Dr Reddy’s improves growth prospects in US with Mayne deal

For one, Mayne Pharma’s FY22 retail generic business revenue declined by 27% year-on-year to $111 million due to pricing pressure and intense competition. The company follows a July to June financial year. As such, the acquired portfolio’s FY22 revenue forms only a small portion of Dr Reddy’s overall revenue. “We flag that the acquisition excludes the generic derma portfolio comprising gAbsoria, gEpiduo and gAczone, wherein Mayne has market-leading share,” said analysts at Nuvama Research in a report on 27 February.

Moreover, the US market has its challenges and is facing price erosion. “Given the high competitive intensity in US generics, high price erosion witnessed in recent years and increased US Food and Drug Administration scrutiny, it makes sense for smaller firms to exit or reduce investment in US,” said analysts at Jefferies India in a report on 27 February.

But for buyers of generic drugs like Dr Reddy’s, this means reasonable valuations. Further, there is unlikely to be a heavy burden on the balance sheet. The transaction’s cash consideration is $90 million plus contingent payments up to $15 million. This means enterprise value to sales of nearly 1x.

Moreover, the value of total addressable market for the pipeline and approved non-marketed products stands at roughly $3.6 billion for 2022, according to IQVIA. This improves earnings visibility. To be sure, the growth of the acquired portfolio is dependent upon one of the key products – gNuvaring.

Meanwhile, shares of Dr Reddy’s are up by over 6% in the last one year, while Nifty Pharma index has fallen by 9%. Increased traction in gRevlimid aided investor sentiments in the stock, which trades at 17 times FY24 estimated earnings, show Bloomberg data.

Dr Reddy’s growth outlook excluding gRevlimid is not exactly rosy given headwinds in the US markets. Also, “As Dr Reddy’s enters a period of investments to fund its next leg of growth, core margins shall likely remain under pressure. Thus, we see limited upside to our ex-gRevlimid numbers,” said the Nuvama report. Given the pressure in US markets, it’s likely that near-term gains may be capped.