CASE ANALYSIS

Dr. Reddy’s Laboratories

 Case Analysis
I. Case Background

 About Dr. Reddy’s:

o In 2006, Reddy’s was the 3rd largest pharmaceutical company in

India with a Turnover of INR 24.6bn, Reserves of INR 20.3bn and
Cash and cash equivalents of INR 9.8bn
o It generated 66.5% of total sales from outside India
o It had specialization in two niche generic markets
 Cardiac drugs
 Non-Steroidal Anti-Inflammatory Drugs (NSAIDs)
o Dr. Reddy was the 1st Indian company to export Active
Pharmaceutical Ingredients (API’s) to Europe

 Crucial Acquisition

o During 2006, Dr. Reddy’s Laboratories wanted to acquire

Betapharm Arzneimittel GmbH, the 4th largest German drug
manufacturer
o But, during the same time, Dr. Reddy was recovering from two
major setbacks:
 Ragaglitazar, an insulin sensitizer which Dr. Reddy out-
licensed to Novo Nordisk A/S. But, Novo Nordisk refused to
accept the formulation, as it showed adverse side-effects
during the clinical trials
 It also lost bid for specialty chemical Amlodipine Maleate
(AmVaz) in a High Court trial in the US. Due to this failed
bid, Reddy lost over US$ 200mn in sales, reporting about 5%
dip in sales
o So, the acquisition of Betapharm was very crucial for Dr. Reddy’s
to recover from the two setbacks it faced during 2004-2005.
II. Strategies Followed:

 Balancing investments:
o The aim of the firm was to be placed among the top 10 pharma
companies of the world by moving up the value chain into drug
discovery. Every small step of the company, be it export sale of
generic drugs or making a Research and development team was to
reach the target. But the drug discovery was a very cost heavy
process and was time consuming, therefore, to fund the process,
business was made from the low end generics and active pharma
ingredients.

 Legal strategy:
o The company had a proactive legal strategy, It had been selling
active pharma ingredients to American and European drug market
as raw materials whereas it was also copying their patented drugs
and was selling them in India and various other markets. When in
1984, US allowed the generic companies to challenge patents under
Hatch-Waxman Act, and sell the drug in the market with 180-day
exclusivity, the firm got involved in filling court cases, but the court
proceedings were costly and lengthy, which mostly went up to 3
years long.

 Lower cost:
o Being an Indian firm, the company had advantages of lower cost.
The cost of manufacturing generics was 50 percent of that of other
global companies. The cost of building plant was 25 percent, and the
firm had great advantage in low cost labour. The salaries paid to the
scientists were 15 percent to those paid in other global markets. A
major difference can be seen in phase 1 testing, where the firm was
costing UD$ 7mn whereas in US it costed US$ 70mn.

 De-risking through partnerships:

o Dr. Reddy took some steps which were never done in the industry
before this. It focused on reducing the risk that the company was
facing and to save the losing value on the balance sheet and share
 price of the company on various stocks- NSE, BSE and NYSE.
Dr. Reddy’s signed a UD$ 56mn deal with ICICI venture for the
launch of its generic drugs in the United Kingdom and agreed to pay
them royalty for next five years. Another joint venture was signed
by the firm with two partners- ICICI venture and Citi group venture
capital international- both of them gave UD$ 22.5mn each as the
firm was losing value on its share price due to high costs involved
in Research and development. Another method the firm followed
was getting involved in collaborative researches for some specific
research of prevailing diseases.

 Global expansion:
o According to the firm, Indian Market was not enough to sustain its
growth and so expansion was important. Another reason pointed out
was that scientific talent at higher level was not available in the
country and therefore there was need for the firm to move to a
scientific hub. First steps were taken into Russia and then in middle
east. The firm later entered European market as it was the second
biggest market after US. The generic opportunity was much more
stable and better there.

Various steps were taken were as follows:

 Global Buisness service organisation: to attain excellence in finance, ERP

and other employee services.

 Hydra headed structure: instead of a permanent organisational structure,

the company decided to change the structure every 3-4 years. And decided
to follow hydra headed structure, that is reporting to 4-5 people, instead of
one.

 Project Suraksha- this implemented internal control to ensure accuracy

of reporting.
  Project Disha- it was to create an efficient, cost effective and end to end
global supply chain solution across business and reduce logistics cost of
the company globally.

Core competencies:
 Low cost labour: the firm based in India had cheap available labour and
also production cost is low as compared to other locations. The scientists
in India had to be paid 15% of what was paid on an average globally.
Therefore, giving an edge to the firm.

 Innovation: the firm invested in innovation on the basis of revenue earned

by generic drugs and sale of active pharma ingredients. The Research and
development of the drug took a long time and this method helped the firm
to survive.

 Strong financial backing: Citi and ICICI were there to fund the firm’s
innovation programs and also to provide loan to the company for
acquisition.

When the firm started losing value to high cost on its balance sheet, the
venture capitalist came to rescue to provide funding for the innovation
process. Therefore, the company had strong financial backing.

 Wider coverage: the company was present worldwide, India and then
penetrated to Russia and Middle East. It copied the patented drugs of US
and sold them in India and other unregulated markets. Its presence was also
in US by some acquisitions and now was planning to penetrate the
European market via Germany, where mostly the drugs were sold through
insurance companies.
III. Recommendations and implementation:

 Dr. Reddy’s strategy of acquiring Betapharm has good potential. Europe

was second largest market for pharmaceuticals and within Europe,
Germany was the largest generic market with a good growth potential.
 Dr. Reddy’s after acquisition should focus on developing human
resource. To execute and get value out of this deal it is important for Dr.
Reddy’s to have developed human resource as Betapharm would be the
biggest acquisition for the company.
 It should continue its focus on R&D. It should continue with its strategy
of financing its drug discovery and development activities, which are
long term, from business like generics and APIs.
 Betapharm is expected to benefit from the acquisition as it would be able
to add more products in its portfolio much faster.
 Dr. Reddy’s acquisition of Betapharm will give it more exposure to
European market. The company’s presence is only limited to UK but with
the acquisition of Betapharm it would enter the biggest generic market in
Europe.
 Other competitors like Ranbaxy were also bidding aggressively at that
time so to cut down competition and take first mover advantage it was
recommendable for Dr. Reddy’s to acquire Betapharm.
 Fierce competitive bidding from various generic companies increased the
acquisition cost for Dr. Reddy’s and extended the payback period.