Magazine Article | March 8, 2010

Double-Digit Growth: The Next Step For Dr. Reddy's

Source: Life Science Leader

By Dan Schell, Editorial Director, Life Science Leader

It’s 6:30 p.m. in Hyderabad, India, and G.V. Prasad is not where I expected him to be. The vice chairman and CEO of the $1.2 billion Dr. Reddy’s Laboratories, the second-largest pharmaceutical company in India, is not in his office surrounded by lawyers and PR staffers poised to interject during our interview with their spin on a particular topic. Instead, Prasad sits casually at home with his wife by his side answering each question with none of the traditional platitudes or canned responses that are almost second nature to many top executives. He’s candid and open. His voice never wavers, even when confronted with questions about his company’s recent poor financial performance (single-digit growth) and product recalls. “It’s important that we discuss everything,” he reassures me. And we do.

A Five-Market Growth Approach
The 49-year-old Prasad has been in his current position since 2001. During his tenure, Dr. Reddy’s has changed significantly, growing in both revenue and market share, and Prasad is commonly recognized as the catalyst for much of that change. In particular, he has been the driving force behind the company’s evolution to a global pharmaceutical player — not just a provider of generics, APIs, and branded formulations. Today the company focuses primarily on the cardiovascular, diabetes management, gastrointestinal, and pain management therapeutic categories.

Globally, Prasad has decided to focus on five key markets: India, Germany, Russia, the United Kingdom, and the United States. “In 2008, we decided to exit a large number of small markets where we didn’t have critical mass or where we weren’t going to be able to achieve critical mass in a reasonable time frame. In our five target markets, we already had a significant local presence and the potential to reach a strong market position,” Prasad explains.

Of Dr. Reddy’s five key markets, it’s Germany (the third-largest pharmaceutical market in the world) that has been the most problematic. The company entered this market with high hopes in 2006 by acquiring Betapharm Arzneimittel GmbH, the fourth-largest German generic drug maker, for $572 million. Since then, though, Betapharm has been a drain on revenue, especially since Germany instituted a drug procurement law in 2008 requiring competitive tenders from generic drug suppliers, which consequently is deteriorating margins for generics suppliers like Dr. Reddy’s. In an attempt to reduce expenses, Betapharm’s main manufacturing was moved to India, but the subsidiary was still much to blame for Dr. Reddy’s recent third-quarter loss ($113.6 million).

Prasad admits Germany has been a lesson learned, and he’ll do things differently in the future with other growth markets. “First and foremost, before a geographic acquisition takes place, we need a deep knowledge of that market. With Betapharm, in our excitement to get into a large market and acquire a very attractive company, we did not invest enough in acquiring deep, local market knowledge. Though I have to qualify that by saying even some of the established players didn’t anticipate some of the changes that occurred in Germany in terms of pricing and the tenders. Regardless, we should have done more research before entering the market.”

Since the company still has room to grow in its five target markets, Prasad says it’s not focusing on expanding significantly in any other regions. Although, he says he is watching Japan closely and would like to find a partner that could help his company enter that market and create value. He uses the recent GSK alliance as an example of how Dr. Reddy’s has done this effectively.

In June 2009, Dr. Reddy’s and GSK announced an alliance to develop and market pharmaceuticals to emerging markets such as various countries in Africa, the Middle East, Asia Pacific, and Latin America. Dr. Reddy’s manufactures the branded pharmaceuticals and licenses them to GSK, which supplies them to the markets. In certain markets the products are comarketed. “GSK had announced its intention to expand into emerging markets with branded generics, so we saw this alliance as a good fit,” explains Prasad. “We could essentially extend the product development work we were doing for the regulated markets and our core markets into these emerging markets through the GSK channel. This alliance was a big achievement for Dr. Reddy’s, and I believe three to four years from now it will prove to be quite a significant relationship.”

Dealing With Recalls, Quality Issues
The last 10 months haven’t been easy ones for Prasad and Dr. Reddy’s. Aside from its problems in Germany, the company also took a big hit to revenue when the exclusivity expired in August 2009 on Sumatriptan, the first generic version of Imitrex, and a very profitable product for the company. The hits kept coming the following month when Prasad and his staff had to unexpectedly recall four products from the U.S. market due to some lots containing oversized tablets. That led to FDA inspections of two of the company’s facilities, which prompted Prasad to make some large-scale and costly changes.

“Historically, we had relied on an inspection-based quality approach,” he explains. “After the recall, we totally revamped our approach and initiated QbD [quality by design] into all of our processes. We also are putting in a lot more automation equipment and additional instrument-based process checks at the end of the production system. We’ve spent tens of millions so far on this initiative, and we’ve had some slowdowns in production during the implementation. But, we are past that now, and I believe these changes will significantly improve our production processes both in terms of quality and efficiency. Supply chain management has also been a big priority for us. During the last two years we have reoriented our supply chain system from being forecast-based to demand-based.”

Transforming R&D To A Biotech Model
The quality control upgrade wasn’t the only big change the company made last year. According to a Pharmabiz (an Indian pharmaceutical website) poll, many of the top Indian pharma companies have been growing their R&D efforts. In early 2009, Prasad announced Dr. Reddy’s was going to reduce its exposure to “high-risk” R&D projects, such as NCE (new chemical entity) research in areas where the probability of success is diminished (e.g. metabolic disorders and cardiovascular drugs). Instead, the company would focus on areas where the probability of success is much higher and where there are clear biomarkers.

Prasad adds, “The other major decision we made was that we would behave more like a biotech company rather than a large pharma company. Earlier, our approach was to have the entire infrastructure for research in-house, and we would dedicate that entire infrastructure to our programs. For a company of our size, it was difficult to support and manage a complete R&D infrastructure. So, we changed the structure of our R&D organization into a kind of virtual biotech company where we maintain a lean structure and spend more money on programs than on overhead and infrastructure.”

In addition, the company extended its work not only into NCEs, but into differentiated formulations where it reformulates existing drugs to make them better. This is also a lower-risk area because the proof of concept is already established. “This is the project I am most excited about currently,” he says. “We have been working on this initiative for about a year, and I believe it will be useful in emerging markets as well as all of the regulated markets [e.g. United States and Europe].”

The Promise Of Biosimilars
Arguably, Dr. Reddy’s has been behaving like a biotech company for the last few years as it endeavors to produce biosimilars. Starting from scratch, the company had to create a dedicated biosimilars team and build a development facility (for generating quantities for clinical trials) and a manufacturing facility (which is still being expanded on the company’s Hyderabad campus).

Prasad has been vocal about his commitment to launch a new biosimilar each year into the Indian market for the next few years, and he assures me the company is still on track to reach this goal. However, there have been delays due to changes in the Indian government’s regulations surrounding biosimilars. “We are close to regulatory approval for one product. On another, clinical development has been completed, and we have been waiting for regulatory approval for about nine months, so it may be approved anytime. We also have another product that is entering the clinic now. Our goal is to start in India, go to emerging markets, and then go to regulated markets like Europe and the United States.”

An Optimistic Future
Looking at the remainder of 2010, Prasad is understandably optimistic. The company should see a boost from Omeprazole, which was launched in December 2009 and is only the second generic of Prilosec (used to treat stomach ulcers and acid reflux). Plans are also underway to launch Fondaparinux (a generic of Arixtra, an anticoagulant) and a version of the allergy medicine Allegra.
In India, which is more of a branded market with shorter regulatory cycles, Prasad says Dr. Reddy’s may release between 30 and 40 generic products in 2010. In the regulated markets of the United States and Europe where the company has to wait for patent expirations, the number of new product launches this year is expected to be about 10.

One product you won’t see coming any time soon from Dr. Reddy’s is the Red Heart polypill (a multi-ingredient pill for the prevention of heart attack). This publicly funded and widely publicized project is just entering clinical trials for primary indication, Prasad says. The company is planning to work with GSK on the project for the emerging markets. “We already have created a different manufacturing setup for this pill, but I don’t see a launch within the next two years,” he says.

During our interview, Prasad exudes the confidence and conviction I expect from a CEO but still speaks in such a relaxed manner that he makes it seem like you’re having a casual chat with an old friend. He doesn’t sugarcoat anything — which is refreshing — and his answers are void of management jargon or buzzwords. This is especially evident when I ask him if he plans to deliver any type of reassuring message to his employees about the company’s recent troubles.

“I don’t think our employees are worried about the performance of the company,” he begins. “This year we had originally planned to have some breakthrough products, and now those launches have been shifted to next year. So, there is some element of anxiety about that, but overall we have still grown. OK, it may not be spectacular growth, but it’s still growth. Further, philosophically, we have never done things like lay people off just because the business contracts for a period. We have a steady approach to management, and we don’t change our philosophy. Our employees know that our company’s goal is to work toward repeatable, upside opportunities each year, and I think 2010 will have plenty of those opportunities.”


Executive Profile: G.V. Prasad

What Business-Related Book Have You Read Lately, And Why Did You Like It?
The Human Side of Managing Technological Innovation: A Collection of Readings, by Ralph Katz. This book is helping me understand how to create a good organizational culture and structure and has other human-related aspects of managing innovation. It is very interesting because it touches on a number of topics that are relevant to Dr. Reddy’s stage of evolution.

How Has Having A Degree In Chemical Engineering Helped You In Your Current Job?
I initially started my career in the API business, which is a chemical-based area. Having a technical background is really an asset in this business. My degree gives me the ability to understand the science and technology part of our business. A significant number of our managers have technical backgrounds.

Describe Your Management Style.
I don’t know if I have a style that is very distinct. I spend a lot of time putting people in the right job, looking for talent for our company, and figuring out how we can leverage talent. Leadership and technical development are two of my biggest focus areas. I am also good at delegating, so I can think about the long-term, larger issues while also having time to interact with our employees.

Is There Anyone You Consider A Role Model Or Mentor For Your Current Position?
Some of my board members actively mentor me, and I often seek their advice. In terms of a role model, I am very impressed with Steve Jobs of Apple. In the pharmaceutical industry, I would say Andrew Witty at GSK is very impressive and inspiring. He wants to focus GSK into emerging markets and wants to serve more patients at lower cost while extending the benefits of the first-world health system to as many people as possible, which is truly inspiring.

What Is The Most Challenging Part Of Being The CEO?
Balancing the performance and health of the company.

What Character Traits Help You The Most In Your Job?
Being strategic, seeing the long term, and having the ability to see both the forest and the trees.