Dr, Reddy - Betapharm

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