Earnings boost for Dr Reddy's Lab post consumer healthcare acquisition

Dr Reddy’s Laboratories (DRL) has agreed to acquire Haleon’s global portfolio of consumer healthcare brands in the Nicotine Replacement Therapy (NRT) category outside of the US.

DRL will pay a total consideration of £500 million, including an upfront cash consideration of £458 million and contingent cash payments up to £42 million based on performances in CY25 and CY26.

DRL will acquire the portfolio through the purchase of shares of Northstar Switzerland SARL, a Haleon group firm.

The purchase will be funded through internal accruals. The portfolio had net revenue of £217 million in CY23, the operating profit margin was 25 per cent, and the deal valuation was 2.3 times of sales.

The transaction is expected to close in Q4CY24.

In the recent years, DRL has increased its global presence in consumer healthcare including a recent JV with Nestlé India.

The Haleon portfolio consists of globally leading consumer healthcare brands in NRT including Nicotinell, a global leader with a footprint in over 30 countries across EU, Japan, and Latin America.

Nicotinell is the second-biggest brand globally in the NRT category and among the top 15 brands in OTC markets in Europe and 32 among all OTC brands (ex-US).

The acquisition will be inclusive of all formats like lozenge, patch, gum as well as pipeline products, in all global markets ex-US.

DRL also gets a pipeline of new products in the acquired portfolio. Manufacturing will be outsourced to contract manufacturing organisations, where DRL has long-standing contracts.

DRL is focused on inorganic growth in the consumer healthcare OTC business. The JV with Nestle, acquisition of the MenoLabs portfolio, the acquisition of NRT Habitrol and pain-relief Doan in the US, and the launch of Histallay in the UK, are all acquisitions and licensing deals.

In India, DRL has an OTC portfolio in the hydration, cough-cold-allergy, and skin care categories.

The JV with Nestlé brings vitamins, minerals, herbals and supplements to India.

In the emerging markets, it has a well-established OTC business, with market-leading products in allergy, pain relief, gastro-intestinal and women’s health.

Currently, the DRL OTC business forms 10 per cent of its global sales (about Rs 2,000 crore) and is growing in single digits but DRL expects OTC growth to accelerate.

Among the company’s priorities are the scale-up of generic business with improving productivity and market share, the development of novel molecules, continuing to seek M&As, and targeting sustainable 25 per cent operating profit margin and return on capital employed.

The earnings estimates will upgrade by around 3 per cent in FY25 (given the acquisition in Q3FY25) and by around 7 per cent in FY26.

The analyst reactions were mixed, with some recommending ‘reduce’ while others are ‘positive’ or ‘neutral’ after the acquisition. The stock is up around 2.8 per cent on the news.