Dr. Reddy shares: On Thursday, shares of Dr. Reddy’s Laboratories surged by 2.7% to Rs 6,235.90 on the BSE. The stock’s rise followed the company’s acquisition of the OTC brand Nicotinell from London-based consumer healthcare giant Heleon, which was announced on Wednesday. Dr. Reddy, based in Hyderabad and known for its pharmaceuticals, acquired one of the leading nicotine replacement therapy (NRT) brands designed to aid in smoking cessation. The total payout for this acquisition amounted to $633 million from Haleon, a spin-off of GSK and Pfizer’s consumer healthcare divisions.
Despite the positive news, brokerages remained cautious about the move, describing it as ‘uncharted territory’ for the Indian drugmaker.
Analysts at Kotak Institutional Equities suggest that Dr. Reddy’s should prioritize leveraging the multiple myeloma drug Revlimid more effectively, given its significant impact on the company’s financial health. They caution that despite the positive news of acquiring Nicotinell, the acquired portfolio has shown flat to slightly declining sales over the past three years, posing higher execution risks for the pharmaceutical giant in this new territory. Moreover, Kotak notes that Dr. Reddy’s will need substantial investments to establish an OTC franchise and boost Nicotinell’s sales across various markets. The analysts also highlight that Dr. Reddy’s current twelve-month trailing valuation, at 2.3 times EV/sales and 9.2 times EV-to-Ebitda, places it in the high valuation category.
We anticipate the acquisition to slightly dilute EPS for Dr. Reddy’s Laboratories. We maintain a ‘REDUCE’ rating with a fair value (FV) of Rs 5,925 (previously Rs 5,975),” stated Alankar Garude, Samitinjoy Basak, and Aniket Singh of KIE in their report.
Global brokerages, however, expressed reservations about the acquisition. Nomura commented that the strategic rationale behind the move remains unconvincing and assigned a ‘Neutral’ rating to the company’s stock with a target price of Rs 6,499.
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Meanwhile, Jefferies noted that the OTC brands will require significant upfront investments, with the synergies from the acquired portfolio likely to become visible only over FY27-28. The brokerage issued an ‘Underperform’ call on the stock, setting a target price of Rs 5,010.
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