JB Chemicals sells Russian Rx biz to Dr Reddy’s; next is what?

JB Chemicals & Pharmaceuticals made headlines recently when it sold the over-the-counter business in Russia and the CIS (Commonwealth of Independent States) to Johnson & Johnson. Now, it has announced the sale of prescription part of the business to Dr Reddy’s Laboratories, another player with a significant presence in Russia.

Dr Reddy’s will pay about $35 million or about Rs 138 crore to acquire JB’s prescription business, including the intellectual property and product registrations. JB will get an additional $4 million or Rs 18 crore for its inventory being transferred.

Dr Reddy’s Russian & CIS business has been doing well, and in the June quarter, sales rose by about 22%. Russia is a key market for leading Indian pharmaceutical companies, who have built distribution networks and enjoy brand loyalty in this rather difficult market. Though there have been periods of turmoil that has affected their performance –devaluation of the rouble, for example- they are benefiting from the robust economic growth in the region now. Dr Reddy’s market position will get a boost from this acquisition.

JB Chemicals’ exit has been prompted by a decision to focus more on the Indian market. The combined consideration from J&J –which paid about $260million- and Dr Reddy’s will add about Rs 1,340 crore to its books, which may get whittled down after it pays tax wherever due. The company’s had loans of Rs 159 crore, as of September 30, and will still retain a substantial portion of the consideration, even if it repays all debt.

But investors will be more interested in what it does with the spare cash to grow its business. In 2009-10, the Russian/CIS business contributed about 40% and its exit will therefore see a significant impact on sales growth during 2011-12.

JB is hoping to make amends by driving up domestic business growth, through contract manufacturing and increasing growth in other overseas markets. It will continue to supply the products to J&J and Dr Reddy’s for the Russian/CIS market. But margins are relatively low in contract manufacturing, and existing players are been a rough time as global pharma majors –the main clients- are going slow on executing their growth plans.

Recently, JB launched a new division Femident which will sell gynaecology and dental products in India. It could potentially enter more categories since India’s pharmaceutical market is growing rapidly. But growing the organic way will mean it will take a long time to plug the gap in its revenues.

It will possibly look for a significant domestic acquisition and will need to do it at valuations, similar to or lower than what it got for the Russian business. That will ensure that it adds to revenues, but also does not overpay. With Russia completely gone now, JB’s investors will wonder what and when its next big move will be. If an acquisition is not possible, then a buyback could return money to shareholders, shrink equity capital and grow earnings per share, compensating partly for the lost business.

JB’s share fell from a level of Rs 164 in May, after it announced its Russian exit plan, falling to a low of Rs 118 but has since then recovered to Rs 144 at present. That reflects some hope that the management has or will have a strategy in place to reward shareholders.

Read the press release from JB Chemicals on the sale to Dr Reddy’s here and read about the completion of the sale to J&J here.

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