Eris Lifesciences falls as margins contract; derma brands’ acquisition fails to cheer Street

Eris Lifesciences announced acquisition of nine dermatology brands from Glenmark Pharma for Rs 340 crore. The brands include Onabet, Halobate, Sorvate, and Demelan for India and Nepal.

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Shares of drug maker Eris Lifesciences fell nearly 2 percent on January 18 after the company’s operating margins declined to 32.4 percent in the December 2022 quarter from 36.6 percent in Q3 FY22.

The company’s acquisition of nine dermatology brands from Glenmark Pharma for Rs 340 crore also failed to cheer the Street. The brands include Onabet, Halobate, Sorvate, and Demelan for India and Nepal.

At 2 pm, the stock was quoting at Rs 638.50 apiece on the National Stock Exchange, lower by 2.04 percent. The stock is down 13 percent in the past one year.

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For Q3 FY23, the company posted 1.1 percent year-on-year growth in net profit at Rs 101.8 crore. Revenue from operations grew 27.4 percent YoY to Rs 432 crore and EBITDA (earnings before interest, taxes, depreciation and amortization) rose 12.7 percent to Rs 137 crore.

The management lowered revenue guidance from 30 percent to 25-26 percent YoY growth for FY23. EBITDA is seen growing 14-15 percent in the financial year, said the company.

All eyes are now on how the company grows its dermatology portfolio. The acquisition of Glenmark’s derma brands, having sales of Rs 87 crore, for a consideration of Rs 340 crore, implies 4x valuation. This is in-line with the industry multiple, said analysts.

Domestic brokerage Motilal Oswal Financial Services has a Buy rating on the stock with a target price of Rs 780 apiece. “It has built multiple levers for growth in branded generics space by broadening dermatology portfolio through acquisitions, adding insulin and its analogues in the anti-diabetes segment and leveraging patient care platform,” it noted.

Foreign brokerage Macquarie also has an Outperform rating on the stock with a target price of Rs 830 per share. However, the firm has lowered FY24 and FY25 estimates by 6 percent and 3 percent, respectively.

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“Eris Lifesciences reported muted performance during the quarter, due to higher promotional expenses from new launches,” noted Prabhudas Lilladher. “Acquisition of Oaknet and Glenmark’s derma portfolio to strengthen Eris’ entry in the derma segment, which is currently operating at sub optimal profitability. Eris’s turnaround of Strides acquired portfolio provides comfort for similar executions,” it added.

It has a Buy rating with a target price of Rs 850 on the stock.