LETTER FROM THE CHAIRMAN AND CO-CHAIRMAN
Some of you may recall that in our letter to you two years earlier we had written"From the beginning of FY2018 there has been a totally focused drive on eliminatingneedless layers and unnecessary costs."
Last year too we reiterated this theme when we wrote "With changing dynamics ofthe generics markets we believe that cost competitiveness will continue to be a keydriver. Hence we aim to continue creating a leaner and more efficient organization."
Cost competitiveness de-layering improving efficiencies and increasingspeed-to-market are continuous processes. These can never stop for any company that seeksto remain on the path of profitable growth. Dr. Reddy's is no exception to this rule.
Your company's strategy is based on three inter-locking and interacting themes. Theseare:
Leadership in chosen spaces
Operational excellence and continuous improvement
Patient-centric product innovation
How is the strategy bearing out? Last year we had said that this strategy is gettingorganization-wide traction and believed that we could be "reasonably optimistic ofthe prospects for FY2020". We are pleased to inform you that it has indeed been thecase.
To appreciate this consider the key financial results for FY2020:
Consolidated revenues for FY2020 were ? 174.6 billion or a 13% growth over theprevious year. This was on top of an 8% growth in FY2019.
Consolidated gross profit was Rs.94 billion which was 13% greater than theprevious year. This too came over and above a 9% growth in FY2019.
Earnings before interest taxes depreciation and amortization (EBITDA)increased to Rs.46.4 billion or an increase of 36% compared to the previous year - on topof a 42% growth in FY2019.
Profit before taxes (PBT) was Rs.18 billion which was 20% lower than Rs.22.4billion earned in the previous year. This was largely on account of impairment chargestaken on a set of product intangibles.
Profit after taxes (PAT) was Rs.19.5 billion versus Rs.18.8 billion in FY2019 -representing a growth of 4%.
Diluted earnings per share (EPS) was Rs.117.40 in FY2020 versus Rs.113.09 inFY2019.
Let us now touch upon some of your company's businesses.
Revenue from Global Generics in FY2020 was Rs.138.1 billion or an increase of 12%compared to FY2019. The growth was driven by impressive performances in Europe EmergingMarkets and India.
Revenue from North America Generics was Rs.64.7 billion representing a growth of 8%over FY2019. Pricing pressures continued in this geography. However we mitigated these bylaunching 27 new products.
Revenue from Europe increased by 49% to Rs.11.7 billion-thanks to expansion of the basebusiness new product launches and scaling up in new geographies such as Italy Spain andFrance.
Revenue from Emerging Markets grew by 14% to Rs.32.8 billion. Each of our key markets -Russia the CIS countries Romania and the Rest of the World territories - witnessedsignificant revenue growth.
Revenue from India was Rs.28.9 billion or a growth of 11% compared to FY2019.
This was due to an increase in both sales volume and price of our existing productsplus additional revenues from the launch of 21 new brands. We also entered the nutritionsegment by launching our diabetes nutrition drink Celevida'.
Revenue from Pharmaceutical Services and Active Ingredients increased by 7% to Rs.25.7billion.
Revenue from Proprietary Products was Rs.7.9 billion. In FY2020 we sold our US andselect territory rights for some products belonging to our neurology franchise.
Your company's path to excelling in the manufacture of complex generics and biosimilarsdepends on its successful filing for new drugs - be these formulations or activepharmaceutical ingredients (APIs).
In FY2020 your company filed eight new Abbreviated New Drug Applications (ANDAs) withthe US Food and Drug Administration (USFDA).
As on 31 March 2020 your company had 99 generic filings pending approval from theUSFDA consisting of 97 ANDAs and two New Drug Applications (NDAs). We believe that 30 ofthese 97 ANDAs have First to File' status. In APIs we filed 98 Drug Master Filesworldwide during FY2020 including 10 filings in the US.
Regarding the USFDA observations and warning letters issued relating to our APImanufacturing facilities at Srikakulam Andhra Pradesh and Miryalaguda Telangana as wellas our oncology formulation manufacturing facility at Duvvada Visakhapatnam AndhraPradesh we are happy to inform you that these have been successfully resolved withsatisfactory USFDA audit closures across all the three facilities.
That brings us to the greatest humanitarian and economic threat facing the globe today- that of the COVID-19 pandemic which came out of Wuhan in China and spread rapidlyacross the world.
At the time of writing this letter* some 6.2 million people have been infected by thevirus and over 370000 have lost their lives across the world. The US is reeling withover 1.8 million cases; the number of cases has shot up exponentially in Brazil andRussia; and with over 180000 cases India now features among the ten worst affectednations.
Over and above the sheer humanitarian and health costs that the pandemic has imposed oncountries rich and poor alike the economic costs are estimated to be phenomenal.
According to the International Monetary Fund's latest World Economic Outlook (April2020) global GDP growth is expected to crash by 5.9 percentage points - from 2.9% inCY2019 to -3% in CY2020. It could be worse. For India growth is estimated to reduce by5.5 percentage points: from 5% GDP growth in FY2019 to -0.5% in FY2020.
IN SUCH A TERRIBLE GLOBAL MILIEU HOW DO WE EXPECT YOUR COMPANY TO PERFORM?
The national lockdown that was imposed in India from 25 March 2020 coupled withsimilar lockdowns in other countries led to major disruptions in the supply chain and inlogistics. These plus restrictions on people movement adversely impacted plantoperations. Added to such constraints were restraints on face-to-face meetings withdoctors which is critical for domestic marketing. All these factors challenged the usualmanner of doing business.
In large part we rose to the occasion with timely and proactive initiatives supportedby our strong digital infrastructure. Well before COVID-19 we had been working at rapidly
building various digital platforms not only across our businesses but also with oursuppliers buyers and doctors. Thanks to this digital backbone we managed to continuemost of our business operations despite the initial challenges. Going forward we will beusing our digital channels even more actively to enable working from home and to reach outto doctors customers and vendors.
Various measures have been undertaken to ensure that our manufacturing operationscontinue unhampered. Moreover across all our manufacturing and R&D facilitiesoffices and canteens we have rigorously imposed social distancing masks at work andfrequent hand sanitizing.
In the initial period we witnessed two opposite developments. On the one hand therewere incremental sales in certain markets such as the US Europe and Russia thanks topanic buying of medicines. On the other some of our sales were impacted and deferred inAPIs in the India business and in a few Emerging Markets.
Overall however there was no major impact of the pandemic on either in Q4 FY2020 orthe full year FY2020.
Equally there is no denying that we may face many COVID-19 related uncertainties inFY2021. Let us touch upon a few.
First pharmaceutical players worldwide have been hugely dependent on China for theirsupply of intermediates and APIs. We believe this will change.
Global pharmaceutical majors will want to reduce their dependence on China; and thereought to be more backward integration as companies attempt to establish themselves asend-to-end manufacturers. Here your company has an advantage thanks to its significantin-house API facilities.
Second we expect to see greater outlays in preventive healthcare and for public healthemergencies. While that is good for all nations and especially India where such spendsare woefully inadequate it is not certain how it will directly benefit pharmaceuticalcompanies other than hospital equipment suppliers.
Third if the pandemic continues for another six to eight months as it is expected towe should be prepared to see increasing delays in the treatment of other diseases.Hospitals and nursing homes all over the world have already begun to push back admissionof non COVID-19 patients.
Delays in treating these patients could lead to worsening health conditions as well asreduced demand for many pharmaceutical products.
Fourth on the flip side there can be an increased demand for over-the-counter (OTC)medicines. The COVID-19 outbreak has seen a significant upsurge in buying of OTCmedicines especially relating to immunity enhancement vitamins analgesics and flu andanti-infective medication. This stockpiling is expected to continue in the short-term andresult in demand surges for OTC drugs.
Fifth in the short-term we will see less face-to-face interaction between medicalrepresentatives and doctors.
Given its importance one might witness some negative impact on pharmaceutical sales.Here we are at an advantage given our strong digital platforms.
Sixth other than the race for COVID-19 vaccines one might see some de-prioritizationon R&D.
Finally the pandemic will seriously affect medical tourism via travel restrictions.
This in turn will reduce the consumption of pharmaceutical products across hospitalsand selected pharma outlets.
Despite these significant uncertainties we believe that successful execution of ourstrategy mentioned earlier - involving leadership in chosen spaces operational excellenceand continuous improvement and patient-centric product innovation - will create thenecessary levers to deal with this uncertain business environment.
|Stay safe. Stay healthy. || |
|With our best regards || |
|K Satish Reddy ||G V Prasad |
|Chairman ||Co-Chairman and Managing Director |