The betapharm Acquisition: DRL's Inorganic Growth Strategy in Europe
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Case Code: BSTR249 Case Length: 19 Pages Period: 2002 - 2006 Pub Date: 2007 Teaching Note: Available |
Price: Rs.500 Organization: Dr. Reddy's Laboratories Ltd. Industry: Pharmaceutical Countries: Germany, Europe, India Themes: Business Strategy, Strategic Management, Mergers and Acquisitions |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
DRL's Acquisition of betapharm
When 3i put betapharm up for sale in 2005, it attracted the interest of several major pharmaceutical companies around the world, including the world's biggest generic drugs manufacturer, Teva Pharmaceutical Industries Limited. Several reasons were attributed for this interest. The most important factors were betapharm's strong marketing infrastructure and instant access to the German generic market, which many experts believed was very difficult to develop through organic growth. The good value offered by betapharm played a major part in attracting potential buyers. Schuler said on the attractiveness of betapharm to potential buyers, "We have substantially built value by complementing many of business functions such as procurement, finance, and controlling and business development.
All that has led to an independent company with a unique positioning representing a clear gateway to German market, which is the second-largest generics market in the world. This has really sparked a lot of trade interest from the players all around the world, particularly from India..."...
Benefits of the Acquisition
The main benefit to DRL from the acquisition was getting an immediate presence in the German generic market and the scope of leveraging this presence to expand in the European market.
Analysts said that DRL acquired this presence without any major liabilities as betapharm was considered a profitable company that was consistently growing at a healthy rate and had a well-planned future products introduction program. Satish Reddy, MD and COO of DRL, explained, "We looked at its turnover and profitability. betapharm has 3.5 per cent market share in Germany; as many as 370 employees, of which there is a strong sales field force of 200; and 145 brands, with a clear launch calendar until 2009. If we had to do all this from scratch, the cost would be prohibitively high... The acquisition was a market entry strategy for us." Niedermaier said that the betapharm acquisition was in line with DRL's ambitious global plans.
He said, "Our business was ideally designed for the German market with its peculiarities, whether it is the healthcare system, product distribution, or communication design. This is our strength. The charm of this combination is that Dr. Reddy's did not have a presence in Germany... Despite its population shrinking, the German healthcare market remains an important one...
A Risky Acquisition?
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. On May 1, 2006, the Economic Optimisation of Pharmaceutical Care Act (AVWG) took effect in Germany.
This act changed the pricing and reimbursement system in Germany. Though this act increased the scope of using generic drugs, there was also pressure on generic drug companies to reduce their prices. An analyst at a leading securities company commented, "Price cuts on generics in Germany have ranged between 20-30% at a time when the overall European pharma market itself has remained stagnant"...
Exhibits
Exhibit I: Major Markets for Generics in Europe
Exhibit II: DRL's Overseas Acquisitions
Exhibit III: DRL's Revenue Mix by Region
Exhibit IV: DRL's Transactions with Foreign Companies in Research
Exhibit V: DRL's Value Pyramid
Exhibit VI: A Brief Note on DRL's CSR Initiatives
Exhibit VII: DRL's Income Statement
Exhibit VIII: DRL's Balance Sheet
Exhibit IX: betapharm's Product Portfolio
Exhibit X: Top Four Generic Drugs Companies in Germany
Exhibit XI: Key Figures for betapharm
Exhibit XII: A Note on the Generic Pharmaceutical Sector in Europe and its attractiveness to Indian Pharmaceutical Companies
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