Aurum Deal of the Month – July 2016

Dr. Reddy’s Laboratories (Dr. Reddy’s or DRL) has signed a definitive agreement with Teva Pharmaceutical Industries (Teva) and an affiliate of Allergan plc to acquire a portfolio of eight Abbreviated New Drug Applications (ANDAs) in the U.S. for USD 350mn in cash.

The Transaction

In July 2015, Teva announced the acquisition of the generics business of Allergan in a transaction valued at ~ USD 40bn. As a precondition to the closing of the deal, Teva is finalizing up to USD 2bn in asset sale agreements to win antitrust clearance. The proposed sale of eight ANDAs to DRL is a part of the divestment plan by Teva to clear Federal Trade Commission review.

Through this transaction, DRL will acquire a portfolio of eight ANDAs comprising of one approved and seven under review with FDA. Majority of the molecules being acquired are complex products and/or expected to have limited competition These complex generics are across multiple dosage forms i.e. sublingual film (Suboxane, market size of > USD 1bn), vaginal ring (NuvaRing, market size of > USD 500mn), inhalation respule, topical cream and oral solids. The combined revenue of the branded versions in the U.S. is ~ USD 3.5bn (for the most recent twelve months ending April 2016). These ANDAs were filed during 2009-2013 timeframe and are expected to be launched over the FY18-FY21 time period. DRL is acquiring the portfolio on a cash-free, debt-free basis and expects to finance the transaction using a combination of cash on hand and available borrowings.

The average cost per acquired ANDA comes to be ~USD 44mn whereas DRL’s spend last year was ~USD 15mn per filed generic product (as per analyst estimate). DRL is paying 3x own filing cost for the acquired portfolio as it adds complex generics across dosage forms to the company’s portfolio. As per analyst estimates, the acquisition is estimated to have a payback period of 5-6 years based on peak sales potential from the portfolio in the range of USD 200-250mn (when all products are launched).

The acquisition is contingent on the closing of the Teva/Allergan generics transaction and approval of DRL as a buyer by the U.S. Federal Trade Commission.

Transaction Rationale for Dr. Reddy’s

North America accounts for ~50% of FY16 revenues (USD 2.4 bn) and is therefore a significant growth engine for DRL. As of end FY 2016, cumulatively ~79 ANDAs were pending USFDA approvals excluding some in-licensed ANDAs.

In FY 2016, overall North American business grew by 19% including the OTC business which grew by 36%. In FY 2016 the US prescriptions business grew by 16% given new launches and market share gains. However increased generic competition in select product categories, on-going consolidation in the distribution network will impact revenue growth and profitability.

Thus the current acquisition is significant as it a) enhances DRL’s product pipeline / capabilities from a US standpoint and b) helps transition its U.S. business model to more complex / specialty business where competition intensity is much lower:

• This acquisition adds new dosage forms to its range of capabilities and will support growth in the medium term launch pipelines in the absence of new approvals

• The US business grew 16% in FY 2016 despite new product launches. The robust performance was largely led by increased market share gains within few limited competition products. Thus company’s strategy to strengthen its US prescription pipeline through inorganic push is clearly a positive

• Additionally DRL is also augmenting its US business through a niche OTC focus. It acquired a portfolio of six OTC brands in the cough-and-cold, pain and dermatology categories

“This transaction will add strength to our product portfolio, help us be more relevant in our US market and also create new opportunities for growth.” – Co-Chairman and CEO of Dr. Reddy’s Laboratories, G.V. Prasad.

deal

In the recent past, we have also witnessed other examples of high ticket deals by Indian companies looking to build a strong foothold in the U.S. market:

• In July 2015, Lupin announced acquisition of GAVIS for USD 880mn creating the fifth largest portfolio of ANDA filings. The acquisition also broadens Lupin’s pipeline in dermatology, controlled substance products and high value niche generics

• In Sep 2015, Cipla announced acquisition of two US-based generic-drug companies, InvaGen Pharmaceuticals Inc., and Exelan Pharmaceuticals Inc. for USD 550mn with combined revenues of over USD 200mn. The acquisitions provide Cipla scale in the U.S. generics market through a wide ranging product portfolio

Share Price Movement

The transaction was announced by Dr. Reddy’s on June 11 2016 (Saturday), with a filing on the BSE. The unaffected stock on June 10 was Rs 3,064.6. The high and low on June 13, 2016 was Rs 3,100.1 and Rs 3,073 respectively, implying a marginal movement in the range of 1.2% – 0.3% to the price before the announcement of the transaction.

Disclaimer: Aurum Equity Partners LLP was not a part of this deal in any way.