Company Analysis: Dr. Reddy's Laboratories Ltd. - Part I
A qualitative analysis of Dr. Reddy's Laboratories Ltd., a global pharmaceutical company headquartered in Hyderabad, India.
Dr. Reddy’s Laboratories (hereafter referred to as ‘company’ or ‘DRL’) is an integrated global pharmaceutical company established in 1984 by Kallam Anji Reddy. The company operates across two core business segments — Global Generics (GG) & Pharmaceutical Services & Active Ingredients (PSAI).
The GG segment comprises – generics, branded generics, biosimilars & OTC products.
While the PSAI segment includes API manufacturing & Aurigene Pharmaceutical Services (APSL).
Let’s analyze these business segments in detail.
Recommended Readings: Understanding Pharma Industry - Part I, II, III & IV (to familiarize with the pharma industry & related technical terms)
Generic Business
The company's generic, or unbranded prescription medicines business earns most of its revenue from two key markets – North American region & Europe.
North America: Comprising of the US & Canada, NAG (North American Generics) contributes 41% of the company’s overall revenue, & made a record-high, closing $1.2 billion in FY23.
Europe: The Company operates in 14+ countries across Europe & recorded a revenue of €210 million on a full-year basis.
DRL’s Generic Business Analysis
Price Wars: As all generic drugs are identical in their therapeutic effect on the body, they are marketed with their chemical names, as commodity generics. This leads to a price war between generic drug companies, as customers can easily switch between a company & its competitor. This lack of pricing power over their customers could lead to low profit margins for the company.
By definition, generics have active ingredients that are identical to the patented/originator drug and are low cost, functionally undifferentiated products, which make generic markets structurally highly competitive.
Source: ‘The Market Study On The Pharmaceutical Sector In India’ by Competition Commission of India (CCI), 18 Nov’21, Pg 7.
High Competition: The development of generic drugs requires little technology & investments, as all a generic drug company has to do is buy bulk drugs/API, mix them with excipients (bulking, colouring & flavouring agents), package them & sell them. The R&D of these companies are limited to reverse-engineering of the patented drug. Additionally, countries across the globe want to reduce the healthcare cost of their society, therefore they deliberately make policies that encourage the entry of new generic players. These low entry barriers lead to intense competition in the market.
What is Dr. Reddy’s doing to sustain & grow in the generic drugs market?
First to Market (180 days of exclusivity)
In Sep’22 DRL launched Lenalidomide Capsules, a generic version of REVLIMID® Capsules. The company had filed an ANDA under Para IV & earned first-to-market, 180 days of generic drug exclusivity for its Lenalidomide Capsules in 2.5 mg and 20 mg strengths.
By 2027, the company aims 25% of its launches to be first-to-market.
Strategic Partnerships
The company is partnering with specialty pharmacies to increase the reach of its complex and injectable generics.
In Europe, it has established partnerships to provide orals and injectables to specialized hospitals.
Digital Presence
The company has launched its own digital marketplace for its institutional segment, DrReddysDirect.com.
It is also partnering with digital platforms to expand its direct sales to customers.
Strategic Acquisitions
In Feb’22 the company acquired Nimbus Health, a privately owned, pharmaceutical wholesaler focusing on medical cannabis in Germany. Medical cannabis is increasingly used in pain management & CNS.
In Feb’23, DRL acquired the U.S. generic prescription portfolio from Mayne Pharma. As TAM (Total Addressable Market) for the pipeline and approved non-marketed products in the U.S. is valued at $3.6 billion approx. by IQVIA for Dec’22, this is a strategic acquisition by DRL.
The portfolio of products acquired from Mayne Pharma is a strategic fit with our growth objectives. The portfolio includes some high entry-barrier products. It also complements our existing portfolio by introducing products focused on women’s health. Our strong balance sheet enables us to acquire products of strategic importance to strengthen our base business and build for long-term growth.”
— Erez Israeli, CEO of Dr. Reddy’s
Diverse Portfolio & Strong Pipeline
Company’s portfolio in North America covers 160+ products across retail, institutional & OTC, which it aims to expand to 335+ products.
Its pipeline includes several first-to-market drugs, complex products across drug-device combinations, peptides, and long-acting injectables.
In Europe, the company has a portfolio of 185+ commercial products across diverse therapeutic categories, and has a strong pipeline of complex generics.
Complex generics: A generic that could have a complex active ingredient, complex formulation, complex route of delivery, or complex drug device combinations. Complex generic drugs enable manufacturer to achieve market differentiation and earn higher margins.
What are the potential risks for Dr. Reddy’s generic business?
Litigation Risk
The companies having ANDA filing under Para – IV are subject to significant litigation risk as they look to invalidate the innovator company’s existing patent before its expiration.
Source: CARE Rating Methodology-Pharmaceutical Sector July’20
Para IV filings are often aggressively and successfully challenged by patent holders, resulting in large R&D and litigation losses for generic drug companies.
Branded Generic Business
Dr. Reddy’s branded generic business operates in India & Emerging Markets, contributing to over half of its revenues.
These branded products are available in India, Australia, New Zealand, Russia, CIS, Romania, China, Latin America & 30 countries across ASEAN & Africa.
IPM (Indian Pharmaceutical Market): DRL’s India business is organized by therapies with 300+ brands. It ranks 10th in ‘top 10 pharma companies in India’ as per IQVIA MAT (Nov’22) in sales value, & aims to make it to top 5.
Worldwide, low cost generic drugs are seen as a key competitive force against the patent-expired brand name drugs marketed at monopoly prices, but in India pharmaceutical market is dominated by "branded" generics. Competition between these ‘branded generic’ versions of drugs is largely based on brand and not on price, thus limiting the effect of generic-induced competition in the market.
Source: Rating Methodology—Pharmaceutical Sector July’20, Pg-3, by CARE, the credit rating agency.
EM (Emerging Markets): The company's EM business covers 48 countries over 5 regions, with 13 new geographies added in the last 5yrs. Its key markets here are - Russia, China and Brazil.
DRL’s Branded Generic Business Analysis
Companies in branded generics business incur high marketing & branding costs as they try to differentiate their drug, giving customers an impression that their “branded” generic drug has better therapeutic effect on the patient than other drugs. Even though there exists little or no difference in the quality and efficacy of branded and unbranded generics given the same regulatory rigour applied to all of them.
CARE Ratings looks favourably at companies having branded generic formulation as they command higher margins with better market positioning in particular therapeutic segments in light of low entry barriers.
Source: Rating Methodology—Pharmaceutical Sector July’20, Pg-3, by CARE, the credit rating agency.
India is the largest supplier of generic medicines. It manufactures about 60,000 different generic brands across 60 therapeutic categories and accounts for 20% of the global supply of generics
the pharmaceutical market in India is unique in that it is dominated by "branded" generics, which enjoy a price premium owing to a perceived quality assurance that comes with the brand name. Competition between these ‘branded generic’ versions of drugs is largely on brand and not on price, thus limiting the effect of generic-induced competition in the market.
Source: ‘Making markets work for affordable healthcare, a policy note’ by the Competition Commission of India (CCI), Oct’18, Pg-4
What is Dr. Reddy’s doing to sustain & grow in the branded generics market?
while analysing formulation companies, it is important to assess their market positioning by understanding the company’s market share in particular therapeutic segment as well as diversification in the product portfolio. This will enable assessment of the stability or sustainability of its future growth.
Source: Rating Methodology—Pharmaceutical Sector July’20, Pg-3, by CARE, the credit rating agency.
Stability & Growth
DRL’s 16 brands—Voveran, Omez, Cidmus, Atarax, Econorm, Omez-D, Practin, Zedex, Ketorol, BroZedex, Razo-D, Stamlo, Tryptomer, Mintop, Clamp, and Nise—are among the top 300 brands in IPM.
DRL has 15+ brands with an annual revenue of more than ₹100 crores, in IPM.
New Launches
In Nov’19 company entered the nutrition segment with the launch of its diabetes nutrition drink ‘Celevida’ in India.
Company launched 94 new products in FY’23, (up from 86 in FY’22) across various countries of the Emerging Markets.
It launched 9 brands in India, including Cidmus and PrimcyV.
With the aim to build a well-rounded business in India, company launched its new division ‘RGenX‘ in Jun’23, entering the trade generics in business in India.
In Nov’23, it launched Nerivio® in India, a wearable therapy device for migraine. Marking DRL’s entry into digital therapeutics (DTx) as part of its innovative products initiative.
“While our core generics business continues to drive our current growth, Nerivio® as DTx joins our e-commerce venture ‘Celevida Wellness’, and our recent deals to bring novel molecules such as toripalimab and pyrotinib to India, as part of our innovative products initiatives in India aimed at improving patient well-being and outcomes.”
— M.V. Ramana, CEO – Branded Markets, Dr. Reddy’s
Divestment Of Non-Core Brands
The company divested 2 anti-bacterial brands in Russia & CIS regions.
“This deal is a step towards divesting brands in non-core areas in order to consolidate and strengthen our play further in our key focus therapy areas of gastro-enterology, pain management, cold and flu, allergy, oncology, neurology, pediatrics and women’s health. “
—M.V. Ramana, CEO – Branded Markets, Dr. Reddy’s
Strategic Acquisitions
To grow its presence in the chronic space in IPM, company acquired Cidmus (cardiovascular medicine brand) from Novartis.
Note: Cardiovascular system is forecasted to be one of the highest spending therapy areas by 2027.
DRL has stated an ambition of breaking into the top 10 cardiac players in IPM.
What are the potential risks for Dr. Reddy’s branded generic business?
Government Regulations
The trend of multiple brands of the same molecule being marketed by the same company at different price points is common in IPM. This leads to higher healthcare costs in the country.
To counter this artificial notion of superior drug quality, in its 2018 policy note, CCI recommended effective and uniform quality control of drugs.
the practice of creating artificial product differentiation needs to be addressed through a one-company-one drug-one brand name-one price policy
Source: ‘Making markets work for affordable healthcare’, a policy note by the Competition Commission of India (CCI), Oct’18, Pg-5
If implemented, the prices of generic drugs may decline by more than 90% leading to a fall in the company’s revenues.
Biosimilar Business
DR. Reddy’s has capability for the development, manufacturing and commercialisation of a range of biosimilar products in oncology and immunology.
DRL’s Biosimilar Business Analysis
Biosimilars can be thought of as generic versions of patented Biologic drugs.
Developing biosimilars is a long & complex process as it involves high R&D costs & its development process is similar to any new drug. Further, it must demonstrate high similarity to the reference biologic in manufacturing quality, biologic activity, clinical safety and efficacy, and in the rate of immune reactions.
The regulatory authorities usually treat biosimilars similar to a new drug while assessing it.
The term “biosimilars” is a misnomer: most national regulatory authorities insist that competitors not only conduct Phase 1 and 2 trials, but also comparative studies in the final phase, before they receive final regulatory approval. Often, this dual requirement of treating each biological medicine from a non-originator source as a new drug, with the additional requirement of proving bio similarity, takes so much time and investment that barely a handful of companies compete with pharma giants thereby muting competition and resulting in monopoly prices.
Source: ‘Making markets work for affordable healthcare’, a policy note by the Competition Commission of India (CCI), Oct’18, Pg-21
This creates a barrier to entry in the market, leading to higher profit margins for biosimilar businesses.
In the biosimilar space, the presence of Indian players have so far been limited, largely to less regulated markets. However, a large number of biosimilars are going off patent in regulated markets over the medium term, which provide an attractive opportunity for players with necessary technical skills and financial resources.
Source: ICRA rating methodology for pharma industry, May’15, Pg-4
What is Dr. Reddy’s doing to sustain & grow in the biosimilar market?
Stability & Growth
DRL has a portfolio of 6 commercial products marketed in India and 27+ in Emerging Markets.
It has already been approved for marketing in India & 25+ Emerging Markets.
It several products in the pipeline in oncology and auto-immune diseases in various stages of development for global launches across regulated as well as emerging markets.
The company is working on 11 biosimilars, some of which are expected to be launched by FY’27 & others by FY’30.
New Launches
The company is expected to launch Rituximab in US & Europe, an interchangeable biosimilar of Rituxan® / MabThera® (rituximab), by 2025.
Company completed full set of clinical studies, & dossier of which has been accepted by USFDA (US), MHRA (UK) & EMA (EU) for review.
Company has initiated global Phase III study for the biosimilar of tocilizumab.
Strategic Partnerships & Agreements
In Dec’21, DRL entered an exclusive partnership for the supply and commercialization of trastuzumab biosimilar (of Prestige BioPharma) in select countries in Latin America and Southeast Asia.
COYA 302 is an investigational combination biologic, for which DRL obtained commercialization rights in USA, Canada, EU & UK.
Company is partnering with Fresenius Kabi, a global health care co., to commercialise rituximab in the US.
What are the potential risks for Dr. Reddy’s biosimilar business?
Obstructions from Innovator Companies
In Feb’14 Roche sued Biocon and Mylan to stop them from selling the biosimilar of Trastuzumab, its breast cancer medicine.
Traditionally, the patent holders used to block generic companies after applying for regulatory approval. However, now the patent holders seek to block generics at the development stage itself. The innovators block access to pharmaceutical reference products for bioequivalence testing by not providing sample of their products, thereby delaying/denying generic entry.
Source: ‘Making markets work for affordable healthcare’, a policy note by the Competition Commission of India (CCI), Oct’18, Pg-23
High Failure Risk
As biosimilar companies incur high R&D costs, failure to get approved by regulatory authorities can result in huge losses for the company.
aggressive in R&D in biosimilar as well as new/ improved chemical entity, which have high revenue as well as higher development costs, also remain exposed to high failure risks.
Source: ICRA rating methodology for pharma industry, May’15, Pg-5
Pharmaceutical Services & Active Ingredients (PSAI) Business
Dr. Reddy’s PSAI segment comprises of API manufacturing & Aurigene Pharmaceutical Services (APSL), which is company’s CDMO business. It recorded revenues of ₹29.1 billion in FY23, a decline of 5% compared to the previous year, due to a reduction in volumes of COVID-19-related products.
The company also sells incremental value-added products including semi-finished and finished formulations. This segment also includes its contract research services business
DRL’s PSAI Business Analysis
In line with formulations, the bulk drug (API) industry is also fragmented with low entry barriers and entities ability to develop low cost manufacturing, high process chemistry skills and requisite manufacturing facilities defines their competitive position.
Source: ICRA rating methodology for pharma industry, Feb’20, Pg-3
Due to the commodity nature of this business, competition is not limited to domestic players, but also from cheaper imports, especially from China.
As in the case of generic drug market, with non-differentiable products & high competition, API manufacturers lose their pricing power.
To flourish in such harsh market conditions, a company must show exceptional operational efficiency.
Given the intense competition, market position is largely determined by pricing ability that is linked to the company's operating efficiencies and economies of scale.
Source: CRISIL rating criteria for pharma industry, Feb’21, Pg-5
What is Dr. Reddy’s doing to sustain & grow in the PSAI market?
Operational Efficiency
diversity of the product range and presence of molecules that are complex to manufacture significantly mitigate competitive pressures and support performance in terms of sales growth and profitability.
Source: CRISIL rating criteria for pharma industry, Feb’21, Pg-5
DRL develops & manufactures complex API’s such as steroids, peptides, & complex long-chain molecules & HPAPI (High Potent APIs).
Company has a strong & diverse portfolio of 150+ APIs across various therapies — cardiovascular, anti-diabetics, CNS, oncology, gastrointestinal, & others.
Company’s experienced technical & cross-functional teams can quickly scale up production from few grams to multi-kilograms.
90% of companies API pipeline is forward integrated to generic formulations.
Economies Of Scale
DRL has 8 global manufacturing units run in accordance with cGMP (Current Good Manufacturing Practices) & have been successfully inspected by international regulatory authorities such as the USFDA (US), EMEA (Europe), ANVISA (Brazil), PMDA (Japan), H`ealth Canada, etc. Of these 6 are in India, & one each in Mexico & UK.
Company manufactured 5000+ million tonnes of intermediates & 2100+ million tonnes of API.
Company has 1250+ reactors, with the capacity of 4100+ KL of reactor volumes.
Geographical Diversity
Exports to different markets not only enhance the company’s risk profile, but also minimise event risks associated with adverse market conditions in a specific country.
Source: CRISIL rating criteria for pharma industry, Feb’21, Pg-5
Company has a diverse range of institutional customers in over 25 countries, and intends to expand its product basket to over 60 countries.
What are the potential risks for Dr. Reddy’s PSAI business?
Regulatory Compliance
Entities (Formulation, API or CRAMS) with presence in highly regulated overseas markets (especially USA and Europe) tend to face increased level of scrutiny for adhering to manufacturing quality norms by the regulatory agencies from these countries.
Source: ICRA rating methodology for pharma industry, Feb’20, Pg-2
Any adverse observations during such scrutiny can have adverse impact on company’s present & future performance.
Pricing Pressure
For API and CRAMS players, the pricing gets indirectly influenced based on the pricing regulations on the formulations.
Source: ICRA rating methodology for pharma industry, Feb’20, Pg-2
Governments across the world want to reduce healthcare costs in their societies. Therefore, they put price cap on essential drugs & limit price increase on others. This can hurt the margins of the company.
SWOT Analysis of Dr. Reddy’s
S TRENGTH
a suitable mix of acute and chronic therapies coupled with presence in other fast growing therapeutic segments/niches may bring in stability in financial performance.
Source: ICRA rating methodology for pharma industry, Feb’20, Pg-4
Diverse Portfolio: Dr. Reddy’s has a well balanced portfolio with a mix of both acute (Gastrointestinal, Anti-Infectives, Dermatology, etc.) & chronic therapies (Cardiology, Anti-Diabetic, Oncology, etc.) therapies.
formulation entities that are backward integrated with presence in APIs also are assured of timely and quality supply of raw material. Besides, this enables them to be cost competitive (especially on account of commoditization as the product ages) and also enables faster filing of product dossiers for the targeted markets.
Source: ICRA rating methodology for pharma industry, Feb’20, Pg-4
Cost Optimization: Dr. Reddy’s global generics segment is backward integrated into APIs to the extent of around 50%. Its biosimilar manufacturing facilities have on-site integration of drug substance (DS) and drug product (DP), allowing cost optimization.
While assessing the operating efficiencies of a formulator, CRISIL Ratings considers the level of automation and certification of the company's facilities by regulatory authorities in the US and Europe. This is critical, given the increase in thrust of Indian companies towards exports, and higher regulatory scrutiny
Source: CRISIL rating criteria for pharma industry, Feb’21, Pg-7
Certified Manufacturing Facilities: Dr. Reddy’s has 8 global manufacturing units run in accordance with cGMP (Current Good Manufacturing Practices) & have been successfully inspected by international regulatory authorities such as the USFDA (US), EMEA (Europe), ANVISA (Brazil), PMDA (Japan), H`ealth Canada, etc.
Its largest manufacturing facility in Hyderabad was included by the WEF as part of its Global Lighthouse Network for deployment of Industry 4.0 technologies.
W EAKNESS
Market Exclusivity: As Dr. Reddy’s is focused on Para IV exclusivity, it must make sure to maintain its market share once the exclusivity expires.
some of the Indian pharma entities focused on filings that targeted marketing exclusivity resulting in significant jump in revenues and earnings in the years such products were launched followed by steep contraction as other players forayed resulting in steep pricing pressure.
Source: ICRA rating methodology for pharma industry, Feb’20, Pg-5
Revenue decline as Covid-19 ended: Company saw a decline in revenue in Rest of the World markets (including Brazil, China, South Africa, Australia, & other markets) due to fall in sales of Covid-19-related product. It also saw 5% decline in its PSAI business due to the same reason.
Revenue decline due to divestments: Though divestment of non-core brands is good for the company in the long-term, in the short-term company will had to deal with decline in Revenues from Russia business.
O PPORTUNITIES
Specialty Medicines: Specialty medicines which treat chronic, complex, and rare diseases have been increasing as a share of spending in higher-income countries. They are expected to be 43% of global spending by 2027. The share of specialty spending in the top-10 developed economies is expected to be higher at 56%.
Biosimilars: In the next five years, biosimilars is expected to see $52 billion in lower brand spending, compared to $15.8 billion in the past five.
Market Growth: The Pharmerging markets are projected to show 5-8% revenue CAGR between 2023-27, primarily driven by the increasing usage of generic drugs and branded generics.
Latin America is among the fastest growing regions in terms of medicine spending globally. Brazil and Mexico are expected to lead the growth in Latin America at 9-12% and 7.5-10.5%, CAGR respectively through 2027.
In India, its expected that spending on pharmaceuticals will continue to increase, with a CAGR of 7.5–10.5% between 2023-27 to reach US$ 35-39 Billion annually. Indian govt. is encouraging local manufacturing through various schemes and incentives like Production Linked Incentive (PLI) scheme.
T HREAT
Litigation Risk: DRL plans to increase its its Para IV filings to 25% of its portfolio.
The entities that follow high risk high reward strategy of patent challenges in US (referred to as Para IV filings), with significant uncertainties relating to the final outcome are exposed to large cash outflows on account of litigation.
Source: ICRA rating methodology for pharma industry, Feb’20, Pg-4
Ongoing Investigations: DRL is yet to resolve the ongoing industry-wide investigation by the anti-trust division of the US DoJ (Department of Justice) on price fixing and price collusion allegations. Further, there are ongoing investigations with respect to allegation of violation of anti-corruption laws in the US and other product and patent related matters, whose outcomes are unascertainable at the moment and would require to be monitored on a case-by-case basis.
Vulnerability to Forex Fluctuations: DRL’s profitability remains vulnerable to forex fluctuations on account of its foreign operations as well as foreign currency borrowings, though it hedges the same through both derivative and non-derivative financial instruments, such as foreign exchange forward contracts, option contracts and currency swap contract.
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