Dr Reddy's proposed acquisition of Nicotine Replacement Therapy Brands for GBP 500 million (~Rs 5,300 crore) has failed to excite brokerage analysts, who have issued cautious calls on the Indian pharma company's stock.
Jefferies issued an 'underperform' call on Dr Reddy's stock with a target price of Rs 5,010 per share, which implies a downside of about 18 percent from the previous close. Dr Reddy's share price was little changed on Wednesday, 26 June, ending at Rs 6,070.
Jefferies' analysts said that the OTC brands being acquired would require upfront investments. Further, the impact of synergies from the acquired portfolio should start reflecting only over FY27-28.
Nomura, on the other hand, has a 'Neutral' call on Dr Reddy's stock with a target price of Rs 6,499, implying an upside of 7 percent. Nomura said the strategic rationale of the acquisition is not convincing.
While the acquisition can be EPS-accretive, the ROIC (return on invested capital) will likely be in high-single digits, added Nomura analysts.
Earlier Wednesday, Dr Reddy's said it will acquire OTC (over the counter) brands in nicotine replacement therapy in non-US markets from Haleon.
The deal is expected to provide Dr Reddy's a global stage for a larger OTC platform -- the nicotine replacement therapy business, which includes the Nicotinell brand of nicotine gum, lozenges and patches, generated revenue of 217 million pounds last year.
Jefferies said that Nicotinell is a mature brand, and is sold in more than 30 countries, including the markets of Europe, Canada, Japan & Australia.
However, the growth of these OTC brands has remained stagnant in the recent years, and that it would require upfront investments before benefits accrue.
Taking a contrarian stance, ICICI Securities believes the acquisition falls right into Dr Reddy's focus towards consumer healthcare and hence aligns with its strategy.
Motilal Oswal Financial Services also agrees as it noted that Dr Reddy's, through organic/inorganic routes, has been strengthening its growth levers in the consumer healthcare segment.
Dr Reddy’s Laboratories has been very active in mergers and acquisitions as it prepares for the future beyond its blockbuster cancer drug, Revlimid. On that account, ICICI Securities also noted that with its strong balance sheet and consistent free cash flow generation capability, funding this acquisition will not be an issue for the drugmaker.
The brokerage also sees the valuation for the deal to be fair given the portfolio's global footprint, therapeutic acceptance from the WHO, and around 25 percent EBITDA margin potential. "Going ahead, the company may introduce this brand in new markets, launch new line extension and increase promotional spends to ensure the brand grows at a faster pace," ICICI Securities stated.
Despite the more positive views, ICICI Securities as well as Motilal Oswal Financial Services both kept a neutral stance on the drugmaker's stock. ICICI Securities had a 'Hold' call with a price target of Rs 6,250, implying a 3 percent upside potential. Motilal Oswal had a 'Neutral' call with a target price of Rs 6,430, leaving the room for a 6 percent upside.
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