Dr. Reddy’s Rejuvenation
Image: Gireesh GV for Forbes India
t Dr. Reddy’s Laboratories factory in Bachupally on the outskirts of Hyderabad, a lot of green cover is giving way to brick and mortar. A Leadership Academy — with a large 300-seater Harvard-like classroom, multiple conference rooms, a board room and residential quarters — is getting finishing touches. A steel and glass structure coming up nearby will house the biologics facility, the fulcrum of future growth. Later this year, the company will move its headquarters to Banjara Hills, where the city’s rich and influential live. It won’t be difficult to assume India’s No.5 drug maker is firing on all cylinders. In fact, the company’s stock was among the best performers in the stock market last year,
For a company that posted a huge loss just 18 months ago — an after-effect of an expensive acquisition gone wrong in Europe — it is a turnaround of sorts. In 2009, the company lost more than 50 percent of the money it made in the preceding five years. It was no longer among the top 10 players in the domestic market, having failed to quickly launch new drugs compared to Mumbai-based Cipla and Sun Pharmaceuticals. Coming months after the sell-off of India’s largest domestic company Ranbaxy to Japanese firm Dai-ichi Sankyo, Dr. Reddy’s predicament seemed to foretell a bad prognosis for the domestic pharmaceutical sector.
But all that is in the past. Dr. Reddy’s, which had vied with Ranbaxy India’s drug market sweepstakes in the heady days before the 2008 crisis, is making a comeback: It has launched a sustained effort to rationalise costs, eliminated unviable markets and stepped up new product launches. Revenues and profits have been climbing and a new thrust on biogenerics is taking shape. And it is feeling like the old days again.
Dr. Reddy’s renewed charge signals a new hope for the domestic drug industry. In recent times, the government has been considering new regulations for foreign direct investment (FDI) in domestic pharma companies. Mumbai-based Piramal and the Singh brothers of Delhi-based Ranbaxy Laboratories sold their businesses citing an exploding investment opportunity in sectors like real estate and finance, implying that the growth phase for the pharma industry was over. But Dr. Reddy’s resurgence is proof that there is a lot of steam left in the local market. G.V. Prasad, vice chairman and CEO of Dr. Reddy’s, says, “The entire premise of Indian companies being a globally competitive generic player is not going away in a hurry.”
In scripting the turnaround, Satish, MD and CEO, and Prasad have been benefiting from each other’s strengths. Prasad, who drives a Mercedes, exemplifies the conservative German car — he is considered the ‘thinker’. Satish Reddy who cruises in the sporty BMW is the ‘executor’. Together, they have infused a healthy dose of realism into a company that had aggressively pursued growth and spread itself too thin until the day the crisis hit.
In 2006, at a time when Indian corporates were making mega acquisitions, Dr. Reddy’s acquired German generic drug maker Betapharm for $560 million. Despite reports that the German government was about to change regulations to force down prices of drugs, Dr. Reddy’s took a risky bet, out-bidding competitors like Ranbaxy in a hotly contested battle. The new regulations, which came after the takeover, said that generic drugs could be sold only on a tender basis rather than as branded products as it was done till then.
Two years after the acquisition, Dr. Reddy’s was forced to write down nearly half its investment in losses. It had a reported over $1.5 billion in sales in 2007 and $220 million in profits; it posted a loss of $200 million in 2009. Reddy says, “The lessons from the wrong acquisition forced us to re-think everything we knew about running
As a business strategy, the deal did make sense. The German market was the second largest generic market after the US. Often patents for drugs expired much ahead of the expiry date in the US. The margins in the German market were also better. Like in India, generics could be branded and detailed to doctors through medical representatives.
But by late 2007, it was evident that the acquisition had been a blooper. “We have no one to blame for the deal but ourselves,” admits Reddy. He and Prasad made a call — instead of putting their efforts in merely fixing the acquisition, they decided to overhaul everything they did. And they began taking the hard decisions.
They re-looked at everything from overall costs, to supply chain, the geographical spread and the way management time was being used in the company. Everything was taken a hard look at. Satish says, “It made us realise that we were cost competitive but not cost conscious.” Prasad adds, “It is a lesson that we should be present in the market when we are committing such a large investment.”