Dr. Reddy’s Rejuvenation

At the 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-seat, Harvard-like classroom, multiple conference rooms, a boardroom 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 will not be difficult to assume India’s number five drugmaker is firing on all cylinders. In fact the company’s stock was among the ideal performers in the stock market last year (earning it a place on our Fab 50 list of ideal large Asia-Pacific companies).

For a company that posted a large loss only 18 months ago–an aftereffect of an costly acquisition gone wrong in Europe–it is a turnaround of sorts. In 2009 the company lost more than 50% of the money it made in the preceding five years. It was no longer among the top ten players in the domestic market, having failed to quickly launch new drugs, in contrast to Mumbai’s Cipla and Sun Pharmaceuticals. Coming months after the selloff of India’s largest domestic company, Ranbaxy, to Japanese firm Daiichi Sankyo, Dr. Reddy’s predicament seemed to offer a bad prognosis for the domestic pharmaceutical sector.

But all that is in the past. Now run by the second-generation family of founder K. Anji Reddy, the eponymous company is making a comeback: It has launched a sustained effort to rationalize costs, has eliminated unviable markets and has stepped up new product launches. Revenues and profits have been climbing and a new thrust in biogenerics is taking shape. It’s feeling like the old days again.

Dr. Reddy’s renewed charge signals 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’s Piramal and the Singh brothers of Delhi’s Ranbaxy Laboratories sold their businesses, citing exploding investment opportunities in sectors like real estate and finance and 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 the founder’s 43-year-old son, Satish Reddy, managing director and co-CEO, and brother-in-law Prasad, 49, have been benefiting from each other’s strengths. Prasad drives a Mercedes and exemplifies the conservative German car–he is considered the “thinker.” Satish Reddy, who cruises in a 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, outbidding competitors like Ranbaxy in a hotly contested battle. The new regulations, which came after the takeover, stated that generic drugs could be sold only on a tender basis rather than as branded products as was done until then.

Two years after the acquisition Dr. Reddy’s was forced to write down almost half its investment in losses. It had 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 rethink everything we knew about running the business.”

As a business strategy the deal did make sense. The German market was the second-largest market for generics after the U.S. Patents for drugs often expired far ahead of the expiration date in the U.S. The margins in the German market were also better. As in India, generics could be branded and detailed to physicians 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 making the hard decisions.

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Submited at Thursday, February 3rd, 2011 at 11:05 pm on Health by samantha
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