Dr. Reddy's shares rise 3% on buying Haleon’s nicotine gum biz; here’s what brokerages say

Shares of Dr. Reddy’s Laboratories climbed nearly 3% in early trade on Thursday, a day after the drug major signed a deal to acquire British consumer healthcare player Haleon plc’s nicotine replacement therapy, outside of the United States, for 500 million pounds.

According to domestic brokerages ICICI Securities and Motilal Oswal Financial Securities, the acquisition will expand Dr. Reddy’s offerings in the consumer healthcare segment and boost its Over-the-counter (OTC) sales. Currently, OTC business contributes 10% of its global sales ₹2,000 crore and is growing in single digits.  

Boosted by the acquisition deal, Dr. Reddy’s Laboratories shares rose as much as 2.75% to ₹6,235.90 on the BSE. Early today, the pharma heavyweight opened lower at ₹6,037.95 against the previous closing price of ₹6,068.45, and declined over 1% to ₹5,999.85 levels in opening deals.

Paring early losses, the stock rebounded 3.9% from the day’s low amid a surge in buying activities, with 0.31 lakh shares changing hands over the counter compared to two-week average of 0.14 lakh stocks. At the time of reporting, Dr. Reddy’s shares were quoting at ₹6,177.50, up 1.8%, with a market capitalisation of ₹1.03 lakh crore.

In a post-market release on Wednesday, Dr. Reddy’s said that its wholly-owned subsidiary, Dr. Reddy’s Laboratories SA, Switzerland, entered into an agreement with Haleon Group to acquire its nicotine replacement therapy (NRT) business, outside of the U.S., for 500 million British pounds. It will make upfront cash payment of 458 million pounds and remaining 42 million pounds will be paid based on performance-based milestones in CY25 and H1 CY26.

The portfolio consists of brands including Nicotinell, Nicabate, Habitrol and Thrive available in gum, lozenge and patch forms across over 30 markets in Europe, Asia, Latin America, Australia, New Zealand and Canada. The proposed acquisition will be inclusive of all formats such as lozenge, patch, and gum as well as pipeline products, in all applicable global markets outside of the United States, the company says in a statement.

Post the deal, ICICI Securities has maintained “HOLD” rating, while it upgraded its target price to ₹6,250 from ₹6,050 earlier. “The acquired portfolio had sales of GBP 217mn in CY23, up 8% YoY. The acquisition may boost DRL’s FY26E revenue by 9% and OTC contribution can jump from 10% in FY24 of sales to 17% in FY26E. The deal is priced at reasonable valuation of 2.3x/9.2x CY23 EV/sales and EV/EBITDA,” ICICI Securities says in a report.

“The acquired portfolio is manufactured at CMOs and may not require high capex investments. The deal will be funded through cash ($980mn at end of FY24) and is likely to be closed in Q3FY25,” it added.

According to Motilal Oswal, the acquisition will expand Dr. Reddy’s offerings in the consumer healthcare segment and extend its OTC reach in Europe and other global markets. “The valuation at 2.3x of CY23 sales and 9.2x EV/ CY23 EBITDA is fair, in our view, considering its expansion in nicotine replacement therapy (NRT), global outreach (excluding US) and ~25% EBITDA margin,” it says in a note.

The brokerage has maintained “Neutral” rating on the stock with a price target of ₹6,430 per share, citing the limited upside on current valuation. The company, through organic/inorganic routes, has been strengthening its growth levers in the consumer healthcare segment, in addition to building a product pipeline in U.S. generics and enhancing marketing efforts in the branded generics market, it says.

In recent years, Dr. Reddy’s has acquired multiple brands in the OTC portfolio in the U.S. markets, such as NRT brand Habitrol, pain-relief brand Doan’s, women’s health products such as Premama for fertility and parenthood, and the MenoLabs portfolio for menopause.  In India, DRRD has an OTC product portfolio in the hydration, cough-coldallergy, and skin care categories. To boost growth and deepen its presencen in India, DRRD has entered into a joint venture with Nestlé India to bring vitamins, minerals, herbals and supplements to India.  Further, in emerging markets, DRRD has a well-established and sizeable OTC business, with market-leading products in the allergy, pain relief, gastrointestinal and women’s health categories.

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