The Hyderabad-based Dr Reddy’s Laboratories is still keeping its fingers crossed on one of the biggest market opportunities in Europe.
German insurer set to finalise Rs 15,750 cr drug supply bids
HYDERABAD: The Hyderabad-based Dr Reddy’s Laboratories is still keeping its fingers crossed on one of the biggest market opportunities in Europe.
The company is waiting to hear from the German insurance major Allgemeine Ortskrankenkasse (AOK), which had called for bids from European pharma companies to supply drugs worth €2.5 billion (Rs 15,750 crore or about $3.5 billion).
Dr Reddy’s, too, has participated in the tender process through its German arm Betapharm. Any part of this order if awarded to Dr Reddy’s is expected to offer major upsides to its revenues.
“We are still waiting to hear from Germany on the tender,” a DRL spokesman told DNA Money.
AOK had called for bids to procure 64 active pharma ingredients.
Though AOK offers one of the biggest market opportunities, the tender is expected to put pharma companies under pressure as they have to cut prices to win the deal.
AOK provides insurance cover to about 24 million publicly insured Germans out of 70 million.
Analysts, however, feel Dr Reddy’s is better positioned to win some of the tenders available.
Vikram Sahu and Balaji R Prasad, analysts with Goldman Sachs, said Betapharm’s vertically integrated structure inherently gives it a competitive advantage in the bidding process.
“DRL’s German subsidiary, Betapharm, was wholly dependent on Salutas for raw material supplies. Erratic raw material supply led to a decline in market share for Betapharm over FY07 and FY08. As the Salutas contract has since been terminated and most of Betapharm’s raw material needs are now being met out of its dedicated Indian facility, we believe that Betapharm’s vertically integrated structure inherently gives it a competitive advantage in the bidding process,” Sahu and Prasad said in a report on Monday.
The structural changes the pharma major had brought in to the German arm are also expected to favour it.
The number of field executives Betapharm had on its rolls was seen as a major drag on the pricing front.
“We have taken measures to rationalise the workforce. From 250 people, the field level workforce has now been brought down to 100,” the company’s chief operating officer Satish Reddy had said during the company’s second-quarter results briefing.
“Owing to the structural change in the format of the AOK contracts this time around, we believe Dr Reddy’s is better positioned to win some of the contracts,” Sahu and Prsad said.
The format has been changed from the previous region-based contract structure (five large contracts for five regions) to a matrix of product/region-based contracts (64 products for five regions, leading to a total of 320 contracts).
“We believe that this allows DRL to focus on specific products (as opposed to bidding for regions as in the past), which would strongly position DRL to win a few of the 320 contracts,” Sahu and Prasad said.
Dr Reddy’s strategy to move production to India means lower raw material costs compared with sourcing from Salutats.
“However, we do not expect this to translate into significant margin improvement for DRL. AOK’s focus on saving around $500 million from these tenders would imply that most firms, including Dr Reddy’s would need to bid competitively on prices which could impact margins,” Sahu and Prasad said.
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}