Glaxo Could Find Reasons to Extend Its Alliance with Dr. Reddy's

It was only a matter of time before speculation about GlaxoSmithKline’s intentions towards Dr. Reddy’s Laboratories reared its head, after a strategic alliance was forged between the two groups three months ago. Rumours are currently abounding that the British pharma giant is set to buy a 5% stake in the Indian generics firm.

The deal between the two groups does feel a lot like the collaboration set up with Aspen Pharmacare in 2008; a year later this was extended and a 16% stake in the South African firm acquired. Given Glaxo’s (GSK) stated aim to expand in emerging markets and the fact that Dr. Reddy’s (RDY) is arguably one of the strongest Indian generics players, it is not unreasonable that this partnership should progress in a similar vein.

Growth potential

The deal announced in June between Glaxo and Dr. Reddy’s certainly appears to have scope to get bigger. Details were thin on the ground, financially and strategically, but the release at the time said Glaxo would gain exclusive access to a portfolio of more than 100 branded drugs in various therapeutic segments, to be manufactured by Dr. Reddy’s and sold by Glaxo in various countries in Africa, the Middle East, Asia Pacific and Latin America.

Russia was also included in the deal, but with more caveats; Dr. Reddy’s retained the first right to launch and co-promote any products with Glaxo. The Indian firm already has a strong presence in this market, an attractive region for any traditional Western pharma company looking to diversify given its fast growing healthcare industry.

According to a recent research note from Noble, Dr. Reddy’s is the seventh largest generic company in Russia, with a strong brand name and a portfolio that includes both branded and OTC drugs. Its top four brands are now number one in their respective categories.

Therefore a stronger collaboration between the two companies in Russia could certainly present an attractive commercial opportunity for both parties, given Dr. Reddy’s already strong footing and Glaxo’s firepower, and could be a trigger for a stake sale.

Permission granted

Still, for any stake sale to happen, Dr. Reddy’s would have to be willing to share more of its hard fought position in Russia. Additionally, it would require the blessing of Dr. Reddy’s founding family, which own around 23% of the company.

Rumours of disagreement amongst management have surfaced in recent years, particularly over troubles in Germany. The company bought Betapharm for $590m in 2006 just before the German generics market underwent a huge legislative shift which crushed drug prices. With the original founder now taking largely a back seat role as chairman, whether these internal dynamics makes a stake sale more likely remains to be seen.

Chirag Talati, an analyst at Noble, sees it is a possibility and believes that the promoters would do well to sell up in the near future. Shares in Dr. Reddy’s closed at a record high of Rs865.45 on Friday, climbing on the speculation; the stock has doubled in value in the last six months.

“It would makes sense to exit now, because five years down the line, will you be able to get these premiums? I’m not sure. The US generics market is definitely harder than two years back, and the patent cliff after 2011 will hit all of them [the Indian generics companies] very hard,” he said.

Full takeout?

Mr Talati believes that if Glaxo does buy a stake, it could well lead to a full takeover a few years down the road. In his opinion Dr Reddy’s is one of the most attractive of the Indian generics firms, with its strong manufacturing base and product pipeline, potential for bio-similars and strong position in Russia and India all key attributes. An alliance over bio-similars is another area where the partnership between the two groups could potentially be extended.

Although prices are at a premium he believes a takeout would also makes sense for Glaxo, as it would allow expansion to happen quickly.

“It is increasingly becoming a game of scale in the large markets,” he said.

Hot property

If the rumours are to be believed, it is not just Glaxo casting an eye over Dr Reddy’s; Pfizer (PFE) and Sanofi-Aventis (SNY) are also said to be interested.

Earlier this month a flurry of reports prompted the company to flatly deny that the founders wanted to sell their stake, however, this does not seem to have quashed the speculation. The market is convinced that Ranbaxy (RBXLF.PK) will not be the only family-owned Indian drug maker to succumb to the global ambitions of a larger oversees company.

Given that appetite for generic assets shows no signs of abating, it is probably only a matter of time before another Indian firm receives an offer they cannot refuse.

Comments

[Justin M. Hall:]

EP:

I like your call on RDY! Nice work my friend!

Justin

Sep 22 08:35 AM

[nadavleva:]

It is a good article.
Well done
Nadav

Sep 24 09:04 AM