E. Kumar Sharma May 15, 2008
Good things come in smaller packages— that’s perhaps the wisdom Indian pharmaceutical major Dr Reddy’s Laboratories has taken home after its big-bang acquisition of betapharm in Germany for roughly Rs 2,500 crore in early 2006. In the course of the 30 days of April the Hyderabad-based company announced three buyouts that it concluded. This time, the three deals put together add up to just a little over $70 million, or around Rs 280 crore. Clearly, the rationale for these purchases isn’t size and scale. “One is for its technology platform, the other is an infrastructure play and the third is a vehicle that can take us into a new geography,” says G.V. Prasad, Vice Chairman and CEO, Dr Reddy’s Laboratories. Analysts see merit in such a strategy. Says Alok Gupta, Executive Vice President & Country Head (Life Sciences & Technology), YES Bank: “Increasingly companies are today keen to acquire unique facilities, technologies or distribution channels that can help them not just reduce costs but also provide a time-to-market advantage.”Consider the technology platform first. On April 1, Dr Reddy’s announced its decision to acquire from Dow Chemical Company a portion of Dowpharma Small Molecules Business—in the main its UK sites in Mirfield and Cambridge. These include a chiral and biocatalysis technology at Cambridge and a scale-up capability in Mirfield. These, says Prasad, are niche technologies for the chemicals business in the space of APIs (active pharmaceutical ingredients) and CPS (custom pharmaceuticals). “The technology has wide application in both APIs and CPS but our primary focus will be to use this technology to build deeper relationships with innovator pharmaceutical companies in the CPS segment,” adds the CEO. The acquisition includes customer contracts, associated products, process technology, intellectual property, and trademarks as well as the transfer of the Mirfield and Cambridge facilities.
Just two days later, Dr Reddy’s announced the takeover of Jet Generici Srl, a company engaged in the sale of generic finished dosages in Italy. The deal has been completed via Dr Reddy’s Italian subsidiary, Reddy Pharma Italia SpA, which has been engaged in building a pipeline of registrations since its in-corporation. The acquisition provides access to an essential product portfolio, a pipeline of registration applications, and a sales and marketing organisation. This is the buyout that enables an entry into a new geography.
The more significant deal was closed on the last day of April—to acquire BASF’s pharmaceutical contract manufacturing business and related facility in Shreveport, Louisiana, USA. This business involves contract manufacturing of generic prescription and over-thecounter products for branded and generic companies in the US. It recorded revenues of $43 million (Rs 172 crore) for the year ended December 31, 2007 and employs around 150 people. “We see it as an infrastructure play for our US generics business. We are serving the US customers from India now. Having local facilities is important,” says Prasad.
Here’s why: If Indian companies bag orders for supplies to the US government, their domestic sites (in India) are still not on the approved list of that country and they have to operate out of locations recognised by the government.
Explains Prasad: “Having a local presence (with the Shreveport facility) not only gives us an access to government business but also helps us become more responsive to the local needs.” The US facility will also serve as a growth platform for Dr Reddy’s plans for the US OTC market. “In the next 12 to 18 months, we intend to add another 3-4 products and take the total number to seven products,” says Prasad. It currently sells OTC products like ranitidine and ibuprofen, which are supplied to stores like Wal-Mart and CVS, where they are available under private labels.
There are more advantages of this deal, too. As Satish Reddy, MD & COO of the company, put it after the transaction was concluded: “The acquisition of BASF’s finished dosage manufacturing facility in the US will enable us to strengthen our supply chain for North America and provide a strong platform for pursuing additional growth opportunities.”
That smaller is beautiful, or rather more workable, is a lesson Dr Reddy’s would have appeared to have learnt from the acquisition of betapharm. This big-bang buyout has yet to show results, and the company is still feeling the pain following pharma reforms in that country and the subsequent decline in prices. Prasad thinks it’s time for the tide to turn. “We are increasing our volumes and we can see that in significantly improved results. It is already showing,” he says. The latest three acquisitions are unlikely to take that long to bear fruit.