Innovation ranks high on Dr Reddy’s Laboratories prescription

By: | Published: December 8, 2014 12:20 AM

Dr Reddy’s Laboratories eyes US market with new drugs; banks on proprietary products business to move up value chain

The fortunes of Indian drug makers are largely dependent on the generic medicines they make for the US market. But with consolidation in the US pharmaceutical supply chain hurting the earnings of Indian drug makers, at least one of them is trying to break the mould and become an innovator.

Hyderabad-based Dr Reddy’s Laboratories (DRL) is looking to move up the value chain and is planning to file two NDAs (new drug applications) with the US Food and Drugs Administration (USFDA) by the end of 2015. The two products that the company is indigenously developing are for the treatment of dermatological and neurological ailments respectively.

In an earnings call, following the announcement of its September quarter earnings, the DRL management had stated that the market value of these two innovative drugs in its pipeline was around $100 million.

InnovationIf it can launch these drugs successfully in the US market, it will be a big boost for the company’s endeavour at its proprietary products division, which account for merely 2% of its turnover at present, but holds potential for the future.

The two new NDAs that DRL intends to file are in addition to the 72 ANDAs (abbreviated new drug applications) already filed by the company. ANDAs are applications that drug makers need to file with the US regulator, seeking approval to market generic drugs in that country. The combined worth of these drugs, for which it has filed applications, is around $40 billion in “innovator brand sales value”, according to an investor presentation on the company’s website.

No Indian company has been able to launch an indigenously developed drug in the US market yet and very few have even filed NDAs for the same.


“Our focus will be to launch difficult-to-make products, which are likely to provide a sustainable stream of cash flow over the coming years,” DRL’s chairman Satish Reddy told FE. “We will focus on developing niche, ‘limited competition’ products and invest prudently to build capabilities in key areas to aid growth.”

In the proprietary products business, DRL is working on more than 15 products that are at different developmental and clinical stages with peak sales potential ranging from $30 million to $300 million, according to the company’s latest investor presentation, issued in November.  DRL stated in the presentation that it would look to file one to two NDAs each year from 2016-17 onwards.

Even in the generic drugs business, which constitutes around 80% of DRL’s overall turnover, the company is focusing on differentiating itself by focusing on something known as incremental innovation.

Incremental innovation is a recent trend in the pharmaceutical industry wherein a drug maker creates new specialty products using known molecules. Since the research is directed towards known molecules, the time taken to develop the tweaked products is shorter and the process is less expensive. Also, since these differentiated formulations have higher efficacy, they are more value accretive for the company as they are either more expensive than traditional generics or prescribed more.

The other component of DRL’s generics business on which the company is pinning hopes for the future is biosimilars. Biosimilars are the generic versions of biological drugs that use organic compounds.

DRL has successfully commercialised four biosimilar products and has witnessed a 35% annual growth rate in sales from India and other emerging markets over the last four years. Its biosimilars business has clocked sales of $94 million in this period.

All these endeavours are reflected in DRL’s R&D (research and development) expenses that have jumped considerably. The company’s R&D expenses stood at R1,240 crore in FY14, 62% higher over the year earlier. As a percentage of sales, R&D expenses rose to 9% in FY14, from a little over 6% in FY13. The company is likely to hike its R&D expenses further to around 11% of sales in 2015-16.

DRL will be investing $300 million to develop its proprietary products business and another $150 million to build the biosimilars business over the next “three to four years till these respective businesses become self-sufficient and cash accretive,” it said in the investor presentation.
The financials of most Indian pharma companies came under pressure in the September quarter as several medical wholesalers, distributors and retailers in the US have joined hands and improved their bargaining power when it comes to drug prices.

Reddy is aware of this and is consequently trying to make his company future-proof.

DRL posted a 17% year-on-year decline in net profit for the September quarter, which stood at R574.10 crore. This was despite its turnover increasing around 6% in the same period to R3,614 crore.

“The fall in profit was due to lack of new product launches in the US market, delayed product approvals and price erosion for some of our key products,’’ says Saumen Chakraborty, DRL’s chief financial officer. “We hope to see a better second half (of fiscal 2015) once launches start happening.” It launched only one product in the US during the September quarter as against four launches in the June quarter.
Growing R&D expenses and pressure on pricing in the US took a toll on the company’s Ebitda (earnings before interest, tax, depreciation and amortisation) margins, which dropped to 24.3% in the September quarter from 28.3% in the same period of fiscal 2014.

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