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Premium member Presentation Transcript EVALUATION OF A AcQUISiTION: A CASE STUDY : EVALUATION OF A AcQUISiTION: A CASE STUDY BY: SHWETA SINGH MBA – IB 3RD SEM THE DEAL(February 15, 2006) : THE DEAL(February 15, 2006) THE DEAL : THE DEAL The sale deal also included the 'beta institute for sociomedical 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 deal was through a definitive agreement with 3i, the private equity house that controls Betapharm, to acquire 100 per cent equity of the German drug major. The acquisition was hailed as the biggest overseas acquisition made by an Indian pharmaceutical company. In terms of value , it’s the fourth largest deal among the top ten deals globally. BETA PHARM : BETA PHARM 4th largest generics co. in Germany 3.5 % share of German Pharma Market Gross turnover of €164 million “Beta” Brand Employs 370 people Excellent relationships with customer groups Leader in Corporate Social Responsibility It markets high-quality generic drugs It is the fastest growing generic company over the past five years in Germany's top-10 with a strong track record of successful product launches. DR REDDDY LABORATORY : DR REDDDY LABORATORY India’s second-largest pharmaceutical company Produces and sells API, Finished Dosages and Biologics Markets its products in approximately 100 countries Revenue of eur 452 million. Employs over 7500 personnel 1st pharma co from Asia (ex Japan) to be listed on NYSE 1st Indian pharma co to out license an original molecule More details : More details Top-10 brands in India Omez Nise Stamlo Stamlo Beta Enam Atocor Razo Reclimet Clamp Mintop Earlier deals of DRL : Earlier deals of DRL BENEFITS TO DRL : BENEFITS TO DRL DRL will get immediate access to the generic market of Germany. 66% of generic market in Europe is held by Germany. DRL will gain strategic presence in EU.Will help DRL to realize its aim of becoming $1 billion mid seized company by 2008. There was not much liability linked to this acquisition, as the Betapharm was growing constantly and had a well planned future. DRL could also increase its product portfolio. Slide 9: The Betapharm didn’t have any manufacturing units, so it would allow for seamless integration with DRL. Betapharm had a strong marketing infrastructure (distribution channels are well established with doctors, pharmacists, etc.). DRL can reduce its dependence on US market. Betapharm can be used as a vehicle to launch DRL’s products in Germany BENEFITS TO BETAPHARM : BENEFITS TO BETAPHARM Will be able to increase its product portfolio and grow faster in Germany. Can use DRL’s marketing infrastructure and global product development to expand its presence. DRL provided competitive manufacturing costs, which will help it develop its position in Germany. DRL has well known Corporate Social Responsibility initiatives, so Betapharm can continue with its corporate philosophies Stock market conditions on the day of deal : Stock market conditions on the day of deal The company's stock recorded the year's highest price on both the BSE and NSE. It closed at Rs 1,281.95 on the BSE and at Rs 1,280.65 on the NSE with over four-lakh shares changing hands on the BSE and nearly 11-lakh shares trading on the NSE. The scrip gained Rs 109.90 on the BSE and Rs 108.75 on the NSE. In what was seen as India Inc’s first major M&A in pharma sector.The stock closed a whopping 9.3 % up on the news. Synergy : Synergy Distribution Highly fragmented market and Unorganized sector Reduce the efforts needed to establish (Identification, Promotion, Incentives) Reduce General & Administrative cost Manufacturing The manufacturing cost in India is 50% less than the global average Source Betapharm’s business from India to reduce the COGS Pipeline R&D costs can be reduced considerably (around 35%) Number of products launched per year would increase Synergy : Synergy Branding Brand Beta Global Presence Presence Entry into Germany Central & Eastern Europe Size DRL was able to reach the $1Billion size due to this acquisition Leverage its generic business to grow in Drug discovery VALUATION : VALUATION At the time of acquisition Betapharm was highly profitable, with estimated EBITDA margin of 24-26%. With assumptions and available industry data, NPV valuation of betapharm and arrived at a value of €550-560 million (or Rs 380-400 per share) assuming WACC of 12% and a sustainable growth rate of 5%. The payback period was likely to be 6-7 years - ICICI Securities. Analysts expected the betapharm acquisition to add $ 200 million to Dr Reddy's topline immediately and the company's shares jumped 9.38 percent to hit its 52-week high price on the Bombay Stock Exchange - Wednesday, March 15, 2006 Valuation - Summary : Valuation - Summary Financing : Financing The transaction was funded using a combination of the company's internal cash reserves and committed credit facilities CRITICS : CRITICS Some analysts opined that DRL had taken a big gamble by acquiring betapharm. The acquisition had resulted in the depletion of DRL's cash reserves and made the company incur a large debt. This could be risky, especially in the context of DRL's declining sales in the US generic market and the litigation costs it was incurring in the US. Further, DRL's domestic market in India was viewed as not being large enough to generate enough profits that would compensate for the decline in revenues from the US generic market and the litigation costs. Therefore, any problem in the German market could have a considerable impact on DRL's bottom line. COMPARISON OF INCOME : COMPARISON OF INCOME Income shows an increase of 1.86 times of 2006 in 2007 . 1.62 times of 2006 value in 2008. 1.96 times of 2006 in 2009. Clearly an increase in income in all the years. COMPARISON OF SALES : COMPARISON OF SALES Increasing trend. Nearly doubled in 2007 and 2009. Approx 2.5 times that of 2003. COMPARISON OF TOTAL FIXED ASSETS : COMPARISON OF TOTAL FIXED ASSETS Increasing in a linear manner over the years. Almost double in 2009 than that of 2006. COMPARISON OF PBDITA/TOTAL SALES . : COMPARISON OF PBDITA/TOTAL SALES . Shows a marked increase in 2007 as compared to base year and a higher value than 2003. Presently this value is around 20% . Some effect of recession is seen in 2008. COMPARISON OF PBDTA/TOTAL SALES . : COMPARISON OF PBDTA/TOTAL SALES . Shows a marked increase in 2007 as compared to base year and a higher value than 2003. Presently this value is around 20% . Some effect of recession is seen in 2008. COMPARISON OF PAT/ TOTAL SALES : COMPARISON OF PAT/ TOTAL SALES Presently this value is around 12%- 13% . Some effect of recession is seen in 2008. COMPARISON OF CASH PROFIT : COMPARISON OF CASH PROFIT Value in 2007= 4.15 times of value in 2006 Value in 2009= 2.5 times of value in 2006 Value in 2009= 1.7 times of value in 2003 COMPARISON OF RONW : COMPARISON OF RONW Presently around 10 %. Value was high in 2007 and has declined thereafter. COMPARISON OF ROCE : COMPARISON OF ROCE Presently around 10 %. High value in 2007 and then a decline. Comparison Of Net cash flow from operating activities (indirect method) : Comparison Of Net cash flow from operating activities (indirect method) Net cash flows have increased manifold from 2006. All the three years after the deal show higher value than before the deal took place. COMPARISON OF EPS : COMPARISON OF EPS Values were at peak in 2002 and 2007. This follows an irregular trend. ANALYSIS : ANALYSIS EXTERNAL FACTORS Lack of demand in Germany Strict regulations against outsourcing Currency Fluctuations Delay in approval of Betapharm products in pipeline No product approval for DRL's product manufactured in India Present Scenario Betapharm contributing INR 2.6 bn. New launches seem to have helped Betapharm improve its performance compared to that in Q1 ( 20 more in pipeline) It was impacted due to price cuts (upto 20%) and stock adjustments. Fierce competitive bidding from various generic companies has increased the acquisition cost for DRL and extended the payback period. CONCLUSION : CONCLUSION Over all , taking all the values into consideration this deal can not be judged as very successful. Sales, assets , cash flows and income show an increase however PBDITA , PAT , EPS , ROCE , RONW show an irregular trend This was an overpriced deal , the effects of which were seen in 2008 and 2009 . However it is on recovery track in 2010. REFRENCES : REFRENCES Prowess databse. Icmr case studies. Dr reddy laboratories website Thank You : Thank You You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.