Dr. Reddy's - Nicotinell Acquisition To Boost OTC Presence: ICICI Securities

ICICI Securities Report

Dr. Reddy’s Laboratories Ltd. has entered into a definitive agreement to acquire Nicotinell, a nicotine replacement therapy brand of Haleon, for £500 million. Dr. Reddy's will initially pay £458 million and £42 million will be paid based on performance-based milestones in CY25 and H1 CY26.

Nicotinell is available in gum, lozenge and patch forms and Dr. Reddy's 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 in CY23, up 8% YoY. The acquisition may boost Dr. Reddy’s FY26E revenue by ~9% and over-the-counter contribution can jump from 10% in FY24 of sales to ~17% in FY26E.

The deal is priced at reasonable valuation of 2.3 times/9.2 times CY23 enterprise /sales and EV/Ebitda.

The acquired portfolio is manufactured at CMOs and may not require high capex investments. The deal will be funded through cash ($ 980 million at end of FY24) and is likely to be closed in Q3 FY25.

We raise earnings per share estimates for FY25/26E by 1%/3%, respectively. Maintain Hold with target price raised to Rs 6,250 (earlier Rs 6,050).

Key downside risks: Delay in launching new products, regulatory hurdles and higherthan-anticipated competition for Revlimid.

Key upside risks: M&A in India and U.S., cost optimisation.

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