Dr. Reddy’s Lab acquisition of Venus Remedies Ltd.

Group 13

Hitesh Garg (13P078)

Nikhil Gambhir (13P091)

Gopesh Nakra (13P104)

Group 14Samarth Kagdiyal (13P041)Shreyans Gangwal (13P047)

Apratim Saha(13P066)Shashank Mishra (13P110)Erika Di Diego (14CBS01)

Indian Pharma Sector Overview

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:

• 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

Venus Remedies Ltd.

• Incorporated in 1989, Chandigarh-based

• Presence in 60 countries and covering more than 75 products

• Contract manufacturer of Oncological and Cefalosporineproducts

• 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

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

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 itskeycompetitor Teva Pharma in the US, which accounts for more than half of the revenues

Relative Valuation

SectorMarket Cap.

P/E P/B P/Sales EV/EBITDA52 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 RemediesCephalosporin

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

Deal structuring Potential organization Acquirer's objective

Acquisition VehicleCorporate or divisional

structure

Maximizing controlFacilitating postclosing

integration

Post-Closing OrganizationCorporate or divisional

structure

Integrate target immediately Centralize

control in parent Facilitate future funding

Form of Payment Cash and Debt No EPS dilution

Form of AcquisitionCash 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

• 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

Appendix

Venus Remedies – Balance Sheet

Appendix

Dr Reddys Laboratories - Balance Sheet

Thank You