Dr. Reddy’s Laboratories Ltd : Chasing A Daring Vision

U113190 Aniroodh GaneriwalaU113191 Arjun AgrawalU113192 Ashish R Jena U113193 Guneet Singh

U113194 Bhabani S Lenka U113195 Avinash Kumar U113196 Bibhu Prasad

U113197 Chiranjeeb Mohanty U113198 Chitrali Nag

Introduction & Briefing

• Dr Reddy’s Laboratories is a global pharmaceutical company based out in Hyderabad.

• Dr. Reddy's Laboratories develops and manufactures branded and unbranded generic drugs and bulk pharmaceutical ingredients. Its stable of products includes ulcer medicines (branded product Omez is a leading seller ), antibiotics, antidepressants (generic version of Eli Lilly's Prozac), pain relievers, diabetes treatments, and cardiovascular drugs. Dr. Reddy's

• Dr. Reddy's Laboratories also makes generic biotech products

Introduction & Briefing contd…

• Its custom pharmaceutical services unit provides contract discovery, development, and manufacturing services to other drug makers

• The firm sells its products in more than 100 countries through direct sales entities and third-party distribution partners.

• Its total sales in year ending March 2013 was $2,127.7 mn.• The growth is 14.6% year-wise (2012-13 data)• In the same period its net income was $307.9 mn and income

growth was 12.1%

Industry Classification

Pharma

Bulk Drugs (API) Contract Research Formulations

Patented Generics

Generic generics

Branded generics

Confidential | Copyright © Larsen & Toubro Infotech Ltd. 5

Industry Analysis – Porters 5 Forces Model SUPPLIER POWER Low to Moderate• High no of suppliers• At times, use of single supplier as sole source for

particular material• Delay in supplying materials hampers their ability to

deliver products

BUYER POWER Moderate to High• For generics and OTC drugs its high• Need to keep buyer’s satisfied otherwise will risk to

lose to competitors• For some of the patented and Life saving drugs

buyer power will be moderate

BARRIERS TO ENTRYModerate to High• High no. Of legal procedures and

licences• High capital requirement for mfg,

supply chain & R&D• Low success ratio in R&D• Patent issues• Barriers are moderate in case of

generics as R&D expenses are low• Exports require high regulatory

clearances

THREAT OF SUBSTITUTES AND COMPLEMENTS

Moderate to High• For R&D intensive drugs threat

is moderate• For generics and off patent

drugs threat is very high• Alternative medicines like

auyrveda, Unani posing threat

COMPETITIONVery High – Generics , Very Low - R&D Intensive• High competition across companies for generics • Very less differentiation points in generics• Price discounting and margin pressures in

generics• For patented drugs it acts almost as monopoly

5

STRATEGIC GROUPS IN THE INDIAN PHARMA INDUSTRY

Applied R & D Basic R & D

Local Branding

Global Branding

CIPLA

Torrent

NOVO NORDISK

Glaxo Smithkline

SANOFI-AVENTIS

DR. REDDY’S LAB

RANBAXY

Generics

International Formulation

Domestic Formulation

TORRENT

CIPLA

Generics Overview

• Major players – Sun Pharma, Ranbaxy, Dr Reddy’s, Cadilla, Cipla

• India to become 10th largest market by 2015 with market size of US$ 20 bn

~ US$50bn

~ US$90bn

Increasing Genericisation Value of Drugs going off patent US$bnUS$bn

Generics Continued

• Key growth drivers– Significant patents expires through 2011– Government priority to rationalize healthcare

costs– Cost Competitiveness

• Key Challenges– Foreign currency fluctuations– Increasing costs and cost of capital

New Drug Discovery and Product Development Process

SWOT Analysis of Dr. Reddy’s

Strengths• Partnerships with key players in the

market keeps its cost base down• Research Driven & Global

Weaknesses• Over-reliance on partnerships• Lack of resources similar to US and

Europe based competitors to develop a drug to marketing

Opportunities• Take a drug all the way to market• Take a molecule from its pipeline all

the way to the market place cost-effectively market

• Increase domestic footprint in generics

Threats• Needs to gain FDA approval for all

sources and products• Products have to pass strict FDA

trials before going to market, which can be costly and time consuming

DRL

BUSINESS

synergies

Active

Pharmaceutical

Ingredients (APIs)

Drug discovery research

Dr.

Reddy’s Research Foundation (DRF)

Discovery research

facility for R&D deptt.s of other drug discovery

companies

Branded Generics

DRL’s Strategic Goals

Global Pharmaceutical

company

Integrated global mid sized

pharmaceutical company

Diversified emerging generics & specialty company

Longer Term (6-7 years)

Mid Term (3-6 years)

Today

Financial Analysis

• Company has a very high current ratio, which indicates good liquidity position. However it also indicates that the company is not using current assets efficiently .• Capital gearing is decreasing over the years , which shows the cautiousness of the company . •Dividend pay out ratio also has come down over years , which may not be good for financial prospects of the company .•The company is sitting on a huge pile of cash of $158 million , which can be invested otherwise to get long term(expansion) as well as short term(current investment) benefits for the company.•The R&D expenditure at 7.6% of revenue falls short of global standard of 12-16% and addition of new patents has also come down from high of 18.3% of revenue.•Company needs to allocate more and more resources to R&D to position itself as a drug discovery Pharma company and also to give cover from TRIPS .

1999 2000 2001 2002 2003Current ratio 1.13 1.02 1.18 5.03 4.87Debt equity ratio 1.11 1.41 1.26 0.23 0.23Debt equity ratio(long term debt) 0.182 0.250 0.191 0.003 0.002net margin -2.74 3.59 6.76 29.99 19.55return on equity -3.97 6.11 14.16 31.84 18.76Dividend payout ratio - 49.0% 18.0% 11.4% 5.5%Cash inflow 3005 -1707 100660 47044Net addition of intangibles 31386 435 10083 9164Net addition as % of Revenue - 18.31% 0.18% 2.83% 2.33%R&D as % of revenue 4.06% 4.45% 4.64% 4.52% 7.61%

Microsoft Office Excel Worksheet

Dr. Reddy’s Dilemmas

• How can we be imitator [in the generics business] and an innovator [in the discovery business] at the same time?

• How can we be forge out licensing alliances with large pharmaceutical companies [in the drug discovery business] and at the same time challenge their patents around the world [in the specialty and generics businesses]?

Paper: On Choices of Innovation Strategy of Chinese Pharmaceutical Enterprises from Perspective of ‘Wise Pig Game’ - Shuzhen Chu, Zhijun Han -Economics &

Management School, Nanjing University of Science and Technology

• Concept of Imitated Innovation - Pharmaceutical enterprises should insist on the combination of imitation and innovation, and aim at manufacturing products with “higher technologies, better curative effects, higher added values, and new forms”, and decreasing the costs of products. Emphasize the high-tech research and the new-form research of imitated medicine, which can consume less material and possess higher quality, being safe and effective.

• How to do it?• Construct a perfect information management system and obtain useful

information timely and rightly. Building an information system for technological research and development that can help to collect information from relevant researching programs, institutions and relevant regulations, laws, and patent materials in other countries that can collect, process, analyze, transfer, and communicate information and an effective feedback mechanism for evaluation of innovation, what can provide with information support for the whole process of enterprises’ technological innovation.

• Deal with the relationship between imitation and copy properly. Pharmaceutical enterprises’ imitated innovation is to absorb others’ successful experiences and lessons by learning from their innovative thoughts and activities, introduce and interpret the core technologies and technological secrets, and make improvement.

• Merge and purchase is a main way for cooperative innovation. In the long run, the cooperation after pharmaceutical enterprises’ merge and purchase will undoubtedly inspire innovation. – Horizontally merge and purchase: Economy of scale i.e. a decrease of

production cost and a increase of return per unit in certain enterprise due to enlarging production scale

– Vertically merge and purchase. Enterprises in one merge and purchase action locate in different stages of production and circulation. They connect with each other by materials’ production, supply, processing, and sale.

– Mixed merge and purchase

Recent Trends in Pharma Industry & Dr Reddy’s

Contribution:• Indian pharma has experienced a boom and it has reached

$20bn in 2013 from $6bn in 2005.• It is expected to grow to $55bn by 2020 (McKinsey&Co report)• It is growing at the compounded rate of 14% per annum.• But recently Indian pharma industry is grappled with quality

issue and US FDA has imposed several restrictions on import of Indian drugs.

• Increasing recalls, warning letters and import alerts to manufacturing facilities of domestic drug makers have raised concerns about the manufacturing practices followed by Indian companies.

• US FDA imposed ban on Dr Reddy’s Mexico plant in 2011, after FDA chastised the plant for failing to validate API testing method and hygiene issue, which was alter lifted after a year.

• Post this, DR Reddy’s has never faced any issue and is growing at a phenomenal rate of 26% YOY (2012-13 data).

• Dr Reddy’s (66.86 bn INR) has already surpassed Ranbaxy (63.03 bn INR) and has become the 2nd largest Indian Pharma company after Cipla (Net sales=69.77 bn INR).

• By 2020, it is expected to be the number one Indian pharma company.

Dr Reddy’s Infrastructure & Capabilities :

Pharma services & Active ingredients

• 6- FDA approved plants in India

• 1 Cytotoxic facility• 1 Plant in mexico• 1 FDA approved plant

in Mirfield, UK• 4 Technology

Development Centres ( 2 in Hyderabad, 1 in Cambridge, and 1 in Leiden, Netherlands

Global Generics

• 7 Formulations plants in India (US FDA inspected)

• 2 FDA inspected plants in USA

Product Development

• Integrated product development capabilities that include API development, Formulations development and analytical development skills.

• One integrated Product Development facility in Hyderabad, India.

New Chemical Entities (NCEs)

• Research in the areas of metabolic, cardiovascular, anti-bacterials, and pain & inflammation.

Biologies

• Biological development centre

• GMP production

• E coli and mammalian cell platforms

Plan

• To set up R&D centre at New Jersey, USA

• GSK-Dr Reddy’s alliance to register their 1st product in the EU in 2014