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Dr Reddy’s Laboratories’ acquisition of Mayne Pharma Group’s US generic prescription product portfolio stands out for two reasons.
One, Dr Reddy’s is pouring more money into a market (the US) that is persistently facing price erosion. So much so that many drug companies are pulling back on fresh investments there. “A striking point from the Q3 FY23 results was curtailed investments in the US from small Indian pharma companies,” analysts at Jefferies India said in a note. According to Jefferies, small companies were the last to enter the US generics market and are unable to scale up their revenue base.
Even large pharma companies which have been early entrants into the North American market are having a rethink. For instance, Lupin is prioritising investments and plans to selectively pursue drug opportunities in the US market. “Lupin has discontinued selling loss-making products and is likely to continue to prune the portfolio further, if required,” analysts at Nomura said in a note after meeting Lupin’s management.
Next, consider the nature of Mayne Pharma’s US portfolio. The acquired portfolio consists of 45 commercialised products, 4 pipeline products and 40 approved non-marketed products. Much of the existing business is facing pricing pressure. In FY22, Mayne Pharma’s retail generic business revenues declined 27 percent. Perhaps this explains the mixed reaction to the acquisition from investors.
Even so, investors should not ignore benefits at the company level. Mayne’s US portfolio has several limited competition products that can help Dr Reddy’s withstand the current price erosion in the base generic drug business. The acquired portfolio can increase US revenues by 9 percent in the current fiscal year and FY24 revenues by 7 percent, show analyst calculations.
Of course, limited competition drugs in Mayne’s US portfolio face competition and future revenues can prove to be uncertain. Even then, the acquisition strengthens Dr Reddy’s US generic drug business. It gives Dr Reddy’s a foothold in women’s health drugs -- Mayne’s portfolio has gNuvaring, a hormonal product the former struggled to launch. “The acquisition will strengthen the US base business while also aiding Dr Reddy’s ambition of consistently growing its overall top line,” add analysts at JM Financial Institutional Securities.
Apart from India and other emerging countries such as China, Dr Reddy’s continues to count the US as one of its key markets. The US is still the world’s largest pharma market, a fact no drug company operating at scale can ignore. The current headwinds make the US market less remunerative. But as the market stabilises (say, due to moderation in pricing pressure), companies that withstand the business vagaries better and strengthen their core portfolio will also benefit the most.
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R Sree RamMoneycontrol Pro