Dr Reddy’s Laboratories buys Wockhardt branded generics business

Hyderabad-based pharma major Dr Reddy’s Laboratories will buy Wockhardt Ltd’s branded generics business in India, Nepal, Sri Lanka, Bhutan and Maldives and its manufacturing plant at Baddi in Himachal Pradesh for around Rs 1,850 crore. Wockhardt is selling a part of the business because of its plans to ensure adequate liquidity. Dr Reddy’s is paying more than three times of the revenues that Wockhardt’s acquired business is generating.

In the due course, Wockhardt’s strategic plan is to shift from acute therapeutic areas to more chronic businesses like anti-diabetes, central nervous system and also into niche antibiotic portfolios. The sell-off will fetch Wockhardt adequate liquidity for investing in growing business both in India and abroad.

The Wockhardt’s business, which is changing hands, is pegged around revenue of Rs 370 crore in the current financial year (2019–20) till December and around Rs 600 crore in 2018–19. In fact, in 2018–19, the divested portfolio constituted 28% of standalone revenue and 14% of the consolidated revenue.

Deal

The deal agreement comprises of portfolio of 62 brands in multiple therapy areas such as respiratory, neurology, dermatology, etc. Once the deal is done, Wockhardt will continue to run international operations in the United Kingdom, the United States, Ireland and in other countries through its step-down subsidiaries. The deal is likely to be finalised by the second quarter of next financial year.

The deal will definitely boost Dr Reddy’s presence in high-growth therapy areas with brands such as Practin, Zedex, Bro-zedex, etc. Wockhardt will also transfer to Dr Reddy’s sales and marketing teams related to these areas. The transaction is likely to be largely funded through internal accruals, except for some short-term funding to handle timing mismatch.

Year Wockhardt Ltd Dr Reddy’s Laboratories Income Net profit Revenue Net profit 2016–17 2546 137 14080 1203 2017–18 2534 69 14202 980 2018–19 2181 -82 15385 1879 2019–20 (Till December) 1136 -153 13028 1185

Edge for Dr Reddy’s Laboratories

The deal surely signifies Dr Reddy’s de-risking strategy with regards to its business in the United States, which has taken a hit because of regulatory actions. As a part of the company’s diversification policy, Dr Reddy’s Laboratories is gradually moving capital allocation towards emerging markets and the deal is definitely consistent with that thinking. Over the last few years, Dr Reddy’s has focused on growing its business in the Indian market and rise up the pecking order and be in the top-10 slot in the near future. At present, with 2.4% market share, Dr Reddy’s Laboratories rank number 14 in India in terms of market share.

In the past, Dr Reddy’s Laboratories had expanded its export business, especially in the distributor-led markets like the United States and Europe. The company had invested heavily in these markets even as entry barriers remain very high for companies from Asia because of stringent safety and regulatory norms. However, Dr Reddy’s Laboratories got a foothold in these markets and even got good returns. Their focus on export market meant that the company did not focus much on the domestic market, especially in the branded generic segment.

However, regulations for non-American pharma companies are fast changing in the United States. There is even pricing pressure in the US market because of consolidation in trade channels. As a result of these uncertainties, Dr Reddy’s Laboratories is now shifting its focus from the exports market to the domestic branded formulation market.

But the challenges in the Indian market are even much more than foreign markets. For instance, in the branded generic market many companies push their products through various channels. Given the fact that the government puts in price control and drugs are price sensitive even for consumers, it is indeed challenging to get a foothold in the Indian generic market and maintain margins.

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