dr. reddy & betapharm - an ideal acquisition

Dr. Reddy - BetapharmDr. Reddy - Betapharm

Deal Ya No Deal – Group 4

DealDeal

Other BiddersOther Bidders

BetapharmBetapharm

Dr. Reddy LabsDr. Reddy Labs

Perfect Pharma AcquisitionPerfect Pharma Acquisition

Limitations in IndiaLimitations in India

Access to the German GenericsAccess to the German Generics

Strategic presence in the Strategic presence in the EuropeEurope

DRL - M&ADRL - M&A

The motiveThe motive

MiscellaneousMiscellaneous

Betapharm – Ideal AcquisitionBetapharm – Ideal Acquisition

ValuationValuation

Valuation - SummaryValuation - Summary

Case Value ($ Million)

Base $333

Optimistic $640

Pessimistic $205

Worst Scenario $138

Post DealPost Deal

FinancingFinancing

AmountWeighte

dCOC

Cost*(1-t)

Wt. COC

Internal 200 35% 13.7% 13.7% 4.8%Debt 370 65% 2.1% 1.4% 0.9%Total 570 5.7%

SynergySynergy

• Distribution– Highly fragmented market and Unorganized sector– Reduce the efforts needed to establish (Identification,

Promotion, Incentives) – Reduce General & Administrative cost

• Manufacturing– The manufacturing cost in India is 50% less than the

global average– Source Betapharm’s business from India to reduce

the COGS• Pipeline

– R&D costs can be reduced considerably (around 35%)– Number of products launched per year would increase

SynergySynergy

• Branding– Brand Beta– Global Presence

• Presence– Entry into Germany – Central & Eastern Europe

• Size– DRL was able to reach the $1Billion size due to

this acquisition– Leverage its generic business to grow in Drug

discovery

What Went WrongWhat Went Wrong

• The Economic Optimisation of Pharmaceutical Care Act (Germany, May 2006)

• Price caps in place - affected the margins of betapharm

• Reduced prices by 15-25%• Longer than expected payback -

other plans shelved

What Went WrongWhat Went Wrong

• Betapharm revenues grew by 3% over the last 2 years

• Patients use medicines endorsed by their Sick Funds (Regulation)

• Supply Chain problems• Salutas (Contract manufacturer,

Germany) terminates contract

What Went WrongWhat Went Wrong

• Lack of demand in Germany• Strict regulations against outsourcing• Currency Fluctuations• Delay in approval of Betapharm

products in pipeline• No product approval for DRL's

product manufactured in India

Write - DownWrite - Down

Year Amount (INR)

2006-2007 177 crore

2007-2008 236.1 crore

The Road AheadThe Road Ahead

• Planned shift of production to India• Good pipeline of FTF opportunities• Continuous strengthening of buying

power of Insurance companies• EBIT margin expansion not going to

be visible over short to medium term

ConclusionConclusion

• As of now, the deal seems to be a failure and DRL would have been better of without Betapharm– Premium paid– Excessive misplaced optimism– Inadequate due diligence– Failure to account for External environment

risks– Shelving of other plans

Thank YouThank You