You are here » Home » Companies » Company Overview » Dr Reddys Laboratories Ltd

Dr Reddys Laboratories Ltd.

BSE: 500124 Sector: Health care
NSE: DRREDDY ISIN Code: INE089A01023
BSE LIVE 15:55 | 20 Sep 2313.60 74.50
(3.33%)
OPEN

2261.00

HIGH

2329.95

LOW

2241.45

NSE 15:59 | 20 Sep 2314.70 73.15
(3.26%)
OPEN

2250.00

HIGH

2329.00

LOW

2240.00

OPEN 2261.00
PREVIOUS CLOSE 2239.10
VOLUME 97743
52-Week high 3394.95
52-Week low 1901.65
P/E 39.65
Mkt Cap.(Rs cr) 38,373
Buy Price 2313.60
Buy Qty 59.00
Sell Price 0.00
Sell Qty 0.00
OPEN 2261.00
CLOSE 2239.10
VOLUME 97743
52-Week high 3394.95
52-Week low 1901.65
P/E 39.65
Mkt Cap.(Rs cr) 38,373
Buy Price 2313.60
Buy Qty 59.00
Sell Price 0.00
Sell Qty 0.00

Dr Reddys Laboratories Ltd. (DRREDDY) - Chairman Speech

Company chairman speech

Dear Shareholder

It is useful to start with a summary of your company's performance in FY2017.

• Consolidated revenues were at ` 140.8 billion which was less by almost9% compared to the previous year.

• Gross profi t margin was at 55.6% of consolidated revenues or four percentagepoints lower than what it was in FY2016.

• EBITDA was at ` 25.5 billion versus ` 36.3 billion in FY2016 andaccounted for 18.1% of consolidated revenues.

• Profi t before tax (PBT) was at ` 14.7 billion compared to

` 27.1 billion in the previous year.

• Profi t after tax (PAT) was at ` 12 billion or 8.5% of revenues. It was40% less than FY2016.

What were the reasons of this unfortunate performance? Broadly speaking your companywent through what is called a ‘perfect storm' when several negative factorssimultaneously came into play. Let us briefl y discuss each of these.

The fi rst was related to the US Food and Drug Administration's (USFDA's) inspections.In November 2014 and March 2015 the regulator inspected three of our plants: two chemicalunits that manufacture active pharmaceutical ingredients (APIs) at Srikakulam andMiryalaguda and our formulations plant at Duvadda near Visakhapatnam which is anoncological sterile injectable facility with the capacity to manufacture certain complexgenerics. Based on their inspection the USFDA sent a warning letter to your company inNovember 2015.

We responded with a comprehensive plan of corrective and remedial actions along withtimelines.

Based on our corrective actions the USFDA re-inspected these three plants betweenFebruary 2017 and April 2017. We have received some observations from the regulatorthereafter and have subsequently submitted a detailed response. At present we await theUSFDA's views on our latest set of responses.

There is no doubt that the remedial actions triggered by the USFDA's observations isunmistakably benefi cial to Dr. Reddy's in the long run and that it has helped us toaccelerate the pace of quality reforms across our plants. We have since November 2015signifi cantly invested in processes automation detailed documentation of each batch andstandard operating procedures and have further strengthened our quality managementsystems. We also believe that the shift in the US regulator's approach from ‘what hasgone wrong' to ‘what can go wrong' is for the long term good of the industry.Equally however the warning letter put on hold the approval of several key drugsincluding high value added injectables and complex generics to the US from the lastquarter of FY2016 and throughout FY2017. This pipeline blockage affected revenues marginsand profi ts. Additional costs of conducting remedial work including the use ofinternational consultants also reduced profi ts.

The second factor was the intensive growth of competition in US from several otherglobal generics players. This was on account of two reasons: new competitors launchingsome of our niche and high salience drugs and dramatically pushing prices down; and thesignifi cant consolidation of our key US trade channels which gave the buyers greaterpricing power than before. Moreover a high value multi-year supply contract from our USmanufacturing facility expired during the year.

Third there were signifi cant delays in USFDA approvals and the consequent launch ofnew products in the US. These have nothing to do with the warning letters regarding ourthree facilities. Instead these are on account on several additional queries raised bythe USFDA – not just to us but all global pharmaceutical companies. Added to thesedeferrals were intellectual property litigations on some of our complex generics products.

Fourth as an industry we are facing government inspired pricing pressures in emergingand even the developed markets. Regulators have become ever more vigilant of priceincreases taken by pharmaceutical companies. In India for FY2017 your company's revenuegrowth was constrained by the notifi ed decline of prices of a large number of drugsincluding your company's leading brands in the National

List of Essential Medicines (NLEM) issued by the National Pharmaceutical PricingAuthority (NPPA). Elsewhere global fi rms have been subpoenaed by lawmakers over pricerises. In the US the EU China and Japan governments are either considering or activelyimplementing policies that constrain price increases. This will only increase over time asmore aged people need direct and indirect healthcare support from their governments.

The fi fth has to do with what was once an excellently profi table emerging marketVenezuela.

Till two years ago your company enjoyed a sound business in providing affordablemedicine to that country. However an increasingly severe economic crisis in Venezuela hasled to the government imposing severe constraints on foreign exchange outfl ows. Thosefamiliar with last year's annual report will know that we took a major write-down of thenet monetary assets of our Venezuelan business in FY2016. Thereafter we have consciouslychosen to limit our business to supplying consignments only against remittance of fundsfrom Venezuela. Since such repatriations are minuscule so too is the size of ourbusiness.

Finally our active pharmaceutical ingredients business was also impacted due to loweroff-take of some key molecules.

These six factors came together; worked contemporaneously throughout FY2017; andseverely affected both revenue and profi ts.

What are the bright spots? And where do we go from here?

We believe that the pricing pressures in the US market will be less severe and morecalibrated in FY2018. We also have an excellent pipeline of complex generics to beintroduced to the country in FY2018 and expect to do better through this effectiveupgrade of our portfolio mix.

We also believe that there are enormous opportunities across emerging markets and areplaying actively to increase our presence in these territories through complex genericsand biosimilars.

The Russian and CIS markets are on a moderate upswing. Though threats ofgovernment-induced pricing pressure remain we are seeing greater offtake of generics– both relatively simple and complex – and oncological biosimilars the latterthrough greater hospital and institutional sales. We believe that emerging markets willagain get back to double-digit growth.

Despite government induced pricing pressures on pharmaceutical products India remainsa high growth market. In FY2017 revenues grew by 9% over the previous year. The fi rstquarter of FY2018 may witness a temporary decline in the sales due to de-stocking by tradeon the implementation of Goods and Services Tax (GST). Post normalisation we expect togrow at low double-digits in FY2018 and for the foreseeable future.

Having striven to widen our European footprint from the UK and Germany to France Italyand Spain we expect more signifi cant growth from the continent in the years to come.

We are particularly proud of our relatively nascent proprietary products business. Thefocus in FY2017 was on the commercialization of our newly launched products: ZembraceTMSymTouchTM (a 3 mg sumatriptan injection for acute migraine) and SernivoTM (abetamethasone dipropionate 0.05% spray to treat mild-to-moderate plaque psoriasis). Weshall attempt to signifi cantly drive the growth of these products while introducing newproducts from our healthy pipeline.

Perhaps the most signifi cant aspect of the top-line crunch in FY2017 is that it forcedus to carefully look at all elements of costs and administrative layers – items thatinexorably build up in good times and are generally only confronted in periods of stress.We have started multiple company-wide projects to lop off costs without affectingproductivity and in doing so recreate a leaner and more nimble global enterprise.

No chairman of a company listed in India and the US should ever make forward-lookingstatements. Even so we are tempted to believe that your company's performance in FY2018will be better than what we saw in FY2017. Let us indeed hope that it will. We have a goodof complex generics offerings and proprietary product. Our biosimilar products are gainingtraction. So too are our over-the-counter portfolios in Russia and the CIS the US andIndia. And the API business should to do better next year. Most importantly themanagement is united in putting aside the results of FY2017 and in striving for highergrowth and better profi tability in FY2018.

We are therefore cautiously optimistic of your company's performance in FY2018.

Thank you for your support.

With best regards

K Satish Reddy G V Prasad
Chairman Co-Chairman & CEO