DRL trims workforce costs by 25% amid Revlimid-linked margin strain

There are 21,757 permanent employees on company rolls as on March 31, 2024; cost optimisation to offset margin pressure due to declining Revlimid sales

Hyderabad-based pharmaceutical major Dr Reddy’s Laboratories (DRL) has embarked on a significant downsizing initiative, aimed at reducing workforce costs by about 25 per cent, sources familiar with the development said.

 

Multiple individuals with knowledge of the matter told Business Standard that the cost-cutting exercise was already underway.

 

“The internal directive is to reduce manpower-related expenses by around 25 per cent. Several high-salaried employees across various departments have been asked to resign. They include many earning over ₹1 crore annually,” said one person close to the matter, requesting anonymity. The person also added that people aged 50-55 years had been offered voluntary retirement in the company’s research & development division.

 

An email sent to DRL seeking comment did not elicit a response until the time of going to press.

 

According to its FY24 annual report, DRL employed 26,343 globally. Of them, 21,757 were permanent employees on the company’s rolls as on March 31, 2024.

 

It hired 6,281 employees during the financial year. The median remuneration stood at ₹6 lakh.

 

In FY24, DRL spent ₹5,030 crore on employee benefits, with an additional ₹39.2 crore allocated to training and development. Notably, 92 per cent of its workforce underwent skill upgrade during the year.

 

Assuming similar cost structures persist, a 25 per cent reduction in workforce-related expenses could potentially translate into annual savings of around ₹1,300 crore.

 

Analysts who track DRL pointed out that the pharma major had been undertaking strategic moves to improve operational efficiencies in recent years.

 

“It has forayed into nutraceuticals (JV with Nestlé) and also digital therapeutics wherein it launched products for migraine and irritable bowel syndrome. These are software-based solutions for managing and treating diseases,” an analyst said, adding that there had been considerable hiring and investments in these divisions.

 

“If these divisions are not doing as well as projected, there may be some downsizing of manpower, it seems,” the analyst added.

 

Sources indicated that the digital therapeutics division may be shut down altogether, while the nutraceutical division may see some downsizing. “300-400 people may be let go across the total organisation,” a source said.

 

Nirmal Bang analysts have noted in a February analysis that DRL is focusing on four key areas to drive growth. These are expanding its base business, launching specialty products (GLP-1 agonists, biosimilars), exploring opportunities through M&A and partnerships, and optimising costs. 

 

“The company aims to sustain double-digit growth and maintain 25 per cent Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins through these initiatives,” the analysts said, adding that DRL is investing in high-margin, complex generics and biosimilars for developed markets.

 

It is also exploring opportunities in GLP-1 agonists, particularly in emerging markets, while strengthening its R&D and manufacturing capabilities to support these initiatives.

 

“Given the expected decline in Revlimid sales (cancer drug) and its impact on margins, we have lowered our estimates. However, DRL’s expanding branded presence and cost optimisation efforts should help offset these pressures,” Bang said.

 

The brokerage expects DRL’s revenue to clock a 10 per cent Compound annual growth rate (CAGR), while Ebitda to clock a 3 per cent CAGR over FY24-FY27. Ebitda margin is expected at around 23 per cent over FY26E-FY27E. The company is expected to generate free cash flow of ₹5,300 crore in FY26, which is expected to be utilised for inorganic opportunities.

 

As such, the median remuneration of employees increased by 7 per cent in FY24.

 

“Average percentage increase in the salaries of employees other than KMP for FY2024, was 9 per cent as compared to FY2023. There was an increase of 14 per cent in the total remuneration of executive directors and KMP for FY2024 on account of computation of remuneration, on accrual basis to executive directors, and actual basis for KMP. The remuneration calculated does not include perquisites on account of employee stock options,” DRL’s FY24 annual report added. 

Bitter pill 

> DRL's move to cost optimisation to offset margin pressure due to declining Revlimid sales

> The pharma major co-hired 6,281 in FY24; employs 26,343 globally

> DRL spent ₹5,030 crore on employee benefits in FY24

> Firm’s digital therapeutics division may be shut down altogether, sources said