CASE STUDY ON

DR. REDDY’S LABORATORIES

By: Group – 4
G A Rohit Kumar: BD20028
Nikunj Pratap Singh: BD20041
Tanisha Gupta: BD20065
Pranay Modi: BD20043
Tejas Chinchole: BD20019
CASE BACKGROUND
Dr. Reddy's Laboratories Ltd. was the first Indian company to export APIs to Europe when it was
created in 1984. Its growth has been powered by the development of an internal organic growth
plan and the acquisition of strategic firms for inorganic expansion. Internal goals included
specializing in cardiac and non-steroidal anti-inflammatory drugs. Brazil, Cyprus, Germany, Mexico,
Russia, Spain, the United States, the United Kingdom, and Venezuela all had completely owned
subsidiaries.

While replicating its proprietary medications in developing regions, the corporation offered APIs as
raw material to European and American companies. It also took use of Section IV of the Hatch-
Waxman Act to introduce generics on the American market for six months and profit from the
difference in price between the generic and the patented drug equivalent.

It had also partnered with ICICI Ventures and Citigroup Venture to derisk the introduction of
generics and novel drug innovation. Its push for globalisation saw the company launch a number of
projects that combined technology and people, as well as sound financial reporting and a well-
functioning worldwide supply chain. As the US market became increasingly competitive, it aimed to
expand into Europe.

BMS Group in 2002 for USD 17 million, Trigenesis in 2004 for USD 11 million, and Roche's API
factory in Mexico for USD 59 million were among the companies it bought throughout the years. It
expressed interest in betapharm, a German company with a turnover of Euro 107.5 million, in early
2005. It was purchased by 3i in 2004.

The company had no manufacturing or product development overheads and had the most
contracts with insurance providers, covering roughly 70% of the total covered population. It also
has intellectual property IP and regulatory infrastructure, which may help Dr. Reddy expand into
Europe more quickly.

Dr. Reddy's bid USD 570 million, which would deplete its reserves as well as create a USD 300
million debt. However, due to strategic concerns such as a shift in their generics approach, the
German market becoming more price sensitive, and manufacturing consolidation, integration of the
new acquisition appeared to be a difficulty, and the rewards were difficult to assess.
PROBLEMS
Cost Of Acquisition
DRL's entire bid for Betapharm was around €480 million, with €400 million coming from a Citibank
loan and the balance coming from DRL's internal accruals. DRL's financial reserves would be
severely depleted as a result of this purchase, which would add approximately $300 million in debt.
They did have approvals from the shareholders to raise capital from the markets but they still did
not have any immediate plans to do the same. Further the discounts mandated in the European
markets would increase as more and more generic drugs were coming, thus generic manufacturers
would face pricing pressure. This would lead to lower sales realizations and thus a longer time
frame to digest the acquisition.

Setbacks
DRL was coming back from two key setbacks in the run-up to the deal. In clinical trials, ragaglitazar,
an insulin sensitizer chemical that DRL had out-licensed to Denmark's Novo Nordisk A/S in 1998,
experienced negative side effects. As a result, research on the chemical was halted. DRL also lost its
quest for specialty chemical AmVaz in the higher court in March 2004, despite winning in the lower
court. DRL would have made $200 million in sales if the ruling had been favorable. In 2004,
revenues were down 5%, while earnings were down 87.3 percent.
The first one hit them hard because analysts criticized them for their discovery foray and that it was
foolish for a minnow like DRL to foray into drug discovery. So DRL was just in recovery mode and
any other setback would detract it from the progress made until now.

Changing German Markets

For a long time, the German and Indian pharmaceutical marketplaces were nearly comparable, with
a mutually reliant community of doctors, chemists, and medical sales representatives. Sales in the
United States, on the other hand, were dominated by large wholesalers and insurance companies,
and so differed significantly from those in Germany.
However, considerable developments have been witnessed in the German markets since 2004. The
shift from branded to generics was motivated by a desire to cut health-care expenditures. The
decline in the historical role of doctors, pharmacists, and medical detailers was mostly driven by
insurance companies gradually gaining greater clout. A new tendering mechanism has been
implemented, attracting new, low-cost participants to the market.

Difference In Corporate Cultures

Both firms' corporate cultures were diametrically opposed. While Betapharm was mostly a process-
driven company with a strong emphasis on systems, DRL was primarily a relationship-driven
company. As a result, driving synergies will be a significant difficulty in combining the two firms.
Such cultural differences frequently result in bias, which can lead to challenges with performance
and synergy. Hence, major challenge lies ahead in terms of integrating the two organizations.

CASE ANALYSIS
Rationale behind acquisition
 Big Pharma companies were making it tough for generic competitors to compete in the US
market. The cost of litigation has risen for generic medicine makers. After the United States,
Europe was the second largest market. Patents worth $18.3 billion were about to expire.
Germany was Europe's largest generics market, at $7.45 billion USD and growing at a rate of
13%. The pharmaceutical market in Germany had a well-developed supply chain and
distribution network, making it difficult for an outsider to enter organically. Betapharm was
a fast-growing company with 145 marketed drugs at the time of purchase and a market
share of roughly 3.5 percent. This acquisition could add $200 million dollars to DRL’s topline
and also pull up DRL’s profitability.

Cost of acquisition:
 Betapharm is a 100% German distributor with no international ties or production facilities. It
maintains continuous agreements with third-party suppliers to manufacture its medications.
DRL offered $570 million for Betaform, which was $60 million more than 3i paid for the
company in 2004. This sum is roughly three times Betaform's annual revenue and nearly
three times DRL's annual revenue. The high bidding price demonstrates Betaform's fierce
competition. DRL could possibly justify the high price by pointing to the acquisition's
potential synergies.

Bargaining power:
 Aside from DRL, Ranbaxy, Wockhardt, Piramal, Teva, Sandoz, and private equity investors
were among the bids for Betaform. The involvement of numerous bidders in an M&A
transaction increases the seller's bargaining power, i.e. 3i, which owns Betaform. To beat
the competition, DRL most likely had to bid a larger sum than the fair value.
Financial Aspect:
 DRL has $200 million in cash reserves to fund the transaction. The remaining funds will be
raised through debts held by domestic financial institutions. DRL had extremely little debt
(D/E of 0.15) and a large amount of cash reserves prior to the transaction. DRL was able to
raise loans quickly as a result of this. After the acquisition, the debt-to-equity ratio would
grow to 1.5. The only other possibilities were an all-cash agreement or a raise in the price.

Risks Involved:
 This was by far DRL's largest acquisition attempt to date. As a result, DRL's execution risks
are substantially larger.
 Germany was on the verge of implementing healthcare changes. The government was
anticipated to impose price controls in an effort to cut healthcare expenses. This decision
would put more pressure on Betapharm's pricing and, as a result, lengthen DRL's payback
period from the acquisition.
 Betapharm has already signed contracts for the production of their products with a number
of companies. Before achieving the synergy with its low-cost manufacturing infrastructure,
DRL must wait for these contracts to expire.
 DRL's bid appears to be excessively high. Betapharm is a marketing-only company with no
manufacturing or overseas operations. Only Germany is included in the geographical scope.
The presence of numerous other bidders is likely to have pushed the bid amount higher
than DRL would have preferred.
 Despite the high apparent synergies, it is possible to argue that Betapharm does not
significantly boost DRL's skills within the organisation. It simply provides access to a new
market and a boost in revenue.

RECOMMENDATIONS:
The deal makes sense from a strategic standpoint. After the United States, Germany had the largest
European market and the second largest generic market. Patents frequently have shorter expiry
periods than those in the United States. The market resembled that of India. Medical reps could
trademark generics and detail them to doctors. DRL is familiar with this business approach.
DRL should, however, evaluate the likelihood of the government adopting price caps, raising margin
pressure on generic medication manufacturers, and revaluing Betapharm as a result of such laws.
DRL should wait for further information on imminent market shifts as a result of the government's
likely healthcare measures. In the event that DRL's bid is chosen, they should plan to create long-
term value with Betapharm. DRL should restructure Betapharm to survive and thrive in the market
shift, which is likely due to government healthcare changes.