Dr. Reddy's Laboratories

Dr. Reddy’s Laboratories Ltd. (Reddy's), founded in 1984 by Dr. K. Anji Reddy, has become India’s third biggest pharmaceutical company. Reddy had worked in the publicly-owned Indian Drugs and Pharmaceuticals Ltd. Reddy's manufactures and markets a wide range of pharmaceuticals in India and overseas. The company more than 190 medications ready for patients to take, 60 active pharmaceutical ingredients, for drug manufacture, diagnostic kits, critical care and biotechnology products.

Reddy’s began as a supplier to Indian drug manufacturers, but it soon started exporting to other less-regulated markets – that had the advantage of not spend time and money on a manufacturing plant that that would gain approval from a drug licensing body such as the US’s Food and Drug Administration. Much of Reddy’s early success came in those unregulated markets, where process patents – not product patents – are recognized. With that money in the bank, the company could reverse-engineer patented drugs from more developed countries and sell them royalty-free in India and Russia. By the early 1990s, the expanded scale and profitability from these unregulated markets enabled the company to begin focusing on getting approval from drug regulators for their formulations and bulk drug manufacturing plants in more-developed economies. This allowed their movement into regulated markets such as the US and Europe.

By 2007, Reddy’s had six FDA-plants producing active pharmaceutical ingredients in India and seven FDA-inspected and ISO 9001 (quality) and ISO 14001 (environmental management) certified plants making patient-ready medications – five of them in India and two in the UK.^[1]

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Dr Reddy's and regulations

Generics Goldmine

With drug prices high in most OECD member states, health services came to rely on generic versions of drugs rather than the branded ‘originals’ – in the UK this was made the result of advice to National Health Service doctors from the country’s health department by a and in the US the 1984 Hatch-Waxman Act or Drug Price Competition and Patent Term Restoration Act^[2] and the financial liberalization of the mid 1990s^[3] gave what had been ‘third world’ pharmaceuticals firms a chance of getting into more lucrative markets, using their ability to reverse-engineer. In 1997, the U.S. FDA created an incentive for generics companies to engage branded drug makers in court, with the introduction of the Para 4 filing law, in a bid to generate competition. The law rewarded generic manufacturers for challenging existing patents instead of waiting for them to expire.

India: Patents and Profits

In the 60 years since India’s independence, the domestic pharmaceutical industry has been shaped primarily by regulation. Initially, multinationals had a near monopoly on pharmaceuticals. They imported and marketed complete formulations in India, mainly low-cost generics along with a few highly priced speciality drugs. When the government increased pressure to deter the import of finished products, multinationals set up formulating units and continued importing bulk drugs.

In the 1960s, the Indian government laid the foundation for a domestic pharmaceuticals industry by promoting the state-owned Hindustan Antibiotics Ltd. and Indian Drugs and Pharmaceuticals Ltd. for the manufacture of bulk drugs. However, the multinationals maintained their lead because of their technical expertise, financial muscle, and ability to move innovations from one market to another. The high cost of original research, the sophisticated scientific knowledge needed and a lack of financing options worked against the private-sector Indian companies.

This state of affairs changed with the 1970 Indian Patent Act, whereby substances used in foods and pharmaceuticals were not granted product patents. Process patents were granted for a period of five years from the date of grant or seven years from the date of filing, whichever was earlier. Process modifications were easier to accomplish, and there was a rapid influx of domestic manufacturers. These companies generally started with bulk drugs and gradually progressed into complete medications. The multinationals were constrained by their parent companies’ product ranges but the Indian producers could make almost anything. Not paying product patent royalties cut the cost of local manufacture and helped Indian producers thrive.

Shortly thereafter, the Drugs Price Control Order put a ceiling on prices of certain mass-usage formulations. Since selling at such low prices could cause discontent in their home markets, multinationals dramatically curtailed new product launches, further boosting India's domestic players.

Under the Foreign Exchange Regulations Act' in the late 1970s, the multinationals had to reduce their stakes in Indian ventures to 40%, or comply with certain export obligations and keep their equity stake at 51%. Many multinationals preferred not to business in that climate – another shot in the arm for India's pharmaceutical industry.

In 1986, Reddy’s started operations on branded formulations. Within a year Reddy’s had launched Norilet, Reddy’s first recognized brand in India. But, thanks to its superior process technology, Reddy’s scored a big success with Omez, its branded omezaprole – ulcer and reflux oesophagitis medication – launched at half the price of other brands on the Indian market at that time.

Within a year, Reddy’s became the first Indian company to export the active ingredients for pharmaceuticals to Europe. In 1987, Reddy's started to transform itself from a supplier of pharmaceutical ingredients to other manufacturers into a manufacturer of pharmaceutical products.

The passage from India

First it moved into Russia, forming a joint venture with the country’s biggest pharmaceuticals producer Biomed in 1992, pulling out in 1995 amid accusations of scandal, involving 'a significant material loss due to the activities of Moscow's branch of Reddy's Labs with the help of Biomed’s chief executive^[4] selling the joint venture to the Kremlin-friendly Sistema group and buying the whole company in 2002.

In 1993, Reddy’s entered into a joint venture in the Middle East and created two formulation units there and in Russia. Reddy’s exported bulk drugs to these formulation units, which then converted them into finished products. In 1994, Reddy’s started targeting the US generic market by building state of art manufacturing facility.

Reddy’s path into new drug discovery involved targeting speciality generics products in western markets to gain drug discovery abilities. The reason why development of speciality drugs was an important link to the development of new chemical entities is that all the elements that are involved in a NCE effort, such as innovation in the laboratory, developing the compound, sending the sales team to the market etc. are also stages in the development of a specialty drug. Reddy’s also invested heavily in building R&D labs and is the only Indian company to have significant R&D being undertaken overseas. Dr. Reddy’s Research Foundation was established in 1992 and dedicated to research in area of new drug discovery. At first, the foundation’s drug research strategy revolved around searching for analogues but its changed focus to innovative R&D, hiring new scientists – especially Indian students studying abroad on doctoral and post-doctoral courses. In 2000, foundation set up a US lab in Atlanta, dedicated to discovery and design of novel therapeutics. The lab is called Reddy US Therapeutics Inc (RUSTI) and its main aim is the discovery of next-generation drugs using genomics and proteomics. Reddy’s research thrust focused on large niche areas in western markets – anti-cancer, anti-diabetes, cardiovascular and anti-infection drugs.

Reddy’s international marketing successes were built on a strong manufacturing base which itself was a result of inorganic growth through acquisition of international and national facilities. Reddy’s merged Cheminor Drug Limited (CDL) with primary aim of supplying APIs to the technically demanding markets of North America and Europe. This merger also gave Reddy’s entry into value added generics business in the regulated markets of APIs.

By 1997, Reddy’s was ready for the next major step. From being an API and bulk drug supplier to regulated markets like the USA and the UK, and a branded formulations supplier in unregulated markets like India and Russia, Reddy’s made the transition into generics by filing an Abbreviated New Drug Application (ANDA) in the USA. The same year, Reddy’s out-licensed a molecule for clinical trials to Novo Nordisk, a Danish pharmaceutical company.

It strengthened its Indian manufacturing operations by acquiring American Remedies Ltd. in 1999. This acquisition made Reddy’s the third largest pharmaceutical company in India, after Ranbaxy and Glaxo (I) Ltd., with a full spectrum of pharmaceutical products, which included bulk drugs, intermediates, finished dosages, chemical synthesis, diagnostics and biotechnology.

Reddy’s started exploiting Para 4 filing as a strategy in bringing new drugs to the market at a faster pace. In 1999 it submitted a Para 4 application for Omeprazole- the drug it had so successfully marketed in India. In December 2000, Reddy’s had undertaken its first commercial launch of a generic product in the USA., and its first product with market exclusivity was launched there in August 2001. The same year, it also became the first non-Japanese pharmaceutical company from the Asia-Pacific region to obtain an NYSE listing. Each of these achievements was path breaking for the Indian pharmaceutical industry.

In 2001 when Reddy’s became the first Indian company to launch the generic drug, fluoxetine (a generic version of Eli Lilly’s Prozac) with 180 day market exclusivity in the USA. Eli Lilly's antidepressant drug Prozac had sales in excess of $1 billion per year in the late nineties. Barr Laboratories of the U.S. obtained exclusivity for all of the approved dosage forms (10mg, 20mg) except one (40mg), which was obtained by Reddy’s. Lilly had numerous other patents surrounding the drug compound and had already enjoyed a long period of patent protection. The case was heard twice by the Federal Circuit court, and Reddy’s won both hearings. The importance of market exclusivity is illustrated by the fact that. Reddy’s generated nearly $70 million in revenue during the six-month period. With such phenomenal returns at stake, Reddy’s was beginning to gamble on litigation that could cost millions of dollars, depending on the length of the trial.

The fluoxetinemarketing success was followed by the launch of ibuprofen tablets 400, 600 and 800 mg in the US under its own brand name, in January 2003. Direct marketing under the Reddy’s brand name represented a significant step in the company’s efforts to build a strong and sustainable US generic business. It was the first step in building Reddy’s fully fledged distribution network in the US market. This was much on the lines of the Indian software majors who have marketing professionals in the US.

In 2001 Reddy’s completed its US initial public offering of $132.8 million American Depositary Receipts issue and also listed on the New York Stock exchange. Funds raided from the US initial public offering helped Reddy’s move into international production – and take over technology-based companies.

In 2002, Reddy’s started its European operations by acquiring two pharmaceutical firms in the UK. The acquisition of BMS Laboratories and its wholly owned subsidiary, Meridian UK allowed Reddy’s to expand geographically and gave company an opportunity to enter the European market. In 2003 Reddy’s also invested US$. 5.25 million in equity capital of Bio Sciences ltd.

Auriegene Discovery Technologies, a contract research company was established as a fully owned subsidiary of Reddy’s in 2002, to gain experience of drug discovery through contract research for other Pharma companies. Reddy’s entered into a venture investment type of agreement with the Indian bank, ICICI. Under the terms of the agreement, ICICI Venture funds the development, registration and legal costs related to the commercialization of ANDAs on a pre-determined basis. On commercialization of these products, Dr. Reddy's pays ICICI Venture royalty on net sales for a period of 5 years. Reddy’s successful growth into a fully integrated pharmaceutical company in less than a decade was founded on a successful and targeted program of inorganic growth and investments in process R&D. It had chosen a high risk-high gain strategy to growth by going into direct competition with existing patent holders. A major challenge for Reddy’s is to find ways to de-risk its overall strategy. One way may lie in managing the cash flows from the ‘safer’ API and formulations businesses. Another way may be to seek out more experienced partners for the R&D business or use acquisitions to boost R&D resources and revenues. It has chosen the global route and went on an acquiring spree.

In March 2002, Dr. Reddy’s acquired BMS Laboratories, Beverley, and it is wholly owned subsidiary Meridian Healthcare, for EUR 14.81 million. These companies deal in oral solids, liquids and packaging, with manufacturing facilities in London and Beverley in the UK. Recently, Dr. Reddy’s entered into an R&D and commercialization agreement with Argenta Discovery Ltd., a private drug development company based in the UK, for the treatment of COPD.

With growing success in the generics market, Reddy’s also came to realize the need for developing marketing and distribution capabilities in the USA Reddy’s was considering several options for marketing the hypertension product in 2003. The company already had one tie-up with Pharmaceutical Resources, Inc. to market Fluoxentine 40 mg tablets. It also had a tie-up with Par Pharmaceuticals Inc., to produce and market over-the-counter drugs in the U.S. In addition to the United States, Reddy’s generics business had established a presence in the U.K., is a platform for expansion into other countries in Europe. Reddy’s also plans to expand its presence in Canada and South Africa. Its API business had sales in over 60 countries, with the US and India being the most significant revenue contributors. The branded formulations business was active in over 30 countries and Reddy’s was a significant player in the Indian and Russian markets. The business planned to significantly increase its presence in China, Brazil and Mexico in the near future.

Dr. Reddy’s entered into a 10-year agreement with Rheoscience A/S of Denmark for the joint development and commercialization of Balaglitazone (DRF-2593), a molecule for the treatment of type-2 diabetes. Rheoscience holds this product’s marketing rights for the EU and China, while the rights for the US and the rest of the world will be held by Dr. Reddy’s. Dr. Reddy’s conducted clinical trials of its cardiovascular drug RUS 3108 in Belfast, Northern Ireland, in 2005.The trials were conducted to study the safety and the pharmacokinetic profiles of the drug, which is intended for the treatment of atherosclerosis, a major cause of cardiovascular disorders.

Dr. Reddy’s entered into a marketing agreement with Eurodrug Laboratories, a pharmaceutical company based in Netherlands, for improving its product portfolio for respiratory diseases. It introduced a second-generation xanthine bronchodilator, Doxofylline, which is used for the treatment of asthma and chronic obstructive pulmonary disease (COPD) patients.

In 2004, Reddy’s acquired Trigenesis Therapeutics Inc; the US based private dermatology company. This acquisition gave Reddy’s access to certain products and proprietary technologies in dermatology segment. Dr. Reddy’s Para 4 application strategy for generic business received a severe set back when Reddy’s lost the patent challenge in case of Pfizer’s drug Norvasc (amlodipine maleate). Amlodipine maleate, the generic version of Pfizer's Norvasc, is indicated for the treatment of hypertension and angina. The cost involved in patent litigation as well as the strategic reversal affected Reddy’s plans to start speciality business in the US generic markets.

In March 2006, Dr. Reddy’s acquired Betapharm Arzneimittel GmbH from 3i for EUR 480 million. This is one of the largest-ever foreign acquisitions by an Indian pharmaceutical company. Betapharm is Germany’s fourth-largest generics pharmaceuticals covering 3.5% market share including 150 active pharmaceutical ingredients.

Reddy’s has promoted India’s first integrated drug development company Perlecan Pharma Pvt Ltd together with ICICI ventures capital fund management company Ltd and Citigroup Venture Capital International growth partnership Mauritius Ltd. The combined entity will undertake clinical development and out-licensing of New Chemical Entity Assets.

Dr. Reddy's is presently licensed by Merck & Co. to sell an authorized generic version of the popular drug simvastatin (Zocor) in the USA. Since Dr. Reddy's has a license from Merck, it is not subject to the exclusivity period on generic simvastatin of 180 days from June 23, 2006, which is split between Ranbaxy Laboratories (also from India) and Teva Pharmaceutical Industries.

As on 2006, Dr. Reddy’s Labs crossed US $500 M in revenues flowing from segments such as APIs, Branded Formulations and Generics with the former two segments accounting for almost 75% of revenues. On an overall note, Dr. Reddy’s controls the entire supply chain and offers high-quality products at competitive prices at the opportune time. It deals in and manages all the processes, from the development of the API to the submission of finished dosage dossiers to the regulatory agencies. It has moved from strength to strength and has built a variety of partnerships as well as acquisitions across its key overseas markets, US and Europe and had laid a strong foundation and is well poised to take advantage of opportunities in international markets.

Key people

On March 31, 2006 board members and senior executives included.

• Dr. K Anji Reddy - chairman
• Mr. GV Prasad - vice chairman & chief executive
• Mr. Satish Reddy - managing director & COO
• Mr. Anupam Puri - independent director
• Dr. Krishna G Palepu - independent director
• Dr. Omkar Goswami - independent director
• Mr. P N Devarajan - independent director
• Mr. Ravi Bhoothalingam - independent director
• Dr. V. Mohan - independent director
• Dr. Rajinder Kumar - president, Research, Development and Commercialization (joined on April 30 2007)^[5]

Key products

Top active pharmaceutical ingredients

• Ciprofloxacin Hydrochloride
• Ramipril
• Terbinafine HCI
• Ibuprofen
• Sertaline Hydrochloride
• Ranitidine HCI Form 2
• Naproxen Sodium
• Naproxen
• Atorvastatin
• Montelukast
• Losartan Potassium
• Sparfloxacin
• Nizatidine
• Fexofenadine
• Ranitidine Hydrochloride Form 1
• Clopidogrel (Not in US due to 2007 patent case)

Top-10 brands in India

• Omez
• Nise
• Stamlo
• Stamlo Beta
• Enam
• Atocor
• Razo
• Reclimet
• Clamp
• Mintop

References