Dr. Reddy's Laboratories Ltd:Chasing a daring vision

Presented by SandeepSanjeev

SarithShailesh

SivaSoumyaSubroto

Agenda

• Milestones• Financials• Situation Analysis• BCG Matrix• Problem Statement• Alternatives• Recommended Action

Major MilestonesYear Milestone

1984 Company incorporated (DRL & CDL separately)

1989 Largest exporter of ibuprofen to US, Spain & Italy

1993 DRF started

1994 GDR issue of $48m

1997 Submits first ANDA for Ranitidine

1998 Out licenses two new molecules to Novo Nordisk

1999 Out licenses one molecule to Novartis

2000 DRL & CDL merged to from Dr. Reddy’s Group

2000 Market capitalization of $1.5 billion

2001 Listed on NYSE – $115.5m ADR issue

2002 Features on Forbes 200 list of small companies

2002 US District Court ruling in favour of Dr. Reddy’s against Pfizer.

Financials 1999 2000 2001 2002 2003

Revenues - India $ 80.09 $ 103.32 $ 121.56 $ 131.57 $ 141.06 Revenues - Overseas $ 63.48 $ 70.08 $ 117.03 $ 229.80 $ 251.77

Total Revenues $ 143.56 $ 173.40 $ 238.58 $ 361.36 $ 392.82 CAGR 29% 31% 50% 10%

Debt-Equity Ratio 1.11 1.41 1.26 0.23 0.23Return on Equity

(3.97) 6.11 14.16 31.84 18.76

EPS (0.06) 0.10 0.26 1.41 1.00

Situation Analysis

• Year Closing 2003– Revenues: $393 million– CAGR: 30% (over last 5 yrs)– Return on Equity: 19%

• Four Parallel growth units in the 1990s– Product Diversification– International expansion with branded formulation– Growth in the generics business– Building of capabilities for discovering new drugs

Situation Analysis

• By 2000, Industry leader within India in pain management, gastroenterology, and cardio-vascular.

• Building its position in neutraceuticals women’s healthcare, styptics, and dental care.

• More than 2000 stockists and 100,000 retailers in India

Situation Analysis

• Operations & Sales offices in over 60 countries• Tapped big markets of Brazil, China, Russia and

Mexico apart from US & Europe• 2002 – International Revenues dominating

domestic revenues by a factor of 2:1 1999 2000 2001 2002 2003

Revenues - Overseas $ 63.48 $ 70.08 $ 117.03 $ 229.80 $ 251.77

Total Revenues $ 143.56 $ 173.40 $ 238.58 $ 361.36 $ 392.82 Overseas % of total revenue 44.22% 40.42% 49.05% 63.59% 64.09%

Situation Analysis

• Generics– By 2001 generics represented a $40 billion market– Favorable economic policies (Waxman-Hatch Act)– Early 2003 – 11 ANDAs approved; Awaiting 23– 76% Cost advantage over the patent holder– Prices typically 60%-70% of the patented drug– Fierce competition from many companies. The

Largest being Israeli Teva and Swiss Novartis Generics

– Bioequivalence study costs $500,000 to $ 2 mn

Situation Analysis

• Bulk Actives and branded formulations– Fierce competition from Ranbaxy and Cipla– High costs of clinical trials $10 mn to $30 mn– Min 200-300 sales representatives needed– Adverse court ruling could be disastrous

Situation Analysis

• New Drug Discovery– Founded Dr. Reddy’s Research Foundation(DRF) in

1993– Developed 10-14 new drug candidates with a

budget of $10 mn– 9 NCEs covering 4 therapeutic areas: diabetes,

metabolic disorder, anti-infective and cancer– Out-licensed 2 anti-diabetic molecules to Novo

Nordisk and 1 to Novartis with high payments.

Strategic Business Units

• 7 Strategic SBUs– Bulk Actives - High Sales– Branded Formulations - High Sales– Generics - Higher Margins– Specialty - Higher Margins– Discovery - Long Term Driver– Custom Chemical Services - Emerging– Biotechnology and critical - Emerging

care

SBU Level StrategiesGenericsBulk ActivesBranded FormulationsCustom Chemical Services

Specialty

New Drug Discovery

Com

petiti

ve S

cope

Competitive AdvantageCost Uniqueness

Narr

ow

Targ

et

Bro

ad T

arg

et

BCG Matrix• US FDA approved ANDAs in the exclusivity period Generics like Prozac• New Drug Discoveries

• Diagnostics • Critical Care• Biotechnology• Specialty

• Bulk Actives• Branded Formulations• US FDA approved ANDAs after the exclusivity period• India – pain management, gastroenterology, and cardio-vascularLo

wH

igh

High Low

Busi

ness

Gro

wth

Rat

e

Market Share

Problem Statement

• How much emphasis should it place on the legacy business of active pharmaceutical ingredients and generics that have brought the company its current stature, and how much should it focus on future business like specialty pharmaceuticals and discovering new chemical entities?

• How to move up the ladder by investing into the drug discovery business and also produce year-on-year profits at the same time?

Alternatives

• Generics– By 2005 generics represented a $80 billion market– Major Driver of the Profits for Dr. Reddy’s (graph

on next page – indicates that even though other SBU’s did well in 2003, profits went down due to decline in generics)

2001 2002 2003 2005

Generic Drug Market 40000 44000 48400 88564

Dr. Reddy’s Generics Sales 4.99 98.41 93.13 ?

Market Share of Generics 0.01% 0.22% 0.19% ?

Dr. Reddy’s Gross Margins 47.74 59.94 56.62

1999 2000 2001 2002 2003 $-

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00

Branded FormulationsBulk ActivesGenerics

1999 2000 2001 2002 2003

-10

0

10

20

30

40

50

60

70

Gross MarginNet Margin

Sale

s in

Mill

ion $

Perc

en

tage

Alternatives

• Bulk Actives and branded formulations– Sales Drivers– Growth rate has not been constant – Intense competition and threat of new entrants is

high

1998 1999 2000 2001 2002 2003

Branded Formulations

$ 46.34 $ 55.96 $ 78.60 $ 116.63 $ 131.20 $ 149.13

CAGR 20.76% 40.46% 48.38% 12.49% 13.67%

Bulk Actives Sales $59.05 $ 82.17 $ 88.17 $ 108.20 $ 113.85 $137.85

CAGR 39.16% 7.30% 22.72% 5.22% 21.08%

Alternatives

• Specialty– Offer higher returns– However come at a downside with higher trial and

marketing/sales costs.– Adverse appeal could result in high amounts of

costs without returns– Current Financials do not favor much investment

into Specialty (Costs could be as much as $ 40 mn1999 2000 2001 2002 2003

Sales $ 141.389 $ 171.454 $ 238.583 $ 356.713 $ 392.822

Net Income $ -3.87 $ 6.149 $ 16.129 $ 106.979 $ 76.790

Alternatives

• New Drug Discovery– Cost Advantage with good recent results– Two R&D centers with 200 scientists– Inline with the company vision “To become a

discovery-led global pharmaceutical company”

1999 2000 2001 2002 2003

Sales $ 141.389 $ 171.454 $ 238.583 $ 356.713 $ 392.822

Net Income $ -3.87 $ 6.149 $ 16.129 $ 106.979 $ 76.790

Intangible Assets

$ 48.106 $ 72.863 $ 62.812 $ 62.292 $ 62.338

DER 1.11 1.41 1.26 0.23 0.23

Alternatives

• New Drug Discovery– Can afford to take debt as the company is low

levered– Intangible assets have been relatively constant

over the last 3 years signifying almost no new patent filings

– Can afford to invest further from the profits into new discoveries in low risk phases (small investments like $10 mn)

Recommended Action

• Short Term to Medium Term– Concentrate on Generics, Bulk Actives for the next 2-3

years as they have been the major profit drivers– With current Net Profit Levels venturing into specialty

can await– As company is low levered there is potential to take

debt and invest in the new drug discovery on similar lines of investing in pre-clinical research & other low risk phases

– Check growth of new SBUs to take appropriate strategic action of making it a star or a dog

Recommended Action

• Medium Term to Long Term– Continue with Generics, Bulk Actives strategy– Venture into Specialty after 2-3 years– Invest in other phases of drug discovery– Lookout for any successful laboratory for takeover

to gain Research knowledge/patents (Corporate Relatedness: Transferring core competencies)

– Invest into new SBUs if they turn out to be stars

THANK YOU