Corporate Bridge Excelling beyond excellence Dr. Reddy’s Laboratories Acquires Cipla A Merger Deal Overview Corporate Bridge Research Proposed Merger Analysis Consists of • M&A Deal Overview with Comparisons of Financials and summary. • Industry Analysis of the Domestic Indian Pharmaceutical Sector with drivers of growth. • Share Price Comparisons of Dr. Reddy’s and Cipla with peer group industries. • Share Price Performances of Cipla and Dr. Reddy’s with relevant price-volume charts. • Deal structures including sources and uses of funds, proposed transaction debt obligations. • Post merger analysis consisting of accretion/dilution analysis and synergies • Valuation analysis and relevant synergies • Credentials
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Corporate Bridge E x c e l l i n g b e y o n d e x c e l l e n c e
Dr. Reddy’s Laboratories Acquires Cipla
A Merger Deal Overview
Corporate Bridge Research
Proposed Merger Analysis Consists of • M&A Deal Overview with
Comparisons of Financials and summary.
• Industry Analysis of the Domestic Indian Pharmaceutical Sector with drivers of growth.
• Share Price Comparisons of Dr. Reddy’s and Cipla with peer group industries.
• Share Price Performances of Cipla and Dr. Reddy’s with relevant price-volume charts.
• Deal structures including sources and uses of funds, proposed transaction debt obligations.
• Post merger analysis consisting of accretion/dilution analysis and synergies
• Valuation analysis and relevant synergies
• Credentials
Corporate Bridge E x c e l l i n g b e y o n d e x c e l l e n c e
Deal Overview
Purchase Price
Total Deal Size (INR MM) Rs. 3,01,883
Total Deal Size (USD Billion, At 1USD=50INR) 6.04 Implied Price Per share Rs. 375.98 Resulting Ownership of Cipla by Dr. Reddy's Laboratories 100% Transaction fees (INR MM) 1,555.0 Exchange ratio 0.23x Cap Rs. 445.83 Accounting Issues Form Purchase Accounting Consideration 50% Stock & 50% Cash Number of shares issued (MM) 90.93
Source Corporate Bridge – India Pharma Domestic Sector review
• The Indian Domestic Sector is fragmented with many small and mid level firms with significant market shares.
• The years 2008 to 2011 has seen many mergers and acquisitions with relatively high valuations for the Indian firms
• Availability of cheap labor, favorable demographics of the Indian population and 100% FDI policy coupled with relatively less stringent government regulations make the sector attractive for investments in the form of M&A
Corporate Bridge E x c e l l i n g b e y o n d e x c e l l e n c e
Drivers of Growth
Industry Analysis
23.1%
46.9%
23.8%
68.4%
47.2%
11.8%
29.4%
0 2 4 6 8 10
Mental Health
diabetes
cancer
CardiovascularDiseases
COPD andAsthma
Injuries-deaths
No. ofHospitalizations
Hundreds
2015F
2005
Burden of Diseases in India, Non-Communicable diseases in Lakhs, % change 2005 to2015
61 48
39 31
39 52
61 69
1995 2005E 2015F 2025F
Necessities Discretionary
Share of average Household Income Spent %,In Thousands, INR
60 82 140 248
1,516
1,708
1,940
2,198
2005-06 2006-07 2007-08 2008-09
Expenditure Trends on Healthcare
in India
INR millions
Public Expenditure Private Expenditure
0.84% 0.84%
0.88%
0.93%
2005-06 2006-07 2007-08 2008-09
Government Expenditure on Healthcare
% GDP
Source Corporate Bridge – India Pharma Domestic Sector review
• Presence of strong growth drivers will sustain the Indian domestic Pharma sector with a CAGR of 15%
• In this scenario consolidation and use of economies of scale via mergers is a good strategy to gain strong fundamentals in the rather fragmented Indian Market
• India is also poised to be the R&D hub in the next few years with all major multinationals like Pfizer, Daichii Sankyo, Johnson & Johnson, Merck, Glaxosmithkline and Bayer each having back end manufacturing presence in India.
Corporate Bridge E x c e l l i n g b e y o n d e x c e l l e n c e
Cipla
Cipla Key Financials
Income statement INR MM 2011 2012E 2013E
Net Sales 61,303.1 70,498.6 81,073.3
% Growth 15% 15%
Gross Profit 33,832.5 38,774.2 44,590.3
% Growth 15% 15%
EBITDA 14,268.3 18,329.6 21,079.1
% Growth 28% 15%
EBIT 11,747.6 15,580.1 17,743.0
% Growth 33% 14%
Pretax Income 11,645.7 15,054.8 17,145.8
% Growth 29% 14%
Net Income 8,993.5 11,291.1 14,493.6
% Growth 26% 28%
Balance Sheet INR MM 2011 2012E 2013E
Total Current Assets 46,599.3 53,390.4 61,294.0
Total Assets 86,302.4 99,593.1 1,14,773.5
Total Current Liabilities 11,790.9 14,160.8 16,284.9
Total Liabilities 19,641.0 23,246.6 25,539.4
Total Equity 66,661.3 76,346.4 89,234.0
A Brief Description of Cipla
The Chemical, Industrial & Pharmaceutical Laboratories , which came to be known as Cipla, was set up by Late Khwaja Abdul Hamied in 1935.The founder’s son now heads the company.
Cipla Manufactures approximately 5500 pharmaceutical products with over half exported in about 170 countries
Cipla has 8 manufacturing facilities in India, with the latest Indore SEZ plant starting commercial production in 2010
Cipla holds the highest market share in the Indian Domestic Pharma market with 5.72% share
36.8 33.3
29.8 63.1
Promoters Public Institutions Public Non-institutional
Share Holding Pattern Cipla, % of Shares
• Cipla Ltd is a limited Pharmaceutical company listed in India.
• It is a generic player with a strong exports base and a steady income growth over the past few years.
• It holds the largest market share in the fragmented Indian market with a 5.72% share.
Name Position
Y. Hamied Managing Director
M. Hamied Executive Director
S. Radhakrishnan Whole-time Director
Ranjan Pai
Non-Executive Directors
V. Kotwal
H. Manchanda
Pankaj Patel
M. Raghavan
Ramesh Shroff
Company Profile
Corporate Bridge E x c e l l i n g b e y o n d e x c e l l e n c e
Cipla Business Overview
Cipla Revenue Break Up
FY12
46.5% 43.0%
10.5%
53.5%
Domestic Exports - Formulations
Exports - APIs & others
Cipla International Business Break Up
FY12
24%
40%
13% 6%
17%
Americas Africa Australasia Middleeast
Europe Total
3,438
4,010
4,961 5,360
6,130
7,050
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
- 4
,00
0.0
8,0
00
.0
FY07 FY08 FY09 FY10 FY11 FY12E
Net Sales EBIT Net Sales Growth Rate
Cipla Historical Growth INR crores
Rs. 4
Rs. 6
Rs. 8
Rs. 10
Rs. 12
Rs. 14
Rs. 16
0%
5%
10%
15%
20%
25%
FY07 FY08 FY09 FY10 FY11 FY12E
RoAE % Net Profit Margin EPS
Cipla Stakeholder Returns
• Cipla has seen positive growth signs for the year 2012.
• It has been expected to grow at a steady rate of 15% in the near future, which is also the industry CAGR.
• Cipla’s export business is slated to grow on the back of a weaker rupee and strong production capacity addition from the Indore SEZ plant.
Company Profile
Corporate Bridge E x c e l l i n g b e y o n d e x c e l l e n c e
Dr. Reddy’s Laboratories Company Profile
Dr. Reddy's Laboratories
Income statement 2011 2012E 2013E
Net Sales 72,368.0 93,973.9 1,08,045.0
% Growth 30% 15%
Gross Profit 49,419.0 62,022.8 71,309.7
% Growth 26% 15%
EBITDA 15,950.0 20,538.0 24,029.5
% Growth 29% 17%
EBIT 12,500.0 15,682.5 17,407.6
% Growth 25% 11%
Pretax Income 12,359.0 15,358.5 17,117.7
% Growth 24% 11%
Net Income 10,520.0 12,357.2 13,764.3
% Growth 17% 11% Balance Sheet 2011 2012E 2013E
Total Current Assets 47,517.0 51,877.8 57,705.5
Total Assets 88,650.0 99,202.4 1,11,128.3
Total Current Liabilities 23,628.0 28,124.8 32,718.5
Total Liabilities 48,332.0 48,087.8 47,940.5
Total Equity 71,960.0 76,212.6 80,659.0
A Brief Description of Dr. Reddy’s Laboratories
Dr. Reddy’s Laboratories was started in 1984 by Dr. K Anji Reddy.
Dr. Reddy’s currently has 18 manufacturing facilities with 15 in India, 2 in USA and 1 in Mexico
Dr. Reddy’s ranks second by market share in the Indian Domestic market after Cipla
Dr. Reddy’s is an integrated Pharma company dealing on three segments viz. Pharmaceutical APIs, Global generics and Proprietary Products
Currently employs 15000 people across 25 nations including USA and Russia.
25.61
40.85
16.73
16.81
57.58
Promoters Public Institutions
Public Non-institutional Shares held by Custodians
Share Holding Pattern Dr. Reddy’s, % of Shares
Company Profile
• Dr. Reddy’s is an Indian Pharma manufacturer.
• It is one of the few Indian companies listed in the New York stock exchange.
• Along with Ranbaxy it is a key player in the Global Generic business
• Dr. Reddy’s has had a history of inorganic growth via acquisitions and mergers from it’s inception.
• Dr. Reddy’s Laboratories has been one of the very few firms that has forayed into the high margin patent products, it has a dedicated segment called proprietary products
Corporate Bridge E x c e l l i n g b e y o n d e x c e l l e n c e
Dr. Reddy’s Business Profile
17.8%
31.0% 14.9%
21.7%
14.5%
India
North America
Russia and otherCIS countries
Europe
Others
Dr. Reddy's Sales by Geographies FY12 INR MM
Dr. Reddy's Sales by segments FY12
29%
69%
1% 2%
PharmaceuticalServices and
ActiveIngredients
Global Generics ProprietaryProducts
Others Total
6,435
4,914
6,790 6,852 7,237
9,335
-30%
0%
30%
60%
05
00
01
00
00
2007 2008 2009 2010 2011 2012ENet Sales Net Income
Net sales Growth
Dr. Reddy’s Historical Growth INR Lakhs
Rs. 0
Rs. 30
Rs. 60
Rs. 90
0%
5%
10%
15%
20%
25%
2007 2008 2009 2010 2011 2012E
RoACE (%) % PAT Margin EPS (Rs)
Cipla Stakeholder Returns
Company Profile • Dr. Reddy’s Laboratories has
strong growth prospects going into FY12 and has been projected to grow at a CAGR of 16%.
• Although it’s North American and European sales have been volatile, the company has projected strong fundamental growth in various markets like Russia and Asia.
• The proposed merger will make the combined entity one of the big players in Global generics
Corporate Bridge E x c e l l i n g b e y o n d e x c e l l e n c e
Share Prices have been steady
Share Price Performances
60
70
80
90
100
110
120
130
140
150
01-Apr-11 01-Aug-11 01-Dec-11 01-Apr-12
Share Price Comparisons Base 100, April 2011 to May 2012
BSE30 Sensex Cipla Dr. Reddy's SUN Pharma Lupin
Cipla announces Q4FY12 results which were lower than analyst expectations
Analyst Reviews CIPLA
1-5 Linear Scale Current
(1) BUY 13
(2) OUTPERFORM 13
(3) HOLD 11
(4) UNDERPERFORM 2
(5) SELL 1
No Opinion 0
Mean Rating 2.12
Source Reuters.com/IndiaMarkets
Analyst Consensus Dr. Reddy's
1-5 Linear Scale Current
(1) BUY 19
(2) OUTPERFORM 11
(3) HOLD 8
(4) UNDERPERFORM 2
(5) SELL 2
No Opinion 0
Mean Rating 1.98
Dr. Reddy’s announces the Launch of Darbepoitein alfa under brand name Cresp
Cipla slashes Anti-cancer drug Nevexar prices by 75%, analysts predict outcome akin to Anti-HIV drug price slashes in 2001
Takeda Pharmaceuticals in preliminary talks with Cipla and Lupin for a possible buy out
Corporate Bridge E x c e l l i n g b e y o n d e x c e l l e n c e
Share Price Comparisons: Cipla & Dr. Reddy's Base 100, April-2007 to May-2012
Cipla Dr. Reddy's mean BSE30 Sensex
Dr. Reddy’s announces strategic partnership with Merck to develop new anti-cancer drugs
Cipla Ltd receives demand notices from the Government for Rs. 424.64 crores for overcharging drugs
Dr. Reddy’s announces Q1FY10 Results PAT growth of 120%, Revenue Growth 21%
Dr. Reddy’s expands portfolio in Russia and CIS countries by in-licensing deals
Rupee Appreciation hurts exports of Indian Pharma companies
Low export demands results in lower than expected income growth
Cipla announces Q4FY10 results exports growth at only 5%
• Dr. Reddy’s has seen more volatility in revenues because of its high proportion of exports of which Europe and North America form a significant share
• Cipla has been insulated since its exports are only 50% of its production but has witnessed lower growth in exports.
• The Pharma industry hurt by the strong rupee of 2007 has posted big gains after 2010.
• On the back of a weaker rupee and gradual demand recovery in the US after Sub-Prime crisis the Pharma sector will post strong growth
Source BSE Website
Corporate Bridge E x c e l l i n g b e y o n d e x c e l l e n c e
Price Volume Charts
-
4,000.0
8,000.0
12,000.0
16,000.0
-
100.0
200.0
300.0
400.0
01-Apr-11 01-Aug-11 01-Dec-11 01-Apr-12
Cipla
volumetraded
WAP
-
4,000.0
8,000.0
12,000.0
16,000.0
-
500.0
1,000.0
1,500.0
2,000.0
01-Apr-11 01-Aug-11 01-Dec-11 01-Apr-12
Dr. Reddy’s
Volumetraded
WAP
• Cipla has been more actively traded than Dr. Reddy’s at the BSE since the high price range of Dr. Reddy’s makes it inaccessible for potential investors
• Comparatively both companies have maintained a stable price range over the period analyzed
Share Price Comparisons
Source BSE Website
Corporate Bridge E x c e l l i n g b e y o n d e x c e l l e n c e
Dr. Reddy’s vs Cipla Financial Snapshot
Financials in INR millions 2011 2012E 2013E 2014E 2015E
Corporate Bridge E x c e l l i n g b e y o n d e x c e l l e n c e
Break Even Synergies
Break even Synergies for EPS neutral transaction INR MM
2012E 4,411.0
2013E 8,732.8
2014E 7,297.8
2015E 5,671.1
Synergy Analysis
P/E Analysis of Dr. Reddy's Laboratories after merger
FY12 in INR
Market Premium
Equity Financing
23.154 0% 10% 20% 30% 40% 50%
0% 22.52x 22.52x 22.52x 22.52x 22.52x 22.52x
25% 22.13x 22.53x 22.94x 23.34x 23.75x 24.15x
50% 21.87x 22.55x 23.22x 23.90x 24.57x 25.25x
75% 21.68x 22.55x 23.42x 24.29x 25.16x 26.03x
100% 21.54x 22.56x 23.58x 24.59x 25.61x 26.63x
Synergies from
• 8 FDA approved manufacturing facilities of Cipla combined with 18 of Dr. Reddy’s
• Lowering of material costs and overall manufacturing costs since these make up a considerable percentage of COGS
• Better position on Patent and intellectual rights protection of the product portfolio
• Market penetration with Cipla’s range of Anti-retrovirals and Anti cancer drugs
• Strong R&D prospects of the combined entity
Top Brands
Dr. Reddy’s Cipla
Omez Asthal
Stamlo Seroflo
Ketorol Viraday
Reditux Ciplox
Nise Norflox
Exifine Novamox
Cetrine
Triomune
• Without the consideration of synergies the transaction becomes dilutive and the break even synergies have been computed
• Cipla and Dr. Reddy’s do not possess significantly overlapping product portfolios
• The Combined entity will benefit from a relatively broad range portfolio
Corporate Bridge E x c e l l i n g b e y o n d e x c e l l e n c e
Corporate Bridge Research Consultants
Credentials
Corporate Bridge Academy B WING, 104, MANGALAYA, OFF MAROL MAROSHI ROAD, BEHIND SANGEET PLAZA, ANDHERI EAST, MUMBAI - 400 059 (MH)
Merger Analysis Completed on 8th June 2012 Analyst:- Amit Nayak IMT, Ghaziabad Under the able guidance of Project Guide: Dheeraj Vaidya Director, Corporate Bridge Research Consultants