Report on Strategic Tools Analysis for Pharmaceutical Industry

Submitted to: Mr. Jayant Bose Course In charge Business Planning, Policy & Strategy

Submitted By Abhay Duseja ((P301311CMG201) Agnel Vas(P301311CMG207) AmulpreetSehgal(P301311CMG209) Ankit Jain (P301311CMG213) Ashish shah(P301311CMG218) Deepesh Agrawal (P301311CMG223)

NIIT University, Neemrana

Strategic Tools Analysis for Pharmaceutical Industry `

Contents
Overview of Indian Pharmaceutical Industry.............................................................. 2 Introduction to Dr Reddys Laboratories .................................................................... 4 Manufacturing facilities and R&D............................................................................. 4 Business profile ........................................................................................................ 4 Market Position ........................................................................................................ 5 Key developments ................................................................................................... 5 PEST Analysis.............................................................................................................. 6 External Factor Analysis Summary (EFAS) ................................................................ 7 Steps for EFAS ......................................................................................................... 7 EFAS for Pharmaceutical Industry ........................................................................... 8 External Factor Analysis Score ................................................................................ 9 Internal Factor Analysis Summary (IFAS)................................................................. 10 Steps for IFAS ........................................................................................................ 10 IFAS for Dr Reddys Labs ....................................................................................... 11 Internal Factors Details .......................................................................................... 12 Internal Factor Analysis Score ............................................................................... 13 Strategic Factor Analysis Summary (SFAS) ............................................................. 14 TWOS Matrix ............................................................................................................. 15 Porter's Competitive strategy Analysis ..................................................................... 16 Recommendations .................................................................................................... 17 References ................................................................................................................. 19

Page 1

Strategic Tools Analysis for Pharmaceutical Industry `

Overview of Indian Pharmaceutical Industry

The Indian pharmaceutical industry is estimated to be worth $29.9 billion (including exports) in 2011-12. Of this,the domestic formulations market was valued at $11.6 billion (or Rs 556.6 billion). In value terms, it constituted only 1.2 per cent of the global pharmaceutical market because of lower drug prices and lower penetration of healthcare vis-a-vis developed markets, such as the US and Europe. India spends just 1.4 per cent of its total gross domestic product on healthcare; the country ranks amongst the lowest in this respect. In contrast, the corresponding figure for developed countries is in excess of 6.5-8 per cent of GDP.

Pharmaceutical Value Chain

Pharmaceutical value chain Source: CRISIL Research

Bulk drugs or active pharmaceutical ingredients ( APIs), are raw materials used to manufacture formulations, which in turn, are ready-to-use forms of bulk drugs (including capsules, tablets, syrups and injections) administered to patients. Bulk drugs are manufactured by combining more than two chemicals or intermediaries. They directly affect the diagnosis, cure, mitigation, treatment or prevention of a disease. Domestic formulation industry highly fragmented Over 100,000 drugs across various therapeutic categories ar e produced annually in India. The domestic formulations industry is highly fragmented in terms of both number of manufacturers as well as the variety of products. There are 300-400 organized players and about 15,000 unorganized players (small scale sector) in this industry. However, in terms of sales, the formulations market is dominated by organized players.

Page 2

Strategic Tools Analysis for Pharmaceutical Industry `

Regimes of Pharmaceutical Industry Pre Patent regime The Indian pharmaceutical industry has grown rapidly over the last few decades. Prior to 2005, the Indian regulatory system recognized only process patents Post Patent regime In line with its commitments to the WTO, the Indian government passed an ordinance to introduce the product patent regime w.e.f. January 2005. Pharmaceutical Value Chain

Chemical /Intermediaries
Active Pharmaceutical Ingredients (API)/Bulk Drugs

Formulations

Bulk drugs are manufactured by combining more than two chemicals or intermediaries Bulk drugs or active pharmaceutical ingredients (APIs) are raw materials, used to form formulations, which in turn, are ready-to administered to patients

Page 3

Strategic Tools Analysis for Pharmaceutical Industry `

Introduction to Dr Reddys Laboratories

Dr Reddy's Laboratories (DRL) was founded by Dr Anji Reddy in 1984. One of India's largest pharmaceutical companies, in terms of revenues. The company has over 190 medications, 60 active pharmaceutical ingredients (APIs) for drug manufacture, diagnostic kits, critical care, and biotechnology products. DRL commenced operations as a supplier to Indian drug manufacturers. Subsequently, in the late 1980s, the company started exporting products to semi-regulated markets and gradually expanded its scale of operations. By the early 1990s, the company shifted focus towards acquiring approvals for its formulations and bulk drugs in regulated markets, such as the US and Europe.

Manufacturing facilities and R&D

DRL has eight API manufacturing units - six in India, and one each, in Mexico and the UK. All these facilities are approved by the US FDA. The company has seven formulation manufacturing facilities in India (of which, 2 are approved by the US FDA) and two manufacturing units in the US (both approved by the US FDA). Additionally, the company has a biologics facility in Andhra Pradesh, which has approval from various regulatory agencies. Further, DRL has three technology development centers; two in Hyderabad and one in UK. It also has two R&D centres, one each in Bangalore and Hyderabad.

Business profile
DRL is present across the pharmaceutical value chain. It produces formulations, active pharmaceutical ingredients (APIs), diagnostic kits, critical care products, and biotechnology products. At present, it also has a handful of molecules or New Chemical Entities (NCEs) in the discovery and pre-clinical stages. DRL sells its products in approximately 100 countries worldwide, with the US, Russia and European countries, being the major markets. The company has strategic alliances with global firms, such as Par Pharmaceuticals, Leiner Health Products, Cobalt Pharmaceuticals, Pharmascience, Merck Sereno etc.

Page 4

Strategic Tools Analysis for Pharmaceutical Industry `

Market Position
DRL is the 15th largest player in the domestic market, with a 2.09 per cent share, as of March 2012. Mainly derives revenues through exports and has a strong pipeline of ANDAs (80 ANDAs pending with the US FDA, as of March 2012) and drug master files (543 as of March 2012). Gastro-intestinal, cardio-vascular and pain analgesics are the top therapeutic categories for DRL. These segments jointly constitute more than 55 per cent of DRL's total domestic formulation revenues. The companys top brands are Omez (acute gastritis), Stamlo (chronic) and Nise (acute).

Key developments
In June 2012, DRL entered into a partner ship with Merck Serono (a division of German company, Merck KGaA) to develop and manufacture a portfolio of biosimilar drugs, primarily in the oncology segment. Under this deal, Dr. Reddys will lead the early product development stage and complete the initial round of trials. Merck Serono will have exclusive sales rights for these drugs, globally (with certain exceptions), and will pay royalty fees to Dr. Reddy's. DRL's API plant in Mexico restarted operations from July 2012, a year after it received an import alert from the US FDA.

Page 5

Strategic Tools Analysis for Pharmaceutical Industry `

PEST Analysis
The macro environment tends to have a long term impact and requires extensive research. These external forces (Political, Economical, Social and Technology) will play a big part in shaping the final outcome of the ultimate corporate achievement.

PoliticaL

-Drug controllers plan to bring more drugs unde prcie control -Pharmaceutical SEZs -Changes in Import and export duties -Concers of animal rights orginations such as PETA and BUAV -Implementation of product patents

Economical

-Amount of low level medical spending (!%) -Low labour cost -Increasing population -Healthcares increasing industry penetration -Expected hight GDP growth rate

Social -Poor resources causing

Technical

illness -Preference of household medicines -Lack of awareness due to low eduction levels

-Advancements resulting into differentiation and cost effetivenss -Increased output -NDDS-Advances capability in formulation research

Page 6

Strategic Tools Analysis for Pharmaceutical Industry `

External Factor Analysis Summary (EFAS)

Opportunity and Threats Gives position of a firm w.r.t. external environment, considering the following factors o o o o o o Political Economical Social Technological Research and Development Environmental

Helps organize the External factors into the generally accepted categories of opportunity and threats To analyze how well the industry is responding to external factors in light of the perceived importance of these factors to the company. Helps to formulate new strategies and policies on the basis of a firms current position

Steps for EFAS

Page 7

Strategic Tools Analysis for Pharmaceutical Industry `

EFAS for Pharmaceutical Industry Opportunity

External Factors OPPORTUNITY Significant export potential Licensing deals and collaborations Contract manufacturing Awareness and Spending Marketing operations 0.2 0.15 0.1 0.1 0.05 5 4 4 3.5 4 1 Significant export potential to the developing & developed countries 0.6 Licensing deals and collaborations with MNCs for New Chemical Entities and New Drug Delivery Systems 0.4 Contract manufacturing arrangements with MNCs 0.35 Growing awareness and increasing spending on health 0.2 Providing marketing operations to sell MNC products in domestic market Weight Rating Weighted Score Comments

Threats
External Factors THREATS Product patent 0.15 regime Ceilings on 0.1 product prices 2 0.3 Product patent regime poses serious challenges to domestic industries unless it invests in R & D. DPCO puts unrealistic ceilings on product prices and profitability and prevents pharmaceutical companies from generating investible surplus. R & D efforts of Indian pharmaceutical companies hampered by lack of enabling regulatory requirement. More than 50 % of revenue is earned from Exports which posed high risk due to currency fluctuations Weight Rating Weighted Score Comments

0.2

Research & 0.05 Development Currency Fluctuations 0.1

1.5

0.075

1.5

0.15

Page 8

Strategic Tools Analysis for Pharmaceutical Industry `

External Factor Analysis Score

Internal Factor Opportunity Threats Total Weights 0.6 0.4 1.0 Total Score 2.55 .725 3.275

Total weighted score of Pharmaceutical Industry is above average. External factors are above average : o o Significant export potential to the developing & developed countries Licensing deals and collaborations with MNCs for New Chemical Entities and New Drug Delivery Systems

Page 9

Strategic Tools Analysis for Pharmaceutical Industry `

Internal Factor Analysis Summary (IFAS)

IFAS Table is one way to organize the internal factors into the generally accepted categories of Strengths and Weaknesses. It gives position of a firm w.r.t. internal environment, considering the following factors o o o o o o Financial Management Human Resource Research & development Legal Competitive

Helps organize the internal factors into the generally accepted categories of strengths and weaknesses To analyze how well a particular companys management is responding to these specific factors in light of the perceived importance of these factors to the Helps to formulate new strategies and policies on the basis of a firms current position

Steps for IFAS

Page 10

Strategic Tools Analysis for Pharmaceutical Industry `

IFAS for Dr Reddys Labs Strengths

Internal Factors STRENGTHS Human Resource Competency Financial Position Company Management Alliances and Partnerships Approvals and International Certification Exclusive Products 0.08 4 0.32 Best employer in Pharmaceutical industry 0.675 Highest Revenue with high profitability 0.28 Corporate governance & CSR 0.35 Building Synergies 0.2 US FDA along with USP certifications 0.525 Limited competitive generics Weight Rating Weighted Score Comments

0.15 0.07 0.1 0.05

4.5 4 3.5 4

0.15

3.5

Weakness
Internal Factors Weakness Infrastructure Diversified Portfolio Research & Development Legal 0.05 0.1 0.2 0.05 2.5 2 1.5 1.5 0.125 Limited Production facilities 0.2 Higher concentration on Generic products 0.3 Investment lowest among peers 0.075 Patent infringement, Product recalls Weight Rating Weighted Score Comments

Page 11

Strategic Tools Analysis for Pharmaceutical Industry `

Internal Factors Details

Human Resource Competency
Awards o o o Best Employer in India 2007 Best company to work with in India 2006,2007 Best Employer in Pharmaceutical Industry in India - 2011

Leadership programs Adoption of role based organization

Key Financials

Expression Operating Income Net Income Operating Margins Net Margins RoCE Debt/Equity Interest Coverage Net Cash Accruals/Total Debt Current Ratio

Units Rs million Rs million Percent Percent Percent Times Times Times Times

10-Mar 73293 3515 23.8 4.8 14.6 0.5 55.8 0.4 1.6

11-Mar 78829 9989 21.7 12.7 24.5 0.8 46.3 0.5 1.1

12-Mar 97655 13009 25.8 13.3 29.1 0.8 22.1 0.5 1.5 led by

In 2011 -12, DRL's revenues grew by 23.9 per cent y -o-y, healthy growth of 68 per cent in the US market.

Growth in the company's US revenues was primarily supported by the launch of new products, especially generic olanzapine, which was launched under a 180 -day marketing exclusivity. The marketing exclusivity also led to an improvement in operating margins by 410 bps y -o-y to 25.8 per cent.

Page 12

Strategic Tools Analysis for Pharmaceutical Industry `

Company Management
Dr K. Anji Reddy o o o o 2010 Awarded Best CSR activity award in Pharmaceutical Industry in 2011 o o LABS Schools 30 years of experience Has served as a member of Prime Ministers council on Trade & Industry President of Indian Pharmaceutical alliance Chairman of Andhra Pradesh Industrial development corporation

Awarded Golden Peacock Award for excellence in corporate governance - 2009 &

Exclusive Products
4 Drugs o o o o Tacrolimus Lansoprazole Omeprazole Fondaparinux

Contributed 32% of sales in US

Internal Factor Analysis Score

Internal Factor
Strengths Weaknesses Total

Weights
0.6 0.4 1

Total Score
2.35 0.7 3.05

Total weighted score of Dr Reddys is above average. Its strategies are effective: o Company is taking advantage of low cost generic products in emerging markets. Company is shifting its focus to research on difficult to make generic drugs

Page 13

Strategic Tools Analysis for Pharmaceutical Industry `

Strategic Factor Analysis Summary (SFAS)

Strategic Factor Analysis Summary(SFAS) matrix, also referred to as Quantitative SWOT Analysis, which is used widely across organizations globally as a key strategic planning tool. The framework trifurcates an organizations operating environment into Societal, Task & Internal environment respectively with the societal & task environments together constituting the firms external environment.

SFAS Analysis
Total weighted score of Strategic factor Analysis summary is 3.25 which is above average. SFAS is above average : o High Financial Position of Dr. Reddy Lab due to high revenue and high profitability Significant export potential to the developing as well as developed countries

Page 14

Strategic Tools Analysis for Pharmaceutical Industry `

TWOS Matrix
TOWS is just another way of saying SWOT illustrates how the external opportunities and threats facing a particular corporation can be matched with that companys internal strengths and weaknesses to result in four sets of possible strategic alternatives. It helps in creating alternative strategies related to growth and retrenchment. The TOWS Matrix is very useful for generating a series of alternatives that the decision makers of a company or business unit might not otherwise have considered. It can be used for corporation as a whole or it can be used for a specific business unit within a corporation. STRENGTHS 1. Human Resource Competency 2. Financial Position 3. Company Management TWOS Matrix 4. Alliances and Partnerships 5. Approvals and International Certification 6. Exclusive Products OPPORTUNITY SO Strategies 1. Significant Strategic alliances/partnership significantly improve export potential export potential (S4) Licensing deals and collaborations 2. Licensing deals and collaborations with MNCs for New Chemical Entities and New Drug Delivery Systems (S6) 3. Contract manufacturing 4. Awareness and Spending 5. Marketing operations THREATS 1. Product patent regime 2. Ceilings on product prices 3. Research & Development More than 50 % of revenue is earned from Exports 4. Currency which posed high risk due to currency fluctuations Fluctuations (S2) Contract manufacturing arrangements with MNCs (S4) Growing awareness and increasing spending on health (S2) Providing marketing operations to sell MNC products in domestic market (S5) ST Strategies WEAKNESS 1. Infrastructure 2. Diversified Portfolio 3. Research & Development 4. Legal

WO Strategies Exports effort hampered by procedural hurdles in India as well as non-tariff barriers imposed abroad (W4) R & D efforts of Indian pharmaceutical companies hampered by lack of enabling regulatory requirement.

WT Strategies Product patent regime poses serious challenges to domestic industries unless it invests in R & D.(S3)

DPCO puts unrealistic ceilings on product prices and profitability from generating investible surplus.(S2) R & D efforts of Indian pharmaceutical companies hampered by lack of enabling regulatory requirement.

Page 15

Strategic Tools Analysis for Pharmaceutical Industry `

Porter's Competitive Strategy Analysis

Different Formulations, NCEs Differentiation

Broad

Generics, APIs Cost Leadership

Scope

Narrow

Cost Focus

Differentiation Focus

Cost

Differentiation

Source of Competitive Advantage

Dr Reddys lab has been focusing on low cost for domestic and export markets. Companys major purpose is to provide affordable medicines through its branded and unbranded generics. Company offers low cost alternatives for its highly priced innovative brands. For eg the company successfully introduced Fluoxetine (generic version of Prozac), Donepezil hydrochloride tablets (generic version of Aricept). Companies attains economies of scale through centralized production. Thus the company follows overall cost leadership business strategy in case of Generic drugs and APIs. Company is also investing in R&D to bring differentiated formulations and New Chemical Entities (NCEs) into the market. Its strategy with respect to these products is overall innovative as it tries to bring new effective drugs into the market.

Page 16

Strategic Tools Analysis for Pharmaceutical Industry `

Recommendation
Research & Development Dr. Reddys Lab invest approximately 8% of revenue for the R & D , which is approximately half the amount invested by the global multinational pharmaceutical companies. So Dr. Reddy Lab can be more competitive and can also take the benefit of the margins if sufficient amount is invested in R & D. Patent infringement & Product recalls Since the patent infringement and product recalls can adversely affect the brand image and the customer value, Dr Reddys Lab should ensure high degree of compliance to the guidelines issued by the regulators of the domestic as well as the exporting country. In addition violation also results in levy of huge financial penalty as in recent case of Ranbaxy. Approvals and International Certification It is prerogative for any pharmaceutical company to obtain the approvals and certifications from the regulator of the country where the medicines are getting sold and hence Dr. Reddys Lab is recommended to vouch for the same in order foray into international markets and increase revenue. Shift Research Focus to Diagnostic-Led Strategy Even with well-established treatments for a condition, there are significant numbers of patients that are either not diagnosed in a timely manner or not diagnosed at all. Better diagnostics and physician education could significantly improve the number of people getting diagnosed and therefore increase the number of patients getting treated thus resulting in increased revenues for drug companies. In order to adopt this approach, Dr Reddy Laboratory would have to: a) Shift marketing resources from promoting specific products to promoting diagnostic testing; b) Time the development of the diagnostic to coincide optimally with the development of the therapeutic; and c) Develop business models that motivate physicians and diagnostic providers to participate Strategic Alliances & Partnerships In an increasingly challenging marketplace, where M&A strategies are failing to deliver R&D productivity gains, the importance of alliances has increased significantly. In fact, research suggests that products co-developed by a pharmaceutical and biotech company are more likely to be commercialized than those that are developed by a single entity

Page 17

Strategic Tools Analysis for Pharmaceutical Industry `

Consortium arrangement with Peer Companies While several models of combining research capabilities among companies can be conceived (joint ventures, alliances, etc.) and are presented with a variety of justifications, philosophically it is difficult to distinguish these ventures from the financial reality of merging firms. Even if the venture is of smaller scope than the entire firm for example, combining cardiovascular research to jointly-develop a product these type of arrangements offer little or no value to the shareholders of the participating companies from a risk-sharing perspective.

Page 18

Strategic Tools Analysis for Pharmaceutical Industry `

References
o Changing Patterns of Pharmaceutical Innovation: A Research Report. The National Institute for Health Care o Management Research and Educational Foundation. Self-published. May 2002. pp. 15-6. o Gilbert, J., et al.; Rebuilding Big Pharmas Business Model. In Vivo. November 2003. o o www.drreddys.com Henderson, Rebecca. Drug Industry Mergers Wont Necessarily Benefit R&D. Research Technology o o o www.moneycontrol.com Management. Vol. 43. No. 4 (Jul/Aug 2000). pp. 10-11. Landau, Ralph. Achilladelis, Basil. Scriabine, Alexander. Pharmaceutical

Innovation: Revolutionizing Human o o o Health. Chemical Heritage Press, 1999. pg 100-105. www.capitaline.com Lam, Michael D. Why Alliances Fail. Pharmaceutical Executive. June 2004. Vol. 24. Issue 6. pp. 56. o o www.yahoofinance.com Myshko, Denise. The Secret to Alliance Success. PharmaVOICE. October 2004. Vol. 4, No. 10, pp. 14-24. o www.researchandmarkets.com

Page 19