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

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Case Details:

Case Code : BSTR249
Case Length : 19 Pages
Period : 2002 - 2006
Pub Date : 2007
Teaching Note : Available
Organization : Dr. Reddy's Laboratories Ltd.
Industry : Pharmaceutical
Countries : Germany, Europe, India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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DRL Gains a Foothold in Europe Contd...

Its extensive and well-recognized corporate social responsibility activities perfectly fit with our successful corporate philosophy and business model. We see Dr. Reddy's as our partner of choice to build a successful joint future and continue betapharm's growth and success story."⁶ 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 favor as betapharm identified with such initiatives through the activities conducted by beta Institut.

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. Their argument was strengthened by the fact that another Indian pharmaceutical major, Ranbaxy Laboratories Limited⁷ (Ranbaxy), which had also aggressively competed for the acquisition and was a pre-sale favorite to bag the betapharm deal, pulled out at the last minute quoting the high price. 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. It was reported that DRL, which had plans for more acquisitions in Europe after the betapharm acquisition, had shelved its plans of any further acquisitions in Europe.⁸

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...

Excerpts >>

6] "3i sells betapharm to India Based Dr. Reddy's Labs," www.3i.com, February 16, 2006.

7] Ranbaxy Laboratories Ltd., based in New Delhi, India, is the largest pharmaceutical company in India. Established in 1961, Ranbaxy now exports its products to over 70 countries with ground operations in 25 countries and manufacturing facilities in seven countries including the US. For the year ended December 31, 2005, its global revenues were US$ 1,178 million.

8] C Chitti Pantulu, "Reddy's Faces betapharm Blip," www.dnaindia.com, October 9, 2006.