Target

Appraisal

Case: Dr. Reddy Laboratories (A) &

(B)

1
Deal Team
Deal Player Ecosystem
 Compe&&ve
Dr. Reddys Laboratories Ltd. Bid in a weeks
&me Betapharm ArzneimiEel GmbH
(Dr. Reddys) (Betapharm)

# Third-largest pharma # Fourth-largest generic drugs
company in India manufacturer in Germany
# Stalked Betapharm for a # Majority stake held by 3i
while # 3i acquired Betapharm in
#Loss the bid in 2004 to 3i March 2004
# Just recovering from some
nancial challenges

4
Is DRL overreaching itself?

5
 How DRL will capture value from the
transacPon once the deal was signed?

6
Indias Top 10 PharmaceuPcal Companies
Ranked by Sales
Rank Company 2005 Sales (In Millions INR)
1 Ranbaxy 42,753
2 Cipla 24,009
3 Dr. Reddys Laboratories 17,293
4 GlaxoSmithKline PharmaceuPcals 15,012
5 Nicholas Piramal India 13,951
6 Lupin PharmaceuPcals 12,186
7 Cadila Healthcare 11,823
8 Aurobindo Pharma 11,598
9 Sun PharmaceuPcal Industries 10,456
10 Wockhardt Ltd 8.815

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Germanys Top 10 Generic Companies
Ranked by Sales
Rank Company No. of Products 2005 Sales (In Millions )
1 raPopharm 312 1,079
2 Hexal 299 1,078
3 STADApharm 225 303
4 betapharm 149 177
5 Sandoz 155 151
6 CT Arzneim 195 149
7 Aliud 149 115
8 Winthrop 144 76
9 1A Pharma 121 75
10 Neuraxpharm 50 75

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Top 10 Gobal Pharma Firms by 2008
Retail Dollars
Rank Company Revenue (in Millions USD)
1 Pzer 20,143
2 GlaxoSmithKline 15,794
3 AstraZeneca 10,899
4 NovarPs 10,108
5 Teva PharmaceuPcals 9,936
6 Merck & Co. 8,283
7 Johnson & Johnson 8,263
8 Sano-AvenPs 6,149
9 AbboE Labs 5,992
10 Eli Lilly 5,842

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Dr. Reddys Consolidated Prot and
Loss Account (Millions INR)

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 Dr. Reddys
Consolidated Balance
Sheet (Millions INR)

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Segmentwise and Geographical Breakdown
of Dr. Reddys Sales (Million Rs.)

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Beta Pharm Financials (Million Rs.)

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 Is the price right?

Price = Triple the

Price = 12 x EBITDA Bidding Route
sales

Largest overseas
AcquisiPon by Swallowing a sh Payback Period in
Indian Pharma bigger than itself 6 to 7 years
Company

Bid at 480 million = $570 million = INR 26,400

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 Financing the Deal

DiluPon
Internal
Cash ($200MM 35%)
in D/E
Reserves
Increase
in WACC
CommiEed
Credit ($370MM 65%) Hasty
FaciliPes Decision
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 Is there strategic t?

AcquisiPons that improved

the capabiliPes within the
organisaPon is beEer,
against buying a company in
some market that merely
increased the turnover
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 Sources of Value

AccrePon Deal

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 Areas of Possible Synergies

DistribuPon Manufacturing R&D Pipeline

Branding Presence Size

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 What are the Dierences, from the PerspecPve of Dr. Reddys,
Between the U.S. Market and the European Market?

US Market European Market

180 Day Exclusivity Yes No
Stability Uncertain Stable
FighPng BaEles Court Room Market Place
Earnings More VolaPle and Less VolaPle and
Unpredictable Predictable
Prole Homogenous market Regulator for each country
Common language No common language
Common currency Dierent legal system
Uniform legal system Varying business ambience
Single ocial market
regulator
Business NavigaPon Easy Not Easy

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 Why is Dr. Reddys Geqng into
Germany?

# Germany is in the middle of health-care reforms - Trying to

reduce health-care costs
Pull # Govt. is encouraging the use of Generic Drugs
# Looking for markets that are Hospitable to Generics

# US is the largest market in the world for generics - becoming

compePPve
# Big Pharma companies are nding ways of retaining its hold
Push on a patented product even arer the expiry of a patent
# Legal issues takes the focus away from Dr. Reddys core
competence in making low-cost drugs

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Interest in Germany - A Long-Term
PerspecPve
Betapharma acquisiPon as
Crucial to expansion in
a launching pad to grow its
Europe is the consolidaPon
business in the rest of
of the German market
Europe

Post-acquisiPon, Dr.
Reddys takes charge
quickly and stabilizes 66% of European Generic is
German operaPons in controlled by Germany
order to be able to move
on

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 Why is Dr. Reddys Focused on
Betapharm?
Among Dr. Reddys potenPal
targets for acquisiPon in
Top two generics makers in
Germany, betapharm seems a - Post-acquisiPon, Dr. Reddys
Germany are six Pmes bigger
manageable risk - Sales sales and income will go up
than betapharm in sales and
turnover for 2005 was INR7.6 correspondingly
beyond reach
billion and its EIDTA was INR2
billion

Dr. Reddys will consolidate its

posiPon in two segments of the
Dr. Reddys will gain a porsolio Betapharm has a pipeline of 60 pharmaceuPcal industry that
of 149 products that are already products scheduled for launch are considered high-growth
selling in Europe in the next ve years up to 2011 areas: the cardiovascular (CVS)
segment and the central
nervous system (CNS) segment

Dr. Reddys will gain access to

250 frontline sales professionals
Eighty per cent of betapharm
who are familiar with the
sales comes from these two
German market and who are
segments
considered to be the best sales
force in the industry

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What are the Gains for Betapharm?
Consolidate its manufacturing
A major value added from the
capaciPes, spread over Asia,
current owners, 3i, has been
into a single locaPon at Dr
the pool of contract
Reddys own faciliPes in
manufacturers they created for
southern India, a move that will
betapharm in the low-cost
lower the companys cost of
regions of Asia
operaPons

Dr. Reddys manufacturing

faciliPes in India are compliant Access Dr. Reddys low-cost
with the regulators of not only manufacturing capacity in India
the US but also of several not only to increase its overall
European countries including protability but also to help it
the United Kingdom and grow in other markets.
Germany

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 What are the Synergies?
Dr. Reddys BetaPharm

Low cost High Powered

Manufacturing MarkePng
Product Product Delivery
Development Skills Skills
Gateway to US Gateway to Europe

Reinforcing mutual strengths and lling each others gaps 24

 What are the PotenPal Trouble Spots?

AcquisiPons Pll Paying a high price - 3i had

ExecuPon risks are many Pmes
Now higher
acquired betapharm only two
years ago for $300 million

BMS Group UK - March

2002 - for $17 million Dr. Reddys paid $17 million to
Premium now - 90 per cent acquire BMS, which had a
premium turnover of $16 million - Slightly
Trigenesis US - May over 100 per cent of sales value
2004 - $11 million

Roches plant - Mexico - German market has been
Nov 2005 - $59 million witnessing ongoing health-care
reforms, and generics
Now paying ~300 % of sales
manufacturers would be under
value for betapharm
increasing pressure to discount
Betapharm Germany - $570 their prices, thus impacPng
million - Largest acquisiPon by far negaPvely on protability
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 What will Determine the Success or
Failure of the AcquisiPon?
IntegraPng Betapharm
ConsolidaPng the
into Dr. Reddys to Matching the product
capacity for Betapharm
achieve the strategic porsolio
product range
objecPves

Speed with which Dr.

Reddys can leverage
Achieving scale new scale to enter other
European markets and
grow its business

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Assessment by the Class of Betapharm
as a Candidate for AcquisiPon

AlternaPve
Mid size - ComplimenPng
Market to US
Aordable Strengths
Market

Can stop being

Leading to
acquired by
sudden growth
compePtors

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What is the likelihood that the acquisiPon of
Betapharm by Dr. Reddys will be a success?

Likely to be
successful given the
strategic t
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What will determine the success or
failure of the acquisiPon?

Government of Germany
is keen on reducing costs IntegraPon speed
of health care Dr. becomes an important
Reddy is a low-cost parameter of success
generic drug company

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 Dr. Reddys Financial EsPmate
Including Betapharm
2007 E 2008 E
INR (Million) Dr. Reddy's Betapharm Total Dr. Reddy's Betapharm Total
Sales 26,849 10,462 37,311 30,994 12,554 43,548
EBIDTA 2,667 2,406 5,073 4,225 2,511 6,736
EBIDTA margin (per cent) 9.9 23 13.6 13.6 20 15.5
Net profit (before interest) 2,537 1,360 3,897 3,940 1,381 5,321
Interest cost (on acquisition) - - 886 - - 886
Net profit (after interest) 2,537 1,360 3,011 3,940 1,381 4,435

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 Challenges in Dr. Reddys AcquisiPon
of Betapharm

Dierent cultural Change in Govt.

Currency uctuaPon
mentality Policy

No product approval
Delay in approval of
for DRL's product Price caps
Betapharm products
manufactured in introduced
in pipeline
India

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Challenges in Dr. Reddys AcquisiPon
of Betapharm

PaPent use
Reduced price Supply chain
Endorsed
by 15% to 25% problems
Medicines

Strict regulaPon
Lack of Demand
against
in Germany
outsourcing

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 Betapharm
Products

Betapharm Betapharm
Suppliers Employees

Speed of
IntegraPon
Betapharm Pharmacists in
Customers Germany

Dr. Reddys
Doctors in
Manufacturing
Germany
CapaciPes

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What are the Key Success Factors in the
Pharma Generics Industry?

Only Bioequivalent No High MarkePng

Cheaper Price
No Clinical Trails Costs

Focused experPse Life cycle Licensing and

and resources management acquisiPon talent

Ability to generate
meaningful free
cash ow

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How AEracPve is it as an AcquisiPon
Target for Dr. Reddys?

Generic Scale is
Research focus
AcquisiPon for important to
14% of Revenue
Cash ows reach capabiliPes

To enter top 10
companies of the US to Europe
world

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 Do your own due
diligence

SoluPons might be
- compePPve
strategy Not just about
weeding out the
development, deal
bad deals
structure and legal
protecPons
Due
Diligence

Learning where
any skeletons Geqng to know
the target
might lie in the
company so well,
target companys
that there are no
closets can
surprises arer you
structure soluPons
own it
for them

Use the due diligence period as an opportunity to get to know the company they are
considering buying beOer than the seller does
If due diligence is conducted successfully, there should be no surprises following the transac&on
Successful due diligence eort will have uncovered any and all possible issues
Due diligence is not necessarily rocket science 36

ObjecPves and Results of a Due
Diligence Process

37
Due Diligence Project OrganizaPon

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 Steps in Due Diligence Process

Data CollecPon Data Analysis

Planning Phase
Phase Phase

Report
Due Diligence
FinalizaPon
ReporPng
Phase

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Due Diligence Performed by Buyer and
Its Advisors

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Due Diligence Performed by Buyer and
Its Advisors

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 AcPviPes of Due Diligence

Financial Management and Legal compliance Document and

statements review operaPons review review transacPon review

Forecasted
Historical Financial Current Financial
Financial Business Plans
Data Data
InformaPon

Minutes of ConrmaPon/
Contracts with
Directors MeePngs Audit Paper Work RepresentaPons
Suppliers,
and Management Files from Financiers,
Customers and Sta
MeePngs Debtors, etc.

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Need for Due Diligence

Strengths and
Gives a fair
weaknesses
value of the
of the
investment
business

Tool of
Helps in
ensuring that
idenPfying
the prevailing
the apparent
system of
irregulariPes
checks works

44
 No one wins
except the
lawyers

Less-than- Rarely get

trustworthy everything
seller you wanted

LiPgaPon
Incapable
is Ugly
ReputaPonal
due diligence
implicaPons
performer

Being
Sore loser
liPgious

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Dr. Reddys Mistakes Related to
Betapharm
Excessive
Premium paid misplaced
opPmism

Failure to account
Inadequate Due
for external
Diligence
environment risk

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