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ShareAre promoters of Dr Reddy's selling out? That question kept pharmaceutical analysts and observers frantically speculating last week as shares of the company zoomed to over Rs 840 in a single day.
A few believed that the company may be stealthily sewing up an equity deal with GlaxoSmithKline Pharma while others added more foreign drug makers to the list of probable suitors.
Dr Reddy's officials steadfastly denied any equity dilution by the promoters but that clarification largely failed to quell the theorists. After all, when Ranbaxy founders exited the company last year selling every brick to Daiichi Sankyo of Japan, it all came as a big shock.
Everyone wondered how the biggest drug company of India could sell out, and like everyone Dr Reddy's founder Anji Reddy too expressed his astonishment. Though an emotional issue for many at that time, today most investment bankers, promoters or chief executives in pharma companies agree that Malvinder Singh took the right step of exiting at the right time and that too for a humongous valuation put to his $1.5 billion company!
Enough value created by Ranbaxy over the last decades was simply encashed at an opportune time, many felt.The same old logic that worked for Ranbaxy looked possible for Dr Reddy's too and all the rumours appeared believable.
Dr Reddy's has touched annual sales of almost Rs 7,000 crore and its numerous challenges to turn around the German company Betapharm is seen as an example of how plans and strategies of the best managed companies can go awry.
Also, Dr Reddy's has a big exposure to the US market with close to Rs 2,000 crore in revenues alone from sale of generics, but pricing pressure has been a perennial dampener in that market. So the company has looked at avenues like private labels (store brands) and branded specialty products.
The one-off windfall gains through patent challenges of the last few years are also not so much talked about as more and more companies increasingly shake hands and call truce to save spiralling litigation costs.
From being a reasonably strong market a few years ago, Europe too is no longer a charming destination for Indian drug makers. The shift from branded generics to plain generics and price-based bidding for drug supplies driven by insurance companies has further hampered growth.
The distribution chains like the pharmacies are tightly squeezing generic companies and the margins are getting narrower, almost pushing the companies to pile up losses. Dr Reddy's is among the many other drug companies working around this limitation but it's still a long haul.
In India too, Dr Reddy's Labs has not grown very satisfactorily. With sales close to Rs 900 crore on growth of a meagre 5% -- much lesser than its peers -- a lot is to be expected from the Indian pharmaceutical market. The company is making decisive moves but the macro picture looks very tough as price competition and product introductions get more and more critical.
All of these factors had stoked last week's rumours suddenly. Still, every logic can be defied if a deal is being worked out but in its 25-year history Dr Reddy's has faced many such adversities. Years ago, Danish firm Novo Nordisk shelved its drug development plans for a novel diabetes drug discovered by Dr Reddy's and overnight the stock tanked. Dr Reddy's only emerged stronger.
Much later, after a bitter bidding war with Ranbaxy, Dr Reddy's bought out Betapharm for over Rs 2,400 crore ($480 million). The company soon landed in its most serious problems as German legislations on drug pricing changed, clipping profit margins that German companies had enjoyed. Dr Reddy's management was unnerved by the early setback and millions of dollars were written off in the aftermath. The resolve of the management to fight the crisis continued.
Now, Dr Reddy's is looking at the next level. Despite a very heavy top line of Rs 7,000 crore, the company has projected growth of over 15% to reach $3 billion in the next four years. Few companies can have the courage to project doubling of sales in that short a time.
The new steps taken to rejuvenate sales include the supply pact with GSK, pumping up research in biosimilars, combining custom pharmaceutical services businesses with the API division for better cost-management and looking at newer markets like India and Japan.
In a recent interview, to a question on the prudence of selling off at this juncture, Dr Reddy's CEO G V Prasad contested Ranbaxy promoter's decision to sell out indicating that running a company is more daunting than selling off. That should put market speculations to rest.
And if the buzz of a selloff by the promoters of Dr Reddy's turns out to be true, the price offered will have to be so mouth-watering that not exiting will look ridiculous. Just the way it was with Malvinder Singh.
Pillman is an executive closely linked to the global pharma industry.
