Why Novartis' India arm and Dr Reddy's are made for each other

Novartis India has notified the exchanges that a strategic assessment will be conducted by parent Novartis AG to evaluate the 70.68% shareholding in its listed business. Analysts note that recent actions suggest a potential strategic shift, even though the pharma major has indicated that there is no guarantee that the strategic assessment of Novartis India will be finished this year or that the outcome may lead to any transaction.

These have been characterised by partnerships and divestitures. The sale of its heart brand, Cidmus, to Dr Reddy’s Laboratories (DRL) in April 2022 and the subsequent sale of another cardiac trademark, Azmarda, to JB Chemicals were two notable divestitures.

In December 2023, Novartis Innovative Therapies AG Switzerland sold 15 ophthalmology brands to JB Chemicals for close to ₹1,000 crore. In what resulted in trimming down its workforce for Novartis, in February 2022, Novartis forged a strategic partnership with DRL, granting exclusive rights to promote and distribute several key brands in India. These brands included the Voveran Range, Calcium Range and Methergine.

Analysts note that sales have been muted, and the company’s revenue in the financial year 2023 decreased by 5% to ₹378.8 crore but with a notable improvement in margins and profitability compared to the previous year. The latest results in the quarter ended December 31, 2023 (Q3FY24) saw revenue increasing by only 5%, albeit with steady margins and profits.

But the quarter under review also saw the resignation of Sanjay Murdeshwar, the Managing Director of the listed MNC arm.

Global brokerage Nomura's analysis suggests that DRL stands to gain substantially from its association with Novartis, along with additional brands in immunosuppressants, neurology, oncology, and other therapeutic areas. The valuations are at around 7.1 times on an FY23 trailing basis. Comparing these valuations with industry standards, the average valuation of deals in the domestic pharma space ranges from four to eight times the sales. For instance, analysts point out that the recent Torrent-Curatio was valued at around seven to eight times its sales.

Novartis might consider selling its India arm due to various factors; for instance, intense competition in the industry could be driving this decision. Multinational corporations (MNCs) increasingly require a larger sales force to effectively promote their products, as highlighted by Nomura's analysis. For instance, compared to Novartis, competitors like DRL boast three times the field force and ten times the physician connections. This competitive landscape may prompt Novartis to explore strategic options, such as selling to maintain competitiveness and ensure sustainable growth in the dynamic pharmaceutical market.