Dr Reddy's seeks to revamp generics biz after remediation with USFDA flops

Sale of Bristol unit, downsizing staff, scaling down R&D and capex are some of the measures that company hopes will get it back to revenue growth and profitability

The management at pharmaceutical major, Dr Reddy's Laboratories, has set about trying to bring its house in order, with the considerable time and energy it spent in negotiating an early closure of compliance issues involving USFDA's warning letter having come a cropper.

The company recently announced a series of steps, including the reversal of business decisions taken earlier. Analysts say the measures are a sign the management seeks to break status quo and regain business momentum.

The management stated upfront the reason for its decisions such as the sale of Bristol manufacturing facility and the reversal of a couple of other earlier business decisions. Commenting on the sale of their manufacturing facility in the US, Dr Reddy's chief operating officer Erez Israeli earlier said, "This sale is in line with our stated priority of streamlining and optimising our global cost structures, and helps us focus on other businesses priorities to drive growth." 

Things started moving after Israeli's joining the company this April while the management has been working hard to bring changes in organisational and business strategies with an aim to get the company back on track in terms of revenue growth and profitability, say analysts. Dr Reddy's CEO G V Prasad himself acknowledged the importance of the ex-Teva man's induction into his team and said Israeli's knowledge and experience from leading pharmaceutical business of scale will be valuable for future growth.

In one of the cost-cutting exercises, the company for the first time effected changes in second- and third-rung leadership and asked some employees to leave on performance grounds earlier this year. It was held that staff costs at Dr Reddy's were higher than some of its peers as the Hyderabad-based drug major was seen more lenient towards its staff. This legacy was put to the test for the first time when Dr Reddy's management was not able to fix accountability on people for the adverse inspectional observations made by the US drug regulator. The observations had culminated into the issuance of a warning letter involving three of the company's facilities in November 2015, analysts say. The company management is still working with the US drug regulator for a final inspection of one of the facilities in question.

Among other cost control measures, the management had slightly scaled down R&D and capex expenses during the first two quarters of the current financial year. While the revisit of previous business decisions based on their contribution to overall revenue growth are expected to continue in the coming months, the company's new business strategy, aimed at returning to higher revenue growth in the US, has not yet been fully translated into action, say analysts.

Until recently the company had been focusing on niche, difficult-to-make products, including those under patent litigation, as these products have a larger market and command better margins as well. This is in complete contrast to the business model followed by other Indian generic players such as Aurobindo Pharma, whose single-minded pursuit has been to launch as many products as possible without bothering too much about their market share or pricing.

Dr Reddy's product strategy, however, has faced challenges due to prolonged waiting time for approval of such products, resulting in fewer launches as compared to the faster approvals given to normal generics products. This has resulted in a fall in US revenues, which account for half the company's global generics revenues.

"To overcome this challenge, the senior management officials said that they would be pursuing the launch of more number of 'me-too' generic products to sustain the revenue growth some time back. But this new strategy is yet to play out in full so far," an analyst told Business Standard on condition of anonymity.

Dr Reddy's launched a couple of big-ticket products this year after a considerable wait for US FDA approval. Last week it launched anti-cancer drug Imatinib Mesylate (the generic version of blockbuster Gleevec owned by Novartis) following the US FDA nod this in August. The company was waiting for approval of its generic Gleevec ever since Sun Pharma was given first-to-file status along with approval back in 2015.
 

Taking stock

• In one of the cost-cutting exercises, the company, for the first time, effected changes in second and third rung leadership
• It asked some of the employees to leave the company on performance grounds earlier this year
• The management had slightly scaled down the expenses on the R&D and capex fronts during the first two quarters this fiscal