cipla will be an added advantage for Watson as it will reduce its manufacturing cost and will help to expand the margins of the company.

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