imd216 pdf eng dr reddys labs china 2003
TRANSCRIPT
I N T E R N A T I O N A L
IMD216v. 07.07.2004
DR. REDDY’S LABORATORIES LTD: CHASING A DARING VISION
This case was written by Anand Jha (MBA 2002) and Professor Bala Chakravarthy as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
How does a company manage imitation and innovation at the same time? Aren’t these two competing goals?
G.V. Prasad, Vice Chairman & CEO, Dr. Reddy’s
For the year closing March 2003, Dr. Reddy’s Laboratories Ltd (Dr. Reddy’s), a company quoted on the New York Stock Exchange, showed revenues of $393 million. Its sales had grown at a compound annual rate of nearly 30% over the previous five years, and its return on equity in 2003 stood at a healthy 19% (refer to Exhibit 1). Dr. Reddy’s enjoyed a price/earnings ratio of 19, one of the highest among its peers. An important challenge for Prasad was to maintain the company’s hard earned reputation as a leading generic drug company, while simultaneously transforming it over the long term into a discovery led global drug company.
Talking to the case writers in his modest office in Hyderabad, India, Prasad remarked:
We have had some great successes on our daring journey seeking to be one of the top twenty-five discovery-led pharmaceutical companies in the world. But our current identity is that of an imitator, a strong generics company with global aspirations. We have to continue delivering the profitability and growth that our present business model promises and yet find a way to invest in opportunities that will give us non-linear and explosive growth in the future. The financial markets will not just buy into our vision like they did for the dot.coms. We will be competing in a well-established business domain. The markets will want results year-after-year, even during our transformation. I don’t know whether this kind of a metamorphosis has been successfully achieved in any industry. But that is what we are aiming for.
Copyright © 2003 by IMD - International Institute for Management Development, Lausanne, Switzerland. Not to be used or reproduced without written permission directly from IMD.
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Dr. Reddy’s: Humble Beginnings
Anji Reddy, a PhD chemist, founded Dr Reddy’s Laboratories (DRL) in 1984. He had struggled for nearly a decade in a difficult partnership that could not exploit the opportunities afforded to indigenous drug manufacturers by the Indian government. In the 1970s the government had chosen to adopt a process patent regime for the Indian drug industry, whereby a manufacturer could produce any drug whose product patent was still valid, as long as the process used to manufacture the drug differed from that of the innovator/patent holder. Anji Reddy recalled that this offered a unique window of opportunity to do some good for the country by offering quality drugs at a fraction of world prices, as well as to build one’s own financial fortune.
Abandoning the troublesome partnership, Anji Reddy made a personal investment of $40,000 and borrowed an additional $120,000 from the banks to start manufacturing Active Pharmaceutical Ingredients (APIs)1 for other drug companies. Soon DRL was formulating its own drugs and selling them under its brand names. Since all Indian competitors provided the same molecule, they had to distinguish themselves by their brands.
Anji Reddy had also formed another company in 1984 called Cheminor Drugs Limited (Cheminor), aimed at selling high quality bulk actives to western pharmaceutical companies, primarily in the US. Typically the bulk active sold was for drugs whose patent had expired. When a pharmaceutical product was no longer protected by patent, its active constituent could be manufactured and sold under its generic name, or a new brand name, by anyone satisfying regulatory controls relating to manufacture and marketing. By 1989 Cheminor became the largest exporter of “ibuprofen” (a bulk active substance) to USA, Italy, Spain and Japan.
Even though the two companies, DRL and Cheminor, maintained separate legal identities until 2000, when they were finally merged, for the purposes of this case the activities of both companies are treated under the umbrella of Dr. Reddy’s. Together, DRL and Cheminor generated $12.5 million in sales by 1990, a respectable figure in the Indian context. But Anji Reddy had bigger plans.
The Anji Reddy Miracle
The 1990s (refer to the Appendix for major milestones in the company’s brief history) saw four parallel evolutions in the group’s strategy: product diversification, international expansion with branded formulations, growth in the generics business and the building of capabilities for discovering new drug molecules.
1 Active Pharmaceutical Ingredients (APIs) - also known as active pharmaceutical products or bulk actives, are the principal ingredients in any formulation. Active pharmaceutical ingredients become formulations when the dosage is prepared together with other inactive ingredients in a form ready for human consumption such as in a tablet, capsule or liquid form.
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Dr. Reddy’s diversified the number of active ingredients (APIs) that it manufactured and sold them both in the Indian market and in fifty other countries. Concurrent with its growth in the active ingredients business, Dr. Reddy’s also pursued aggressive diversification of its branded formulations portfolio. By 2000 it was an industry leader within India in three therapeutic areas: pain management, gastroenterology and cardio-vascular. The company also started building its position in neutraceuticals, women’s healthcare, styptics and dental care; and began diversifying into the diagnostics and instruments business. Along with its product diversification, Dr. Reddy’s rapidly built its marketing infrastructure from its home base in south India to cover the entire country. By 2000 there were nearly 1,500 sales persons in its national detailing network helping the company to reach prescribing physicians in all major Indian markets.
The company had six factories for the manufacture of active ingredients, each capable of producing products to the standards of the US Food and Drug Administration (US FDA). It had three additional formulation plants, also built to international standards, for manufacturing its branded formulations. By 2000 the company had built an impressive supply chain capable of reaching 2,000 stockists and 100,000 retailers in India, and of exporting efficiently to over 50 countries.
Dr. Reddy’s was a pioneer among Indian drug companies in that it looked to international markets for its growth. Countries in Eastern Europe, South East Asia and Latin America, that had loose patent regimes, were the first to be targeted with exports. However, the real targets were the big markets of Russia, China, Brazil and Mexico. Dr. Reddy’s started exporting to Russia in 1992 and subsequently set up a 76:24 joint venture there in 1995. The 51:49 Chinese joint venture became operational in 2001. The company had a subsidiary in Brazil and was planning to expand its operations in Latin America.
Through Cheminor, Dr. Reddy’s sold active ingredients and generic drugs to markets in the developed world that were tightly regulated. It had offices in the US and Europe to increase its bulk active sales to the west. The company began forward integrating into the formulation of its own generic drugs and eventually set up a state-of-the-art manufacturing facility for formulating generic drugs.
It was clear to Anji Reddy from the beginning that just being a copycat manufacturer would not lead the company to greatness. He started Dr. Reddy’s Research Foundation (DRF) in 1993 to focus on drug discovery. He chose to keep discovery research separate, in order to protect it from the every day operating frenzy. DRF was meant to be a small organization, fast and flexible, with top employee strength of 200. Furthermore, employees were split into smaller teams of 30 to 40, each focusing on a distinct therapeutic area.
Finding researchers for this new activity was a big problem. The available scientific pool was more oriented towards process chemistry. The few Indian scientists skilled in drug discovery had either migrated abroad or worked for western multinationals in India. Anji Reddy was able to attract two from the latter pool. Dr. Rajgopalan, the head of discovery research in 2002, recalled his move:
I was attracted by Anji Reddy’s personality and passion for his work. It was a pleasure to be working for a scientist once again. Even though my colleagues at Hoechst were surprised by my move, I have had no regrets.
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DRF hired fresh PhDs from universities and began grooming them for drug discovery research. In order to expand this talent pool, the company instituted “spirit of excellence” scholarships in select Indian universities. Besides a good salary and stock options, DRF’s perks included financial support for attending national and international conferences, and encouragement for pursuing a doctorate while working for the company. There were also opportunities to work with foreign universities and hospitals.
Besides the research facility in Hyderabad, Dr. Reddy’s operated a discovery laboratory in Atlanta, Georgia. It had also set up Aurigene Discovery Technologies, a service organization to help the discovery efforts of big pharmaceutical companies, with research facilities in Boston and Bangalore. Working in partnership with the R&D departments of other drug discovery companies, Aurigene sought to build competencies in the drug discovery process and to help accelerate the discovery operations of its drug company clients, including Dr. Reddy’s.
Money was raised in foreign capital markets to fund the company’s diversification activities as well as to expand its generics business and support its new drug discovery efforts. The company’s GDR2 issue in July 1994 netted $48 million. It subsequently raised an additional $115.5 million in the US market in April 2001 through an ADR3 issue, becoming the first non-Japanese Asian pharmaceutical company to be listed on the New York Stock Exchange.
The End of an Era
In 2000, while remaining Chairman, Dr. Reddy entrusted active management of the company to his son-in-law, G V Prasad (Vice Chairman and CEO), and to his son Satish Reddy (Managing Director and COO). He remained close to his first love, the company’s new drug discovery efforts. Prasad had done his undergraduate work in chemical engineering at the Illinois Institute of Technology, and his graduate work in industrial administration at Purdue University, in the US. Satish Reddy did his undergraduate work in chemical engineering in India and followed that up with a graduate degree in medicinal chemistry at Purdue University. Prasad was 39 and Satish Reddy 34 when they assumed leadership of the company.
2 Global Depositary Receipts (GDRs) – give access to two or more markets, most frequently the US market and the Euromarkets, with one fungible security. GDRs are most commonly used when the issuer is raising capital in the local market as well as in the international and US markets, either through private placement or public offerings.
3 American Depository Receipt (ADR) - Introduced to the financial markets in 1927, an ADR is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. ADRs are bought and sold on American markets just like regular stocks, and are issued/sponsored in the US by a bank or brokerage.
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Both Prasad and Satish Reddy had asked the founder to look outside first to fill the top jobs in the company, but as Anji Reddy recalled:
I couldn’t find anyone. Relationships aside, I believe you can’t get a better team than the two of them. Dr. Reddy’s is in very safe hands.
The market capitalization of Dr. Reddy’s was around $1.5 billion in 2000. The Reddy family owned nearly a quarter of the company’s shares. Anji Reddy recalled asking in 1973 when he left his Indian public sector job to become an entrepreneur, “If I am that smart, why am I not rich?” By the time he stepped down in 2000 the question was no longer relevant.
Prasad Takes Charge
Prasad inherited an excellent base to start his ambitious journey. The company had a very healthy balance sheet and a robust business model. But there were new challenges.
As noted earlier, DRL and Cheminor, although sister concerns, operated as separate entities until 2000. Similarly, despite being a part of DRL, DRF (the research foundation) also operated independently. Before Anji Reddy handed the baton to Prasad he had started the process of bringing the three entities together under a common corporate entity, Dr. Reddy’s Laboratories (Dr. Reddy’s). The immediate task for Prasad was to complete this integration. A new logo and identity was created for the group and a new daring vision enunciated: “To become a discovery led global pharmaceutical company” (refer to Exhibit 2).
Generics was the new growth segment for Dr. Reddy’s. Bulk actives and branded formulations provided the ballast. But both of these businesses were getting very competitive. Dr. Reddy’s faced two fierce Indian competitors in its bulk actives and branded formulations businesses, Ranbaxy and Cipla. The generics business was also very competitive. Two of the largest generics companies, the Israeli Teva and Swiss Novartis Generics, only enjoyed around 5.5% market share each.
Dr. Reddy's Business Segment Data (all figures in USD '000)
1998 1999 2000 2001 2002 2003
Branded Formulations 46'341 55'961 78'603 116'631 131'200 149'130Bulk Actives and intermediates 59'048 82'174 88'169 108'202 113'851 137'848Generics 0 0 0 4'992 98'408 93'130Diagnostics, critical care, biotech 2'126 3'070 4'217 7'439 9'327 9'304Drug Discovery 1'274 2'174 1'942 0 2'712 0Others 139 185 465 1'318 5'863 3'413Total 108'928 143'563 173'395 238'583 361'363 392'826
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Growing the Generics Opportunity
By 2001 generic drugs represented a $40 billion market opportunity, growing at 10% to 12% each year. What helped this growth was that governments in the US, major European countries and Japan were all under pressure to reduce health care costs. In the US, the Drug Price Competition and Patent Restoration Act of 1984 gave generic drug manufacturers new opportunities. This law, colloquially called the Waxman-Hatch Act after the two lawmakers who drafted it, provided generics companies with access to the active substance, allowed them to undertake all preparatory work to apply for registration requirements and file registration applications before the patent on the originator product expired, and thus be fully prepared for a market entry immediately on the expiry of a patent. Patents for over $30 billion-worth of blockbuster drugs were due to expire by 2005, and generics manufacturers had the opportunity to cash in.
The Waxman-Hatch Act also permitted generic drug manufacturers to file Abbreviated New Drug Applications (ANDAs) 4 for generic versions of all post-1962 approved pharmaceutical products. The innovator company was given a five-year exclusivity period (called New Chemical Entity or NCE block). The generic player could file a patent challenge one year before the NCE block period ended. In order to get approval, the manufacturer had to submit detailed information regarding the bioequivalence of the drug they were proposing and the manufacturing process to be used; proving that the generic version was equivalent to the branded version. Each bioequivalence study cost the company anywhere from $500,000 to $2 million. The first ANDA filing by Dr. Reddy’s was in 1997 for Ranitidine 75 mg tablets in the US market. It subsequently filed numerous other ANDAs in the US and other developed markets.
An ANDA filing didn’t have to wait until the patent on a drug was set to expire. The generics competitor could also submit what was called in industry jargon a Paragraph IV application (alluding to that paragraph in the Act), claiming that the patent being challenged was invalid, unenforceable, or would not be infringed by the generic drug that was sought to be introduced by the filer. The law allowed the patent holder to sue the applicant within 45 days of such a filing, in which case it automatically got a 30-month stay period. If either the patent holder lost the lawsuit during this period or no decision was available from the courts at the end of it, the US FDA could approve the ANDA and give the first generic applicant a 180-day exclusivity period to start marketing its drug.
Dr. Reddy’s spent several million dollars in 2001 fighting Eli Lilly’s patents on the 40-milligram dose of the blockbuster anti-depressant drug Prozac. After a six-month court battle Dr. Reddy’s finally prevailed and won the right to market its generic drug exclusively for six months. The company achieved $68 million in sales in the exclusivity period alone, at a gross margin estimated in excess of 90%.
4 Abbreviated New Drug Application – completed dossier filed by suppliers of generic version of a drug when it was set to go off patent.
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As of early 2003, 11 ANDAs had been approved and Dr. Reddy’s had successfully marketed these products. The company was awaiting decisions on 23 additional applications, 17 of which involved patent challenges. However, whether or not to jump at an ANDA approval depended on a host of factors. As one investment analyst observed:
Rewards from a litigation-based strategy are substantial but the predictability of success and timing are low. Risks emanate from litigation/set backs/delays, regulatory changes/delays and R&D failures.5
Drug prices of generics in the exclusivity period were typically 60% to 70% of the original patented drug. After the exclusivity period, with the entry of other generics, prices quickly dropped to 15% to 20% of the peak price. This would be an argument for quick entry. However, if the winner of an exclusivity application went ahead with the marketing of its drugs and subsequently lost the original lawsuit or an appeal by the patent holder, there were compensation costs to be considered. Of course, if everything worked well, there were huge profits to be made. The generics manufacturer typically had a 57% cost advantage over the patent holder. This was estimated to be even higher (76%) for Indian generics companies.
Specialty: An Exciting New Bet
Specialty referred to generic drugs that were sold under a company’s own brand name, unlike conventional generics that were sold under the molecule name. Dr. Reddy’s saw this as an exciting new segment to grow in. Specialty drugs were also different from the original innovator product in that they usually offered an improved/different version of the original compound (better dosage, compliance, convenience, etc.). The original patent holder often challenged this claim in courts. The regulatory authorities also asked for clinical evidence to support the claims made for the specialty drug. If both of these hurdles were met, the company launching a specialty drug could enjoy an exclusive niche until a generic competitor challenged it in due course. However, since the new drug was not a straight bio-equivalent of an approved drug, pharmacists were not permitted to routinely substitute a prescribed drug with its specialty competitor. The company launching this new specialty drug had to market it to prescribing physicians. The new drug had to be prescribed by its brand name before a pharmacist could fill it.
In December 2002 Dr. Reddy’s won its first court battle to launch a specialty drug in the US market. A US District Court in New Jersey ruled that the amlodipine maleate molecule of Dr. Reddy’s did not infringe the existing patent of “Norvasc,” Pfizer’s blockbuster blood-pressure drug. Norvasc had generated $3.8 billion in sales for its rival in 2001. Even a modest 15% market share would be a financial bonanza for Dr. Reddy’s. But as Prasad observed, this was not without its downside:
5 Deutsche Bank’s Research Report on Dr. Reddy’s
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Pfizer has appealed the District Court’s judgment. While we wait for that appeals court decision we cannot just be looking at the upside. Whereas in the generics business all we have to show is the bio-equivalence of the substitute product being offered, the specialty business requires doing clinical trials that may sometimes involve thousands of patients! The costs of these trials can run anywhere between $10 million and $30 million. In addition, we will have to invest in new detailing capabilities in the US. Prescribing physicians have to be educated on the new drug. Unless they prescribe Dr. Reddy’s formulation by name the pharmacist cannot substitute Norvasc with amlodipine maleate, since the molecular composition of the two are not identical. We would have to hire a minimum of 200 to 300 sales representatives just to create a base presence in the market. This could easily double our financial exposure. While we would like to move quickly, an adverse appeals court ruling can be disastrous for us. We generate about $50 million in free cash flows each year. We have to reserve half of that for investments in our existing businesses. If we overreach in our pursuit of opportunities in the specialty area our whole portfolio could be at risk. An option is to look for a partner to pass on some of this risk. But then we would have to share in the upside as well.
A Cautious Approach to New Drug Discovery
The initial focus of new drug discovery was on therapeutic areas that were less competitive. Diabetes care was one such. Not much was happening on this research front and Dr. Reddy’s saw it as an opportunity to catch up with the established international players.
Following through on all phases of the drug discovery process was deemed prohibitively expensive, costing hundreds of millions of dollars. Dr. Reddy’s concentrated only on the pre-clinical research phase, since it was less capital intensive and low on risk. On a shoestring budget of $10 million, it was able to develop 10 to 14 new drug candidates, four to six times the industry average on productivity. Dr. Reddy’s out-licensed two anti-diabetic molecules to Novo Nordisk and one to Novartis, getting milestone payments in return. The company had also developed a robust pipeline, including nine NCEs (New Chemical Entities) covering four therapeutic areas: diabetes, metabolic disorder, anti-infective and cancer.
Managing a Global Company
Dr. Reddy’s sought a presence in all major world markets. By 2002 it already had operations or sales offices in 60 countries. It had subsidiary companies in the US, Brazil, UK, France, Holland and Singapore. Revenues from the company’s US operations were fast catching up with revenues generated in India. In fact by 2002 international revenues began dominating domestic revenues by a factor of nearly 2:1.
Dr. Reddy's - Geographic Mix of Revenues (USD '000) Exchange Rate: $1 = Rs.46
1999 2000 2001 2002 2003India 80'086 103'317 121'558 131'566 141'056USA 14'159 16'509 38'836 131'244 127'229Russia & other FSU 15'465 13'270 26'864 35'366 45'823Europe 7'119 14'323 10'964 16'979 30'457Others 26'735 25'977 40'362 46'208 48'257Total 143'563 173'395 238'583 361'363 392'822
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Yet, given the manufacturing cost advantages that India offered (one fifth of the US cost), it made sense to house the company’s fixed assets primarily in India.
This vast geographical spread for a mid-sized company like Dr. Reddy’s brought with it its own challenges. As Prasad noted:
Our markets are pretty far-spread. The value is created in India but realized in the US. It is a challenge to manage across cultures, across time zones and geographies. Within the geography there are different businesses. The company has to maintain a matrix-type structure, keeping the interests of each business in mind while at the same time extracting the maximum from each geography. This is a new challenge.
Autonomy and Sharing
In 2001 Dr. Reddy’s structured itself around seven strategic business units--SBUs (refer to Exhibit 3). Bulk actives was Dr. Reddy’s oldest business. This and branded formulations were two SBUs that had their roots in the old DRL company. The generics business and its specialty spin off came from Cheminor. Discovery was a business unit created to capture the erstwhile activities of Dr. Reddy’s Research Foundation (DRF). In addition to these five SBUs, two other SBUs were created. The Custom Chemical Services (CCS) business catered to the needs of pharmaceutical companies that wished to outsource their requirements for contract research, custom synthesis and contract manufacturing. It served as a single point of contact for customers and was capable of delivering products ranging from a few grams to multi tons. The seventh SBU combined two emerging businesses, biotechnology and critical care. Dr. Reddy’s sought to exploit its unique competencies in recombinant proteins technology through its biotechnology business; and the critical care business catered to specialty segments like Oncology. Each SBU was a separate profit center with single point accountability. The generics, specialty and discovery SBUs were run out of the US, and the rest from India.
The SBUs were supported by a set of shared corporate services. The corporate center played the role of a “strategic controller,” focusing on developing individual SBU-specific strategies and managing financial performance, while participating only in critical operational decisions. But with this added autonomy Prasad feared that cooperation among the SBUs could suffer:
Dr. Reddy's - Geographic Distribution of Assets (USD '000) Exchange Rate: $1 = Rs.46
1999 2000 2001 2002 2003India 67'822 70'236 69'587 80'968 99'521USA 345 331 533 778 2'306Russia & other FSU 59 84 319 752 676Europe 21 33 68 78 2'429Others 5 3 8 13 78Total 68'252 70'687 70'515 82'589 105'010
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This kind of a structure can put a blinker on each unit. But we can and must create additional value across businesses. For example, products coming out of the new specialty business run out of the US can also be of great interest to the branded formulations SBU in another country, say China or Korea. How do we facilitate the free flow of ideas within the organization, when each SBU has its own well-defined targets, interests and issues? We have to instill a sense of sharing together with the granting of more autonomy to the businesses.
A leadership team, the management council, consisting of 14 members, made all major decisions for the company. 50% of the council members were non-Indian by passport and 6 of them were based in the US. The non-Indians in the council were seen by their Indian peers to stress short-term performance and autonomy of action, over their own preference for long-term growth and sharing. Satish Reddy, the company’s COO, acknowledged:
The council still has to mature as a decision making body. It is currently more of a forum for sharing information than for serious brainstorming. With time we expect the council to provide the glue that binds the SBUs together and leads them in unison towards a shared vision.
Prasad added:
We have our own internal checks and balances within top management to achieve our vision. Dr. (Anji) Reddy is a passionate champion for new drug discovery, and Satish watches over the interests of our legacy businesses, bulk actives and branded formulations. I must not only focus on growing our generics and specialty businesses, but also ensure that our portfolio is in balance.
People Issues
A new human resources model was announced for the company (refer to Exhibit 4) that built on the three pillars of innovation, entrepreneurship and globalization. The company sought to develop a critical mass of research scientists who could expand the company’s opportunity horizon and also act as a source of inspiration for young aspirants. Employees were encouraged to take risks and not to give up easily. The third pillar, globalization, acknowledged that the company’s top and senior management team would have to comprise of different nationalities. Dr. Reddy’s sought close relationships with research institutes and universities in the key strategic locations that it operated throughout the world. These links were expected to produce a rich source of new talent for the company. The company actively encouraged movement of employees across functions and countries. It hoped to create a globally shared human resource pool. Talent management also became a priority. Reflecting on the need for this, Prasad observed:
The ever-changing business model of Dr. Reddy’s causes problems. We used to be a chemicals company. We then moved on to drug formulation. We have started seeing success recently as a generics player. Our ambition is to grow over the medium term through specialty, and over the long term through new drug discovery. As the relative importance of each business changes in our portfolio, there are new heroes. This leads to emotional issues with people who were very important at one point in time and then suddenly find themselves sidelined in the newer scheme of things.
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Experienced and skilled executives were brought in from the outside and represented nearly half of the company’s senior managers. Nearly 10% of Dr. Reddy’s 5,500 employees worldwide were non-Indians. The largest concentration was a team of 200 in China, followed by 160 in Russia. The Americans, while smaller in numbers, were key members of the senior management team. Managing this global workforce was not easy. Compensation was a big issue. For example, an Indian manager moving to the US could make more there than a local hire. There was little incentive for this manager then to accept the next transfer out of the US. Any planned job rotation had to be tempered by the fear of losing an employee. Also, the large infusion of external recruits highlighted the need for better internal training and personal development. The company’s rapid transformation did not give employees either the time or the right opportunity to acquire new skills. The old timers naturally felt neglected.
The company’s HR policy was transformed from its prior emphasis on job security to a new emphasis on employability, focusing more on employee learning and development, talent management and on developing a performance-orientated culture. The company introduced individual KRAs (key result areas), regular reviews and feedback, annual superior and self-appraisal, performance-linked compensation, bonus and stock options. Competency-based development programs were offered to employees at all levels with courses on communication, analytical and negotiation skills. Employees with high potential were sponsored for graduate degrees at reputed business schools.
Managing Dilemmas
As the meeting with the case writers drew to a close, Prasad concluded:
Life at Dr. Reddy’s is full of dilemmas these days.
How can we be an imitator [in the generics business] and an innovator [in the drug discovery business] at the same time? We have to maintain a fine balance between producing profits today and investing in future growth. The company just cannot invest in specialty and drug-discovery and then wait for returns…it has to deliver year-on-year results. We need to take care of our legacy businesses. But then, how can we forge out-licensing alliances with large pharmaceutical companies [in the drug discovery business] and at the same time challenge their patents around the world [in the specialty and generics businesses]?
Some may argue that we really cannot manage imitation and innovation under one roof, that the two business models are different, and we should separate the bulk actives and generics business from the specialty and new drug discovery business. My challenge is to prove them wrong. Finding organizational synergies between these seemingly different businesses is another critical challenge for us.
Finally, how can we work from a low cost/low margin base [in India] while building talent in a very high cost economy like the US and Europe?
Managing these interconnected strategy, organizational and people dilemmas successfully is key if we have to realize our daring vision. We have our work cut out for us.
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Exhibit 1 Dr. Reddy’s Financial Statements (in $ thousand, except ratios)
Source: Company information
5 Year Income Statement 1999 2000 2001 2002 2003Sales 141,389 171,454 238,583 356,713 392,822 License fees 2,174 1,942 - 2,712 - Services - - - 1,938 - Total Revenues 143,563 173,396 238,583 361,363 392,822 Cost of Revenues 92,602 103,296 124,692 149,325 170,412 Gross Profit 50,961 70,100 113,891 212,038 222,410 Operating ExpensesSelling, general and administrative expenses 31,561 37,135 61,280 79,730 109,137 Research and Development expenses 5,746 7,638 11,062 16,123 29,889 Amortization expenses 4,763 6,629 10,486 10,603 9,118 Other expenses (-gain) 6,513 (45) (1,350) (4,543) 1,524 Total Operating expenses 48,583 51,357 81,478 101,913 149,668 Operating Income 2,378 18,743 32,413 110,125 72,742 Income taxes(-benefit) 2,667 5,582 6,987 3,344 8,654 Net Income (3,870) 6,149 16,129 106,979 76,790
5 Year Balance Sheet 1999 2000 2001 2002 2003AssetsCash and Cash Equivalents 9,115 12,120 10,413 111,073 158,117 Accounts Receivable 30,119 37,904 51,733 82,863 78,696 Inventories 34,508 35,677 41,725 47,702 60,645 Total Current Assets 84,863 95,413 115,386 258,247 328,845 Property, Plant and Equipment 68,251 70,687 70,515 82,589 105,010 Invested securities 773 457 464 246 189 Investment in affiliates 1,194 876 6,195 5,702 3,700 Intangible assets 48,106 72,863 62,812 62,292 62,338 Total Assets 205,830 242,711 258,324 412,326 501,993 Liabilities & Shareholders equityCurrent LiabilitiesBorrowings from Banks 29,337 53,394 55,850 2,159 3,181 Current portion of long term debt 11,820 6,202 8,250 140 3,126 Trade accounts payable 22,601 19,409 14,877 24,406 36,639 Total Current Liabilities 75,246 93,233 98,096 51,321 67,465 Long term debt 17,735 25,159 21,813 1,023 889 Total Liabilities 108,440 141,954 144,053 76,295 92,605 Shareholder's EquityMinority interest - 164 348 - - Common equity shares 6,867 6,867 6,867 8,317 8,317 Additional paid-in-capital 93,395 93,395 93,395 219,239 219,239 Retained earnings (2,724) 413 13,633 108,402 180,931 Equity shares in controlled trust (106) (106) (106) (106) (106) Accumulated other comprehensive income (42) 24 134 179 1,007 Total stockholder's equity 97,390 100,593 113,923 336,031 409,388 Total Liabilities & stockholders equity 205,830 242,711 258,324 412,326 501,993 Earnings per equity shareBasic (0.06) 0.10 0.26 1.41 1.00 Diluted (0.06) 0.10 0.26 1.40 1.00 Number of sharesBasic 63,177,560 63,177,560 63,177,560 76,027,565 76,515,948 Diluted 63,177,560 63,177,560 63,177,560 76,149,568 76,516,731 Financial Ratio Analysis 1999 2000 2001 2002 2003Gross Profit Margin 36.04 40.89 47.74 59.44 56.62 Operating Profit Margin 1.68 10.93 13.59 30.87 18.52 Net Margin (2.74) 3.59 6.76 29.99 19.55 Return on Equity (3.97) 6.11 14.16 31.84 18.76 Assets Turnover 68.69 70.45 92.36 86.51 78.25
Exchange rate: $1 = Rs.46( $ , )
I N T E R N A T I O N A L
- 13 - IMD-3-1234
Exhibit 2 Dr. Reddy’s New Identity
Our new identity is a sunny abstract that can be interpreted as a person with outstretched arms. It expresses joy, warmth, vitality, and the boundless possibilities in the search for a healthier life. The new form sums up our essential driving force in three words: Life. Research. Hope
Life: We are all bound by a common thread that gives a purpose behind every heartbeat, every breath, every thought. It is what we call life. A gift so unique and precious that it needs to be constantly enriched and nurtured.
Research: For us, the spirit of human endeavor is best exemplified by the quality of our research. Meaningful research that leads to innovative products. Discoveries that make a significant impact in the life of everyone who needs them. All tempered by the finest scientific minds, across the world.
Hope: It is hope that dwells eternally in the human heart. Hope that inspires us, as humans, to strive, achieve and excel. When hope springs from the promise of a healthy life, the job of living is more than complete.
Core purpose
To help people lead healthier lives
Vision
To become a discovery-led global pharmaceutical company
Core Values !" E – Excellence !" Q – Quality !" R - Respect for the Individual !" I - Innovation & Continuous learning !" C - Collaboration & Team Work H - Harmony & Social ResponsibilityThe
company’s business practices are guided by the highest ethical standards of truth, integrity and transparency.
Source: Company information
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I N T E R N A T I O N A L
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Exhibit 4 HR Model
The ten key initiatives were: 1) organizational design – refinement of the new SBU structure and the role of the
corporate center, 2) competence profiling – an assessment center to test employees on the most
frequently required competencies, 3) talent management – work on recruitment, training & development and
compensation schemes to ensure that the best talent was available to the company, regardless of the temporary distortions that this may cause,
4) performance ethic – systematically weed out poor performers and tie the compensation of the rest to performance by increasing variable pay,
5) value development – an active approach to deploying the five core values of the company through communication, and in recruitment and performance assessment,
6) knowledge management – create a culture of learning and knowledge sharing, 7) Ankur – an in-house training and development facility to provide opportunities for
employees to develop both technical and management skills, 8) coaching – develop master coaches and mentors throughout the organization to help
employees, 9) celebrations – celebrate even small successes and the company’s oneness, and 10) HR portal –provide a user-friendly portal to the company’s employees worldwide
on all HR matters of interest to them. Source: Company information
I N T E R N A T I O N A L
- 16 - IMD-3-1234
Appendix Major Milestones in Dr. Reddy’s History
Year Milestones 1984 Company incorporated (DRL & CDL separately) 1989 Introduces ranitidine for the first time in India 1989 Largest exporter of ibuprofen to US, Spain, Italy, Japan 1990 Introduces famotidine and diltiazem for the first time in India 1990 Exports the molecules ciprofloxacin & norfloxacin, first time in India 1992 Establishes Reddy-Cheminor Inc. in the US 1993 Establishes Reddy-Cheminor SA in France for European market 1993 Launches domperidone, anti emetic, for the first time in India 1994 Launches dextromethorphan, anti tissue, for the first time in India 1994 GDR issue of $48m 1995 Enters into strategic alliance with PAR pharmaceuticals, USA 1996 Launches naproxen for the first time in India 1997 Enters into strategic alliance with Schein pharmaceuticals, USA 1997 Submits first ANDA for Ranitidine 75mg tabs 1997 Develops doxazocin mesylate, first after the innovator 1997 Receives “best vendor” award from Organization of Pharmaceutical
Producers of India 1997, 1998
Out-licenses two new molecules to Novo Nordisk for clinical trials, getting milestone payments for each
1999 Out-licenses another molecule to Novartis for clinical trials 1999 Acquires Chennai-based American Remedies Ltd 2000 DRL & CDL merged together to form Dr. Reddy’s Group 2001 First Asian, non-Japanese Pharma company to be listed on the NYSE,
raising a capital of $115.5m through its ADR issue 2001 First Indian pharmaceutical company to get a 180-day marketing
exclusivity for generic version of Eli Lilly’s blockbuster drug “Prozac” 2001 Dr. Reddy’s adopts new corporate identity and philosophy of “Life –
Research – Hope” 2002 Featured in the Forbes 200 list of small companies 2002 Acquires BMS Laboratories and Meridian Healthcare in the UK - amongst
the few Indian companies to undertake acquisitions in developed economies
2002 National award for excellence in corporate governance 2002 US District Court ruling in favor of Dr. Reddy’s. The company’s
amlodipine maleate molecule was not found in infringement of Pfizer’s patent for Norvasc, a blockbuster blood pressure drug.