Dr Reddy's measures for success

India''s Dr Reddy''s Laboratories has launched roadshows for a debut ADR that will mark the first US listing attempt by an Asian pharmaceutical company.
Investor presentations for an 11.5 million unit issue began in Asia yesterday (Thursday), with final pricing provisionally scheduled for April 11 after the completion of roadshows in Europe and the US next week. With Merrill Lynch as lead manager, the company is hoping to raise about $158 million based on today's close share price of Rp1,285 ($27.59). Each ADR unit equals two shares and the overall offering will comprise about 18% of the company's share capital. With ABN Amro and CLSA as co-managers, there is also a 15% greenshoe.

India's fourth largest pharmaceuticals company by market capitalization, Dr Reddy's is hoping to become the country's first this year to venture into the international equity markets and complete a full New York Stock Exchange (NYSE) listing. But bankers believe that its decision to launch a straight equity deal at a time of continuing market uncertainty remains well founded.

"Since about 70% of international investment in Indian equities is directed towards the tech sector, many investors are looking for diversification," says one. "Most ADRs from the subcontinent also only attract India and Asia funds. This one will also draw the sector funds which want diversification away from the US and European pharmaceutical giants."

The combined weight of these accounts, in tandem with the defensive nature of the sector and relative insularity of the Indian economy, are said to be the main driving forces behind the successful completion of a deal. Bankers also emphasize the huge growth potential of the Indian pharmaceuticals sector, likely to be one of the major beneficiaries from a flood of drug patents freed onto the global market over the next few years.

While $17 billion of patents have expired over the past five years, some $40 billion are set to expire over the next five, representing 15% of the entire sector and including drugs such as Prozac. "India is a low cost centre and a highly educated one," a banker explains. "In India it costs $10,000 per scientist, in the US, $100,000."

Dr Reddy's will use proceeds to expand its push into the US, where it is starting to build a platform to distribute its products. The company makes a mix of generic and brand name drugs including methyl dopa, verapamil, oxythagine and cephalexin.

Year-to-date its share price is up 0.97% versus an overall market decline of 4.6%. Most of the outperformance has occurred since the announcement of the filing earlier this week with the stock rising 6% to close at Rp1,285.