Dr Reddy's trades lower after buying US generics firm. What brokerages have to say

Dr Reddy's Laboratories

Dr Reddy's Laboratories shares traded marginally lower in the early hours of February 28.

Dr Reddy's Laboratories SA, a wholly owned subsidiary of Dr Reddy’s Laboratories, has entered into a definitive agreement to acquire the US generic prescription product portfolio of Salisbury, Australia, based Mayne Pharma Group Limited, the company said in a press release dated February 27.

The portfolio includes 45 commercial products, four pipeline products and 40 approved non-marketed products, including a number of generic products focused on women’s health, the company said.

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, it added.

“This important acquisition provides our North America organisation with a significant foothold in the women’s health space. The acquisition is in line with our stated strategy to enhance our portfolio in our chosen growth markets. We are well-positioned to successfully integrate the portfolio and grow the business,” said Marc Kikuchi, Chief Executive Officer, North America business at Dr Reddy’s.

For the financial period ended June 30, 2022, Mayne Pharma reported a total revenue of $111 million for the acquired portfolio.

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Here is what brokerages have to say about stock and the company after the Mayne acquisition:

The research house has an 'overweight' rating on the stock with a target price of Rs 5,099 per share. The acquisition of Mayne Pharma's US generic business is expected to be value accretive, as it should bolster company's US portfolio with few high-valuation, low-competition products, it said.

Products such as oral contraceptives and Nuvaring will generate better returns on the company's surplus cash. M&A remains an integral part of the company's growth strategy.

The research firm has kept a 'buy' rating on the stock with a target price of Rs 4,955 per share. The preliminary analysis suggests that the portfolio is plain vanilla, as all of its products are oral solid dosage (OSD). However, many of these products face high competition intensity.

However, the deal multiples are reasonable, and strengthen the company's overall positioning.

The brokerage house has given an 'outperform' rating for the stock with a target price of Rs 4,947 per share. According to the analysis, the recent acquisition of Mayne Pharma's US generic portfolio by Dr Reddy's does not move the needle for the company.

The company has a sizable US portfolio, which has witnessed meaningful price erosion. The company had competition in key products like Ciprodex, Vasostrict, and Suboxone in the recent past.

Revlimid presents an attractive opportunity for the company, but its will be short-lived. Thus, the acquisition of Mayne's portfolio seems to be a stop-gap solution to tide over the company for the next 2-3 years.

The broking firm raises its EPS estimate by 0.5 percent each for FY24/FY25 to factor in addition of business from the acquired portfolio. It continues to value company at 22 multiple 12-month forward earnings and add Rs 210 net present value of g-Revlimid to arrive at a price target of Rs 4,420.

The competition remains intense in the US generics and the regulatory risk continues to be on the rise. The R&D investment remains elevated for complex products.

Considering these factors, the outlook on return ratios is subdued over the medium term.

The ANDA pipeline for the US market and product distribution in markets of DF/Russia remains promising. However, Motilal Oswal expects moderation in earnings over FY23-25 and reiterates its 'neutral' stand on the stock.

At 9:25am, Dr Reddy's Laboratories traded at Rs 4,394.90, down Rs 20.10, or 0.46 percent, on the BSE.