Dr Reddy Betapharm

The Betapharm Acquisition: DRL's Inorganic Growth Strategy in Europe

DRL GAINS A FOOTHOLD IN EUROPE

On February 15, 2006, Dr. Reddy's Laboratories Limited (DRL), a leading Indian pharmaceutical company, acquired the fourth-largest generic pharmaceutical company in Germany, betapharm Arzneimittel GmbH (betapharm) from the 3i Group PLC (3i) for US$570 million (Ð'Ђ480 million). The deal also included the Ð''beta institute for socio medical research GmbH' (beta Institute), a non-profit research institute founded and funded by betapharm to conduct research on issues related to social aspects of medicine and health management. The acquisition was hailed as the biggest overseas acquisition made by an Indian pharmaceutical company.

The synergies from the acquisition were expected to benefit both DRL and betapharm. Through this acquisition DRL could get immediate access to the German generic market, the second-largest generic market in the world after the US. Germany also accounted for 66 percent of the generic market in Europe. The acquisition was expected to help DRL gain a strategic presence in the European market as the generic drug market in Europe was expected to show strong growth

Betapharm was expected to benefit from the acquisition as it would be able to add more products to its portfolio and grow at a much faster rate in Germany. Besides, the acquisition would help it to utilize DRL's global product development and marketing infrastructure to expand its presence in the European market in the long run. Though DRL was not the highest bidder, it clinched the deal largely due to the perceived synergies between the two companies. DRL's strong commitment to corporate social responsibility (CSR) initiatives too helped swing the deal in its favour as betapharm identified with such initiatives through the activities conducted by beta Institute.

However, some analysts were of the opinion that DRL had paid too much to 3i for the acquisition as the value of the acquisition was estimated to be more than three times the annual sales of betapharm. DRL, however, justified the premium price saying that the advantages from the acquisition were manifold. A few also expressed their doubts as to whether DRL could leverage any benefits in the short term as betapharm was reportedly emerging from a lean period.

A few months after the acquisition, there were already early signs of trouble, as the Economic Optimisation of Pharmaceutical Care Act (AVWG) took effect in Germany on May 1, 2006. Though the act was expected to increase the scope for the use of generic drugs, it also put some price caps in place, which affected the margins of betapharm. Analysts opined that the payback to DRL from this acquisition would take a few years longer than previously expected.

BACKGROUND NOTE

Dr. Reddy's Laboratories Limited

DRL was founded by Dr. Anji Reddy (Reddy) in 1984 in the South Indian city of Hyderabad. Reddy, who hailed from an agricultural family, had a keen interest in chemical engineering and obtained a doctorate in that discipline in 1969. He worked for a short while as a scientist with the state-owned pharmaceutical company, Indian Drugs and Pharmaceuticals Limited (IDPL), in its research and development division. Reddy was known for his entrepreneurship even before he established DRL. In fact, he was involved in founding and managing two companies, Uniloids Limited and Standard Organics Limited, during the period 1976 to 1984, prior to establishing DRL.

In 1986, DRL became a public limited company and started exporting pharmaceutical drugs in the same year. The formulations operations started in 1987 and the company obtained its first US Food and Drug Administration9 (USFDA) approval for the drug Ibuprofen. In 1988, it acquired a bulk drugs manufacturing company, Benzex Laboratories Pvt. Ltd, to boost the bulk drugs business.

During the 1980s, India was dependent on imports for its requirements of bulk drugs. However, the role played by DRL and other major Indian pharmaceutical companies helped change that. By the 1990s, India had become self-reliant in bulk drugs and the bulk drug industry had become an export-oriented sector.

The early 1990s saw DRL embark on an aggressive international expansion with its products making their way to several international markets such as Russia, Europe, and the Far East. In 1993, Dr. Reddy's Research Foundation (DRF) was established to realize the vision of the company to discover new drugs and not just rely on reverse engineering the drugs discovered by other companies. The establishment of DRF made DRL one of the few pharmaceutical companies in India to have an active drugs discovery program. In 1997, DRF achieved a major milestone when it out-licensed an anti-diabetes molecule that it had developed to Novo Nordisk AS. And it was considered as a landmark in the Indian pharmaceutical industry as it was believed to have started the evolution of Indian pharmaceutical companies from being mere imitators of drugs discovered by other companies into drug discoverers. This accomplishment also enabled DRL to realize its objective of becoming a vertically integrated global pharmaceutical company.

The company continued to grow with several acquisitions, the most important being the acquisition of Cheminor Drugs Limited in 2000 that helped the company become the third-largest pharmaceutical company in India. In 2000, Reddy US Therapeutics was established in the US to conduct target-based drug discovery. In 2001, DRL became the first Indian pharmaceutical company as well as the first Asian pharmaceutical company outside Japan to be listed on the New York Stock Exchange (NYSE). It also launched its first generic product, Ranitidine in the US market in the same year.

DRL's first overseas acquisition was that of BMS Laboratories Limited of the UK, in 2002. In the same year, DRL also acquired Meridian Healthcare of the UK. By 2005, it had consolidated its position further with two more acquisitions. DRL also entered into agreements with several companies to market or license its products and the molecules developed by it. In 2005, it announced the formation of the first Indian integrated drug development company, Perlecan Pharma. With more consolidation expected in the research-based pharmaceutical sector, it was expected that DRL, with its active drug discovery programs, might concentrate more on research and licensing of molecules, and forming alliances with other companies.

As of 2006, DRL operated in five segments: formulations, active pharmaceutical ingredients (API)