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Case Analysis: Dr. Reddy’s Laboratories
Submitted by : Amol Mahajan BM-A B12008
so this lured all players across the globe to hunt for US market. but it didn’t have any immediate plans to do so. The bid is placed in early February 2006. is that of Lipitor . Reddy’s to acquire Betapharm. acquirer and target. Reddy’s Bid : $ 570 million Out of this 400 million were to be taken from Citibank and rest through Accruals Deal will be all cash and will stripe off all resources plus a debt of 300 million Dollars 50% lending to be placed on each of the balance sheets i. Dr. Indian Pharma sector was valued at $ 10 billion in 2005 .Early the model used to be a “blockbuster” business model. e. Reddy’s had placed bid earlier in March 2004 as well when it lost and 3i had taken hold of the bid.e. Blockbuster model means that you discover a drug and hold patent of it for years and garner huge amount of money for it by selling at premium and licensing the manufacturing for a royalty on sales.K. a venture capital firm based in U. patent will get over . 4. 9.36% of the sales contribution shows the dominance of big players 5. By the time. The final decision on the competitive bidding was expected within a week.g. Deal Conditions: Dr. 2. However. It involved huge time and cost in R&D. a drug used to treat high cholesterol levels. 8. But the blockbuster model used to create a niche market type of scenario and under current scenario when the focus was shifting to high growth markets and targeting high value drugs. 6. Growth rate of 7% was moderate for a sector like pharma. It used to bring the prestige. The sector has high concentration and high herphindal index as top 10 players contributed $ 101 billion of sales. 11. had generated a sales of 8% for Pfizer in 2003 . The industry had seen a drastic change over the years . Reddy’s was the question mark upon the value expected on this transaction in the future. But Blockbuster model slowly got a fading due to flaws. Indian Pharmaceutical Industry 1. 2. The global Pharma industry was valued at US$550 billion in 2005. 10. 4. US market itself was holding 50% share of the world market. the companies used to get patent for the other and so a chain of single drug was very prominent where one drug gave a huge margin for a decade. CFO . Dr. 7. the model was disappearing.Introduction 1. Dr. 3. 18. The given case deals with bid placed by Dr. the blockbuster model used to have its own advantages. 5.The success rate was 0. which is more than the overall industry revenue in India that time. The closest competitor to US pharma market was Europe at 170 billion dollars but had a better growth rate. power and hence profits. Reddy’s had shareholder approvals in place to raise capital from the markets.2% used to reach the commercial stage. Global Pharmaceutical Industry 1. One of the worries which was haunting VS Vasudevan .02% from preclinical to 1st three phases of trial and only 0. 3. from 3i.
000 businesses involved in it. 13. Otherwise. Local manufacturing dominates the market by meeting over 75% of the overall demand. were moving up the value chain. such as Dr. It was 36% ahead of its next competitor. Capitalizing on the above act . MNC’s which had left India in 1970s because of pronounced Socialist stance of the federal government that time. The three prime reasons for this are : a. 3. The dominant trend in Indian pharma for more than two decades has been to produce copycat versions of the drugs which were under patent process somewhere else and selling them in domestic as well as the markets with less stringent patent laws. 10. 4. Started targeting U. Highly fragmented marketed with 20. 6. Drug and Cosmetic Act and reduced the waiting time for a generics maker to secure a license to market a clone in the USA. the Indian pharmaceutical industry grew rapidly during the 1990s The current growth rate of 9% was much lower than 15% in 1990s. development and clinical trial costs involved for a generic drug. Other prevalent trend in the market was “moving up the value chain” This basically means that companies used to earn a lot of revenue through generic route and then they will use these profits to finance their drug discovery and development channel. were seeking entry to capture value from local attributes such as low cost of drug development b. c. Export growth rate was as high as 30% . 8. 7. Growth rate was around 9% which was much better than US and European market. Some firms. saccharoses and packaging.India Became first Indian company to export API to Europe in 1985. and riding on their low cost of production and economies of scale. Patent regime to comply with WTO was introduced very recently in 2005. Dr. The scenario in Indian Pharmaceutical is expected to change due to new patent regime in 2005. 9. Founded by a scientist Entrepreneur .Also there are no legal . There was a great liberalization in some of the provision of the Federal Food. Difference between generic and patented original drug matters in terms of cost as generic drug costs around 80% as there is huge cost savings on R&D . This really vitalized the growth in Indian Pharmaceuticals. PFIZER. Anil Reddy in 1984 at Hyderabad . 5. generics in 1994 by building a home base approved by USFDA. 3. One of the great feature of this act was that it reduced the waiting time for a generics maker tosecure a license to market a clone in USA. By 1999. marketing . 12. Another major factor which led to the widespread usage of the generic drug in the developed market was the effort on the part of government to bring down their health care costs. Reddy’s were acquiring and creating new capacities across globe both in emerging as well as developed world. Large domestic drug companies which had built up scale and developed skill sets during the intervening period.2. 2.This shows a lot of dependence on the external markets. 4. Dr. this was expected to bring a shift from generic to patented drugs. it became the 5th largest pharmaceutical company in India . 11. Now we will talk a bit about the bidder. starches.S. Reddy’s laboratories Dr. Cost saving for generic drugs was also contributed by using less expensive alternatives for non-active ingredients like colorings. This is the exact reason why Teva Pharma had a huge number of prescriptions worldwide. which was otherwise retail leader across globe. Reddy’s Laboratories 1. But the reason why Generic drugs held a prominent role in Indian Market over the years owes a lot to Hatch Waxman Act in USA in 1984. Generic drugs contain almost same API(active pharmaceutical ingredient) as the clone drug.
8.82 million US $(assumption that 1 US $ =46 INR) 1st Indian company to have an exclusive generic license in USA . 11. 10.This could be very crucial factor for Reddy’s. During the time of buyout. Betapharm with a 250 sales team personnel had one of the best frontline forces in the business. Hence in the anticipation of this . 2. generic markets was expected to get a Boom . . 7.i. US. the revenue of Betapharm rose to 220 million US dollars.8 million ADS(American Depositary Shares) and secured a listing on the New York Stock Exchange. 10. it completed its IPO of $ 132. 6. 9. Interestingly . Had a turnover of 107. Financials were going very good and had a huge pool of amount for the Acquisiton. it became 4th largest generics maker with roughly 3. 9. Redy’d had also participated in this bid and had lost to it. Amongst 50 most prescribed drugs in Germany. Subsidiaries were focused mainly on sales and marketing. One such benefit was it developed a new organization structure for Betapharm which now boosts of its own business development supply chain and finance divisions.Dr. Cardiac drugs and Non-steroidal Anti inflammory drugs-both were among the top 10 therapeutic segments in the world.With a cash and equivalents kitty of 9. UK which were wholly owned. the new bidder . In 2005. Later on the funds from IPO was used for Acquisitions on global level. a leading German generics firm. the company fall more in generics category. 6. 3. that were low switch probable and had a promise of repeated long term purchase. although. Had also a not for profit beta institution in R&D in community medicine Acquired by 3i in a MBO in 2004 in a 300 million Euros buyout.e. 5. Betapharm 1. Germany was more special as it was undergoing health reforms to bring down health care cost and also 10% of the cost was to be paid by the patient. Why 3i acquired Betapharm? There was a strategic motive as 3i wanted to move to “Big Five ” league of generic makers in Germany. 7. the amount should be invested in some project or takeover or otherwise it is useless to keep such a huge amount of idle cash.5 market share.8 bn INR. The above fact was contributed mainly due to acquisition of American Remedies ltd. Germany. With 180 day exclusive offer In 2001. 19. 74% was betapharm .It got a generic exclusive license for fluoxetine. they had dedicated teams to handle compliance issues related to individual products. How 3i helped beta pharm? 3i helped betapharm to forge partnerships with drug makers in Asia and create a remunerative product pipeline which was exactly what Betapharm was looking prior to acquisition. 3i also provided another subsidiary benefits. Set up in 1993 as sales and marketing subsidiary of Hexal. 11..5 million euros in 2003. 12. namely. It had built an image of a niche. As far as manufacturing locations were concerned.The target had a turnover of 912. Took a majority stake in a tripartite venture in China in 2000 with an investment of $ 15 million to manufacture bulk formulations. 8. Corporate office was located in Hyderabad but had subsidiaries in Brazil. Most Importantly.To get advantage of this boom . it was in the process of product line up gradation. particularly by getting specialized in two segments.5. As discussed earlier that there are two major categories of players in pharmaceuticals. 3i made this acquisition.9 million INR . 72% of the company’s products were long term therapy medicines. the company had three Greenfield manufacturing facilities in India and one each in Mexico and UK.In Germany. Mexico. which was a low cost version of Eli Lilly’s blockbuster Prozac. In November 1999. 13. 4.
outside places like USA was offering a lot for intellectual resources easily.) Globalization Dr. finance. with Biomed . it signed a $56 million deal with ICICI Venture. The other reason for getting global was that Dr. country’s biggest pharma producer. iv) The company was having belief in flexible organizational structure than a rigid one. 4. Reddy’s to place bid for Betapharm 1. This became more important when the company was losing out in all three exchanges in which it was listed. 2. And it was tough to get those people to work in India .For phase 2 of it . Reddy’s was able to foray into the business. Reddy was finding it difficult to get the top scientists in India and for innovation. Hence focus was to change structure every 2-3 years.So the company was trying to get into these innovation hubs to source talent easily. This helped Reddy’s to get the financial constraints out of the way as cost could go up as high as $5 million to get new drug into picture for approval.end global supply chain solution across all business and reducing logistics costs to effectively manage enhanced supply chain. it went into another partnership with a joint venture with ICICI and Citigroup Venture capital International which brought in 75% of total 30 million dollars for riskier drug business.) Part of Strategy The founder had clearly articulated vision to be amongst top 10 pharmaceuticals across the world and the tool he was focusing for this was moving up the chain to drug discovery. However.) Acquisitions .In 2005. ii) In august 2005. iv) Last but not the least. Dr. This was done to attain efficiency across domains in marketing. it would lose out on the opportunity to become a research based firm and given the fact that even 25th ranked research based pharmaceutical had a bigger share than number 1 generics firm. 2002. ii) Two Greenfield units were set up in Middle East in the following year. iii) In 2004. it was outsourcing to external party and in return getting a royalty on sales. best in class internal controls for financial reporting was done to become compliant to Section 404 of Sarbanes Oxley Act.Dr. Some of the past globalization efforts included: i) Joint venture in Russia In 1992. 3. it was shredding the risk. Reddy’s Laboratories believed that Indian Market was not a good proposition for high growth momentum. it was able to export bulk drugs to Middle East and rust for further processing to finished products. It had a feeling that if it gets trapped in the cheaper generic drug market. Very soon. internal controls etc. to fund generic drugs launch in UK in return for royalty on net sales to ICICI for 5 years. Reddy used to do phase 1 of it. vi) Project Disha: It aimed at creating cost effective end-to. iii) Another one was Anrgenta discovery for pulmonary disease related collaboration to develop a new approach. v) Project Suraksha.and for phase three .) De-risking through Partnerships i) Dr. ERP. Reddy labs had been going through a numerous chain of partnerships . there are three phases in drug development. Hydra headed structure was dominant. Reddy’s looking for this Acquisition –What was the value driver for this? The given 5 reasons can be attributed for the intent of Dr. Global Business services organization was phased to have 99% accuracy and was able to achieve 4 sigma till now. it was using PE firms for funding . Hence. an Indian PE investor. the interim goals like becoming a billion dollar company and half a billion dollar sales in generics by 2008 were also there but those were more of the means to achieve the top 10 position than a long term vision. Thus by merely contributing 25% of the funds.Why was Dr.
To blot out the stains due to these two recent stigmas.Dr. German market itself was around 7 billion dollar worth. Subsequently. It had hardly any long term debt.) Betapharm is looking to upgrade its product line and wanted to enter into “Big Five” league of the generic drug makers in the Germany .) Betapharm when acquired by 3i had a target to be in top 5 generic drug maker in the country and it was a strategic buyout by 3i . the company received two setbacks to its images as a drug researcher and developer Firm. it had always put a focus on Acquisitions. an insulin sensitizer molecule licensed by it to Denmark’s non nordisk had adverse effects in clinical trials. led to degradation of its image as a drug research and was seen as a minnow and was seen to better suited for API and generics market. 2. In March 2004. 2005 and to add further advantage for acquisitions. balaglitazone. These two incidents.) Looking for opportunities outside USA Large companies in USA had started appointing authorized generics. SWOT analysis for Dr. a variation of Pfizer’s amlodiphine in a legal suit which wiped off sales by 5% and profits 77% in 2004.) German market was looking to reduce cost on health care. hence Generics drug maker were expected to play a great role. They were also resorting to sophisticated life cycle management which was evading generic companies to eat into their sales.In order to become a reckoning force in pharmaceuticals. with a turnover of around 220 US dollars . Reddy’s had always use Inorganic route to achieve growth . it lost bid for specialty chemical amlodiphine maleate.This was the driving factor for Betapharm to go for this route. 4. Within Europe. So a deal with company like Reddy’s will give Reddy’s a chance to vertically integrate and this in return will bring stability to the Betapharm by having in house production. Reddy’s was looking for European market where 4 major patents were getting over in 2011.Since the goal was achieved and in 2005. in 2004 even without putting to clinical trials. to put a block on the generic companies. of around 11. 5. Ragaglkitazar. it was looking for further growth and opportunities. there were no windfall revenues in European market but offered a fixed stream or revenues. Reddy’s was that there was a cash lying on its balance sheet to the tune of $ 209 million on mar 31. 6. novo returned another molecule. the companies like Dr. To hedge this risk. What is in it for Betapharm? Why will it opt for it? 1.) Image Building process Very recently.) Betapharm’s model was to outsource its entire production. it was looking aggressively to acquire a firm to build its muscle and regain image in drug research. 3. Though due to lack of any exclusive licenses. Reddy’s Laboratories . The big plus for Acquisitions possibility for Dr.This served as a gait for the companies to look for ventures in Europe.8 billion euros .
Strengths • Huge Cash balance • Legal expertise • Expertise in Generics • Low cost structure due to scale • Similarity of German market with Indian Opportunities • So far . • Germany is the biggest Generics market in Europe and an entry over there will help to find foot in other European nation • 74% of 50 most prescribed generics in Germany were from Betapharm • Since Betapharm had its own supply chain . has been in generics • Low in Intellectual Property Threats • Compliance issues after acquisiton as it was relationship driven company while betapharm was process driven • Pricing pressures as more discounts were sought in Germany in new cost cutting initiatives in health care. it can help Reddy's to tranform their ERP and become more of process driven • Weakness • Recent Stock rates downfall • Recent failures as a drug research firm • No expertise in Drug research . • Failure in sales could be very fatal as it is already recovering from setbacks Possible Sources of Synergy . it had four acquisitons but this will be biggest • Provides an opportunity to set its base in Europe which is seen as a stable stream of revenues .
Reddy’s has got expertise in the manufacturing of the molecules to be taken over to the final processing phase. it is a double edge sword. if done with precision can prove this acquisition to be very smart move.) Human Capital – Betapaharm had intellectual property IP . Betapharm could well be a key element of Dr. Reddy’s. In short . it can actually benefit from Betapharm and use its process driven mechanism and adapt to that. This can help the combined entity in the long term. Given the opportunities lying in the market and huge amount of synergy possible as discussed above. operational. Reddy’s . Reddy’s will become a big player in a big league of generics market in Europe and will hedge its dependence on US market. Reddy’s recovery from its recent Setbacks.Dr. Conclusion In the current scenario. Reddy’s had a long expertise in filing suits and also dealing with them.1. betapaharm had advantage in regulatory infrastructure .) Enhanced Customer Base.) Same set up in German and Indian Pharma. As far as post acquisition changes are concerned.On the other hand. 3. 220 million dollars of reserve Cash equivalents are not going to serve it.Anyways . Reddy’s and can be a gateway for it to go global. it can use independent verticals to do the valuation like legal.So it can be very successful to use the base of Betapharm which outsourced its entire production.Betapharm had number of contracts with Insurance companies which covered 70% of the total German population 5.) Brand Equity. Reddy’s to set up its base in Drug research has been to get talented scientists who were more interested to work in innovation Hubs.Dr. 2. 7.) Legal Advantage. it promises economies of scale due to enhanced size and low fixed cost enhancement.) Manufacturing. this deal can open the doors for Dr.. At the same time. 4. supply chain. Reddy’s. huge amount of operational efficiency is expected from the acquisition success.Combined entity can have a very efficient set up in this.The major challenge with Dr.) Economies of Scale. it may face challenges as betapharm had entered into exclusive contracts with development houses and innovators in low-cost reasons of Asia for supply of finished dosages. Reddy’s can leverage the beta brand equity earned through CSR activities. for a company that was just beginning to get back on track from a fall in sales. Dr. the best alternative available with Dr.With this acquisition. 8. IT and regulatory processes. .Being a single entity.the chances of switching are low which can promise a steady stream of cash flows for Dr.Over the years. The marketing play which is a trump card for betapharm can very well mingle with production and manufacturing expertise of Dr. But this task of consolidation .) Long Term Sustainability – Since most of the betapharm’s were long term therapy medicines. 6.Only risk averseness can deny this acquisition. Reddy’s is to go for this deal.Both the markets were quite similar and this will make the task easier for Dr. a failure of the deal could be daunting. Dr.Betapharm had acquired brand equity . However.last but not the least.This case mentions nowhere the role of an investment banker so the role of these valuation teams will be very crucial. All it needs to care about is integration in finance and governance. However. marketing team’s .
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