Dr. Reddy’s LabsDr. Reddy’s Labs

CASECASE

ANALYSISANALYSIS

COMPANY’SCOMPANY’S

SNAPSHOTSNAPSHOT

Patent Expirations - TrendsPatent Expirations - Trends

New drug discovery and development New drug discovery and development processprocess

DRL’s strategic goalsDRL’s strategic goals

(API)(API)

M/S Cheminor Drugs M/S Cheminor Drugs Ltd.Ltd.

19841984

DRL’s strategic goalsDRL’s strategic goals cont…cont…

DRL Revenues (By Product line)DRL Revenues (By Product line)

DRL Revenues (By Region)DRL Revenues (By Region)

DRL Strategy Overview by DRL Strategy Overview by DivisionDivision

DRL Strategy Overview by DRL Strategy Overview by DivisionDivision cont…cont…

Issues before Dr. Reddy’s Issues before Dr. Reddy’s LabsLabsProblem: Problem:

►Balancing theBalancing the * *two business modelstwo business models::

Maintain the image of Generic led businessMaintain the image of Generic led business

(short term), &

Transform into drug discovery led business Transform into drug discovery led business

for long termfor long term to form a Global drug company.

►Producing profits today and invest in future

growth.

►Managing interconnected synergies;

organizational expansion & People issue.

DRL’s synergiesDRL’s synergies

Active Pharmaceutical Active Pharmaceutical

Ingredients (APIs)Ingredients (APIs)

Drug Drug discoverydiscovery research research

Dr. Reddy’s Research Dr. Reddy’s Research

Foundation (DRF)Foundation (DRF)

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

companiescompanies

Branded Branded

GenericsGenerics

DRLDRL

BUSINESSBUSINESS

synergiessynergies

Profit Profit CentersCenters

Cost Cost CentersCenters

Government Regulation: Patent Government Regulation: Patent RegimeRegime

► In 1970s, Indian government had open In 1970s, Indian government had open

the gate for Process Patent regime.the gate for Process Patent regime.

► Manufacturer can produce the Manufacturer can produce the

formulation of the patented drug, if the formulation of the patented drug, if the

process differs the original drug/ process differs the original drug/

innovator.innovator.

► Opportunity: Opportunity: offering same offering same

formulation with the similar efficacy at formulation with the similar efficacy at

the affordable (lower) cost.the affordable (lower) cost.

STAGE 1: APIs BusinessSTAGE 1: APIs Business► Personal investmentPersonal investment : $ 40,000 : $ 40,000

Borrowings from Banks : Borrowings from Banks : $ $ 120,000120,000

Total Investments : $ Total Investments : $ 160,000160,000

► Supplier of Supplier of active ingredientsactive ingredients for for other drug companiesother drug companies

► Advantage:Advantage: Can control the Can control the backward support for the supply of backward support for the supply of active ingredients to product active ingredients to product formulations – long term leverageformulations – long term leverage

STAGE 2: Branded STAGE 2: Branded FormulationsFormulations

► DRL started manufacturing DRL started manufacturing

formulation and selling formulation and selling

under its brand name.under its brand name.

►Problem of many ‘Problem of many ‘me-toome-too’ ’

drugs in the segment.drugs in the segment.

STAGE 3: BULK ACTIVESSTAGE 3: BULK ACTIVES► In 1984, Cheminor Drug Ltd. was formed.In 1984, Cheminor Drug Ltd. was formed.► Purpose:Purpose: Selling high quality bulk actives Selling high quality bulk actives

for Western markets specifically US.for Western markets specifically US.► Active constituent of off-patent drug Active constituent of off-patent drug

can be manufactured and sold under can be manufactured and sold under different generic name, after satisfying different generic name, after satisfying regulatory clauses for manufacturing regulatory clauses for manufacturing and marketingand marketing..

► By 1989, Co. become largest exporter of By 1989, Co. become largest exporter of ““ibuprofenibuprofen” (bulk active salt) to the ” (bulk active salt) to the markets like US, Italy, Spain & Japan. markets like US, Italy, Spain & Japan.

STAGE 4: DRF STAGE 4: DRF (Dr. Reddy’s Research Foundation)(Dr. Reddy’s Research Foundation)

► Started in 1993 – focus on drug discovery. (Started in 1993 – focus on drug discovery. (research labresearch lab in in

HyderabadHyderabad and and discovery research labdiscovery research lab in in Atlanta, GeorgiaAtlanta, Georgia))

► Separate entities – separate core competencies –Profit Separate entities – separate core competencies –Profit

centers.centers.

► DRF: Employee – 200 (split into 30-40, each focusing on DRF: Employee – 200 (split into 30-40, each focusing on

distinct therapeutic area)distinct therapeutic area)

► Fresh PhDsFresh PhDs

► Talent pools from Universities – ‘spirit of excellence’ – Talent pools from Universities – ‘spirit of excellence’ –

scholarshipsscholarships

► Incentives: Incentives: Good Salary + Stock options + Financial Good Salary + Stock options + Financial

sponsor for national & international workshops/ conferencessponsor for national & international workshops/ conferences

► Motivate to pursue doctorateMotivate to pursue doctorate

STAGE 5: Outsourced STAGE 5: Outsourced discovery research for discovery research for

regulated marketsregulated markets► Aurigene Discovery TechnologiesAurigene Discovery Technologies – separate – separate

Service entity – undertaking outsourced discovery Service entity – undertaking outsourced discovery assignments of other drug companies (research assignments of other drug companies (research facilities in Boston & Bangalore).facilities in Boston & Bangalore).

►Working in collaboration with R&D departments of Working in collaboration with R&D departments of other drug discovery companies.other drug discovery companies.

► Purpose: Purpose: Build competencies – drug Build competencies – drug discovery process discovery process among clients including Dr. among clients including Dr. Reddy’s LabsReddy’s Labs..

► AdvantageAdvantage: Knowledge enhancement based on : Knowledge enhancement based on variety of research assignment and can align with variety of research assignment and can align with the corporate knowledge which can be leveraged the corporate knowledge which can be leveraged for long run to access regulated markets.for long run to access regulated markets.

Business domains: ScenarioBusiness domains: Scenario

►OpportunitiesOpportunities: :

growth segments.growth segments.

Thrust areas:Thrust areas: Bulk Bulk

actives & branded actives & branded

formulations - Genericsformulations - Generics

► ThreatThreat: Entry : Entry

barriers in the form barriers in the form

of stiff domestic of stiff domestic

competition.competition.

► Focus for future: Focus for future:

Shared risks.Shared risks.

Business domainsBusiness domainsBulk actives & Bulk actives &

branded branded formulationsformulations

GenericsGenerics

► Ranbaxy Ranbaxy (both (both domestic & global domestic & global presence) – can presence) – can compete due to compete due to deep pockets and deep pockets and rich research rich research knowledgeknowledge► CiplaCipla (strong in (strong in domestic market domestic market but started making but started making marks in foreign marks in foreign markets) – not a markets) – not a serious threat in serious threat in near future for near future for foreign marketsforeign markets

► TevaTeva (Israel) – (Israel) – competence competence in in respective respective domain domain backed by backed by R&D R&D support.support.► Novartis Novartis GenericsGenerics (Swiss) – (Swiss) – known known player with player with global global presencepresence► Mkt Mkt shareshare: total : total 11%11%

Financing the expansion & Financing the expansion & diversificationdiversification► Source of funding : Source of funding : Financial capital marketFinancial capital market

► PurposePurpose: : Diversification into Vertical & Horizontal integrationDiversification into Vertical & Horizontal integration Expanding generic businessExpanding generic business & & Drug discovery infrastructureDrug discovery infrastructure

► Financial Instruments for fundingFinancial Instruments for funding:: GDR (Global Depository Receipt) issue in July 1994 - GDR (Global Depository Receipt) issue in July 1994 -

$ 48 $ 48 millionmillion

ADR (American Depository Receipt) issue in April 2001- ADR (American Depository Receipt) issue in April 2001-

$ 115.5 million$ 115.5 millionTotal funds raised = $ 163.5 Total funds raised = $ 163.5

millionmillion►Used forUsed for: :

Generic MarketsGeneric Markets: market building and penetration: market building and penetration Drug discovery & researchDrug discovery & research: infrastructure and hiring : infrastructure and hiring

knowledge poolknowledge pool

Formation of Corporate BrandFormation of Corporate Brand► All the three entities brought All the three entities brought

under same roofunder same roof – 2000. – 2000.

►New ‘New ‘LogoLogo’ and ‘’ and ‘Brand identityBrand identity’ ’

identified for the Corporate brand.identified for the Corporate brand.

► New VisionNew Vision::

“ “ To become a discovery led global To become a discovery led global

pharmaceutical company”.pharmaceutical company”.

Dr. Reddy’s Laboratories (Dr. Dr. Reddy’s Laboratories (Dr.

Reddy’s)Reddy’s)

1990s: DRLs Parallel group 1990s: DRLs Parallel group strategystrategy

PRODUCTPRODUCT

DIVERSIFICATIONDIVERSIFICATION

Diversified into no. of APIs Diversified into no. of APIs – manufactured & sold in – manufactured & sold in Indian Indian

& 50 foreign destinations& 50 foreign destinations

INTERNATIONAL INTERNATIONAL EXPANSION WITH EXPANSION WITH BRANDED BRANDED FORMULATIONSFORMULATIONS(2000) Industry leader in three (2000) Industry leader in three branded formulations branded formulations (therapeutic areas)(therapeutic areas): : ► Pain management, Pain management, Gastroenterology & Cardio-Gastroenterology & Cardio-vascularvascular

GROWTH IN GENERIC GROWTH IN GENERIC BUSINESSBUSINESS► Also started making Also started making neutraceuticals, women’s neutraceuticals, women’s healthcare, styptics & dental healthcare, styptics & dental carecare► Diversifying intoDiversifying into diagnostics & instrument diagnostics & instrument businessbusiness (Medical (Medical Equipments)Equipments)

BUILDING DRUG BUILDING DRUG DISCOVERY DISCOVERY CAPABILITIESCAPABILITIES► Enter into R&D based Enter into R&D based domaindomain► Build formidable Build formidable marketing chain – (2000) marketing chain – (2000) 1,500 MRs for national 1,500 MRs for national detailing network for detailing network for reaching prescription reaching prescription doctorsdoctors

DRL’s Manufacturing DRL’s Manufacturing capacitycapacity

► 6 factories for manufacturing active 6 factories for manufacturing active

ingredients – as per FDA standards.ingredients – as per FDA standards.

► 3 formulation plants – manufacturing 3 formulation plants – manufacturing

branded formulations.branded formulations.

► Supply chain networkSupply chain network: 2,000 : 2,000

stockists; 1,00,000 retailers in India; stockists; 1,00,000 retailers in India;

and exporting channels for over 50 and exporting channels for over 50

foreign destinations.foreign destinations.

DRL’s Target MarketsDRL’s Target Markets

East European East European CountriesCountries

South-East Asian South-East Asian CountriesCountries

Latin American Latin American CountriesCountries

Target markets: Russia, China, Brazil & Mexico

DRL’sDRL’s

Foreign Foreign

Target Target marketsmarkets

Generic MarketGeneric Market► Generic drugs represents Generic drugs represents $ 40 billion$ 40 billion

market in 2001market in 2001► Growing at 10 to 12% per yearGrowing at 10 to 12% per year..► Reasons for growthReasons for growth: Pressures on govt.s : Pressures on govt.s

in US, European countries & Japan – reduce in US, European countries & Japan – reduce healthcare costs.healthcare costs.

►Drug price competition & Patent Drug price competition & Patent Restoration Act – 1984 (US) – Waxman-Restoration Act – 1984 (US) – Waxman-Hatch ActHatch Act – allow the access to active – allow the access to active ingredient of original patent drug (getting ingredient of original patent drug (getting off-patent) – off-patent) – file registration before patent file registration before patent expiry – removing the leap period of market expiry – removing the leap period of market entryentry..

►Market scope: $ 30 billion post 2005.Market scope: $ 30 billion post 2005.

Generic MarketGeneric Market cont…cont…

Waxman-Hatch ActWaxman-Hatch Act also permits: also permits:► Generic players to file for Abbreviated New Drug Generic players to file for Abbreviated New Drug

Applications (ANDAs) – generic versions of all post Applications (ANDAs) – generic versions of all post 1962 patented drugs.1962 patented drugs.

► 5 year exclusivity for innovator (New Chemical Entity 5 year exclusivity for innovator (New Chemical Entity or NCE block) – generic player can file for patent or NCE block) – generic player can file for patent challenge – criteria: bioequivalence same as of challenge – criteria: bioequivalence same as of patent drug for approval – 1 year before off-patent patent drug for approval – 1 year before off-patent (Paragraph IV application).(Paragraph IV application).

► Overall cost: Bioequivalence study cost ($ 5,00,000 Overall cost: Bioequivalence study cost ($ 5,00,000 to $ 2 million) + Market operational costs.to $ 2 million) + Market operational costs.

► Factors for investing in ANDAs: predictability of Factors for investing in ANDAs: predictability of success or failure is low and timing of entry is slow.success or failure is low and timing of entry is slow.

► Risks: Application processing delays, regulatory Risks: Application processing delays, regulatory changes and R&D failures.changes and R&D failures.

► Drug prices in exclusivity period – 60-70% of original Drug prices in exclusivity period – 60-70% of original drug & after exclusivity – entry of competition – 15-drug & after exclusivity – entry of competition – 15-20% of peak price. (Timing of entry is crucial)20% of peak price. (Timing of entry is crucial)

► Cost advantage: 57% (foreign mkts) – 76% (india) of Cost advantage: 57% (foreign mkts) – 76% (india) of patent company.patent company.

Generic MarketGeneric Market cont…cont…► New opportunity domain: Specialty drugsNew opportunity domain: Specialty drugs► Generic drugs sold under company’s own brand Generic drugs sold under company’s own brand

unlike conventional generics being sold under unlike conventional generics being sold under molecule name.molecule name.

► Growth prospects & distinct from original patent Growth prospects & distinct from original patent drug – offer improved/different version of original drug – offer improved/different version of original compound (NDDS) – better compound (NDDS) – better dosage/compliance/convenience) – niche market – dosage/compliance/convenience) – niche market – need aggressive marketing to prescribers for need aggressive marketing to prescribers for market entry.market entry.

► Overall costs: Clinical Trial on patients - $ 10 to Overall costs: Clinical Trial on patients - $ 10 to 30 million + cost on detailing (US).30 million + cost on detailing (US).

► Pfizer’s blood pressure drug ‘Norvasc’ (US). Pfizer’s blood pressure drug ‘Norvasc’ (US).

Drug discovery led Drug discovery led businessbusiness► Initial focusInitial focus: Diabetes and similar other therapeutic : Diabetes and similar other therapeutic

areas.areas.► ReasonsReasons: less competitive; low entry barriers; nascent : less competitive; low entry barriers; nascent

knowledge domain.knowledge domain.► Trials process – expensive and riskyTrials process – expensive and risky► Concentrated on pre-clinical trial stage; costing $ 10 Concentrated on pre-clinical trial stage; costing $ 10

millionmillion► Strategy adopted:Strategy adopted: risk sharing – risk sharing –

out-licensing clinical trials like Anti-diabetic molecules – Novo out-licensing clinical trials like Anti-diabetic molecules – Novo Nordisk & Novartis.Nordisk & Novartis.

Collaborative research like NDDS for Chronic obstructive Collaborative research like NDDS for Chronic obstructive Pulmonary disease (COPD) – UK based Argenta Discovery.Pulmonary disease (COPD) – UK based Argenta Discovery.

Balaglitazone – Denmark based Rheoscience.Balaglitazone – Denmark based Rheoscience.

► Nine NCEs pipelines covering four therapeutic areasNine NCEs pipelines covering four therapeutic areas: : diabetes, metabolic disorder, anti-infective & cancer diabetes, metabolic disorder, anti-infective & cancer (different competencies, market structures, regulatory (different competencies, market structures, regulatory framework, disease patterns, prescribers preferences, diff. framework, disease patterns, prescribers preferences, diff. promotional efforts etc.)promotional efforts etc.)

DRL’s Global EmpireDRL’s Global Empire►20022002 – Operations & Sales offices in 60 – Operations & Sales offices in 60

countriescountries►SubsidiariesSubsidiaries in US, Brazil, UK, France, in US, Brazil, UK, France,

Holland & Singapore.Holland & Singapore.►US shareUS share in overall revenues were higher. in overall revenues were higher.

† † Market sizeMarket size: : $245 billion$245 billion market of market of $500 $500 billionbillion global market in global market in 2005-062005-06..

►International vs Domestic revenue sharing: 2:1International vs Domestic revenue sharing: 2:1►Huge generic growth prospectsHuge generic growth prospects – post 2008 – post 2008

- $ 82 billion formulation market getting off-- $ 82 billion formulation market getting off-patent globally.patent globally.

Global ChallengesGlobal Challenges►Value created in India; realised in Value created in India; realised in

US and other markets.US and other markets.► Managing across culturesManaging across cultures►Across geographiesAcross geographies► Separate time of entriesSeparate time of entries► Sustaining the competence in each Sustaining the competence in each

four business models; extracting four business models; extracting optimum from all geographies.optimum from all geographies.

Global market entry Global market entry strategiesstrategies

11stst Acquisition Acquisition – Trigenesis (US Specialty Co.) -2004 – – Trigenesis (US Specialty Co.) -2004 –

$ 11 million.$ 11 million.► Purpose: Automatic access to niche dermatology Purpose: Automatic access to niche dermatology

domain.domain.► Risk sharing across therapeutic domains and across Risk sharing across therapeutic domains and across

geographies.geographies.

22ndnd Acquisition Acquisition – Roche (New Mexico) – 2005 - $ 59 – Roche (New Mexico) – 2005 - $ 59 million.million.

► Purpose: entry into Mexican market.Purpose: entry into Mexican market.► Well established markets for manufacture & sale of Well established markets for manufacture & sale of

APIs.APIs.

33rdrd Acquisition Acquisition – Betapharm (Germany) – 2006 - $ 570 – Betapharm (Germany) – 2006 - $ 570 million.million.

► Purpose: Market & regulatory access and similar Purpose: Market & regulatory access and similar synergies and few new areas. (Table CS 1.6, pg. 809)synergies and few new areas. (Table CS 1.6, pg. 809)

European MarketEuropean Market► Scope due to intense competition Scope due to intense competition

by global companies in US.by global companies in US.► Euro 11.8 billion off-patent in 4 Euro 11.8 billion off-patent in 4

generic markets – UK, France, generic markets – UK, France, Italy & Germany (largest market Italy & Germany (largest market size).size).

►$14.2 billion market – large, $14.2 billion market – large, generics growing faster than generics growing faster than branded formulationsbranded formulations

► Rate of growth equal to USRate of growth equal to US

Familiarity/Familiarity/ IndianIndian US US EuropeEurope Latin AmericaLatin America unfamiliarunfamiliar

► DemographicsDemographics

► PsychographicsPsychographics

► CulturalCultural

► Legal/RegulatoryLegal/Regulatory

► TechnologicalTechnological