Dr. Reddy’s Continues To Exit Non-Core Businesses

Dr. Reddy's Laboratories Ltd. has agreed to sell its neurology branded products to Upsher-Smith Laboratories as part of its plan to exit specialty business to focus on profitability.

India's second-largest drugmaker by revenue will sell its U.S. and select territory rights for Zembrace and Tosymra (used for treating migraine), which were commercialised through its wholly owned subsidiary, Promius Pharma, according to its exchange filing.

Dr. Reddy's will receive $70 million upfront, $40.5 million in near term and additional financial considerations, including existing contractual obligation and inventory. It will also receive sales-based royalties on a quarterly basis. The sale of proprietary products would help to mitigate operating losses in this business, it said.

With the latest sale, Dr. Reddy's has almost exited the proprietary portfolio of products already commercialised, according to Morgan Stanley. Dr. Reddy's diversification to specialty business hasn't met with commercial success so far, Sameer Baisiwala, pharma analyst at the research firm, said in the note.

So far, the company has sold five specialty products over last three months. In April, Dr. Reddy's sold three U.S. dermatology brands—Sernivo (for plaque psoriasis), Promoseb (used for treating seborrheic dermatitis) and Trianex (for eczema, dermatitis, allergies and rash, among others)—to Encore Dermatology Inc. for Rs 180 crore. In January last year, it out-licensed Zenavod (used for treating redness in face, pimples and swelling) to Galderma S.A.

But the drugmaker retains the specialty products in the R&D pipeline, according to Morgan Stanley.

Dr. Reddy's said it will continue to focus on developing its proprietary product pipeline with Tepilamide Fumarate and Tazarotene Lotion (for plaque psoriasis), E7777 (for T-cell lymphoma), and Celecoxib Oral Solution (used for treating pain and inflammation).

Here's what other analysts are saying:

• The move is in line with the company's strategy to operate this business on a self-sustaining mode rather than depend on generic cash flow to fund the development pipeline, Neha Manpuria, analyst at JP Morgan, said in a note.
• The proprietary product business is a drag on the company's overall profitability, according to Saion Mukherjee, head of equity research at Nomura. The brand divestments will eliminate commercial losses with significant reduction in R&D spends, he said, adding the negative earnings per share of Rs 27 for proprietary products is likely to be reduced.
• Annual losses under proprietary products may reduce from $60-70 million to less than $30 million, said Girish Bakhru, vice president of BofAML. The deal, he said, is positive on a cash flow basis as it gives certain amount upfront.
• It's a smart move considering the challenges and expenses incurred in successfully commercialising branded products in the U.S., according to Alankar Garude, equity research analyst at Macquarie. With the proceeds from the deal, the company is expected to sharpen focus, both organically and inorganically, in U.S. generics, India, Russia, China, active pharmaceutical ingredient and global hospital business, Garude said.