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Mergers and Acquisition - DRL Vs Betapharm

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Amogh Deo

on 6 February 2013

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Transcript of Mergers and Acquisition - DRL Vs Betapharm

The Betapharm Acquisition:
Dr. Reddy lab Benefits from the Deal Ansoff Matrix Introduction The Deal Mega Deal Acquirer Target Price USD 570 million
Euro 480 million
INR 2550 crore Largest Oversea acquisition by an Indian company
Deal Included "Beta Institute for sociomedical Research GmBH" (Beta Institute)
100% acquisition from private equity firm 3i
Fourth largest deal among top 10
Largest oversea acquisition by an Indian Pharmaceutical company Betapharm wasn't a planned acquisition, it was an opportunity
The opportunity had presented itself 3 years earlier but at a steep price
2006 DRL in global expansion mode and had access to funds
Betapharm didn't fit in their strategic plan, it just came up and DRL went for it Rates as on 16th Feb 2006 The deal was technically correct and the decisions at that point of time weren't wrong
DRL choose to improve their turnover instead of capabilities
DRL failed to read the market signals and other warnings by the industry analysts
Economic Optimisation of Pharmaceutical Care Act, Germany took effect on 1st may 2006
Commoditization of generic drug market Timeline DRL 1984 Company founded by Dr. Anji Reddy, in Hyderabad 1986 Company issues IPO

Starts exporting Drugs 1987 The formulations operations started

Obtained 1st patent for ibuprofen with USFDA 1988 Acquired bulk drug manufacturing company, Benzex Laboratories pvt Ltd 1990 Aggressive international expansion. Russia, Europe and Far East 1993 Established Dr Reddy's Foundation to discover new drugs and not just rely on reverse engineering 1997 Out licensed an anti-diabetes molecule it had invented to NOVA NORDISK AS 2000 DRL starts their inorganic expansion, most important being Cheminor Drug Limited. This propels DRL to #3 position in India 2002 Goes to acquire two UK based companies: BMS Laboratories Limited of the UK and Meridian Healthcare 2005 Acquires Roche's API Business in Mexico.
Thus providing opportunity for the company’s CPS (custom Pharmaceutical services) business to grow from a base of USD10 million to USD100 million over the next 18 months. 2006 BetaPharm Acqusition DRL has well established social initiatives as well as CSR activities Benefits to DRL Access to the German generic drugs market, the second-largest generic drugs market in the World

66% of generic market in Europe was held by Germany

To gain strategic presence in EU as generic drug market of EU was expected to show strong growth

Reduce its dependence on US market. Margins had shrunk due to intense competition

To realize the aim of becoming $1 billion company by 2008. Acquisition increased revenue by around $200 mil (1065.5 cr) as immediate gains Betapharm was growing constantly, had a well planned future and not much liability linked to this acquisition

To increase its product portfolio

Betapharm had a strong marketing infrastructure

Betapharm could be used as a vehicle to launch DRL’s products in Germany

Ageing European population coupled with increasing healthcare costs presented DRL with an attractive European generic market. Benefits to DRL Benefits to Betapharm Increase product portfolio and grow faster in Germany

Use DRL’s marketing infrastructure and global product development to expand its presence

DRL provided competitive manufacturing costs, which could help Betapharm develop its position in Germany

DRL ‘s well known Corporate Social Responsibility initiatives ensured that Betapharm could continue with its corporate philosophies The acquisition scored high on synergies

The deal was also a good diversifier as DRL’s US generics business then was under pressure.

However, DRL paid a tad too much to land the deal

Funding the deal wasn’t a problem

A few months after the acquisition, the entire backdrop of the German generics business changed drastically 2004 1993 2006 1993 - 2003 2005 BETAPHARM Timeline Founded in Ausberg, Germany
Thomas and Andreas Strüngmann
Hexal Group Subsidiary Developed a Strong competitive advantage
Product list consisted of top quality generic medicines - 126 products
Workforce 314 employees
Sales turnover of 75.3 € mil [541 cr]
Sales projection for 2004 was 140 € [1005 cr] Betapharm Acquired by 3i for 110 € mil [790 cr]
3i a British investment Firm
A good reputation in HealthCare
Fantastic International Network Developed extensive sales and Distribution Network in Germany (66% of EU mkt)
4th largest generic pharma company in germany
Sales in 2005 was 186 € mil [ 1335 cr] Acquisition by Dr. Reddy's Lab Importance of the Deal Products in therapeutic areas Access to lucrative European markets Porters 5 forces Valuation At the time of acquisition Betapharm was highly profitable, with estimated EBITDA margin of 24-26%

As per ICICI Securities assumptions and available industry data:-
NPV valuation of Betapharm at a value of Rs 380-400 per share assuming WACC of 12% and a sustainable growth rate of 5%
The payback period was likely to be 6-7 years

Analysts expected the Betapharm acquisition to add $ 200 million (1065.5 cr) to Dr Reddy's topline immediately Bad Timings High-margin branded generics market turned into a low-margin volume play, driven by the introduction of Government reforms

Within months of acquisition, the Economic Optimization of Pharmaceutical Care Act was introduced, reducing drug reference prices

Another law introduced in April 2007, further lowered the realizations by empowering insurance companies to enter into contracts with suppliers of generics

Supply chain issues with Betapharm’s contract manufacturer Salutas played havoc

Till date, Betapharm continues to be a drag on DRL’s margins and profitability

Patients use medicines endorsed by their Sick Funds (Regulation) Highly fragmented market and Unorganized sector

Reduce the efforts needed to establish (Identification, Promotion, Incentives)

Reduce General & Administrative cost Presence Branding Size Pipeline Manufacturing Distribution SYNERGY The manufacturing cost in India is 50% less than the global average

Source Betapharm’s business from India to reduce the COGS R&D costs can be reduced considerably (around 35%)

Number of products launched per year would increase Mckinsey 7s Model Corporate Social Responsibility DRL -Dr. Reddy's Foundation (DRF) and the Centre for Social Initiative and Management (CSIM)

Beta Pharm- Beta institute for sociomedical research Ensure wide product availability Complementary products of Beta Pharm in heart ailment and nervous system

Brand Beta

Lucrative R&D capabilities of Beta Pharm Brand Beta

Global Presence Entry into Germany

Central & Eastern Europe DRL was able to reach the $1Billion size due to this acquisition

Leverage its generic business to grow in Drug discovery Stock Market Condition The 1st major M&A in pharmaceutical sector, resulted in On the Day of the deal The company's shares jumped 9.38 %
Recorded the 52 week high price on BSE and NSE
BSE – Rs. 1281.95 with over 8 lakh shares trading
NSE – Rs. 1280.65 with over 11 lakh shares trading FINANCING CRITICS Some analysts opined that DRL had taken a big gamble by acquiring Betapharm.

The acquisition had resulted in the depletion of DRL's cash reserves and made the company incur a large debt.

This could be risky, especially in the context of DRL's declining sales in the US generic market and the litigation costs it was incurring in the US.

Further, DRL's domestic market in India was viewed as not being large enough to generate enough profits that would compensate for the decline in revenues from the US generic market and the litigation costs.

Therefore, any problem in the German market could have a considerable impact on DRL's bottom line. Financial Comparison Comparison of
Income Comparison of
Sales Comparison of
Fixed Assets Comparison of
PBDIT Income shows an increase of 1.86 times of 2006 in 2007

1.62 times of 2006 value in 2008

1.96 times of 2006 in 2009

Clearly an increase in income in all the years Increasing trend

Nearly doubled in 2007 and 2009

Approx. 2.5 times that of 2003 Increasing in a linear manner over the years.

Almost double in 2009 than that of 2006. Shows a marked increase in 2007 as compared to base year and a higher value than 2003. Marketing Models S.W.O.T Analysis T.O.W.S Analysis G.E Matrix DRL Steadies the Ship Current Financial Status Conclusion  Managing Director and Chief Operating Officer Satish Reddy sums up the deal on the company website,

“Sufficient understanding of the market would have actually helped us, rather than making an acquisition of that nature, overpaying, and then trying to make the best out of it.” Company tried to increase more penetration in market by tie up with hospitals, Insurance companies and pharmacy chains Reduction of prices by German government Moved the entire supply chain from Germany to India TakeAway Strict discipline in selecting and implementing a growth strategy

Imperative to develop a long term advantage than a short term gain

A company should focus on enhancing their capabilities and not just improve their turnover

Understanding the trends and markets most important
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