BackDr Reddy’s UCB buy a small boost to India business
It matters more to the India business, adding approximately 9% to Dr Reddy's revenue of Rs432 crore in the quarter
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Dr Reddy’s Laboratories Ltd bought a bunch of drugs being sold by European drug maker UCB SA in India and neighbouring countries, along with 350 employees, to spur growth of its domestic business.
The price at ₹ 800 crore was stiff because revenue of these products in 2014 was just ₹ 150 crore. But then, acquisitions in the domestic pharmaceutical market are seldom cheap. Also, these products are in the fast-growing categories of dermatology, respiratory and paediatrics and their sales grew by 22% in 2014, according to a Mint report. Profitability figures are not available but a Nomura research report says these products earn higher margins than that earned by Dr Reddy’s domestic business.
The acquisition’s value to Dr Reddy’s revenue growth is small, with its generic drug sales at ₹ 3,169 crore in the December quarter. It matters more to the India business, adding approximately 9% to its revenue of ₹ 432 crore in the quarter. Though not cheap, Dr Reddy’s will aim for a faster payback using its scale to grow the size and profitability of the acquired portfolio. In the December quarter, Dr Reddy’s sales grew by a relatively low 11%, and could do with a push.
Dr Reddy’s India business contributes to only 14% of generic drug sales. Its top market is the US, contributing 53% of sales, while Russia and other countries of the Commonwealth of Independent States account for 15% of sales. Its Russian business has been affected by the depreciating rouble. Its US business, too, has been affected by a slower pace of regulatory approvals that has hit sales growth.
Dr Reddy’s earnings in 2014-15 is expected to grow by only 4.5%, according to a Motilal Oswal Securities Ltd report, but is expected to recover to a compound growth of 16% in its earnings between 2014-15 and 2016-17. Acquisitions such as these, capitalizing on its low net debt-to-equity position of 0.1 times, can help in accelerating growth if the rationale of these acquisitions is realized in full.
However, the real answer to whether it can fulfil expectations lies in its performance in the US market.
The writer doesn’t own shares in the above-mentioned companies.
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