Analyses a hypothetical scenario of the acquisition of Venus remedies by Dr. Reddy's Laba

1. Dr. Reddy’s Lab acquisition of
Venus Remedies Ltd.
Group 13
Hitesh Garg (13P078)
Nikhil Gambhir (13P091)
Gopesh Nakra (13P104)
Group 14
Samarth Kagdiyal (13P041)
Shreyans Gangwal (13P047)
Apratim Saha(13P066)
Shashank Mishra (13P110)
Erika Di Diego (14CBS01)

2. Indian Pharma Sector Overview

3.  Rising household income levels
 Increasing Prevalence of lifestyle related diseases: Rapid growth of chronic segments
 Improving healthcare infrastructure/delivery systems
 Wave of patent expiries: Growth for generics players in developed markets such as the US
 Rising penetration in smaller towns and rural areas
Growth Drivers:
Challenges:
 Competitive pressures on domestic market as MNCs become aggressive in pricing policies
 Price controls exerted under National Pharmaceutical Pricing Policy impacts top line of
pharmaceutical companies
 Crowded generics space leads to increasing competition for Indian generics companies
 Indian pharma market: valued at US$12 billion and accounts for 1.4% of global pharma industry
 With 72% market share, generic drugs forms the largest segment
 Market is highly fragmented with top ten companies accounting for around 35% of the market
 Expected to expand at CAGR of 24% to reach US$ 55 billion by 2020
0
50
100
2005 2013 2020F
Revenue($bn)
72%
19%
9%
Revenue Share
Generic
OTC
Patented
Indian Pharmaceutical industry:

4. • Founded in 1984, based in Hyderabad
• Family controlled business
• Manufactures and markets a wide range of
pharmaceuticals in India and overseas
• 2012 revenue was $2 billion
• Vertically integrated business with 3 segments
– Pharma Services & Active Ingredients
– Global Generics (80% of the revenue)
– Proprietary Products
Business Description Strong revenue growth over the last decade
Source: Dr. Reddy’s Investor Presentation November 2014
28% revenue growth
during 2008-13 in
the emerging
markets

5. Venus Remedies Ltd.
• Incorporated in 1989, Chandigarh-
based
• Presence in 60 countries and
covering more than 75 products
• Contract manufacturer of
Oncological and Cefalosporine
products
• Focus on R&D and IP generation
• Invested 12% of sales in R&D in
FY14
• Strong R&D focus on high growth
anti microbial resistance and
Oncology segments

6. Oncology
• High unmet needs and product
revenue potential
• Worldwide sales of $78 bn in 2012,
expected to reach $110 billion by
2018
• Price of cancer drugs has risen
from an average of $5000 per
month to $10,000 per month
• Biosimilar market has not yet fully
materialized
• China and India show untapped
potential as the disease population
outpaces the treated population
Source: http://www.pharmexec.com

7. Strategic Rationale
Strengthen Oncology
Segment
Cost Synergies
FDA approved
Manufacturing Centers
Improved Competitive
Position
 Dr. Reddy’s will be able to strengthen its expertise in the oncology
segment as a part of their generic business (oncology being a key
offering in all major geographies
 The strong drug pipeline & previous ANDA approvals of Venus are
positive for the growth in this sector
 Overlap between many geographies will lead to significant cost
savings in Sales & Marketing Work Force expense
 US, Russia, CIS & South Africa being some
 The cGMP compliant facilities will draw further draw synergies from
combined manufacturing of other generics
 Further cost synergies are probable due to Dr. Reddy being a
vertically integrated firm
 Reddy will be able to have a slice of the pie of the profits of itskey
competitor Teva Pharma in the US, which accounts for more than half
of the revenues

8. Relative Valuation
Sector
Market
Cap.
P/E P/B P/Sales EV/EBITDA
52 week
low/high
Elder Pharmaceuticals Ltd. Cephalosporin 356.93 130.68 0.46 1.78 3.5 162.5/349.3
RPG Life Sciences Oncology 152.96 NA 1.87 2.70 15.4 44.6/134.35
Kopran Ltd.
Cephalosporin
and oncology
235.08 15.28 2.21 3.03 11.2 18.25/72.65
Arvind Remedies
Cephalosporin
227.88 3.65 0.82 0.78 3.0 30/66.2
AVERAGE 49.87 1.34 0.51 8.28
Value of the firm
(in Rs cr.)
Value Per Share
(Rs.) Total Value (30% Control Premium)
P/B 813 713.15 927.10
P/Sales 530.9 465.65 605.35
EV/EBITDA 884.4 775.80 1008.54
Current Market Cap. – Rs. 271.86 cr Current Share Price – Rs. 237.60

9. Deal structuring Potential organization Acquirer's objective
Acquisition Vehicle
Corporate or divisional
structure
Maximizing control
Facilitating postclosing
integration
Post-Closing Organization
Corporate or divisional
structure
Integrate target
immediately Centralize
control in parent Facilitate
future funding
Form of Payment Cash and Debt No EPS dilution
Form of Acquisition
Cash Purchase of stock
• Complete right on
intellectual property
Deal Structuring
Additional benefits of aforementioned deal structuring
• No target shareholder approval required
• Enables circumvention of target’s board in hostile tender offer
• May insulate from target liabilities if kept as subsidiary

10. • Related to deal structuring
• Difficulty in cost synergies in various divisions in divisional structure
• Form of payment (cash and debt)
• Immediate tax liabilities for seller
• Increases leverage of Dr. Reddy’s Labs
• Form of Acquisition (Cash Purchase of stock)
• Union and employee benefit agreement do not terminate
• No asset write-up
• Responsibilities for known and unknown liabilities
• Other Problems
• Possible Dilution of EPS post acquisition
• More leverage post acquisition
Problems in Acquisition

11. Appendix
Venus Remedies – Balance Sheet

12. Appendix
Dr Reddys Laboratories - Balance Sheet

13. Thank You