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Dr.

Reddy - Betapharm

Deal Ya No Deal – Team 1


Pre- Deal
Deal
Other Bidders
Betapharm
Dr. Reddy Labs
Perfect Pharma Acquisition
Rationale
Limitations in India
Access to the German Generics
Strategic presence in the Europe
De Risking Drug discovery
Miscellaneous
Options
Organic
Inorganic
DRL - M&A
Betapharm – Ideal Acquisition
REVENUE BREAK UP
Value Driver Diagram
Pharmaceuti
cal
Sector
Valuation
DCF Valuation - Base Case
Valuation - Base Case
Scenario 1 - Optimistic
Valuation - Optimistic
Scenario 2 - Pessimistic
Valuation - Pessimistic
Scenario 3 - Worst Case
Valuation - Worst Case
Comparable Transactions
Comparable Transactions
Valuation - Comparable Deals
Comparable Multiples
Valuation - Summary
Sensitivity Analysis
Market Perception - Event Study
Post Deal
Financing

This is only for computational purpose (Liability side)

The true risk (Asset side) still remains


Synergy

• Distribution
– Highly fragmented market and Unorganized sector
– Reduce the efforts needed to establish (Identification,
Promotion, Incentives)
– Reduce SG&A 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
Synergy

• 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
Integration
Post Merger Integration

• Management of Control
• Execution Challenges

• Tax and Transfer Pricing


• Accounting
• Significant Vs Non Significant Entity
• Risk Management
Cultural Integration

• Managing language barriers and cultural


diversities
• Alignment of strategies and business models
of acquired company and the acquirer
• Retaining talent and employee motivation
• Balancing interpersonal connections with
formal controls and processes
• Emphasize direct communication
• Encourage Innovation
What 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% in two phases
• Longer than expected payback - other
plans shelved
What 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 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 - Down
Relative Performance
The Road Ahead

• Planned shift of production to India


• 60% production to India by 2009-2010
• 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
Conclusion

• 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
– Margin erosion of the parent company and
underperformance vs. peers
Thank You