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HDFC Securities Institutional Equities
Dr. Reddy's Laboratories Ltd. is going to acquire Haleon's global portfolio of consumer healthcare brands (Northstar Switzerland) in the Nicotine Replacement Therapy category outside of the U.S.
The proposed acquisition will be inclusive of all formats such as lozenge, patch, and gum as well as pipeline products. The total consideration of £500 million (upfront cash of £458 million and performance-based contingent payments of ~£42 million) implies 2.3 times enterprise value/sales for CY23 (reported sales of £217 million in CY23 and ~4% CAGR over CY21-23).
The company expects the acquired business to be margin accretive (Ebitda margin at Dr. Reddy's level of ~25%). The company is looking to leverage market reach of Northstar for cross-selling of Dr. Reddy's brands and geographical expansion.
We will factor the acquisition post-completion of the transaction, which is expected by Q3 FY25. We see the acquisition of OTC brands as strengthening Dr. Reddy's consumer healthcare business (global consumer healthcare sales at ~$330 million, including US sales at ~$140 million); however, the acquired portfolio is a slow-growing business and with a steady Ebitda margin; on the proforma basis, the earnings per share impact would be ~2-3% in FY26.
Key concerns on the base business (ex-gRevlimid) growth remain, given increasing competition in key products in the US market.
We maintain Reduce with a target price of Rs 6,050 (25 times FY26E EPS + Rs 200/share from gRevlimid).
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