- 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
- 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
- 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. Reddy's Laboratories Limited
Message From The Chairman 16. Sources 17. GET WELL SOON