Coming at You, Merck

Can Dr. Reddy's Labs crack the global drug market?

Anji Reddy knew the good times couldn't last. Ten years ago, the Indian chemical engineer realized his company, Dr. Reddy's Labs, could not indefinitely sustain its main business: producing knockoffs of brand-name drugs made by big U.S. and European companies, then selling them in India and elsewhere in the developing world. The strategy was perfectly legal in India, since New Delhi had never signed any of the international treaties that protect drug patents. The problem was that too many other Indian companies were in the same business. So Reddy decided his company would start concocting its own drugs--and even sell them in competitive markets like the U.S.

The decision proved prescient. Starting in 2005, India will honor pharmaceutical patents, meaning local drugmakers can no longer copy Western drugs with impunity. The nation's pharmaceutical companies are scrambling to prepare for the inevitable shakeout. And Dr. Reddy's, which is expected to make $30 million on sales of $200 million for the year ending in March, is launching that U.S. offensive its founder has long dreamed of, starting with a generic version of the hugely profitable antidepressant Prozac. It's a cheeky move--and U.S. investors will have a chance to bet on the outcome. In mid-April, Dr. Reddy's hopes to raise $150 million in an initial public offering and list on the New York Stock Exchange.

Dr. Reddy's ultimate goal is to become an Indian Merck & Co. or Pfizer Inc. "We want to be a truly innovative company," says Reddy, "discovering and marketing drugs the world over." Last year, the company opened a $1.5 million laboratory in Atlanta. But such ambitions take time. So Dr. Reddy's aims first to crack the U.S. market for generics--drugs whose patents have expired or been overturned.

Over the next decade, 20 blockbuster drugs, each with annual sales of more than $1 billion, are set to go off patent. Along with Prozac, Dr. Reddy's plans to release generic versions of the anti-ulcer drugs Xantac and Daypro. "All the action is in the U.S.," says Satish Reddy, chief operating officer and son of the founder. "We want to be in early."

The ambitious strategy pits the Hyderabad-based company against seasoned U.S. generics makers. Dr. Reddy's now sells five generic drugs in the U.S. through such local distributors as Par Pharmaceutical and Interpharm. But revenues, at $25 million, are small. Still, some analysts reckon the company has an edge. Ashwin Adarkar, a McKinsey & Co. partner, says Indian drugmakers such as Dr. Reddy's "are blessed with low-cost talent, world-class chemical synthesis skills, and cost discipline honed by cutthroat competition."

RIVALS ABOUND. Dr. Reddy's is hoping to break out in the U.S. with a version of Eli Lilly & Co.'s Prozac, whose patent is set to expire in August. For the first time ever, Dr. Reddy's would market a drug in the U.S. under its own name. Not that this spells automatic riches: It's one of a dozen or so generics makers planning to flood the U.S. with cheap Prozac. Among the contenders are such heavyweights as New York-based Barr Laboratories Inc. "We're a $500 million company," says Barr spokeswoman Carol A. Cox. "[Dr. Reddy's] is not a threat."

Still, generics is all about low cost. By learning to pinch pennies, Dr. Reddy's has flourished in India, where the lack of patent protection means drugmakers are dueling with rivals eager to steal market share. Dr. Reddy's is constantly looking for ways to make drugs more efficiently. For example, thanks to improved chemical processes, it cut the per-pill price of producing the antibiotic ciprofloxacin from 70 cents to a penny.

Ultimately, Dr. Reddy's will have to develop and launch its own drugs. Eight discoveries are in the works--including medicines that reduce insulin reactions in diabetes patients--but U.S. approval is at least four years away. Moreover, to sell the drugs outside India, Dr. Reddy's must build a brand. That won't be easy. Even Satish Reddy acknowledges "we're not taken seriously in the U.S." A quick killing in the generics market could change that perception.

By Manjeet Kripalani in Hyderabad, with Michael Arndt in Chicago

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