1. BEST CFO Dr Reddy and Betapharm By Santhosh .R Roll no-1121214

2. Dr. Reddys Labs acquires Betapharm for $ 560mn. Mumbai. In what is seen as India Incs first major M&A in pharma sector, DRL acquired 100% stake in Germany based Betapharm for $560mn. The stockclosed a whopping 9.3 % up on the news. 3. - The Acquirer

Among the largest domestic pharma companies in India

Annual turnover of over INR 4900 Cr.

Annual PAT of INR 438 Cr.

Approved byUSFDA ,MHRA(UK)

Formulations make 37% of companys product mix; generic products account for 13%

4. -The Target

Fourth largest generic pharma company in Germany

3.5 % Market Share in Eurozone.

EBITDA marginsbetween 24 26%

Portfolio of over 145 products

5. Valuations

StickerPrice of 480 mn. from PE firm3i

Revenues of 165 mn.

2.9X revenues and 12X EBITDA

The transaction was funded using a combination of DRLs internal cash reserves and committed credit facilities

6. 7. The Goodies

Access to lucrative German generic drug market

Enhanced portfolio

DRL is likely to leverage its product development skills and low-cost manufacturing in India to boostBetapharms EBITDA margins

Help DRL realize its ambition of becoming a US$1 billion mid-size global pharmaceutical company by 2008

The fastest growing generic company over the past five years in Germany's top-10 with a strong track record of successful product launches.

8. Financing of the deal

DRL had its war chest ready with a $200 million cash and remaining debt arranged from domestic FIs. DRL funded the acquisition through a combination of internal accruals and borrowings.

9. Stock jumps on acquisition news correction in prices BSE Code - 500124Face value - Rs. 5.00 Promoter holding- 26.40% 52 week H/L 739 (16 June 08)/ 387 (18 Nov 08) 10. Break -Up 11. Claimed Synergies from the Acquisition

Dr. Reddy's non-existent in Germany, but the market has deep-rooted sales and distribution networks that makes inorganic expansion there tough and expensive for an outsider.

Through this acquisition DRL could get immediate access to the German generic market, the second-largest generic market in the world after the US.

Germany also accounted for 66 percent of the generic market in Europe (Refer to Exhibit I for a list of the major generic markets in Europe).

The acquisition was expected to help DRL gain a strategic presence in the European market as the generic drug market in Europe was expected to show strong growth due to rising public healthcare costs.

betapharm was expected to benefit from the acquisition as it would be able to add more products to its portfolio and grow at a much faster rate in Germany.

The acquisition would help betapharm to utilize DRL's global product development and marketing infrastructure to expand its presence in the European market in the long run.

12. A Risky Acquisition?

With assumptions and available industry data, ICICI dida quick NPV valuation of Betapharm and arrived at a value of 550-560 millionassuming WACC of 12% and a sustainable growth rate of 5%. The payback period wasseen to be 6-7 years. The deal was seen as anAccretive Acquisition.

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

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.

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.

13. A Risky Acquisition?

Betapharm booked FY losses in 08, 09

Raw materials sourcingproblems in Mexico

Absence of upsides (revenues arising out of marketing exclusivity of authorised generics)

A few months after the acquisition, there were already early signs of trouble, as the Economic Optimization of Pharmaceutical Care Act (AVWG) took effect in Germany on May 1, 2006. Though the act was expected to increase the scope for the use of generic drugs, it also put some price caps in place, which affected the margins of betapharm. Analysts opined that the payback to DRL from this acquisition would take a few years longer than previously expected. It was reported that DRL, which had plans for more acquisitions in Europe after the betapharm acquisition, had shelved its plans of any further acquisitions in Europe

14. Present Scenario

Betapharm contributing INR 2.6 bn.

New launches seem to have helped Betapharm improve its performance compared to that in Q1 ( 20 more in pipeline)

It was impacted due to price cuts (upto 20%) and stock adjustments.

Fierce competitive bidding from various generic companies has increased the acquisition cost for DRL and extended the payback period

Acquisitions contributed Rs3.9b (20% of sales) with Betapharmcontributing Rs2.6b and Mexico acquisition Rs1.4b. New launches seem to have helpedBetapharm improve its performance compared to that in 1Q wherein it was impacted due to price cuts and stock adjustments. Overall gross margins (GPM) were at 41% compared to 51% for 2QFY06. We believe that authorized generics and the Mexico acquisition have pulled down overall margins as the companys core business enjoys about 50-53% GPM. We believe that authorized generics would be enjoying GPM of only 20%.BetapharmGPM has improved to 58% (53% in 1Q) while API GPM has also improved to 41% contributing positively to overall GPM 15.

We see our investment in Betapharm as a key strategic initiative towards becoming a mid-sized global pharmaceutical company with strong presence in all key pharmaceutical markets. Betapharm has created a strong growth platform and is well positioned for the future and we are looking forward to partner with them in building a strategic presence in Europe."

- Dr. K. Anji Reddy,

Chairman,

Dr. Reddy's Laboratories Limited

Message From The Chairman 16. Sources 17. GET WELL SOON