Dr. Reddy's Laboratories (RDY)

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In 2007, Dr. Reddy's Laboratories (RDY) became the number one pharmaceutical company in India in terms of profitability. ^[1] In the past, the company generated most of its income from branded drugs, but in 2006, it reached an agreement with Merck to sell the generic version of Zocor, a $4 billion drug. In the last two years, Dr. Reddy's has expanded its generic program through other acquisitions and through research. As a result, its generic sales in 2007 were around $750 million overall, more than half of its total revenues.

Dr. Reddy's is also pursuing growth in the relatively untapped biogenerics market. At the beginning of 2008, the company already produced and sold 2 different biogenerics in India and had plans to add one drug per year over the next 8 years. ^[2] It is well ahead of competitors in terms of building the expensive infrastructure necessary to produce these types of drugs. Dr. Reddy's is a major seller in Europe, the US & Canada, and is a dominant player in Russian and Indian markets where it has faced limited competition in the past. Going forward however, the company will face greater competition from companies like Mylan and Barr Pharmaceuticals (BRL) which have made acquisitions in recent years (2006/2007) that have expanded their presence in international markets.

[edit] Business Financials

Total revenue in 2007 was about $1.5 billion, making Dr. Reddy's one of the top 5 generic manufacturers by revenue. Prior to 2006, split fairly evenly between "formulations" (branded, proprietary drugs) and Active pharmaceutical ingredients (API)'s, each with nearly 40% of sales, and generics with only about 17%.^[3] Dr. Reddy's produces branded products to treat cancer, diabetes, cardiovascular disease, inflammation and bacterial infection, all major growth categories in terms of demand for medications. The company is very vertically integrated; it uses many of the API's in its branded products.

Company Annual Reports^[4]

Company Annual Reports^[5]

[edit] Key Trends and Forces

• Major growth of generics as branded companies fight back: Dr. Reddy’s experienced massive growth in its generic sales from 2006 to 2007. At the end of 2006, generic products accounted for about 4 billion rupees of Dr. Reddy’s sales, and by 2007, this number was 33 billion rupees.^[6] The reason for the surge in growth was Dr. Reddy’s agreement with Merck beginning in January 2006 which gave Dr. Reddy’s the right to produce Merck’s blockbuster drugs Proscar and Zocor if another company successfully challenged Merck’s patent.^[7] Zocor had 2006 sales of around $4 billion, and the year it went off-patent, Dr. Reddy captured 55% of the generic sales, accounting for a huge jump in revenue for the company. Dr. Reddy's is the benefactor of a new trend in branded pharmaceutical companies approaching smaller generic manufacturers and offering the formulations to its drugs in case they are challenged. Generic companies have an incentive to challenge patents because if successful, they are awarded 190 days of exclusivity. To eliminate this lucrative incentive, companies such as Merck preempt the sale, and the result is that the challenger does not gets less of a benefit. In this case, it received only 45% of the generic market for Zocor instead of 100%.

• Acquisitions provide additional growth and expansion opportunities:In addition to its agreement with Merck, Dr. Reddy’s acquired three off-patent products from PDL Biopharma for only Rs.127 million. This acquisition allowed Dr. Reddy’s to immediately begin selling PDL Biopharma’s products through its existing sales and marketing networks. Finally, in March of 2006, Dr. Reddy’s acquired beta Holding GmbH from 3i Group PLC (betapharm) which allowed it to enter the German market, an otherwise very difficult market to enter given government regulations. ^[8]

• Aggressive expansion with low costs: At the end of March, 2007, Dr. Reddy's had 69 Abbreviated New Drug Applications (ANDA) pending approval in the US. This is the application that allows a company to start manufacturing and selling a generic version of a pharmaceutical. This number of ANDA's is very large given Dr. Reddy's fairly new entry into the major generics market. It is larger than Mylan's 65, and Barr's 60, and close to Watson's 70In 2008, Dr. Reddy's has 37 product approvals and 10 tentative approvals from the [[FDA approval of drugs|US FDA], and so it can begin or continue to sell the 37 products but must wait for approval of the others.^[9] .

• Dr. Reddy's low cost advantage Indian chemists are paid multiples less than in the US and Europe, and even the executives take a proportionally smaller salary. This cost savings allows Dr. Reddy to compete more affectively on price and makes entering already saturated markets more feasible.

• Movement into “Generic Drugs (Biogenerics and Biosimilars) ” ahead of the competition: Dr. Reddy’s is in the process of expanding into a relatively new area of bio generics. At the end of 2007, it produced and sold 2 different biogenerics in India, and is building the facilities to expand its capabilities. Biotech drugs are pharmaceuticals produced in cells. The technology is about 10-15 years old, and 2015 to 2020 many of the original drugs will come off patent. There are few FDA regulations on generics for biotech drugs, and so they would be very easy to produce and sell quickly. The problem, however, is that the fermentation tanks and other infrastructure necessary to manufacture biotechs takes a long time to produce.^[10] Dr. Reddy’s has jumped far in front of other competitors, such as Mylan and Barr in creating the infrastructure.

• Dr. Reddy's faces increased competition in international markets: Prior to 2006, Dr. Reddy's benefited from a broader geographical reach than its competitors Mylan Laboratories (MYL) and Barr Pharmaceuticals (BRL). It also faced only limited competition in Russia and remains the dominant player in the Indian pharmaceutical market. Not even Merck (MRK)'s Sandoz or Teva Pharmaceutical Industries (TEVA) the largest generics companies had a presence in India. Dr. Reddy built its broad international presence by acquiring companies that already have access to target markets. The acquisition of betapharm, for instance, allowed RDY to enter the German market was a big step, as this market has entries to barrier due to government regulation^[11] Starting in 2007, however, competition in several markets, including Europe and India intensified. Mylan Laboratories (MYL)\Mylan's acquisition of Matrix in India and Merck (MRK)'s generic subsidiary increaseed its geographical reach significantly. Barr has also made acquisitions from 2005 to 2007 that increase its international base.

[edit] Competition

Dr. Reddy's is facing increasing competition both around the world and in India. Mylan Laboratories (MYL) has begun expanding internationally, and in 2006 the company made its first foray into the Indian market. Teva and Novartis' generic business, Sandoz, are already major global players in Dr. Reddy's two biggest markets, Europe and the US. Both of these companies are able to compete effectively on price, which Dr. Reddy's has a unique advantage in given the cost of labor in India. Dr. Reddy's margins on generics are as high as 70% which is unheard of for many companies, but it does not have the breadth and distribution channels of the largest companies.

Dr. Reddy's faces competition both from generic and brand name drug producers. Some of its top competitors include:

• Mylan Laboratories (MYL) is the third largest generic producer in the US. Mylan also owns subsidiaries that produce proprietary drugs and hospital packages.
• Barr Pharmaceuticals (BRL): is a split generic/brand manufacturer with about 75% of its sales in generics. Its main product line is contraceptives, and it is dominant in this market.
• Sandoz, a generic division of Novartis AG (NVS). Sandoz's major therapeutic areas include antibiotics, preparations for treating the central nervous system, cardiovascular, hormones and antiallergics.
• Teva Pharmaceutical Industries (TEVA). Teva Pharmaceuticals USA is one of the largest producers of generic drugs. Its products include therapeutic areas such as anti-infective, cardiovascular, oncology, dermatological and anti-inflammatory.

[edit] References

1. ↑ Key Milestones, Dr. Reddy's US Website
2. ↑ Brian Orelli. “Leading the Pack of Follow-On Drug Makers.” The Motley Fool, June 25, 2007
3. ↑ Dr. Reddy’s 2007 20-F pg. 16
4. ↑ Dr. Reddy’s 2007 20-F pg. 15
5. ↑ Dr. Reddy’s 2007 20-F pg. 15
6. ↑ Dr. Reddy’s 2007 20-F pg. 16
7. ↑ Dr. Reddy’s 2007 20-F pg. 26
8. ↑ Dr. Reddy’s 2007 20-F pg. 26
9. ↑ Dr. Reddy’s 2007 20-F pg. 25
10. ↑ Brian Orelli. “Leading the Pack of Follow-On Drug Makers.” The Motley Fool, June 25, 2007
11. ↑ Dr. Reddy’s 2007 20-F pg. 26
12. ↑ Dr. Reddy's 2007 20-F
13. ↑ Mylan 2007 10-K
14. ↑ Novartis 2007 20-F
15. ↑ Teva 2007 20-F
16. ↑ Dr. Reddy's 2007 20-F pg. 16
17. ↑ Mylan 2007 10-K pg. 31
18. ↑ Teva 2007 20-F pg. 3
19. ↑ Barr 2007 10-K pg. 45
20. ↑ Novartis 2007 20-F pg. 90