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Dr.Reddy’s: Betapharm benefits! - Views on News from Equitymaster
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Dr.Reddy’s: Betapharm benefits!
Feb 16, 2006

After weeks of speculation on who is likely to acquire Betapharm, Germany’s fourth largest generic company, Dr.Reddy’s sealed the deal by announcing the acquisition today. Dr.Reddy’s has acquired Betapharm from the owner 3iGroup (world leader in private equity and venture capital) for a total enterprise value of 480 m euros (around Rs 25 bn) in cash. In this article, we shall analyse how this acquisition is likely to benefit Dr.Reddy’s. About Betapharm
Betapharm is currently the fourth largest generics company in Germany with a market share of 3.5%. The company markets high quality generic drugs with focus on long-term therapy products with high prescription rates. Betapharm’s current portfolio comprises about 145 products and it had a gross turnover of 164 m euros in 2005.

Betapharm's product folio
Therapeutic area % of total portfolio
Cardiovascular 62.2%
CNS 16.7%
Gastro & Metabolism 10.7%
Anti-infectives 5.4%
Others 5.0%
*Source: Betapharm

About Dr.Reddy’s
Dr. Reddy's Laboratories is a leading pharmaceutical company in the country, having a presence across the pharmaceutical value chain - basic research, finished dosages, generics, bulk actives, biotechnology and diagnostics. The company was the first from India to get an Exclusive Marketing Right (EMR) in the US market for Fluoxetine Axetil. Active Pharmaceutical ingredients (API's) constituted 39% of the company's business in 9mFY06. Formulations business is another big contributor to revenues (47%). The generics business in regulated markets formed 11% of total revenues in 9mFY06. The rest came from diagnostic, critical care and biotechnology businesses. In 2005, the company formed India’s first integrated drug research company Perlecan Pharma for the purpose of conducting clinical trials on its NCE assets.

Dr.Reddy's: Geographical view (FY05)
Region % of sales
India 34.8%
North America 22.6%
Russia and CIS 12.5%
Europe 14.9%
Rest of the world 15.1%

Consolidation to be a key driver in the global generics space The global generics market has become extremely competitive with the entry of a large number of players leading to brutal price erosion. In this environment, companies are looking to consolidate to acquire scale, gain access to a larger portfolio of products and strengthen reach in the global markets. In the global generics arena, the top two behemoths Teva (revenues to the tune of US$ 7 bn) and Sandoz (generic arm of Novartis with revenues to the tune of US$ 6 bn) dominate the scene. The gap between these two players and the rest of the generic companies has considerably widened, highlighting the uneven competition and also indicating that there is enough room for the other generic companies to grow. The mid-size generic companies globally will thus have to either follow the inorganic route to acquire scale or probably run the risk of being potential acquisition targets themselves.

What’s in the deal for Dr.Reddy’s?
As mentioned earlier, Dr.Reddy’s has acquired Betapharm for a consideration of 480 m euros, implying a price to sales ratio of 2.9. The transaction will be funded using a combination of Dr. Reddy's internal cash reserves and committed credit facilities. The CY05 revenues of Betapharm stood at 164 m euros (around Rs 8.5 bn), which translate into 47% of Dr.Reddy’s FY05 sales of Rs 18.3 bn. After the consolidation, Dr.Reddy’s total revenues will be around Rs 27 bn (approx US$ 0.6 bn). Since other details are unavailable, we will not be able to give a perspective in terms of margins and the impact on the bottomline.

Having said that, the acquisition will give Dr.Reddy’s access to a wide range of products, especially in the lifestyle segment, which is currently the fastest growing segment. More importantly, it will strengthen Dr.Reddy’s presence in the European region (especially Germany). Europe currently contributes around 15% to sales. It must be noted that currently Germany is the third largest pharma market in the world (US$ 29 bn) and has a generic penetration of around 31%.

Top generic companies in Germany
Rank Company No.of products Sales (m euros)
MAT Sep 2005
1 Ratiopharm 312 1,079
2 Hexal 299 1,077
3 Stadapharm 225 303
4 Betapharm 149 177
5 Sandoz 155 151
*Source: Betapharm

What to expect?
At the current price of Rs 1,250, the stock is trading at a price to earnings multiple of 51.9 times our estimated FY08 numbers (without considering Betapharm). The company has come back strongly in the current fiscal so far, after a tough and challenging FY05. The partnership with ICICI Venture has reaped benefits, which has consequently eased the pressure on the company. The considerable drop in R&D expenditure is testimonial to the fact. The company, besides investing in high-risk Para IV filings, is also focusing on relatively less risky Para III filings, which is a positive. Besides this, the company is planning to make significant strides in the speciality segment, which have higher margins. Custom manufacturing is also a focus segment. As far as the latter is concerned, Dr. Reddy’s recently acquired Roche’s contract manufacturing facility in Mexico to scale up this business. As far as the generics market is concerned, the company has planned to launch a minimum of six products in FY07.

Dr. Reddy’s also formed ‘Perlecan Pharma Pvt. Ltd’ by roping in ICICI Venture and Citigroup Venture Capital. The formation of this company will be beneficial to the company in the sense that it will mitigate the risks and costs associated with clinical development of the molecules, consequently leading to an improvement in its margins going forward. Therefore, we are positive about the growth prospects of the company from a long-term perspective. After a strong 9mFY06 performance, we will have to upgrade our numbers.

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