Wednesday, November 16, 2011

Buy Ranbaxy, Likely to get Nexium/Prilosec API/formulation supply contract - 2012 and onwards

Recall in 2008, AZN settled the Nexium patent litigation with Ranbaxy and as per the terms of settlement, Ranbaxy was to supply part of  the Nexium API/formulations to AZN for its US business and was granted distribution rights for authorized generics version of felodipine and Prilosec. Also recall that Merck was also a part to the settlement agreement.

Besides AstraZeneca, Merck and AZN have a JV in the US, which also sells Nexium/Prilosec/felodipine in the US. Currently Merck is manufacturing Nexium/Prilosec/felodipine formulation and supplying it it to the JV. The sales value of the supply is about $1000m..  AZN has a call option to buy out MRK interest in the JV, and the option is exercisable in 2012. AZN has indicated that they will exercise the option and in that event MRK has told that the supply that they do to the JV will also be more of less have residual value.
As part of its strategic priorities, AZN has also indicated that it intends to outsource 100% of its API needs.

If we connect the dots, it seems it is likely that Ranbaxy might become the new supplier of the Nexium / Prilosec formulations. If so, it could give them significant incremental sales.