3i brokers betapharm deal with Dr. Reddy's

3i has sold its stake in German generic pharmaceutical company betapharm Arzneimittel GmbH to Indian Dr. Reddy's Laboratories Ltd in a deal worth €480m.

A leader in the generics market Betapharm markets high-quality generic drugs focusing on long-term therapy products with high prescription rates. Located in Augsburg, Germany, betapharm currently employs about 370 people including a sales force of 250. Founded in 1993, betapharm is the fourth largest generics company in Germany with a market share of approximately 4%. The company portfolio of 145 treatments targets cardiovascular, central nervous system, gastrointestinal and inflammatory conditions.

Building trust
3i first invested €110m in the company in March 2004. Bernie Schuler, a partner in 3i’s European buyouts business, had tracked the sector for a long period of time and was able to win the confidence of the management team and vendors. Most importantly, he was able to win the trust of the company’s owners, Andreas and Thomas Strengmann. Schuler explains: “This was a principal to principal deal where I spent a considerable amount of time talking to the  Strengmann family. In a deal of this kind you have to build up rapport with the owners because they are not familiar with the world of private equity and do not make decisions based solely on financial rationale. We were able to build a relationship based on trust and proceed on that basis.” Schuler has led the transaction on behalf of 3i and subsequently managed the asset as a non executive director on the board of the company until exit.

Value creation
Until 2004, betapharm had been a sales and marketing subsidiary of its parent company, Hexal. In essence it was 3i’s plan to create a fully fledged pharmaceutical business representing a unique gateway to the second largest generics market in the world. Due to the interdependence with Hexal, 3i and management had to create a new organisation with its own business development, supply management, financial services and inventory and logistics management in addition to its existing superior marketing and sales expertise. This required a detailed postmerger integration plan. At the time of the investment, betapharm was strengthening its market position by completing its product range of existing generic drugs. It was also increasing the number of new product launches of drugs with expiring patents. Germany has one of the highest levels of use for patent-free drugs in Europe and new healthcare reforms are encouraging greater use of generic products to help control healthcare spending.

Aside from securing the supply of actual products from Hexal, betapharm had to create its own pipeline by forging partnerships with independent drug companies. These businesses, which are often based in Asia, produce generic drugs and obtain regulatory approval. Typically these companies get several marketing authorisations that they can sell on to third parties such as betapharm. As a non-executive director Schuler worked with the board to set up the  new pipeline. He made trips around the world to help initiate partnerships with other companies and supported the set up of a department at betapharm devoted to business development. He explains: “During my time with the company we visited many companies to initiate partnership deals and engaged with Hexal to secure a continued, high quality product supply at a competitive cost level.” The implementation of our post merger integration plan also required new  resources. 3i introduced Thomas Nedtwig to the firm as CFO. A member of 3i’s People Programme,

Nedtwig set up a finance department from scratch and installed SAP, an Enterprise Resource Management software solution. Thanks to his input, betapharm’s management team can keep track of the company’s performance and get regular financial updates. 3i also managed the company’s succession plan following the retirement of Peter Walter as CEO. It found a new CEO – Dr Wolfgang Niedermaier – which it presented to the board. A former head of generics at Heumann, Pfizer’s German subsidiary, Niedermaier has implemented a cohesive corporate structure and improved interdepartmental communication at betapharm according to the post merger integration plan set by the board.

Timing the exit
While betapharm’s excellent performance has enabled it to achieve its milestones sooner than planned the consolidation in the industry also progressed more rapidly than originally envisaged. The company’s performance has not gone by unnoticed and 3i received substantial interest from potential tradebuyers. The eventual sale to Dr Reddy’s was also initiated by 3i. Schuler met Dr Reddy’s on one of his business trips to India and started discussions with the company’s CEO and CFO. “Just like our investment in betapharm, the sale to Dr Reddy’s was a principal to principal deal,” says Schuler. “Dr Reddy’s is still a family-owned company and was keen to enter the European market. Nevertheless it lacked the experience of a larger international acquisition and subsequent integration. Betapharm also had its own concerns about merging with Dr Reddy’s. By working directly with the principals we were able to eliminate those fears, build trust between the two companies, and show how the deal would add value to both businesses. It was important for us to find a suitable partner for the next stage of betapharm’s development” Dr Wolfgang Niedermaier, CEO, betapharm, said: “Under its ownership 3i created the conditions and the entrepreneurial environment to unlock betapharm’s entire potential and leverage its capabilities for dynamic growth.”

For more information about betapharm, visit: www.betapharm.de