CASE ONE:

DR. REDDYS LABORATORIES LTD - CONQUERING THE WORLD WITH AFFORDABLE MEDICINE FOR THE MASSES

Dr. Reddys Laboratories Ltd. is a pharmaceutical company based in Hyderabad, Andhra Pradesh, India. The company was founded by Anji Reddy. Dr. Reddys manufactures and markets a wide range of pharmaceuticals in India and overseas. The companys portfolio includes over 190 medications, 60 APIs (active pharmaceutical ingredients) for drug manufacture, diagnostic kits and critical care and biotechnology products.

Dr. Reddys is not just a generic company, but an API company with a much broader activity. It is the only Indian company to have signicant R&D activities being undertaken overseas. Dr. Reddys has enormous capabilities in chemistry, formulation development, manufacturing, environmental management and research. With this depth of capabilities as well as a history of continuous progress, a workforce of more than 12,000 employees, and a global orientation, Dr. Reddys represents a company with great potential to become a brand in Western (US and European) markets.

19841990: Taking the rst steps. In 1984, Dr. Reddys originally launched the production of active pharmaceutical ingredients. In 1986, Reddys started operations on branded formulations. Within a year, Reddys had launched Norilet, the companys rst recognized brand in India. Soon, Dr. Reddys obtained another success with Omez, and Reddys became the rst Indian company to export the active ingredients for pharmaceuticals to Europe. Reddys started to transform itself from a supplier of pharmaceutical ingredients to other manufacturers into a manufacturer of pharmaceutical products in 1987.

19911999: Expanding and Innovating. The companys rst international move in 1992 took it to Russia, where Dr. Reddys formed a joint venture with Biomed. Dr. Reddys Research Foundation was established to carry out research in the area of new drug discovery. The focus has since changed to innovative R&D, hiring new scientists, especially Indian students studying abroad in doctoral and post-doctoral courses. In 1994, Reddys started targeting the US generic market and in 1997, it was ready for the next major step. From being an API and bulk drug supplier to regulated markets like the USA and the UK, and a branded formulations supplier in unregulated markets like India and Russia, Reddys made the transition into generics by ling an Abbreviated New Drug Application (ANDA) in the USA. In the same year, Reddys out-licensed a molecule for clinical trials to Novo Nordisk, a Danish pharmaceutical company. Reddys strengthened its Indian manufacturing operations in 1999 by acquiring American Remedies Ltd.

20002009: Growing Globally. In 2000, Dr. Reddys Research Foundation set up an American laboratory in Atlanta which was dedicated to discovery and design of novel therapeutics. The laboratory is called Reddy US Therapeutics Inc. and its main aim is the discovery of next-generation drugs. Reddys research thrust focused on large niche areas in Western markets: anti-cancer, anti-diabetes, cardiovascular and anti-infection drugs. In the year 2001, it became the rst non-Japanese pharmaceutical company from the Asia-Pacic region to obtain a New York Stock Exchange listing, a ground-breaking achievement for the Indian pharmaceutical industry.

Reddys started its European operations in 2002 by acquiring two pharmaceutical rms in the United Kingdom. The acquisition of BMS Laboratories and its wholly owned subsidiary, Meridian UK, allowed Reddys to expand geographically into the European market. The American launch of Reddys house-branded ibuprofen tablets in 400, 600 and 800 mg strengthened in 2003. Direct marketing under the Reddys brand name represented a signicant step in the companys efforts to build a strong and sustainable US generic business. It was the rst step in building Reddys fully-edged distribution network in the US market. In 2005, Dr. Reddys entered into a marketing agreement with Eurodrug Laboratories, a pharmaceutical company based in the Netherlands, to improve its product portfolio for respiratory diseases. Dr. Reddys acquired Betapharm Arzneimittel GmbH from 3i for 480 million in March 2006. This is one of the largest-ever foreign acquisitions by an Indian pharmaceutical company. Betapharm is Germanys fourth-largest generics pharmaceutical company. In 2008, Reddys also acquired Dowpharmas small molecule business in the UK. Dr. Reddys announced in 2009 that it had entered into a strategic partnership with GlaxoSmithKline plc (GSK) to develop and market select products across emerging markets outside India.

Having started in 1984 as an API manufacturer, Dr. Reddys Laboratories are currently offering over 150 patented medications and more than 60 APIs, with more than 500 DFM llings, and assuring safety and quality of the medicinal products. The main business of Dr. Reddys Laboratories, however, is the production and distribution of generic drugs: drugs that can be legally reproduced after the branded drug goes off-patent, which is usually after a time period ranging from 20 to 25 years, as well as biologically-similar alternatives, new chemical entities, and differentiated formulations. In other words, Dr. Reddys is mostly involved in cheap and efcient reproduction of medications which are no longer protected by patents. Thus, they can be sold under the brand-name price since expensive steps such as research and innovation of the drug have already taken place.

Dr. Reddys Laboratories offers more than 200 generic drugs which are distributed to countries in the West and to Asia. The production of generic drugs is more cost efcient since the drugs have already been developed and tested. Therefore, based on the original price of the off-patent drug, generic drugs are substantially cheaper to purchase, in agreement with Dr. Reddys Laboratories philosophy of making crucial pharmaceuticals available for everyone. These generic drugs are mostly offered in the major therapeutic areas of cardiological diseases, pain management and anti-infection drugs, as well as those used in dermatology and oncology. Generic and biologically-similar pharmaceuticals are sold under brand names, also known as branded generics, in order to supply people, who are willing to pay a small premium in order to get an efcient and recognizable product, with high quality yet affordable drugs. Well known generic brands by Dr. Reddys include Omez, Ciprolet, and Nise, which are holding leadership positions in various key markets, especially in India, Russia, and Commonwealth of Independent States countries.

In developed markets such as the USA, Germany, UK, and Australia, however, the drugs are not sold under branded names but their generic names, also called pure generics, in order to keep costs low in the production stage and lower the healthcare costs for the patients. Furthermore, Dr. Reddys Laboratories product range does not only contain copycat or generic drugs but also includes APIs and is the second largest provider of APIs since it distributes to more than 75 countries in the world. Being a world leader in generic APIs also has multiple advantages, such as keeping prices low and making it available for patients in the shortest amount of time.

Dr. Reddys Laboratories has performed very well in the past two years. It made revenues of more than 96,737,323.00 Indian Rupees (1.3 billion) during the scal year 2012 with a gross prot of more than 55 %. The year 2013 followed with a remarkable growth of 20 % in revenues, which demonstrates the quick growth the company is experiencing due to their successful business strategies mentioned above. Because Dr. Reddys LTD is listed on NASDAQ, the past years were very benecial for the stockholders due to a strong increase in earnings per share as well as dividend pay-out. The companys stock was strongly bullish and share prices have risen signicantly when compared to other indexes within the last 5 years and this has made Dr. Reddys a stable and efcient investment opportunity.

If one analyses why we have been so successful, the single most important fact is our strength in the R&D and our ability to commercialize technologies developed in a quick and efcient manner.

This quote by the Chairman and CEO of Dr. Reddys, G.V. Prasad, states why the company was able to become a world pharmaceutical company in less than 30 years: the fact that high priority was put on the R&D sector.

There are multiple daughter companies wholly owned by Dr. Reddys, such as Promius Pharma, which focus solely on innovation and new product development which are positioned not only to produce generic drugs but also to research new and affordable alternatives. Another important fact, which greatly contributed and still contributes to the companys success, is the patient-friendliness of the company. Dr Reddys is different from other pharmaceutical companies because it does not exploit the end-consumer by exaggerating medicinal products but puts efforts into making medicine affordable for everyone. This fact almost instantly provided the company with a good reputation. Furthermore, Dr. Reddys was the rst pharmaceutical company in India that approached the end-consumer directly, providing in depth customer services and using it as a tool to keep patients both satised and updated on upcoming products.

Another major point contributing to the success of the company is the very diverse manufacturing and distribution of medicinal products in emerging and developed markets. In emerging markets, generic drugs by Dr. Reddys Laboratories are sold under branded names, whereas the opposite approach is taken when acting in developed markets: that is, distributing the product solely under the generic name to make it more competitive in Western markets in particular. Hence, a focus on R&D, the right marketing efforts, and the companys philosophy that healthcare must be affordable, made Dr. Reddys a world leading pharmaceutical company in less than 30 years.

Through multiple R&D laboratories all over the world, Dr. Reddys Laboratories assures high quality standards for all their products. Targeting Western specialty generics in order to establish a foundation for drug production constituted the rst step for the company towards its own innovation and research. The company has multiple research and development institutes in India and North America which are pioneering next generation pharmaceuticals using genomics and proteomics. The laboratory, Reddy US Therapeutics Inc., located in Atlanta, is only doing research on next-generation drugs, and focuses on Western niche markets such as anti-cancer, anti-diabetes, and anti-infection drugs. Additionally, more and more new medical products are developed on a biologically similar basis, focusing more on the conversion of natural ingredients rather than just on synthetic ones. Dr. Reddys Laboratories are also strongly engaging in novel molecule innovations which are crucial in developing new treatments for therapeutic use.

Dr Reddys Laboratories capitalized on the regulatory troubles of Indian rivals to post its highest ever quarterly income and operating prot during October-December 2013. Indias largest pharmaceutical company by sales announced in January 2014 that net prot in the third quarter swelled by 70% compared to the previous year whilst revenue grew by 23%. (Economic Times 2014) Based on this citation written by The Economic Times in February 2014, it become clear what a huge growth potential and thus growth development Dr. Reddys Laboratories has displayed in the past year especially, but also in general, since it was founded in 1984.

The biggest growth in market size and capitalization has been made primarily in the US market as a result of several crucial factors. The business beneted the most from the launch of new products in the generic business and the expansion of key products with limited competition due to patenting and complex development. Additionally, Dr. Reddys Laboratories was able to increase its market share in the US because competing pharmaceutical companies, such as Wockhardt and Ranbaxy, had been dealing with legal issues concerning the safety of a new plant and so production was unable to meet the market demand.

Dr. Reddys has a long history of being guided by principles. The strong belief that they can make medicines of higher quality and lower prices compared to Western companies was a driving factor for the company to enter the overseas market as an API supplier in 1986. At that time, Dr. Reddys Laboratories was one of the rst suppliers in the overseas market. It gained more and more attention when it became the biggest supplier of methyldopa to the German pharmaceutical giant Merck. By delivering high quality for low prices and by getting US FDA (Food and Drug Administration) approval for their plants, Dr. Reddys Laboratories was able to supply ibuprofen to the US market shortly thereafter. Hence, within a short time, Dr. Reddys made a name in the European and North American markets.

This reputation began to grow as the company also launched several products for which they had gained marketing exclusivity rights: that is, being able to make extra revenues of more than 200 million US$ just by having exclusive selling rights due to patenting and FTF regulations (Mahalingam, 2013). Not only has Dr. Reddys Laboratories been successful in expanding into the European and US market, but it also has been reaching out to the emerging markets. It has become a trustworthy partner with Russia, which is currently the biggest growing market of the pharmaceutical company. Through the companys willingness to strive to its best potential and to take on new challenges by entering into such difcult markets as the US, it inspired other smaller Indian companies and became a benchmark for success.

Dr. Reddys Laboratories has a strong position in the global market. While playing a minor role in the domestic market, it established itself in the global market with its generic business and over-the-counter drugs in North America, West Europe, and in Russia, its fastest growing market. The pharma market accounts currently for more than 65 % of Dr. Reddys Laboratories total revenues. The main business of the company in the North American market is the development and production of global generics, whereas a pipeline with more than 200 generic drugs are on le in order to instantly replace products which are going off-patent within the next few years. In addition to those generics which have yet to be launched, other key products with limited competition have been constantly introduced to the market over the previous years and are expected to continue to build high market share with little price erosion.

The strongest growing market for Dr. Reddys Laboratories, however, is the Russian market, which is currently experiencing a strong restructuring of their pharmaceutical sector as it is trying to reach a level of 50 % in domestic production of pharmaceuticals. The huge increase in demand is mainly in the middle to low cost generics produced by Dr. Reddys Laboratories as well as over-the-counter drugs. Since the company already has strong business connections with Russia since 1988, it was able to increase its revenues signicantly (20 % on average) during the past years. Even if Russia passes a specic law which requires generic and innovative companies to have a manufacturing presence when selling its products, Dr. Reddys Laboratories has already stated that they are willing to locate production facilities in Russia, and the only thing to evaluate is whether to acquire existing facilities or build new ones.

Despite the generally strong growth of Dr. Reddys Laboratories in the USA, Russia, and the emerging markets, Dr. Reddys Laboratories is not one of the biggest players in the domestic Indian market; it does not even rank in the top 10 in the domestic pharma market although it is ranked as the second largest pharmaceutical company in India. The strong focus on protable foreign markets is surely to some extent a reason for the lack of performance in the domestic market. The Indian pharmaceutical market is ooded with several new products from companies such as Sun Pharma and Cipla, whereas Dr. Reddys Laboratories had been focusing on a few selected brands which limits the companys portfolio to a much greater extent and thus makes it difcult to acquire additional market share.

Therefore, in the past four years, the company has invested heavily in boosting the sales force by 50 % and marketing efforts have been expanded into rural areas, as they are seen as an emerging market in India itself. Furthermore, through the development of new product lines and the extension of existing key brands in the area of gastrointestinal or cardiovascular, which account for more than 50 % of its revenues, the company will have new possibilities to gain a bigger market share. However, as Dr. Reddys has been showing so little effort in the domestic market as compared to foreign markets, it will be very challenging for the company to gain acceptance within the Indian medical community and therefore increase sales since time has shown that the Indian pharma community is hesitant when it comes to new portfolios, unlike the North American community. Furthermore, Dr. Reddys may also be inuenced by the new Drug Pricing Controls, which will increase the prices for some of its essential products perhaps causing a decent loss in prots in the home market (Economic Times, 2014). Since the medical portfolio of the company is relatively small compared to its competitors, another way of gaining market share more quickly is by acquisition of other medical businesses, individual brands, or entire portfolios.

However, Dr. Reddys Laboratories has far more possibilities than only acquiring other businesses or expanding their existing portfolio, including making use of the huge R&D facilities in developing biologically similar products. These products have little competition in the domestic market and are expected to increase from US$2 billion to US$ 46 billion through 2016. Since the possibility of new entrants remains small due to the complexity of the products and production processes in this new emerging pharmaceutical sector, Dr. Reddys may use this favourable position to grow its market share.

Additionally, by entering into a partnership with Merck Sereno, a division of the pharmaceutical company Merck, Dr. Reddys will lower the risk by splitting development costs, which are estimated to be at more than US$200 million. The fact that the company is already heavily engaged in the development of biologically-similar products, and that developed countries are still far from launching biologically-similar products to such an extent, gives Dr. Reddys a crucial advantage in its home market among its Indian competitors. High entry barriers and the difculty of domestic companies to increase their capabilities also work in Dr. Reddys favour. Thus, the key driver for the company to gain market share with little competition within its domestic market is its high expenditure in R&D.

Dr. Reddys Laboratories is a multinational pharma company, which provides high amounts of tax yearly to the government from producing, importing or exporting products. The new regulations in the Indian Drug Pricing Policy will most likely lead to higher prices and to shrinking prot margins, and also to having to pay more taxes, which is a clear disadvantage for the company as well as for the whole pharma sector in India. Furthermore, Russia passed a law which would force pharmaceutical suppliers to build domestic plants in order to be able to distribute their products to the Russian market. This would lead to higher taxation as well in the Russian market, although the good, general relationship between Russia and Dr. Reddys Laboratories would suggest that both parties would be in favour of such an idea since having production facilities in Russia opens new supply channels towards Eastern European countries. A special-purpose program will support the restructuring of the Russian pharmaceutical industry, which might provide benecial incentives for companies such as Dr. Reddys to produce in this market in the near future. Nevertheless, the general advantages and benets, which Dr. Reddys already possesses and seeks to expand over the coming years, are primarily their own successes in technology, long term thinking, and a high degree of innovation.

As one of the largest pharmaceutical companies in India, Dr. Reddys Laboratories averages 200 orders a day alone for its US generic pharmaceutical and over-the-counter products. A triple-digit percentage revenue increase in the past year (2013) demonstrates the agility of the companys move into the generic marketplace. Getting to market rst following US FDA approval is a key with generics. Dr. Reddys needed a streamlined supply chain and the exibility to position its new products against the large number of prescription drugs due to come off patent protection. Since it manufactures in India, Dr. Reddys must plan for additional lead times to get products to the USA. When drugs move from branded to generic, pharmaceutical companies face a host of regulatory and supply chain challenges to get products to clinicians and retail pharmacies. Since the FDA approves the sale of branded drugs as generic as late as the day of patent expiration, acting quickly and efciently means being rst out of the gate, sometimes even getting products to the drug wholesalers or store distribution centres the next day. That drives critical planning for the right warehousing and distribution solutions linked with transportation. Further complicating the process, the FDA also may require label and packaging changes to some medicines prior to approval for generic sales.

Since Dr. Reddys Laboratories company mission is to make affordable medicine for everybody, the challenge is going to be how to remain sustainable in the low pricing class in order to build and keep their customer base. Newly imposed regulations are obstacles which have to be overcome by the company using even more technological advantages in order to still make prot by keeping costs low throughout the production process. In addition, Dr. Reddys has to show initiative and strong cooperation with the new healthcare project in order to gain a favourable position in the Russian pharmaceutical market. As Dr. Reddys plays more of a minor role in their domestic Indian drug market due to the intense competition, a different approach, such as the production of highly technological medicine, rather than lower costing has to be found in order to retain a leading position in the Indian market.

(25 Marks)

CASE ONE QUESTIONS:

A. Critically discuss the strategy/strategies adopted by Dr. Reddys Laboratories Ltd. to become a global company.

B. Discuss the issues and challenges Dr. Reddys Laboratories Ltd. faced in its march to become a global company.

C. With reference to strategic management concepts/tools, discuss how the company dealt with the issues and challenges it faced.