Dr. Reddy's Mode of Discovery

The Indian drugmaker's CEO explains the company's move from generic offerings, and its intent on securing a spot among the world's top 25 pharma companies

Since its founding, Dr. Reddy's Laboratories has predominantly been a generics player, with North America accounting for nearly half its revenue. But in 2005, the Hyderabad (India)-based pharmaceutical manufacturer teamed up with venture capitalists to set up an independent arm for new drug discovery. It's now looking at innovations to drive its ambition of becoming one of the world's top 25 pharma players.

G.V. Prasad, CEO and vice-chairman of the company—and also the son-in-law of the original Dr. Reddy—talked to BusinessWeek.com reporter Nandini Lakshman about the company's growth, its shifting business model, and the setbacks it has faced.

What does Dr. Reddy's focus on today?

The global generics market has been well exploited. The growth today is in Asia, particularly India and China. There is also growth beyond generics for Indian companies. Biologics [biotech drugs based on naturally occurring molecules], biosimilars [compounds that mimic a natural substance, such as synthetic estrogen], combination drugs, and improved versions of existing drugs based on drug delivery technologies are important opportunities for us.

We will be an important player in the global biologics space. We have invested $10 million per annum for the past several years in R&D. We are now investing about $50 million in new development and manufacturing facilities in Hyderabad to scale up various products. In 2007, we launched Reditux, a biosimilar version of Roche's Rituxan, a monoclonal antibody for the treatment of non-Hodgkin's lymphoma. It was the first biosimilar antibody launched in the world.

What new products will we be seeing in the coming years?

We are accelerating the development of our generics pipeline—launching about eight new products every year in the U.S. and a similar number in Europe. We plan to launch at least one biosimilar product every year in the countries where the patents allow us to do so. Next fiscal year, we will launch our dermatology business based on [products licensed from U.S. companies]. We will follow this up with in-house developed products in the subsequent years.

So you've changed your business model?

We have not changed the basic business model, but fine-tuned it. Earlier, we were more focused on developing a broad portfolio of generics. With intensified competition for plain-vanilla products, we are increasing the percentage that have entry barriers to technology and intellectual property. The custom pharma space also is an important growth driver. Biologics and [new chemical compounds] will drive growth in the medium to long term. Currently innovation-based businesses do not account for much of our revenue. But in the next five years, 25% will come from innovation, including drug discovery and drug delivery systems.

You had a setback with the Betapharm acquisition in Germany last year. Have you turned it around?

The German market has been going through significant price pressures due to successive regulation changes. Dr. Reddy's was also hit by product availability issues from our prime supplier in Germany. We are now fixing the availability issue by shifting production to India. Three of Betapharm's major products have already been shifted. By June, the top 10 products will move. Products that are inconvenient to shift to India are being outsourced to European producers. We will resolve the problem by the second half of the next fiscal year. The shift will give us cost benefits and increased sales.

North America accounts for nearly half your revenues. What are you doing to stem the 63% sales plunge last quarter?

The U.S. continues to be a big focus area for us. The decline in the North American market was due to the one-time exclusivity revenues. Last year we had a 180-day exclusivity for Zofran, and we also had the authorized generic for Zocor. These two opportunities boosted our sales in a big way in the U.S. If you exclude the one-time opportunities, our revenues have grown and we remain confident about our growth in this market.

What is the progress on new drug discovery?

We have a five-product pipeline. Our antidiabetic molecule, Balaglitazone, is in phase three trial. Our anticancer drug is entering clinical trials in Europe. Our pipeline did witness some failures this year, but this is the nature of the game. We are renewing our focus on metabolic disorders and are working on several new partnerships to improve our pipeline. We must recognize that drug discovery is a long-term investment, and it will take time to realize the benefits.

Does this make you jittery? You don't have too many collaborations either.

We are not worried about collaborations at this time. Our focus is to improve our pipeline to increase our chances of success. We are focused on finding products with significant differentiation, and which will make a big difference to patients. We are committed to this path and our work will continue with renewed vigor.

With increasing competition, how does Dr. Reddy's plan to stay ahead of the pack?

We are constantly looking to move up the value chain. Even in generics, now the focus is on technology and IP-driven products rather than plain-vanilla generics. We are looking at much more difficult products, like the antidepressant Prozac, which requires a once-a-week dosage.

Also, the U.S. market has gotten commoditized, and it's no longer as attractive as it used to be for generics. That makes geographic expansion critical. That's become a priority for us. We are already there in the U.S. and Europe, and are looking at opportunities in Asia, Australia, New Zealand, and Japan. Consolidating our presence in Germany, Britain, Italy, and Spain is also a priority.

We are looking at both organic and inorganic growth. In 10 years, we expect innovation-driven businesses to account for 50% of our revenues. We want to be among the top 25 pharma companies in the world by then.

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