Dr Reddy's shares: Should you buy, sell or hold the pharma stock after Nicotinell's acquisition?

Brokerage firms continue to remain mostly positive on Dr Reddy's Laboratories Ltd as the pharma major entered into a definitive agreement with Haleon plc and its associate companies to acquire Nicotinell and related brands through its subsidiary Dr Reddy’s Laboratories SA, Switzerland.
 

Brokerage firms see this takeover as a lucrative acquisition and another feather in the recent string of acquisitions. The purchase of Nicotinell will expand its consumer healthcare portfolio and boost the OTC presence of the company, said some analysts. However, others believe that the current valuations of the company captures all the optimism and limits the upside.
 

Dr Reddy's acquired Haleon’s global nicotine replacement therapy (NRT) OTC brands for 500 million pounds at 2.3 times sales. This acquisition will help leverage customer relationships and give an opportunity to cross-sell. The management guided for better growth by reinvesting excess margins, beyond 25 per cent, said JM Financial.
 

"While the current growth trajectory is modest, it adds 8 per cent to FY26 revenue and is EPS accretive for Dr Reddy's. The acquisition alleviates concerns around managing gRevlimid cliff. Recent initiatives like Nestle JV, biosimilars, innovation, licensing deals, pinpoint towards Dr Reddy's focus on growing its new businesses," JM added with a 'buy' rating and a target price of Rs 7,390.
 

Dr Reddy’s Laboratories has announced three deals that we believe add significant value to its global franchise distribution agreement with Novartis in Russia, in-licensing of Cyclophosphamide Injection from Ingenus in the US and the latest acquisition of the portfolio of nicotine replacement therapy brands, including the Nicotinelle brand from Haleon plc, said Elara Capital.
 

"Dr Reddy's continues to be a key beneficiary of the upcycle in the US generics market that we believe is still in its early stages. The large cash flow from the gRevlimid opportunity is helping DRRD further its inorganic strategy in a sensible fashion. We upgrade the company to 'buy' from 'accumulate' and raise our target from Rs 6,981 to Rs 7,328," added Elara.
 

Shares of Dr Reddy's Labs have surged about 3 per cent to Rs 6417.95 during the trading session on Friday but finallt settled at Rs 6405.75, commanding a total market capitalization of close to Rs 1.10 lakh crore. The scrip had settled at Rs 6239.55 in the previous trading session on Thursday.

Dr Reddy's stock has gained about 8 per cent in the last one week, while the counter has gained 10 per cent in the last six months. The drug major is up nearly 30 per cent from its 52-week low, while it has surged more than 150 per cent in the last five years.
 

Nicotinell is available in gum, lozenge and patch forms and DRL may market this brand across 30 countries in Europe, Asia, Latin America, Australia, New Zealand and Canada. The acquired portfolio had sales of 217 million pounds in CY23, up 8 per cent YoY, said ICICI Securities, which has a 'hold' rating on the stock with a revised target price of Rs 6,250.
 

"The acquisition may boost Dr Reddy's FY26E revenue by 9 per cent and OTC contribution can jump from 10 per cent in FY24 of sales to 17 per cent in FY26E. The deal is priced at a reasonable valuation of 2.3 times and 9.2 times CY23 EV/sales and EV/Ebitda. The acquired portfolio is manufactured at CMOs and may not require high," added the brokerage.
 

Motilal Oswal believes that the acquisition expands Dr Reddy's offerings in the consumer healthcare segment and extends its OTC reach in Europe and other global markets. Accordingly, it has revised its target price Rs 6,430, based on SOTP, 22 times 12 months forward base business earnings and NPV of Rs 80 related to g-Revlimid.
 

"Dr Reddy's through organic/inorganic routes, has been strengthening its growth levers in the consumer healthcare segment, in addition to building a product pipeline in US generics and enhancing marketing efforts in the branded generics market. We maintain 'neutral' on the stock given the limited upside on current valuation," it added.

 

 

 

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