Event update: Dr Reddys Lab (Outperformer) - Acquires a portfolio of domestic brands from Wockhardt

Event

DRL has bought a portion of Wockhardt’s domestic formulation business for Rs18.5bn

Key highlights

• As part of the transaction, DRL has bought a portfolio of 62 brands across multiple therapies including Respiratory, Neurology, VMS, Dermatology, GI, Pain and Vaccines. DRL also acquired the related sales and marketing teams and manufacturing plant based in Baddi
• Some of these brands include Practin, Zedex, Bro-zedex, Tryptomer and Biovac which are present in the top 10 products of Wockhardt with average MAT Nov 19 sales of Rs759m; Notably, Practin, Zedex and Bro-zedex are amongst top 300 brands in IPM.
• The overall acquired brand portfolio had sales of Rs5.9bn in FY19 and Rs3.8bn in 9MFY20 – Wockhardt’s India business has been under pressure in FY20 so even this portfolio has got impacted
• DRL has effectively paid ~3.1x FY19 sales for this portfolio
• Prima facie, given that most recent comparable transactions have occurred at valuations of 4-5x sales, this looks like a good deal for DRL from a valuation perspective though we need to analyse the brands in greater detail; the financial impact of the deal will depend on the profitability of the portfolio / amortization charges associated with the transaction; given by past precedents in such transactions, it unlikely to be meaningful in the near term from an EPS accretion perspective given significant amortization charges in near term.
• This transaction is in line with DRL management’s stated intent to enhance focus on the domestic formulations market

Valuations & view

DRL’s clearly articulated strategy, under the new management, to reduce reliance on select US generic launches and to enhance focus across India / EMs / PSAI backed up by aggressive and multi-pronged cost optimization initiatives has imparted significant solidity to the business and enhanced its medium term growth visibility. Given the ongoing flux in the global generic industry, we believe this successful strategic transformation lends significant competitive advantage to DRL from a medium to long term perspective. Additionally, DRL’s strong US pipeline continues to remain a potential source of significant valuation upsides. Maintain Outperformer with TP of Rs3572.