Let us begin with your company's performance in FY2018. Consolidated revenues wereat Rs 142 billion which was ~1% more compared to the previous year. Consolidated grossprofit was Rs 76.3 billion or 2.6% less vis--vis the previous financial year. The grossprofit margin was 53.7% versus 55.6% in FY2017.
EBITDA reduced to Rs 24.1 billion a fall of 5.5% compared to the previous year.
Profit before taxes (PBT) was Rs 14.3 billion compared to Rs 14.7 billion in theprevious year.
Profit after taxes (PAT) was Rs 9.8 billion versus Rs 12 billion in FY2017.
Frankly these are disappointing results especially coming after a financiallydifficult year in FY2017. Last year we described the reasons for your company'sunfortunate performance as the consequence of a perfect storm' when a host ofnegative factors simultaneously came into play. We had then hoped that some of the darkclouds would disappear and make way for better performance in FY2018. Unfortunately thathas not happened. It is important to highlight the negative factors.
First the US market which accounts for 52% of your company's global generics salesand 42% of all sales continued to witness further consolidation of sales channels whichhas given the fewer big US buyers even greater pricing power.
The negative price effects of substantial channel consolidation have been furtheraggravated by intense price competition among multiple suppliers for each generic product.Over the last three years the average price decline for generic drugs in the USA has notonly been high but has also significantly increased in every passing year. Moreovergrowing competition from various international suppliers has made it very difficult ifnot impossible to overcome the price fall by volume increases. These factors are notunique to Dr. Reddy's. They have negatively affected all major pharmaceutical companiesexporting to the USA. Second we have been affected by regulatory interventionsespecially from the USA. As you know in November 2015 the USFDA issued a warning letterregarding three plants: an API manufacturing facility at Miryalaguda (Telangana) anotherAPI plant at Srikakulam (Andhra Pradesh) and an oncology formulation manufacturingfacility at Duvvada near Visakhapatnam (Andhra Pradesh). In consultation withinternational experts and the USFDA your company has continuously worked on institutingcorrective and preventive actions across these three sites and has had follow-up meetingswith the regulator. The USFDA re-inspected these facilities during February-April 2017.Based on their observations further corrective actions were undertaken and suchinformation was shared with the regulator. Post this inspection Miryalaguda APImanufacturing facility received an EIR indicating closure of the audit. However for theother two plants there is no change in status vis-a-vis the USFDA. Consequently launchesof key molecules injectables as well as certain APIs from these sites have been delayed.Although your company has successfully secured regulatory and customer approvals totransfer the production of some of these products to alternative facilities the outcomehas been a significant loss of revenue from the USA for both FY2017 and FY2018.
There was also a regulatory hiccup when the Federal Institute for Drugs and MedicalDevices (BfArM) of Germany audited your company's formulation unit 2 (FTO-2) atBachupally Hyderabad (Telangana). This resulted in the good manufacturing practices (GMP)compliance certificate not being renewed in August 2017. Corrective work was immediatelyundertaken. After a follow-up audit the GMP non-compliance status was withdrawn inJanuary 2018. However stoppage in sale to Europe for four months led to lesser revenues.Thankfully this is over and we expect to increase sales in FY2019.
Third during India's transition to the GST regime from 1 July 2017 your company'sperformance was impacted due to reduction in channel inventory and absorption of highertax on drugs that were not in the National List of Essential Medicines (NLEM). Moreoverprice controls under India's drug price control orders affected revenue across selectedproducts. As a result sales performance in India was more muted than it should have been.
WHERE DO WE GO FROM HERE?
Regarding pricing pressures in the USA it is difficult to predict how long thesetrends will last. Instead our task should be to overcome this reality. The only way ofdoing so is to have a strong pipeline of difficult-to-manufacture complex formulationsthat address key therapeutic needs one that allows us to introduce severalvalue-added products each year so that each such launch steps-up revenues to combat theprice erosion in those products that were brought to the market earlier. Your company hassuch a pipeline. In FY2018 we filed 19 new abbreviated new drug applications (ANDAs) andone new drug application (NDA) under 505(b)(2) route with the USFDA. As of 31 March 2018we had 110 generic filings pending approval from the USFDA comprising 107 ANDAs and threenew drug applications (NDAs) filed under the 505(b)(2) route of the US Federal Food Drugand Cosmetic Act. Of these 107 ANDAs 63 are Para IV applications of which webelieve 30 have First to File' status. We have to match this robust pipeline bysecuring timely approvals from the USFDA and complement those with rapid ramp-up ofproduction and delivery to the USA. We have to do this without fail and withbest-in-class cost of production. That is the way out.
As far as the USFDA regulatory hurdles go your company remains fully committed tofollow the highest standards of quality. We have significantly enhanced quality managementsystems and operations which include improvements in rigor of investigations and documentcontrol systems standardization of instrument calibrations strengthening shop-fl oorlevel IT controls as well as shop fl oor training programs and simplifying andstandardizing standard operating procedures and batch records. We have requested the USFDAto schedule an inspection of the oncology formulation manufacturing facility at Duvvada.Hopefully the regulator will recognize the scale and scope of improvements undertaken atthe facilities and give us the green light.
There exist significant opportunities in Emerging Markets which are now on alonger-term upswing. We should be able to increase revenues from these geographies throughgreater sales of simple and complex generics as well as hospital and institutional salesof oncological biosimilars. There are also major prospects in key emerging markets forspeciality generics and biosimilars and your company will be doing its utmost to increaseits market presence in these countries.
With the German regulatory problem behind us we expect to increase our sales to thatcountry as well as Romania. Moreover having opened operations in France Italy and Spainwe should be working on generating higher revenues from these countries and to increaseour market presence in Europe in the near future.
Relative to the competition that matters we have underperformed in India. Your companynow needs to put all its efforts in ensuring that it grows at least as fast as the market ideally faster and achieve the kind of double-digit growths that it attainedin the past. This is doable. It needs totally focused effort by the team.
After three years of lacklustre performance the pharmaceutical services and activeingredient (PSAI) business has turned around. We expect the business to now generatedouble-digit growth as it has in the past and it surely can.
Though small the proprietary product (PP) business has done well. The two new productsthat were launched in FY2017 ZEMBRACETM SYMTOUCHTM (a 3 mg sumatriptan injectionfor acute migraine) and SERNIVOTM (a betamethasone dipropionate 0.05% spray to treatmild-to-moderate plaque psoriasis) have found market traction. In FY2018 the USFDAapproved a third product IMPOYZTM (clobetasol propionate) cream. We expect to see greaterrevenues in the USA driven by these three products. Towards the end of the year we havefiled our lead migraine candidate DFN-02 with the USFDA.
A positive upshot of the revenue crunch in FY2017 and FY2018 has been your company'sattention to costs. From the beginning of FY2018 there has been a totally focused drive oneliminating needless layers and unnecessary costs. This will continue throughout FY2019and thereafter with the aim to create a leaner internationally cost-competitive and morenimble organization.
Your company's management has accepted several challenging goals for FY2019. Theseinvolve better plant management; an unwavering focus on institutionalizing best-in-classmanufacturing and quality practices; bringing about greater efficiency in R&D productdevelopment and speed-to-market for new products; driving hard to perform better in salesin the USA Europe India and the Emerging Markets; and maintaining a tight leash oncosts.
We hope that these initiatives backed by the resolve of each employee of your companywill deliver better results in FY2019. Because Dr. Reddy's and you the shareholderdeserve it.
Thank you as ever for your goodwill and support.
|With best regards || |
|K Satish Reddy ||G V Prasad |
|Chairman ||Co-Chairman and |
| ||CEO |