Indian pharma is in consolidation

Satish Reddy is managing director and chief operating officer of Dr Reddy’s Laboratories Ltd. A chemical engineer from Osmania University, Mr Satish Reddy was appointed managing director in 1997. He presided over the company’s transition from a predominantly API manufacturer to a more value-added, finished dosages producer.

He also anchors the corporate social responsibility initiative for the organisation. He mentors Dr. Reddy’s Foundation — a non-profit organisation supported by Dr Reddy’s, which works on issues of social development. His nomination as a "Young Global Leader" by the World Economic Forum for 2007 has further enhanced the list of his distinguished achievements.

Excerpts from an interview with AMIT BHANDARI:

Dr Reddy’s acquisition of Betapharm hasn’t turned out as well as you had expected. What went wrong and how are you tackling it?

Healthcare reforms took place in Germany almost immediately after we had acquired Betapharm. New, lower reference prices were set for drugs. Competition there overreacted and cut prices sharply, which everybody else had to follow. Betapharm was using contract manufacturing in Germany, but our supplier was unable to match the larger sales volumes resulting from the lower prices. So we decided to shift manufacturing to India, a process that took about 16-20 months in all. We were able to start manufacturing in India in December 2007 and expect 40 per cent to 50 per cent of the overall requirement for Betapharm to be addressed this way. We conduct an assessment of various risks that a strategic move could face, but in this case we didn’t expect things to move so fast.

There seems to be a change in your overseas strategy. The recent acquisitions that you have made are all very small compared to Betapharm. Why? Also, are there more takeovers on the horizon?

All our takeovers are with a strategic intent. Betap-harm was a means for us to acquire a presence in Germany, which is the second largest market for drugs globally. In Mexico, we acquired the manufacturing assets of Bosch in a business that’s not core for them. It got us contracts with Bayer as well as a readymade manufacturing capacity.

We are looking at small, strategic acquisitions either for customers or capability. We acquired Dow Pharma’s UK assets, which were non-core to them, primarily for the customers. We acquired US-based contract manufacturing facilities of BASF because bidding for federal business there requires ma-nufacturing facilities in certain nations, and India is not on that list. In Italy, we had started registering products and the takeover (of Jet Generici Srl) gives us a readymade outfit for logistics distribution.

Even now, there are markets such as Mexico, Brazil and Turkey, where we are present but don’t have the scale.

These are branded markets and organic growth would take a long time.

How is the Indian pharmaceutical industry expe-cted to shape up going forward?

India hasn’t been very conducive to pharma sector M&A activity for some time. The last big wave of mergers in the sector was almost 7-8 years back. So firms started looking abro-ad, which is where most of the investments went. However, there is now a window of opportunity opening up. Small and medium-size players will not have the pipelines needed to grow. Consolidation is inevitable in the Indian pharma space. Smaller players would probably be out of the market while some mid-size firms could remain regional players. Unbranded generics market in India is insignificant while government procurement is unlikely to create a big chance. Larger players will have an advantage in getting licen-ces for patented products.

Your financial figures have shown sharp fluctuations in the past years.

We had sudden spikes in profitability in FY02 and FY07. In both the cases, it was because we had got exclusivity, which allowed us to be the only generic sellers for a patented drug, for some products. The exclusivity was worth $70 million in FY02.

However, now when we talk of a 25 per cent growth, it’s without such exclusivities. Our current base of $1.25 billion is also much larger, so the impact of such a windfall would also be lower.