Betapharm's acquisition by Dr Reddy's Lab

Dr. Reddy’s Labs acquires Betapharm for $ 560mn.

Mumbai.

In what is seen as India Inc’s first major M&A in pharma sector, DRL acquired 100% stake in Germany based Betapharm for $560mn. The stock closed a whopping 9.3 % up on the news.

- The Acquirer

• Among the largest domestic pharma companies in India

• Annual turnover of over INR 4900 Cr.• Annual PAT of INR 438 Cr.• Approved by USFDA, MHRA (UK)• Formulations make 37% of company’s product

mix; generic products account for 13%

- The Target

• Fourth largest generic pharma company in Germany

• EBITDA margins between 24 – 26%

• Portfolio of over 145 products

Valuations

• Sticker Price of €480 mn. from PE firm 3i• Revenues of € 165 mn.• 2.9X revenues and 12X EBITDA• The transaction was funded using a combination

of DRL’s internal cash reserves and committed credit facilities

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 boost Betapharm’s EBITDA margins

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

Strategy

A Sweet Pill ? With assumptions and available industry data,

ICICI did a quick NPV valuation of Betapharm and arrived at a value of €550-560 million assuming WACC of 12% and a sustainable growth rate of 5%. The payback period was seen to be 6-7 years.

The deal was seen as an Accretive Acquisition.

Stock jumps on acquisition news

correction in prices

BSE Code - 500124 Face value - Rs. 5.00Promoter holding- 26.40%52 week H/L – 739(16 June 08)/387(18 Nov 08)

Particulars 2005-06 2006-07 2007-08

Sales (in Rs. Cr.) 2,095.51 3,828.04 3,330.66

Cost of Sales(in Rs. Cr.)

1,686.19 2,455.91 2,761.19

PAT (in Rs. Cr.) 211.12 1,176.86 475.22

EPS( in Rs.) 27.53 70.09 28.26

OPM % 12.61 31.69 15.06

Side Effects

• Betapharm booked FY losses in ’08, ‘09• Raw materials problems in Mexico• Absence of upsides (revenues arising out of

marketing exclusivity of authorised generics)

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

A case of wrong prescription?

“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

(In March 2006)

Message From The Chairman

Sources

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