Group 2

DR. REDDY’S
LABORATORIES

Aditi Roy BD21056

Eshita Kare BD21068
Pavan Srinath BD21082
Rishikesh Promod Nair BD21087
Shivam Pandey BD21094
Table of contents
1. Executive Summary ....................................................................................................... 3
2. Problems Identified ........................................................................................................ 3
3. Alternatives available ..................................................................................................... 4
4. Recommendation ........................................................................................................... 6

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1. Executive Summary

• In 2005, the global pharmaceutical market was growing (USD 550 billion, growing at
7%) with USA showing the maximum growth (USD 245 billion), followed by UK
(USD 170 billion, growing at 7.1%). This had made USA and UK aspirational markets
for the growing companies.
• One such growing companies, Dr. Reddy’s Laboratory was amongst the top five
pharmaceutical companies in India. One of the major reasons for the firm’s significant
growth was the acquisition of American Remedies Ltd. in 1999.
• The vision of DRL was to become a drug discovery company with steady stream of
revenue. They tried to align their major actions towards achieving this goal. Since the
pharmaceutical market saw the decline of blockbuster business model (where
companies would develop one drug and cash it completely), DRL also joined the path
towards generic medicines.
• To establish a niche for itself in the market, it specialized in 2 drugs - cardiac drug and
non-steroidal anti-inflammatory drugs (NSAIDs). With its successful portfolio of
generic drugs, DRL ventured into the foreign lands ending up with subsidiaries in
Russia, Venezuela, UK and USA.
• In the same breath, DRL wanted to expand more into UK, Germany in particular since
UK was the 2nd biggest pharmaceutical market at the time and even within Europe,
Germany was the largest generics market growing at 13%.
• It had been courting a German generic drug manufacturer, Betapharm, since quite some
time for acquisition. The company was planning to use the regulatory infrastructure of
Betapharm for getting faster access in Germany and Europe as Betapharm occupied a
market share of 3.5% in Germany and was the fourth largest generics maker in the
country.

2. Problems Identified

If DRL goes ahead with the acquisition of Betapharm, it will face the following problems:
Financial Setbacks -
• DRL’s vision for drug discovery proved to bring a lot of financial setbacks for the
firm. First reason being the discontinuation of drug ragaglitazar - an insulin sensitizer
molecule which it had out-licensed to Denmark based Novo Nordisk A/S. However, it
had failed during clinical trials with adverse side effects. As a result, the money spent
in R&D was lost.
• Secondly, DRL lost its bid for the specialty chemical AmVaz in the higher court after
a victory in the lower court. Had they won in the higher court, they would have
received 200 million USD in sales, and did not have to face decline in their profits by
87.3%.
High Acquisition Cost -
• The bidding price for Betapharm was 480 million (USD 570 million). Citibank was
supposed to lend 400 million and rest was to come from Dr. Reddy’s internal

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 accruals. Resultantly, it added a huge debt in the books of DRL while depleting its
cash reserves. While DRL’s plan to work out of it was to raise capital from the
market, it had no tangible plan on how exactly to do that.
• Also, the increasing competition in the European market, the firms were also
supposed to not get any advantage in pricing. This impacted the recovery during the
time of acquisition.
German Markets -
• Like Indian market, German market was also based on the mutually dependent
community of doctors, medical salespersons and chemists while on the other hand, the
sales in the US markets was based on insurance companies and large-scale
distributors.
• However, since 2004, German market shifted its focus to reducing their health care
costs as the influence of insurance companies was increasing greatly. Resultantly, the
market was moving from brands to generics.
Execution Risks -
• This acquisition was different from its past records such that this time they did not
address the legal aspect as they had to challenge various patents in the court.
• DRL has had multiple acquisitions in the past, but that of Betapharm was one of the
biggest. The execution risk was thus very high.
Position in Supply Chain -
• Always being a commodity mindset organization, this acquisition will lead DRL to
customer facing front role. This, combined with the ongoing regulatory changes in
Germany, made the impact unforeseen.

3. Alternatives available
The founder of Dr. Reddy’s had a vision of accelerating the growth of the company to take it
among the top 10 pharmaceutical companies globally. As the growth potential of a generic
drug manufacturing company is limited, and even the biggest generic drug company is still
behind 25 pharma companies building their base on strong R&D and discovering new drugs,
the company understood the criticality of transitioning into a discovery-led firm to become a
top global player.
The company wanted to scale up to achieve billion-dollar annual revenue, increasing the
generic component of the revenue mix to $500 million by 2008.
However, the present environment is increasingly complex, as the company is battling
through two financial setbacks:
• One new molecule had adverse effects in the clinical trials, because of which the
partner company- Novo Nordisk returned another molecule without putting it into
trials. This brought tremendous financial and reputational loss to Dr. Reddy’s globally
in its ability to discover new drugs, with experts suggesting it stay at non-complex
generic and API manufacturing instead of having bigger ambitions.

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 • Dr. Reddy’s lost the bid of a specialty chemical in US court, which could have
brought in a substantial sum of $ 200 million if the decision would have been in their
favor.
The company was required to conduct an in-depth analysis of its decision to acquire
‘betapharm’, so as to achieve its goal of foray into the drug-discovery segment and balancing
the negative effect on the company’s financials. The company would also have to evaluate
the restructuring propositions and associated costs, and whether they would be willing to
invest the required amount continuously as required, considering the dynamics of the industry
and changing regulatory actions of the government, so as to reap the full benefits of the
acquisition.
The company had an option to choose among the alternatives discussed below to maintain a
balance between positive financial outcomes, approaching the set goals, and probability of
success.
#1 Not acquiring betapharm
• Financial Health –
Dr, Reddy’s was undergoing tremendous financial pressure from its P&L numbers.
Under such circumstances, the core company needs attention and course correction,
and an acquisition at present could deviate the management from addressing key
issues within the existing setup. Additionally, the company might find it difficult to
fund the transformations by infusing cash into the potential acquisition because of its
own Profits shock. There could be a possibility that cash would be financed from the
market to consolidate the market position of Dr. Reddy’s, and an acquisition could
increase the leverage beyond desired levels.
2003 2004 % Decline
Sales 19.33 bn 18.37 bn 5%
Profits 2.51 bn 0.32 bn 87%
• Organizational Culture –
The two organizations in question have a vastly different culture, which might be
difficult to integrate. Dr. Reddy’s was a company operating on relationships, whereas
betapharm was a process driven company, attaching high importance to procedures,
systems, and protocols. Under such circumstances, establishing synergies could
become challenging and expensive. Also, employees of betapharm might not respond
to the high degree of change in a desired way and attrition rate could go up, which
would increase the cost of re-establishing the foundations and extracting benefits out
of the acquisition in the short to medium term.
• Regulatory hurdles –
Germany, which is an important market for betapharm, is undergoing a
transformation in healthcare sector. The government has a vision of greatly reducing
the healthcare cost to make it affordable for all. In this situation, the generic drug
manufacturers are subject to being pressurized to reduce prices, which could hit the
profitability index and make the opportunity less lucrative. Absence of exclusivity
license blocks the possibility of getting windfall profits in short run by pricing the
drugs at a higher price. Thus, the overall payback period could be lengthened beyond

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 the projects and the IRR can take a negative hit, making the decision financially
unsuitable.
#2 Acquiring betapharm
• The company would have to shell out ₹25,650 million or equivalent to complete the
deal.
• Assuming that the deal is all-cash, Dr. Reddy’s would be financing ₹21,375 million
from the market and contributing the remaining ₹4,275 million from its cash reserves.
• This could mean reducing the cash reserves by ~45%, which would decrease the
shareholder equity and further hit the share price of Dr. Reddy’s in the market.
• Around 50% debt is expected to come in the books of Dr. Reddy’s and the remaining
could be on the books of betapharm itself.
• This would directly mean funding inorganic growth through debt, which might not be
most desirable, especially considering that drug discovery is a capital-intensive
venture with uncertainty in expected returns- both magnitude and timeline.
• However, as the company’s vision is to reach among the top 10 global pharmaceutical
companies globally, aggressively expanding in drug-discovery is imperative, and
increasing the leverage could be help the company reach its goal faster and have a
consolidated market position, after which debt payback would not be as big a
challenge.
• The company could however explore alternate means to finance the acquisition,
whether it could be going to public markets or syndicating debt financing.
• Extracting cash from public market might not be advisable, because it is a time-
consuming process with regulatory hurdles, and could delay the acquisition,
increasing the risk of losing the opportunity in the first place. Financing after
acquisition would also not be advisable because the share prices could take a dip after
the deal, which could result in releasing more than desired equity to get the required
cash equivalent.

4. Recommendation

Analysing the alternatives, it is advisable for Dr. Reddy’s to acquire ‘betapharm’ because of
the following reasons:
• This would provide Dr. Reddy’s the opportunity to have a strong presence in the
German market, which is a fast-growing space for pharmaceutical companies.
• Dr. Reddy’s could enhance their product portfolio for the international market with
the 149-strong product line of betapharm, and 20 products in pipeline with an
expected launch within the next 5 years.
• The company could capitalize upon the low-cost manufacturing.
• The acquisition is in line with the long-term goal of Dr. Reddy’s and help them
expand size and fuel growth globally in the following years.