Revised Wockhardt deal boosts prospects of Dr Reddy's India business

The company, according to its new strategy, is focusing on growing its India-based branded products

Dr Reddy’s shares scaled their 52-week high on Wednesday, and continue to trade firm. With the pharma major completing its acquisition of 62 brands run by Wockhardt in India — at a lower-than-expected valuation — investor sentiment received a lift.  

While the deal boosts Dr Reddy’s domestic prospects, the firm will also be holding back Rs 300 crore of the Rs 1,850-crore acquisition price that it had announced in February. The amount withheld will be paid based on the portfolio’s performance over a year.

The acquired portfolio had generated revenue of Rs 594 crore in FY19, though it has since declined to Rs 500 crore — considering revenues for the nine months ending December 2019 are annualised. Actual figures for FY20 could be much lower, owing to the Covid impact, according to analysts who say the performance-linked payment model is favourable to Dr Reddy’s. 

At the time of announcement, the deal was valued at 17x its FY20 estimated enterprise value (EV)/Ebitda, assuming industry margins of 20-25 per cent. Now, taking into consideration the Covid-led challenges on growth, the acquisition would still translate to a 15x the FY20 EV/Ebitda, show Credit Suisse estimates.

 

 

Though the current disruption is not favourable to prescription products, growth potential is nevertheless strong for the portfolio, which comprises brands such as Practin (anti-allergy), Zedex (anti-cough), Bro-zedex (anti-cough), Tryptomer (anti-depressant, anti-migraine) and Biovac (Hepatitis vaccine), say analysts. Even after factoring in the slowdown, analysts expect the portfolio to contribute 17 per cent to Dr Reddy’s India revenues.

What adds to advantages is that there is no overlap with the firm’s existing product basket. Further, Ebitda margin is similar to its India formulations business. “The deal is in line with our strategic focus on India,” says G V Prasad, Dr Reddy’s chairman and managing director.

The firm, based on its new strategy, is focusing on enhancing its India-based branded products. China, too, is being looked at as a growth opportunity, while in the US the firm relies on niche and specialty drugs, and where it has been divesting its loss-making businesses.

Pricing environment for US generic drugs has also improved, compared to the  double-digit price erosion earlier. US business grew at 21 per cent year-on-year in the March quarter — ahead of Cipla, Sun Pharma and Lupin.

Clearance for the Srikakulam plant — which was under the US FDA’s radar for quite a while — also eases the regulatory overhang.

Consequently, analysts at Nomura maintain their positive rating and see more upside, while for Credit Suisse, Dr Reddy’s is the top pick in the health care sector.