What Dr. Reddy's Stands To Gain From Buying Novartis' India Business

Drug major Novartis AG has initiated a strategic review of Novartis India Ltd. amid reports it's selling the India listed business.

"Novartis AG has commenced the strategic review that will include an assessment of its 70.68% shareholding in Novartis India Ltd.," a Novartis India spokesperson told NDTV Profit. "No decision has yet been taken regarding the eventual outcome. In the meantime, it is business as usual."

Media reports suggest that drugmaker Dr. Reddy's Laboratories Ltd. is in the race to acquire Novartis AG's stake in Novartis India. Dr. Reddy's declined to comment on NDTV Profit's emailed queries.

Why This May Be A Good Fit For Dr Reddy's

Dr Reddy's bought Novartis' cardiovascular brand, Cidmus, in India for approximately Rs 456 crore in April 2022, which it has been able to scale up.

In February 2022, Novartis entered into an exclusive sales and distribution agreement with Dr Reddy's for a few of its established medicines, which include the Voveran® range, the alcium range and Methergine, to further broaden access to these medicines beyond the current geographies.

Volume growth of portfolios distributed by Dr. Reddy's was double digit, Novartis India had said in its annual report of 2022-23.

"Given the existing distribution arrangement, which we believe covers a significant part of Novartis' existing portfolio (almost 50% of Novartis India sales), we think Dr. Reddy's is best placed to acquire Novartis' stake in Novartis India," said Nomura.

Of the products that are not yet distributed by Dr Reddy's, the key brands are Myfortic, Tegrital, Simulect, and Sandimmun. These brands account for close to 50% of Novartis India's sales of products distributed by Dr Reddy's. "In these brands, Novartis has leadership positions with very high market share. We think these brands can complement Dr Reddy's existing presence in these segments. Thus, the acquisition makes strategic sense for Dr Reddy's, in our assessment," Nomura said.

These brands can complement Dr Reddy's existing presence in these segments, according to the research firm. Thus, the acquisition makes strategic sense for Dr Reddy's assessment.

The acquisition could be earnings accretive over time and mildly value accretive as cost synergies are realised, it said.

Dr Reddy's wants to increase its India business and is always looking for opportunities. They want to increase Ebitda margin to 25–27% from 15-20%. This will increase Dr Reddy's margin and can contribute healthy growth to its India business, according to Foram Parekh, research analyst at Sharekhan.

"The Indian market is an expensive market; any deal that has been done in the past is at 5–6 times market capitalisation to sales, and that kind of valuation Novartis would be looking at," she said.