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Last Updated : Feb 14, 2020 07:19 PM IST | Source:

Will the Wockhardt move help Dr Reddy's break into the big league?

Analysts say unlike previous attempts, Dr Reddy’s is making more concerted effort to expand in India

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Dr Reddy’s Laboratories used to rely heavily on exports markets, especially distributor-led markets like US and Europe. The drug maker allotted much of its capital on those markets, where entry barriers are high due to stringent regulatory expectations.

But once it got a foothold, Dr Reddy’s reaped rich dividends as these markets follow generic substitution model, where it doesn't require huge investments on branding, promotion and distribution.

The success in export markets meant Dr Reddy's did not push enough in a branded generics market such as India.


However, with pricing pressure in US market on account of consolidation in trade channels, competition and regulatory uncertainties, Dr Reddy's had to re-calibrate its strategy. The company began shifted its focus to the domestic branded formulation market.

The complexity of the domestic market is huge. It is a branded generics market, where hundreds of companies deploy thousands of marketing representatives to push their brands to doctors. Given much of the spend on medicines in India is out-of-pocket, the market is price sensitive, in addition to government drug price controls. But once brands are established it’s much more stable and sustained market.

As per their website, the company has a portfolio of over 300 brands spanning gastroenterology, oncology, pain management, cardiovascular, dermatology, urology, nephrology, rheumatology and diabetes.

And while it employs a sales force of 5,000 people to push these brands, only seven, including legacy brands such as Omez, Nise, Stamlo, and Razo among others have made it to top-300.

But Dr Reddy's was never spoken in the same breath as some of its peers such as Sun Pharma, Cipla, Lupin, Torrent, Zydus Cadila among others, who all have get more than one-fourth of their revenues from Indian market. In contrast Dr Reddy's gets about 17 percent of its sales from Indian market.

Domestic formulation business contributed Rs 2,620 crore of Dr Reddy's Rs 15,385 crore revenues in FY19.

The company admits this, and it did try to boost its presence in the Indian market. Some years ago, the company undertook a major restructuring of its domestic formulation business, recalibrated focus from acute to chronic, and acquired a portfolio of drugs from Brussels-based UCB in April 2015.

Analysts say unlike previous attempts, Dr Reddy’s is making more concerted effort to expand in India and it had already started showing results. The company is growing almost double the growth of Indian pharmaceutical market (IPM).

“Over the last few quarters - 19.1 growth versus 9.8 percent for IPM, April-December 2019,” said HDFC Securities in its latest report.

Dr. Reddy’s with 2.4 percent market share ranks 14 in India.

"The measures undertaken to revive growth like focus on core brands, MR productivity, and differentiated launches are bearing fruits," HDFC Securities report said.

But organic expansion wouldn't be enough to break into top -10.

Realising this the company earlier this week announced the acquisition of select divisions of branded generic business of Wockhardt in India and few international territories of Nepal, SriLanka, Bhutan and Maldives. The portfolio includes 62 products and its line extensions largely in acute therapeutic areas. The acquisition also includes field force and a manufacturing plant in Baddi, Himachal Pradesh.

This acquisition would take India contribution to Dr Reddy's total sales to more than 20 percent from 17 percent currently. Ranking-wise, it will help Dr Reddy's to jump two places.

Dr Reddy's paid Rs 1850 crores or 3.8x of the revenues that the Wockhardt acquired business is generating.

The acquired portfolio includes high growth therapy areas with brands such as Practin (antihistamine), Zedex (cough syrup), Bro-zedex(cough syrup), Tryptomer (migraine) and Biovac (vaccine).

But analysts say Dr Reddy’s can do much more to unlock value of the portfolio than Wockhardt.

The sales of acquired portfolio declined 15 percent to Rs 377 core in nine months FY20, as Wockhardt wasn’t able to allocate capital given its precarious balance sheet, which Dr Reddy’s can do better.

"Wockhardt's current EBITDA margin profile is quite subdued while balance sheet is stretched on account of high debt. Meanwhile, the company has kept a control on its SG&A expenses, which has trended down from 18 percent to 16 percent of sales over FY17-19. We suspect Wockhardt’s India sales have suffered as management resorted to aggressive cost control," said Ambit Capital in its report.

Analyst expect Dr. Reddy’s to revive the growth of the acquired portfolio with improved serviceability of the products and increased spend on sales and promotion.

"DRL's acquisition of Wockhardt’s key India brands is a step towards further de-risking the financial profile of the company. Domestic sales contribution goes up to 21 percent of overall top-line in FY22 vs. 12% in FY15), while we estimate EV contribution at 25 percent," the Ambit report said.

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First Published on Feb 14, 2020 07:19 pm
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