Dr Reddy's banks on acquisitions for growth

Earlier this month, Dr Reddy's Laboratories entered into an agreement to acquire 23 select products from Belgian biopharmaceutical firm UCB in the territories of India, Nepal, Sri Lanka and the Maldives for about euro 128 million (Rs800 crore). This buy-out of the UCB portfolio is unique in more than one way.

For a company like Dr Reddy's, 70 per cent of whose generics drug sales revenues comes from outside India, the liberal payout for the acquisition - the largest after the Rs2,250-crore purchase of Betapharm in 2006 - marks a new-found focus on Indian business. The deal comes after the company made several small acquisitions, mostly in the range of $40 to $80 million, in other countries including the US in the past 3-4 years.

The recent consolidation has given the Sun-Ranbaxy pharma entity an 8 per cent market share in the largely fragmented and price-sensitive Indian market, estimated in 2013 to be worth $12 billion. In comparison, Dr Reddy's has a 2 per cent market share, according to Sarabjit Kour Nangra of Engel Broking, who tracks these companies as well as the pharma sector.

Ignoring such a gap would not augur well for a top company, especially when the prediction is that the size of the Indian market will see swift expansion in the next five years. "The Indian pharma market size is expected to grow to $85 billion by 2020," forecasts the Indian Brand Equity Foundation. Its recent report said, "The growth in the Indian domestic market will come on the back of increasing consumer spending, rapid urbanisation, rising health care insurance and so on. Going forward, better growth in domestic sales will depend on the ability of companies to align their product portfolio towards chronic therapies for conditions such as cardiovascular disorders, diabetes, depression and cancer."

Dr Reddy's has already worked hard to overcome its single-digit growth by focusing on particular therapeutic areas and by enhancing its sales force from 3,500 people to 4,500. The acquisition of UCB products is a logical extension of these efforts. "The acquisition of select brands of UCB portfolio is primarily in four therapy areas, namely, pediatrics, dermatology, respiratory and neurology," explains Alok Sonig, senior vice-president and Indian business head (generics), Dr Reddy's. "These four areas are quite strategic for our company. Of the 23 brands we have acquired from UCB, 8-10 are top brands in the molecule categories and we feel there is a significant potential in these brands."

Most analysts concur. "The acquisition fits well as the company required more therapeutic segments to grow its Indian business," says Hitesh Mahida of Antique Stock Broking. "The payout for UCB is slightly expensive, but the margins for these products are very high." The earnings accruing from these products was around Rs150 crore, adding around 9 per cent to the Rs432 crore that Dr Reddy's earned in its Indian business in the third quarter ending December 31, 2014. It had reported overall revenue of Rs3,169 crore during the period.

The Hyderabad-based company also believes that these products will generate much higher values after they are introduced to unapproached physicians and primary care physicians, thus increasing brand awareness. The company will also expand the footprint of these brands in areas beyond the metros and Tier I cities. Sonig is optimistic of the UCB brands growing over 20 per cent in the next few years. Nangra points out that putting more products in the hands of the sales force will help increase the domestic revenues.

"We have already declared what therapy areas are of interest to us, including in acute care space as well as in chronic space such as cardiovascular and diabetes and select specialty areas where we continue to be leaders," says Sonig. "We will continue to pursue these areas for leadership and we will continue to explore opportunities that make strategic and financial sense." His statement hints at the possibility of more acquisitions with a focus on the domestic market.

Aggressive intentions

The pharma company is non-committal as far as the numbers go, but clearly it means to compete aggressively. "The near and mid-term goals for our Indian business are to make a difference to the lives of patients in the select therapy areas that we chose to compete in through select differentiated launches and portfolio," said the company in a statement. "We believe that this will enable delivery of industry-leading growth and improve our competitive position."

India as a marketplace for drug companies is still not very different from what it used to be, say five years ago. Even today, generics make up 72 per cent of drug sales. Only 9 per cent of sales involve patented drugs, while the rest are over the counter formulations. Though India is the third-largest world market in terms of volume, it is ranked 13 in terms of value, according to the pharmaceutical sector report by Equitymaster.

India is still a fragmented marketplace, but it has a lot of headroom for growth, given the poor diagnosis and treatment rates here, says Sonig. "We see bigger investments in healthcare infrastructure and expansion of retail chemists," he says. "And patients too are becoming more aware as a result of rising incomes and improving socioeconomic trends. So, for companies like ours, this is a great opportunity to accelerate access to high quality medicines and impact healthcare in the country."

Perhaps Dr Reddy's has read the situation correctly, for experts acknowledge such a trajectory for the Indian market. According to global consultancy McKinsey & Company, six trends will influence the growth of the Indian pharmaceutical market over the next decade: doubling of disposable incomes, expansion of medical infrastructure, greater penetration of health insurance, rising prevalence of chronic diseases, adoption of product patents and aggressive market penetration driven by the relatively smaller companies. The report also predicts that India will rank among the top ten in the world in the next decade, overtaking Brazil, Mexico, South Korea and Turkey with an incremental growth of $14 billion. Clearly

Dr Reddy's aims to be a major participant in this growth story.

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