Dr. Reddy’s (DRRD) announced that it has entered into a definitive agreement to acquire 8 ANDAs (abbreviated new drug applications) from Teva (1 approved and 7 pending), due to Teva/Actavis overlap. Information is limited at this point, but typically, divestitures are available at attractive valuations and we understand that Teva had run a competitive process for these products. We await the publication of the FTC (Federal Trade Commission) order and will then take a more informed view on the earnings impact of the acquisition.
Portfolio of 8 ANDAs acquired, though scant disclosures make it difficult to estimate impact
DRRD announced that it has entered into a definite agreement with Teva to acquire 7 pending and one approved ANDA from Teva for $350 million in cash. The acquisition is part of Teva’s divestiture of overlapping products from its proposed acquisition of Allergan’s Actavis generics business. According to the company, the 8 products are a mix of dosage forms and comprise complex generics, though disclosures are scanty on the nature of the filings and expected timing of launches. Only the IMS market size of $3.5 billion has been disclosed, but this is of limited use. However, in the coming days, we expect the FTC order on the divestiture to be made public, which will enable us to take a more informed view on the valuation and/or earnings impact. At this point, we do not believe the approved ANDA is of Adderall XR or Pulmicort Respules, two of the largest overlap products. Determining the 7 pipeline ANDAs remains tricky given large pipelines of both the companies with Teva having 230 ANDAs pending approval and Actavis 320.
Historic M&A track record is weak— more details needed
Given the weak FY2017/18 launch pipeline in the US, the ongoing US FDA related remediation at three of its key facilities, and expected headwinds facing several of its key products, this acquisition will provide the much needed boost to DRRD’s near-term pipeline needs, though the exact impact on growth and/or earnings will largely depend on the launch timings of the 7 filed ANDAs. On a broader basis, we like DRRD’s strategy to acquire divestiture products as typically these products are available at lower valuations and sometimes at throw-away prices when there are negotiated transactions. However, we understand that in this case, Teva had run a competitive process for the products. Historically, DRRD has had a mixed M&A track record, with $1.3 billion spent on acquisitions in the last 10 years (including Betapharm) with modest value creation, at best. Even excluding Betapharm, DRRD will now have spent over $700m on acquisitions since FY12, with further $750m+ spent on capex, resulting in its ROCE contracting by 630bps to 21% in FY16. This is despite several key limited-competition US launches. DRRD is currently trading at 26X and 21X FY17/18 EPS. We do not have a rating on the stock.
—Kotak Institutional Equities