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ShareMumbai/ Hyderabad: The stock of Dr Reddy's Laboratories soared on Thursday on buzz about GlaxoSmithKline (GSK) looking to acquire a stake in the company.
The stock touched an intraday high of 851.55 before closing the day at 821.15, up 3.65% from the previous close. In the derivatives segment, open interest surged a whopping 36.5% to 651,200 shares, suggesting more action in the days to come.
The MNC is said to be trying to enter into a bulk deal with either the promoters of the company or an existing large investor by paying Rs 950 per share.
The buzz comes a little over a year after the Japanese firm Daiichi scooped up Ranbaxy in a deal that valued the local company at around $6.6 billion (over Rs 31,000 crore). That's around 4.3 times the Indian company's 2008 sales of Rs 7,332 crore.
"Benchmarking Dr Reddy's to 3X sales (on account of problems like Betapharm), valuation of the deal could be estimated at Rs 20,000 crore," a research analyst from a Mumbai-based brokerage said.
Dr Reddy's posted sales of Rs 6,862 crore for the 2008-09 fiscal.
GSK is already partnering with DRL for marketing the company's products in the emerging markets. It is expected to evaluate about 100 products of DRL for marketing using its existing network in those countries.
That perhaps gives reason to suppose it could pick up a stake in Dr Reddy's too, big or small.
"We have already seen such moves in the form of Mylan buying out Matrix, Sanofi taking over Shantha Bio and Pfizer entering into a major manufacturing deal with Aurobindo.
Though there are no such moves involving DRL at this point, even the speculation about any such development sounds logical," a veteran stock broker based in Hyderabad said.
DRL denied the reports. "The promoters have no intention of diluting their stake in the company and it is purely a market speculation," the company said in a statement .
However, an industry observer who has worked as a top executive with several MNCs including GSK said such a move would be logical.
"GSK has the marketing prowess, while Dr Reddy's has the generic products that are being seen a prime tools to curb rising healthcare costs. So, both parties could see a strategic fit in each other," he said.
Also, the recent performance of Dr Reddy's has not been up to the mark, he pointed out. "Dr Reddy's is facing several issues. It has been growing at about 9% annually, which is much less than the pharma industry's growth of over 11%. Their Betapharm acquisition has gone haywire. Their novel molecule pipeline is also not eliciting any optimistic fervour in the industry."
On the other hand, for GSK, like for any other Big Pharma player at this juncture, new molecule pipelines are tapering out and generics are in focus. "And Dr Reddy's has a readymade generics basket which can very well suit the MNC. So any sell-out by Reddy's is beneficial to both parties."
Meanwhile, IIFL said in a September 9 report that DRL is the "best long-term pick" in the space today. "We believe that quality and visibility of earnings, technological capabilities, management quality and good disclosure norms make Dr Reddy's the best long-term pick in the pharma space at current valuations. The stock is trading at less than 20x FY10 core earnings adjusted for one-off earnings. Our price target of Rs 966 is 19xFY11core earnings plus cash and value of exclusivities per share," IIFL analyst Bino Pathiparampil said in the report.
