Mark to Market: Can Dr Reddy’s buy its way out of a slump?

Dr Reddy’s has announced the acquisition of British pharma firm Haleon's global portfolio of nicotine replacement therapy (NRT) products (outside of the US) for £500 million. Haleon's NRT brands include Nicotinell with a footprint in over 30 countries spanning Europe, Asia and Latin America; Nicabate (sold in Australia); Habitrol (sold in Canada); and Thrive (sold in New Zealand and Canada).

Sales of the acquired brands in 2023 stood at £217 million, which makes the deal fairly valued at 2.3 times of sales. Not just that, Dr. Reddy’s has got access to a strong bouquet of brands. Nicotinell is the second biggest brand globally (outside the US) in the NRT category. All the four acquired NRT brands cumulatively enjoy a market share of 25% in their target markets.

NRT treatment usually spans 6-12 months. These products enjoy some level of customer stickiness given multiple patient relapses during the treatment period. While 80% of the acquired brands’ revenue comes from developed countries, analysts see rising demand from emerging markets as well, given the growing emphasis on curbing tobacco usage.

NRT has been recommended by the World Health Organization in its Model List of Essential Medicines for nicotine use disorders since 2020.

“This acquisition will give Dr Reddy’s access to key global customers, markets, talent and it will be able to leverage the platform to launch additional products from the portfolio," PhillipCapital said in a note.

“In fact, Dr Reddy’s existing global OTC (over-the-counter) business with sales of US$ 300 million will get the big boost on account of the global leadership position of acquired business in OTCs," points out the broking firm.

Mixed reactions

However, not everyone is so gung-ho. For one, the acquired portfolio is a slow-growing business.

During the last three years, the acquired portfolio sales grew at just 4% CAGR. Now, Dr Reddy’s global OTC business, comprising around 10% of its overall sales, too is growing in single digits. Thus, the Nicotinell acquisition will hardly give a substantial push to its revenue growth.

Secondly, analysts are jittery over the need for continuous investments in multiple geographies over the next few years, that too in the unfamiliar NRT segment for the company. Dr Reddy’s itself highlighted that it expects to grow the acquired portfolio by new product launches and increasing marketing spends.

"Given the small scale of its OTC franchise currently with limited OTC experience across most markets, we expect Dr Reddy’s global OTC journey, particularly in non-India markets, to witness a steady ramp-up at best," Kotak Institutional Equities noted. "Accordingly, we bake in a 5% organic sales CAGR over FY2024-27E for the Nicotinell portfolio," it added. Kotak expects the deal to be marginally dilutive to Dr Reddy’s FY25-26 estimated earnings per share and has lowered its FY25 EPS estimate by almost 2%.

Also Read: New businesses and partnerships hold the key to Dr Reddy's growth

The major overhang for the company is its dependence on US sales of its generic version of the blockbuster cancer drug Revlimid, which accounts for about half of its profits.

Revlimid will go off-patent in January 2026, and Dr Reddy’s has been scrambling to build new revenue streams to offset the impact of price erosion. In recent times, Dr Reddy’s has acquired multiple brands in the OTC portfolio in the US market, as well as inked a joint venture with Nestlé to bring vitamin, minerals, herbals and supplements to India.

 

However, with its core US generics business facing headwinds like increasing competition and pricing pressures, the Street remains lukewarm towards its OTC forays. So far in 2024, Dr Reddy’s stock has climbed 7% compared to a 14% gain in Nifty Pharma.

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