Analyst Call Tracker: Why Dr Reddy's acquisition of Maynes Pharma failed to cheer analysts?

Dr Reddy's Laboratories

Dr Reddy’s Laboratories’ recent acquisition of Maynes Pharma has failed to excite investors and more sell-side analysts turned bearish in February.

According to Moneycontrol's Analysts' Call Tracker, ‘buy’ calls for Dr Reddy's came down to 31 from 33 as ‘hold’ and ‘sell’ calls climbed one each over February.

A total of 11 brokerages either have a 'hold' or 'sell' rating now on the stock as it continues to disappoint, with a meagre 2 percent gain during the month.

The stock had slumped 4 percent within two days after the Maynes deal was announced on Monday last week. The deal had enthused investors.

Dr Reddy's Laboratories has acquired Maynes Pharma's US generic prescription product portfolio, which includes approximately 45 commercial products (mostly oral), four pipeline products, including the recently launched generic of Nuvaring and gCardizem, and 40 approved non-marketed products, including a number of generic products focused on women’s health.

“Approved high-value products include a hormonal vaginal ring, a birth control pill and a cardiovascular product. Under the terms of the agreement, Dr. Reddy’s will acquire the portfolio for an upfront payment of approximately $90 million in cash, contingent payments of up to $15 million, consideration towards inventory and credits for certain accrued channel liabilities to be determined on the closing date," the drug maker announced in an exchange filing.

Acquisition excludes generic derma portfolio

The acquisition excludes the generic derma portfolio of Maynes Pharma, where the company has a market-leading share. Apart from that, the acquired business also posted a 34.7 percent decline in revenue over FY20 to FY22 to $111 million, largely on the back of intense competition and persistent price erosion.

While the Street does see the acquisition as a low-risk foray at a reasonable valuation, many analysts have apprehensions when it comes to the value addition that this deal brings for Dr Reddy's.

The major contention among analysts is the lacklustre portfolio acquired by the drug maker that is solely dependent on the generic of Nuvaring to support revenue growth.

"The portfolio acquired by Dr Reddy's doesn't look very promising, and, hence, I expect pressure from price erosion to continue," said a research analyst at a domestic brokerage who covers the pharmaceutical sector.

He also pointed out that margins are not so good in the oral segment. This means the portfolio is margin-dilutive and will end up looking expensive in the long term.

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At a time when price erosion, increasing competition and higher regulatory scrutiny from the US Food and Drugs Administration are sparking commentaries from managements of many Indian pharmaceutical companies to downsize presence and investments in the US business to focus more on the India business, this move by Dr Reddy's failed to fuel optimism among analysts.

Most analysts were not happy with the drift in Dr Reddy's plans to look towards organic and inorganic growth in the India business as the company acquired the portfolio for the US market.

"Previously, the management of Dr Reddy's had also commented that its focus was on the Indian and Russian markets, and, accordingly, the Street was foreseeing investments happening in those markets," said an industry expert who did not wish to be named.

"After that, when the company went for acquisitions in the US market, it also disappointed analysts and fuelled concerns with regards to the direction that the management was planning to take when it comes to growing its India business."

Even though Vishal Manchanda, equity research analyst, pharma, at Systematix Shares and Stocks (India) put faith in the management of Dr Reddy's with regards to the Maynes Pharma acquisition and feels that the move isn't a bad one, he is not thrilled either.

He also highlighted that the Street's major concern when it comes to Dr Reddy's is its reliance on a single asset, namely Revlimid, which will also start facing intense competition and hence price erosion within the next 2-3 years.

Moreover, as the market for Revlimid will also turn competitive over time, Dr Reddy's will have to sink deeper into investments in order to diversify its portfolio. Accordingly, analysts at Nuvama Institutional Equities believe that as Dr Reddy's enters a period of investments to fund its next leg of growth, its core margins shall likely remain under pressure.