Dr. Reddy's Laboratories Ltd.

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Dr. Reddy's Laboratories Ltd.

7-1-27, Ameerpet
Hyderabad, Andhra Pradesh 500 016
India
Telephone: 91-40-373-1946
Fax: 91-40-373-1955
Web site: http://www.drreddys.com

Public Company
Incorporated: 1984
Employees: 5,796
Sales: Rs 18.01 billion ($391.8 million) (2003)
Stock Exchanges: Bombay New York
Ticker Symbol: RDY
NAIC: 325412 Pharmaceutical Preparation Manufacturing

Dr. Reddy's Laboratories Ltd. is one of India's leading pharmaceutical companies with global ambitions. The company has departed from the Indian pharmaceutical market mainstream of copying patented drugs to pursue the development of its own—patentable—molecules. As such, the company has already achieved success with a number of promising anti-diabetic molecules. At the same time, Dr. Reddy's is pursuing a share of the lucrative, but highly competitive, U.S. generics market, including the higher-margin "branded generic" market. Dr. Reddy's operates through several strategic business units, including: Branded Finished Dosages; Generic Finished Dosages; Bulk Actives; Custom Chemicals; Biotechnology; Diagnostics; Critical Care; and Discovery Research. A leader in its domestic market, the company is also active on the international scene, which accounted for 64 percent of the company's total sales of Rs 18 billion ($392 million) in 2003. North America contributed 32 percent of sales, while Russia added 28 percent. The rest of the company's international revenues were generated through the Asian, African, and South American markets. Dr. Reddy's is led by founder and Chairman Dr. Anji Reddy and CEO (and Reddy's son-in-law) G.V. Prasad. Dr. Reddy's Laboratories was the first Asian pharmaceutical company, excluding Japan, to list on the New York Stock Exchange.

Bulk Actives to Generics in the 1980s

In 1970, the Indian government, then led by Indira Ghandi, abrogated laws respecting international pharmaceutical patents. The move, meant to reduce the cost of providing healthcare to India's large and exceedingly poor population, had the effect of supercharging the country's pharmaceutical sector. With a long history in process chemistry, and a large and highly educated pool of scientists, the sector quickly became experts at reverse-engineering, and then copying, the drugs developed by the world's large multinationals.

The new industry quickly became one of the world's most energetic markets—by the 1990s, there were more than 20,000 companies operating in India's pharmaceuticals industry. Indian producers were able to produce drugs and their components for a fraction of the cost of their Western counterparts, and quickly found an enormous demand throughout the developing world. Yet the highly competitive domestic market, as well as the slender margins available from the copied—many would call them pirated—drugs forced the Indian companies to develop highly cost-effective manufacturing and marketing models.

Dr. Anji Reddy, the son of a well-to-do turmeric farmer in Andra Pradesh in the south of India, was one of the early entrants into the new and fast-growing market. Reddy traveled to Bombay to pursue pharmacology studies, then went on to earn a Ph.D. in chemical engineering. Reddy then went to work for state-owned pharmaceutical company IDPL. At the time IDPL had been reliant on Russian technology; yet the company quickly turned the tables, gaining expertise—and eventually providing that to Russia itself.

Reddy remained with IDPL into the early 1970s. The change of law and the rise of new opportunities in the pharmaceutical industry, however, encouraged him to set up his own business, and in the mid-1970s, Reddy founded a company for producing and selling bulk actives—the basic ingredients of drug compounds—to pharmaceutical manufacturers. Reddy's clientele soon featured a host of national and multinational companies, such as Burroughs Wellcome and others.

In the early 1980s, however, Reddy sought to aim higher and establish himself as a manufacturer of finished products. In 1984, Reddy founded Dr. Reddy's Laboratories, using $40,000 of his own, backed by a bank loan for $120,000. Reddy jumped into the market of producing copies, taking advantage of the 1970 law. As he told Forbes: "We are products of that. But for that, we wouldn't be here. It was good for the people of India, and it was good for this company."

Reddy's grew quickly, adding a large number of formulations, and achieving strong local success with its NISE range of painkillers. The company also had success with its copy of Bayer's antibiotic ciprofloxacin and, especially, with AstraZeneca's omeprazole, which, under the trade name Losec, had become the world's largest-selling drug. That drug provided fortune for Dr. Reddy's as well, as Reddy told the Financial Times: "After Astra, I think I must be the largest producer in the world."

Meanwhile, Reddy's took advantage of India's low wage and production costs to boost its production of bulk actives. By 1986, the company prepared to expand still further, and listed its stock on the Bombay exchange. In that year, also, the company began its first exports of bulk actives, including methyldopa.

The company achieved another crucial milestone in 1987 when it gained U.S. FDA approval for its ibuprofen formulation. That approval, which was coupled with the all-important FDA certification of its factory, marked the start of the company's international formulations exports.

In the meantime, Reddy's continued to develop its bulk actives business, becoming one of India's largest exporters of drug ingredients. In order to support that growth, the company made its first acquisition, of Benzex Laboratories Pvt. Ltd., a bulk actives specialist.

Risking on Research in the 1990s

By the early 1990s, Reddy's, like its Indian counterparts, boasted a wide range of "copied" drugs in its portfolio. International sales were also becoming an increasingly important part of the company's total revenues, a trend boosted by the company's entry into the Russian market in 1991. That country later grew into one of the company's primary export markets.

Reddy himself, however, by then joined by son-in-law and future CEO G.V. Prasad, recognized that continued pressure from multinational drug companies, with political backing from their domestic governments, coupled with India's desire to join the World Trade Organization, would eventually lead to the re-imposition of respect for international drug patents. At the same time, competition among Indian manufacturers—with as many as 100 companies producing knockoffs of the same drug preparation—had become increasingly heavy, making it harder to generate profits. Meanwhile, the restriction-free market in India had led to a mass exodus of the country's highly regarded researchers and scientists.

These factors led Dr. Reddy's to a dramatic strategic shift. In 1992, Reddy founded Dr. Reddy's Research Foundation and determined to lead his company through the transition from copier to pharmaceutical innovator. By 1993, the company's new research and development wing was operational, and it set to work performing "drug discovery" work in a variety of fields, including metabolic disorders, such as diabetes, and cancer treatments, among others.

Reddy's shift initially met with skepticism from the Indian community. As Reddy told the Financial Times: "I made a statement in Bangalore in 1993. I said: 'Don't think that because we don't have millions of dollars we cannot invent new drugs. Don't shy away from this.' But nobody had the conviction that an Indian company could discover anything."

Nonetheless, for its research and development effort, Reddy's adopted a standard practice among even the largest multinationals, that of developing "analogue" preparations of existing drugs. By slightly altering the composition of a molecule or preparation, Reddy would be able to present a new drug, which was sufficiently different chemically to achieve a separate patent.

The shift into research represented only one prong of Dr. Reddy's ambitions. In its determination to become a player in the global market, the company moved to end production of illegal copies and instead shift its operations to the manufacture of—legal—generic drugs. In 1994, the company placed a rights issue of $48 million in order to construct a new facility dedicated to producing generic drugs capable of meeting the legislative requirements of Western markets. The company also opened a U.S. subsidiary in New Jersey that year.

By 1995, Reddy's initial research and development efforts had already paid off, as the company filed its first patent application for a new and promising anti-diabetes formulation. The company successfully completed laboratory testing on the drug, an insulin sensitizer dubbed balaglitazone by 1997. Yet, lacking the funds to engage in its own clinical testing, the company placed the patent up for grabs, and licensed it to Novo Nordisk in 1997. This marked a first for an Indian-developed drug. The following year, Novo Nordisk acquired the license for Dr. Reddy's second insulin sensitizer, ragaglitazar.

Company Perspectives:

Our vision is to become a discovery-led global pharmaceutical company.

We will achieve this vision by building: A workplace that will attract, energise and help retain the finest talent available. An organisational culture that is relentlessly focused on the speedy translation of scientific discoveries into innovative products that make a significant difference in people's lives.

Going Global in the 21th Century

The year 1997 marked a new era for Dr. Reddy's. In that year, the U.S. FDA adopted new rules, designed to encourage the growth of the generic drugs market in the United States, which provided a six-month exclusivity period for the first company to gain approval to market newly available drugs in a generic form. Dr. Reddy's decided to get in on the action—as an estimated $60 billion of drugs was expected to outgrow their patents over the next ten years—and in 1997 the company filed an abbreviated new drug application (ANDA, used for registering a drug in its generic formula) for a generic version of the popular anti-ulcer medication Zantac.

Buoyed by its early success, Dr. Reddy's moved to expand its operations at the turn of the century. In 1999, the company made a new acquisition, buying up American Remedies Limited, based in Chennai, boosting its formulations capacity. That year, also, the company set up a research and development subsidiary, Reddy US Therapeutics, in Atlanta, Georgia, placing part of its drug discovery effort closer to the U.S. market.

In 2000, the company made another important acquisition, this time of Cheminor Drugs Limited, which enabled Dr. Reddy's to claim the number three spot among Indian pharmaceutical companies. That year, the company launched the commercial distribution of its first generics in the United States. Back home, the company's research efforts had paid off with the filing of an Investigational New Drug Application for an anti-cancer molecule developed in the company's labs.

Dr. Reddy's global ambitions now took it to the New York Stock Exchange, where the company listed its stock in 2001, becoming the first Asian pharmaceutical company outside of Japan to do so. The company clearly revealed its ambitions, as Reddy told Business Week: "We want to be a truly innovative company discovering and marketing drugs the world over." That year, the company scored a new success in its research activities, licensing a second-generation anti-diabetic molecule to Novartis in a deal worth some $55 million. Meanwhile, on the generics front, the company was lifted when its application for a 40mg generic version of the popular anti-depressive Prozac was awarded a 180-day exclusivity period. That period generated some $56 million—nearly all profit—for the company.

By 2002, the Indian government had agreed to re-introduce patent enforcement in the pharmaceutical industry, starting in 2005. Although some observers questioned whether the company would maintain the political will to enforce the new rules, Dr. Reddy's emerged as one of only a handful of Indian companies capable of independent research. Indeed, the company had continued to build up its research capacity. In 2001, it had created a new subsidiary, Aurigene Discovery Technologies, dedicated to the biotechnology sector.

The year 2002 also marked the company's first overseas acquisition, when it paid £9 million to acquire the United Kingdom's BMS Laboratories Ltd. and its marketing and distribution subsidiary Meridian Healthcare Ltd. That purchase enabled the company to expand into the U.K.—and ultimately European—generics market.

At the end of 2002, Dr. Reddy's scored a new victory in the U.S. market, when it successfully defeated lawsuits lobbied by Pfizer to prevent the Indian company's marketing of its own variant of the pharmaceutical giant's Novasc. The company then began preparations to introduce its version of the drug in 2003. Yet the new compound was expected to mark a new step for the company, as it became determined to enter the higher-margin branded generics category.

Dr. Reddy's backed this change in strategy with a new portfolio of drugs, including the filing of an ANDA for fexofenadine HCI (better known as Allegra, from Aventis) in April 2003. In July of that year, the company scored a new victory when it was granted tentative FDA approval to develop and market generic versions of the Bristol Myers Squibb drug Serzone. Dr. Reddy's appeared well on its way to achieving its goal of becoming a global pharmaceutical company.

Key Dates:

1984:: Dr. Anji Reddy founds Dr. Reddy's Laboratories, based on a bulk actives business he had founded in the 1970s, in order to extend into the production of drug formulations.
1986:: Dr. Reddy's goes public on the Bombay stock exchange.
1988:: The company acquires Benzex Laboratories in order to expand the bulk actives business.
1992:: Dr. Reddy's Research Foundation is founded as part of the strategy to enter drug development.
1994:: The company opens a subsidiary in the United States.
1995:: The company files its first patent for an in-house developed drug.
1999:: The company acquires American Remedies Ltd.
2000:: The company acquires Cheminor Drugs Limited and becomes the third largest Indian drug company.
2001:: The company lists shares on the New York Stock Exchange; a new research and development facility opens in Atlanta, Georgia.
2002:: The company acquires BMS Laboratories Ltd. and its marketing and distribution subsidiary Meridian Healthcare Ltd. in the United Kingdom.
2003:: The company gains tentative approval to market generic versions of Serzone, developed by Bristol Myers Squibb.

Principal Subsidiaries

Aurantis Farmaceutica Ltda (Brazil; 50%); Aurigene Discovery Technologies Inc. (U.S.A.); Aurigene Discovery Technologies Limited; Cheminor Drugs Limited; Compact Electric Limited; Dr. Reddy's Exports Limited (22%); Dr. Reddy's Farmaceutica Do Brazil Ltda.; Dr. Reddy's Laboratories (EU) Limited (U.K.); Dr. Reddy's Laboratories (Proprietary) (South Africa); Dr. Reddy's Laboratories (UK) Limited; Dr. Reddy's Laboratories Inc. (U.S.A.); DRL Investments Limited India; Kunshan Rotam Reddy Pharmaceutical Co. Limited (China; 51%); OOO JV Reddy Biomed Limited (Russia); Pathnet India Private Limited (49%); Reddy Antilles N.V. (Antilles); Reddy Cheminor S.A. (France); Reddy Netherlands B.V.; Reddy Pharmaceuticals Hong Kong Limited; Reddy Pharmaceuticals Singapore; Reddy US Therapeutics Inc.; Zenovus Biotech Limited.

Principal Competitors

RPG Enterprises; GlaxoSmithKline Consumer Healthcare Ltd.; East India Pharmaceutical Works Ltd.; Cipla Ltd.; Concept Pharmaceuticals Ltd.; Khandelwal Laboratories Ltd.; Dabur India Ltd.