Dr Reddy's Laboratories :Acquires select UCB India portfolio: Nomura Research

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DRRD makes inorganic move in the Indian pharma market

Dr Reddy’s has announced an agreement to acquire select brands from

UCB (UCB SA, Not rated) in India mainly in respiratory, derma and

paediatrics segments. The acquired portfolio excludes UCB Neuro/CNS

drugs used for epilepsy, Parkinson’s disease and seizures. The acquired

portfolio includes market-leading brands such as Atarax, Nootropil, Xyzal

and Zyrtec. As part of the deal, DRRD will also acquire 350 employees of

UCB, largely comprising the field force. This deal is expected to close by

1QFY16.

DRRD has acquired the portfolio for INR8bn (EUR118mn). The acquired

brands’ sales were at INR1.5bn as of CY14, which implies EV/sales multiple

of 5.3x. This multiple is in line with recent acquisitions in India’s pharma

market (Torrent acquired the brand portfolio of Elder at EV/sales of 5x in

Dec-13). As per DRRD, the acquired brands have recorded an annual

growth rate of 15-17% over the past three years. The EBITDA margins of the

acquired business are higher than DRRD’s current India operations,

according to the company.

We see the acquisition as incrementally positive

We view this acquisition as incrementally positive as:

(a) This acquisition demonstrates DRRD’s increased focus on the domestic

pharma market. The company has put in place a new leadership team

and attrition in the field force has come down. This we believe will help

DRRD grow ahead of the broader market consistently.

(b) The acquisition strengthens DRRD’s existing respiratory product

portfolio, particularly in cough & cold and allergy segments. The two

largest acquired brands in the respiratory segments are Atarax

(Hydroxyzine) and Xyzal (Levocetirizine), accounting for ~40% of the

acquired portfolio sales. Atarax is a dominant brand with ~75% market

share in the segment. Xyzal accounts for 14% of the Levocetirizine

market and has a strong presence in the paediatric segment. Besides

respiratory, the acquired brands like Nootropil (#1 brand in the segment

with ~45% market share) have strong presence in drugs used for

treatment of Vertigo. This is a new therapeutic segment for DRRD.

(c) The acquisition will be EPS-accretive (we think marginal) from the first

year, according to the company. EBITDA margins of the acquired

portfolio are higher than the margins for DRRD’s existing domestic

business, according to the company.

We reiterate our Buy rating on DRRD and are reviewing our target price.