Dr Reddy’s Laboratories (DRL), India’s second largest drugmaker by sales, acquired select brands from European drug maker UCB SA in India and neighbouring countries, mainly in respiratory, derma and paediatrics and neurology segments, for Rs 800 crore.
Speaking to CNBC-TV18, Alok Sonig, Senior VP and India Business Head (Generics), DRL said there is a significant growth potential in UCB brands acquired. According to him, the acquired brands have grown historically at lower double-digits and have a lot of headroom to grow further. He expects them to grow north of 20 percent going ahead.
Below is verbatim transcript of the interview:
Q: Could you start by giving us some details on this acquisition of some brands from the UCB portfolio, how many brands have you acquired, what is the rationale behind all this?
A: Last week we announced the acquisition of select brands of UCB portfolio in primarily four therapy areas, paediatrics, dermatology, respiratory and neurology. These four areas for Dr Reddy’s are quite strategic. These areas also have 23 brands in total that we have acquired, 8-10 are top brands in their molecules in the categories and we feel there is a significant potential in these brands.
We can grow them, accelerate the growth rate by doing two things, one, taking these brands to consulting physicians or primary care physicians who have not been detailed these brands. Secondly, to expand our footprint of these brands to areas beyond metros and tier I cities. So that form the heart of the rationale for Dr Reddy’s to acquire the select brands of UCB.
Q: The company is paying Rs 800 crore for select brands that works out to around 5.3 times EV to sales which according to some might be a tad expensive. Can you explain to us how these valuations were arrived at?
A: The valuation was primarily based on the rationale that I shared with you. We believe these brands have a lot more headroom to grow as we take them to consulting physicians and as we take them to geographies outside of metros in tier I towns.
We believe that these brands can grow north of 20 percent. So given our capabilities of Dr Reddy’s and also the specialty representatives that UCB have who are also coming with the acquisition, I think between the specialty heritage and the heritage that we have with primary care with consulting physicians and areas outside of metros, we believe that there is significant growth opportunity and the valuation we did, we feel was an optimal valuation and fairly priced.
Q: Around Rs 800 crore, how are you funding it?
A: Mostly through our cash position.
Q: What are the cumulative sales of these brands that you have acquired, what is their growth rate, what is their margin?
A: It is about Rs 150 crore. These brands have significant margin. It will be hard to give you specific number given that there are different brands and different margins but overall high margin and reasonably stable business.
These brands have grown historically at about lower double digits, which we feel was given the footprint issues as they were largely restricted to select geographies and given the fact that they were not reaching out to the primary care segment of the physician community.
Q: One of their key drugs Keppra is not a part of the deal. Why is that and would you look to acquire the drug separately?
A: That is part of their go forward portfolios. In the message they had shared that they will continue to focus on Immunoscience and aspects of central nervous system (CNS) which stays with them along with the therapy area that they want to focus on which would be part of their future.
Keppra is not part of this acquisition and we will focus on respiratory, which is the allergy portfolio, we will focus on dermatology and paediatric portfolio and we will get into the neurology segment of CNS which would be a good strategic level for us.
Q: How much will this add to your India sales, how much will it augment to your current domestic growth and margins?
A: It will clearly add north of Rs 150 crore to our India business. It will improve margin position slightly given that the total India business is significant.
This would represent 10 percent of the business and it is more about the future, it is about our ability to grow these brands over the next two-five years, which is the basis of the acquisition.
Q: Any more such acquisitions that the company would consider in the domestic market anytime soon?
A: We continue to explore opportunities in the market place. We have already declared therapy areas of our choice and interest. There were some in the more acute space, there are areas in the chronic space in cardiovasculars and diabetes and some specialty areas where we continue to be leaders such as oncology, nephrology and urology. So these areas are where our focus lies.
We want to pursue leadership in these areas and I am not able to comment at this time but we will continue to explore what makes sense with our strategic agenda.