Moneycontrol Bureau
Dr Reddy's Laboratories shares gained 1 percent in early trade Monday after it acquired eight abbreviated new drug applications (ANDAs) from Teva Pharma and an affiliate of Allergan plc in the US.
"The acquired portfolio consists of products that are being divested by Teva as a precondition to its closing of acquisition of Allergan's generics business," the company says in its filing.
The acquisition of these ANDAs is also contingent on the closing of Teva/Allergan generics transaction and approval by the US Federal Trade Commission of Dr Reddy's as a buyer, it added.
The pharma major acquired products portfolio on a cash-free and debt-free basis. It expects to finance the transaction using a combination of cash on hand and available borrowings under existing credit facilities.
With maintaining underperform rating, Bank of America Merrill Lynch believes this deal is an attractive one for Dr Reddy's as it not only boost the medium term growth outlook in the US but even the pay-back period is also less than seven years. Further, most of these products aid the overall complexity of company's pipeline as they don't have in-house capabilities, it says.
According to brokerage firm's research note, acquired portfolio can add USD 170-200 million annual sales from 2018 onwards with 50 percent plus EBITDA margins.
The portfolio being acquired for USD 350 million is a mix of filed ANDAs pending approval and an approved ANDA, and comprised of niche segments such as Sublingual film, Vaginal ring, topical derma, inhalation respules and oral solid products.
The company has indicated that half of these products will be launched in 2018 with rest of launches by 2020. One is already approved and seven are pending with US Food & Drug Administration.
Combined sales of branded versions of these products in the US is approximately USD 3.5 billion MAT for the most recent twelve months ending in April 2016, according to IMS Health.
JP Morgan, which has overweight rating with target price of Rs 3,600 on the stock, says these ANDAs are likely to be filed from Teva/Allergan facilities or contract manufacturing organisations (CMOs), which will either be site transferred to Dr Reddy's facilities or require change in contracts with CMOs.
According to the brokerage house, key downside risks include any potential regulatory issues (import alert at any facilities under warning letter), delays in product launches in the US, and adverse foreign exchange fluctuations.
Dr Reddy's had received warning letters for its three facilities - two in Andhra Pradesh (SriKakulam & Duvvada) and third in Telengana (Nalgonda district). This could lead to disruption in supplies and some delay in approvals due to implementation of remedial actions, says JP Morgan.
However, the brokerage believes that the impact will be offset by aggressive de-risking from Srikakulam, sourcing injectable from third-part instead of Duvvada and approvals from other facilities.
Credit Suisse has maintained neutral rating on the stock. It says average research & development per acquired product works out to be USD 44 million whereas Dr Reddy's spend last year was less than USD 15 million per filed generic product; therefore the acquired portfolio is 3 times of company's own filing cost.
At 11:55 hours IST, the scrip of Dr Reddys Laboratories was quoting at Rs 3,083, up Rs 18.40, or 0.60 percent on BSE.Posted by Sunil Shankar Matkar
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