MERGER, ACQUISITION and CORPORATE

RESTRUCTURING
Case Submission: Dr. Reddys Laboratories (A)
Submitted by: Yogesh P. Gajria
B16181

EXECUTIVE SUMMARY
Dr. Reddys Laboratories, Indias third largest pharmaceutical company in 2005 in terms of
sales (INR 17,293 million) has bid for the Germans fourth-largest generic drug manufacturer
Betapharm at a price of USD 570 million. The target firm had reported annual turnover of
around USD 220 million in 2005 with a market share of around 3.5% in Germany. However,
the prime objective of the acquisition is increase the footprints of acquirer in European
market leveraging the extensive sales force employed by betapharm (68% of employees are
a part of sales team).
Dr. Reddys since its set up in 1984 has seen constant growth fueled by its two primary
businesses Active Pharmaceutical Ingredients (API) and Generic Drugs. The company has
specialized in in two segments Cardiac drugs and Non-Steriod Anti-Inflammatory Drugs
(NSAID). betapharm, started in 1993 as a sales and marketing subsidiary of Hexal was
acquired by 3i, a PE firm for USD 300 in 2004. Within one year, the company has significant
progress in the market share as its products covered 74% of 50 most prescribed generic drug
in Germany.
European pharmaceutical market is considered as the second biggest market after United
States, which had become very competitive due to Paragragh IV filings under Hatch-Waxman
Act after the Blockbuster model. Germany specifically had been undergoing significant
changes in health care sector. It was witnessing a drastic reduction in drugs prices, making it
a lucrative destination for generic drugs. Dr. Reddys cost effective manufacturing in India and
sales and marketing expertise of betapharm seemed the right combination in the long term.
However, the deal posed several risks to Dr. Reddys in long term with respect to its entrance
in a new geographical location with major reforms from the government. There were
Executional risks as this particular acquisition would be the biggest by the acquirer and would
require effective processes and systems to derive maximum value post acquisition. Also,
there would be a shift of betapharm from a process oriented focusing on sales and marketing
to a front-end organization with customers needs as their focus will be a daunting task.
Hence, it is imperative to analyze the case initially in terms of values derived by the acquirer
which are identified from different potential sources such as Operational, Financial,
Marketing and Control. Then, the impact of the risks associated post acquisition is understood
considering the external market environment and internal capabilities of both the firms.
CASE ANALYSIS

As the case is pertaining to a global acquisition, there would be a number of stakeholders involved in
different phases of the deal. The buy and sell side along with a brief description of their historic
deals are mentioned below.

BUY SIDE TARGET

Past Acquisition Name of the Name of the Past Acquisition
background organization organization background
Bought 100% of Acquired by 3i, UK
BMS group for USD based venture capital
17 million in 2002. firm as a part of USD
Bought Trigenesis in 360 million MBO in
2004 for USD 11 2004.
million to access
niche dermatology
products.
Acquired Roches
API plant for USD 59
million in 2005.

German Government Money Lenders

It was introducing reforms leading to
OTHER reduction in the cost of health care. One such
STAKEHOLDERS was 10% of the cost of drug to be payable by
the patient. This made the market suitable for
low cost generic drugs.
Citibank had agreed to lend
the major portion of capital
required for the deal (400
out 480 million).

While identifying the target it is necessary to know the long term vision of the acquirer and see it the
acquisition has a strategic impact towards it.

Vision of Dr. Reddys:

To be one among the top 10 pharmaceutical companies in the world by moving up the value chain
into drug discovery.

However, a pharmaceutical company required huge amount of capital to move up the value chain and
develop the R&D infrastructure for drug discovery and development. In Dr. Reddys, these activities
were financed primarily by businesses that were low-end like Generics and APIs. Hence, for the above
vision, there were two major goals set by the management keeping the deadline as 2008, one being a
billion dollar revenue company and second to increase the revenue from sales of generics to USD 500
million. In 2005, the sales of the company was hovering around USD 400 million and hence needed
growth in both the fronts organic and inorganic to reach the billion dollar mark.

Betapharm is chosen as the target primarily due to its presence in European market. After US market
being highly competitive after the Hatch-Waxman Act, it made sense to look into different
geographical regions with better prospects and grow inorganically if existing presence is low.
POTENTIAL SOURCES OF VALUE

From the perspective of buyer, it is important to list out the key value drivers, which would make the
deal favourable in short or long term depending on the strategic implications towards its vision. In
the case, as Dr. Reddys has been a pioneer in low cost effective generic drugs and APIs, its primary
focus has to been to penetrate into Germany market with the existing team of betapharm.

POTENTIAL SOURCE OF VALUE POTENTIAL IMPACT

Operational Synergy
As a bolt-on acquisition,
regulatory infrastructure of Access to new geographical
High.
betapharm could be used for regions and hence, higher
future filings in Germany and sales potential
Europe

Financial Synergy
No major impact as such.

Marketing/Product Synergy
betapharm has a big and
efficient sales team of 250
people.
High beta brand equity
among insurance companies.
beta Institute being popular
among corporates as a part of
their CSR activities.
Having local expertise in sales
High and marketing helps in
knowing the customer well.
Government reforms involving
Medium
more insurance companies.
Companies ready to invest and
Medium provide support to the
institute.

Control
No major impact.

From the above table, it can derived that Dr. Reddys would be able to derive the value it wants to
achieve post the deal considering the internal integration happens smoothly and the external
environment remains stable and favourable. Hence, this leads us to know the potential risks also
stated in the case and what could be the impact of the major stake holder German Governments
emphasis on health care cost reduction policies.

IMPACT of RISKS

Problem 1: In Germany, Health insurance is compulsory for the whole population in Germany. It has a
universal multi-payer health care system paid for by a combination of statutory health insurance
officially called "sickness funds and private health insurance, colloquially also called "(private)
sickness funds". The spendings in health care sector as a % of GDP in the country had seen an increase
in the past but in 2000s, constant efforts by the government has kept the prices nearly stable. This
also leaves some form of uncertainty among the players about the next step and hence, they become
conscious.

Solutions:

1. Not be dependent on Germany alone As betapharm has good number of sales employees,
they would have to be deployed to regions outside the country exploring the other regions
of Europe for better market potential.
2. Tie-ups with insurance companies The management of betapharm, if kept unchanged even
after acquisition would enable to establish better contacts with the insurance companies
and hospitals to penetrate more into the market.
3.

Problem 2: Dr. Reddys has never acquired a company of the scale of betapharm and hence, it would
be a challenge to execute the deal looking into the legal framework and integrate the processes with
betapharm for a smooth functioning of the organization post deal.

Solutions:

1.