Dr.

Reddy’s: Strategy in Turbulent Environment

Dr. Reddy’s: Strategy in Turbulent Environment

This case is prepared under the guidance of Prof. K. Rangarajan by Rakesh

K. Mishra, research scholar at Indian Institute of Foreign Trade (IIFT).

The purpose of this case is to act as a study tool for class discussion rather
than to illustrate either effective or ineffective handling of Strategic
Management issues.

The case draws reports from various websites and company sources and is
gratefully acknowledged accordingly.

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 Dr. Reddy’s: Strategy in Turbulent Environment

The case can be used in Strategic Management class discussions on following strategic
issues:

Broad Business Environment: Broad business environment prevailing in the country and its
impact on a particular kind of industry. The impact of evolving regulatory environment,
emerging product and process standards benchmarked to global standards etc. on the
business of companies.

Longitudinal Analysis: This case may also be used for understanding the strategic decisions
involved behind evolving a company from a simple beginning to transforming itself into a
global company over a time. This will simultaneously lead to understanding of adapting
strategic decisions according to the changes in business environment.

Importance of Environmental Scanning for Business Strategy of a company: This can also
be used to understand how changes in economic climate, technological changes,
demographic changes etc. (e.g. change in economy and living standards have lead to more
life style diseases) changes products and services demands and companies need to be alert
and receptive in fulfilling those changed needs.

It can be used to understand entry strategies, impact of opening up of economy-globalization,

mergers and acquisitions (M&A), strategic alliances in the specific sector, corporate social
responsibility and human resource management (HRM) particularly of resources associated
with R&D.

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 Dr. Reddy’s: Strategy in Turbulent Environment
Introduction

On 10th May 2012, it was not a usual evening at the headquarters of Dr. Reddy’s at Banjara
Hills, Hyderabad. Chairman, Dr. K Anji Reddy had just finished a very important meeting
with his core group before releasing the annual report of his company for year 2011-2012,
that was scheduled very next day.

Normally, a very calm, composed and optimist personality, Dr. K Anji Reddy, was not at his
normal self. Although, he had every reason to be very satisfied with the efforts of his team
members and sound financial performance of his Company. FY2012 had been a good year
for the Company, consolidated revenues increased by 30% to Rs. 96.7 billion in FY2012,
earnings before interest, taxes, depreciation and amortization (EBITDA) rose by 55% to Rs.
25.4 billion, profit after tax (PAT) grew by 45% to Rs. 15.3 billion, and diluted earnings per
share (EPS) increased from Rs. 64.9 in FY2011 to Rs. 83.8 in FY2012.

He kept standing at the window taking stock of the weather outside. Unruly winds were
blowing, and there were dark clouds in the sky. He was restless to think for this year to be
different from normal years. It may have been because of the emerging opportunities from
many of the patented drugs going off-patent in the recent years to come, rise of living
standards of developing economies, or the emerging risk areas like fierce competition in
Biosimilar markets, increasing regulatory compliance costs, adapting to dynamic legislative
landscape.

A fast rewind was going in his mind down into the memory lane ----how he along with his
close knit group had built this company from a humble beginning with an initial capital of
Rs.25 lakh in1984 to 2 billion USD company in 2012 with operations in so many countries
across many geographies. In all these years, the company had moved from focussing on
production of cost effective generics and building a strong supply chain (to make the drugs
available to more and more patients) towards innovation and R&D and making a long lasting
partnership with stake holders by sharing expertise and knowledge. This led to an increased
understanding of pharmaceutical business at global level culminating into 83% revenue from
global operations compared to 17% of revenue from India operations in the FY 2011-12.

He was delving upon four positive indicators of future growth that had come up in the just
concluded meeting. First, the Company succeeded in yet another generic launch in the USA
under 180 - days marketing exclusivity. Second, the biosimilars business continued along its
impressive growth path which grew by 45% over last year and recorded sales of USD 26
million. Third, investments in R&D grew by 17% to clock USD 125 million in FY2012(6%
of sales). And fourth, its entry into Japan through a joint venture with Fujifilm to develop,
manufacture and promote generics, with a plan to launch the first products in the next three to
four years.

For the dream run to continue, Dr. Reddy was charting out three strategic goals in his mind:
 Leadership positions in the key markets
 Identifying right partners for alliance in specific geographic and product markets
 Stressing upon proprietary products for next generation of growth

He came back to the room to hear a knock at the door of his cabin. Mr. G.V. Prasad, Vice
chairman and Mr. Satish Reddy, COO were at the door with data and files for next round of
discussions. He thought probably this was the right time to decide on the future course of
strategy with his future leaders.

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 Dr. Reddy’s: Strategy in Turbulent Environment
Company History/Background

Phase-I (1984-1990): Taking the first Steps

Dr. Anji Reddy established Dr. Reddy's Laboratories with an initial capital outlay of Rs. 25
lakhs*. The certificate of incorporation was issued on 24th February 1984. On the same day,
first meeting of the board of directors of Dr. Reddy’s was organised and was attended by Dr.
K. Anji Reddy and Mrs. K. Samarajyam.

Mr. M. P. Chari, who is the current General Manager of Production at Standard Organics
Limited, became the first Managing Director of Dr. Reddy’s laboratories. The same year, Dr.
Anji Reddy and Murali K. Divi (Currently Chairman of Divis Laboratories) took over
Cheminor Drugs and Murali Divi became the Managing Director of the company. The
construction of first API manufacturing facility at Bollaram, Hyderabad started on 1st May
1984 and was commissioned in June 1985.

The company went public with listing on Bombay Stock Exchange (BSE) in June 1986.
Dr. Reddy’s Laboratories Private Limited commenced the commercial production of its first
API, Methyldopa, a hypertension drug that was unavailable in India, in 1985. Dr. Reddy
supplied Methyldopa to Merck, Sharp, Dhome (MSD), manufacturers of Aldomet and
exported it to West Germany, Yugoslavia, Bangladesh, Kenya and Canada.

Formulation operations began with the formation of Stangen Pharmaceuticals. Soon, Stangen
Pharmaceuticals started expanding its marketing network to Eastern, North Eastern, Northern
and Central India.

In 1987, Cheminor Drugs obtained its first USFDA approval for Ibuprofen API. This marked
the first inspection of the API facility at Jeedimetla, Hyderabad. The company also started
exporting Ibuprofen API to the U.S.A. Globe Organics, a subsidiary of Cheminor Drugs, that
had started operations too. In the same year, Dr. Reddy’s obtained USFDA approval for
Methyldopa.
It acquired Benzex Laboratories, a bulk drug unit in Bollarum, Hyderabad thus expanding its
bulk actives business. Benzex started manufacturing active ingredients of certain semi-
synthetic Pencillins (Ampicillin and Cephalexin).
Dr. Reddy’s became the first Indian pharma company to export Norfloxacin and
Ciprofloxacin to Europe and Far East. Cheminor drugs also went public. It became the first
Indian company to introduce Diltiazem and Famotidine in the Indian markets.

Phase-II (1991-1999): Expanding & Innovation

First formulation exports to Russia commenced and operations started with a field force of
five in the city of Moscow**. On 22nd April 1991 Omez, Dr. Reddy’s brand of Omeprazole
was launched that went on to become Dr. Reddy’s first Rs 100 crore brand. Across India,
Omez heralded the birth of a new class of compounds in the treatment of acid-peptic
disorders and revolutionized its treatment. Omez was also the first brand of omeprazole to
enter the Indian market. Today, it is the top brand of omeprazole in 11 countries.
------------------------------------------------------------------------------------------------------------------------------
* “It was a dream. It was not a plan on the drawing board, no. But it was a dream” Dr. Kallam Anji Reddy, Founder
Chairman
**“We were among the first to enter the prescription market in Russia and over the years managed a solid brand
positioning, good distribution capabilities and a strong product pipeline. Today, when the market is booming, we will
obviously profit from it.” Satish Reddy, COO

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 Dr. Reddy’s: Strategy in Turbulent Environment
Commercial production at the Pydibheemavaram API plant commenced on 28th December
1991.

Dr. Reddy’s and Cheminor Drugs jointly established Dr. Reddy’s Research Foundation
(DRF). Dr. Reddy’s became the first company to start working on drug discovery programs
in India. DRF is recognized as a scientific and industrial research organization by the
Department of Scientific and Industrial Research, Ministry of Science and Technology,
Government of India.

European markets got a focussed thrust with the launch of Reddy - Cheminor SA at Paris.
Domperidone, an anti-emetic drug was also launched.
As part of company’s plans to expand its generic business and enter highly regulated markets
like the US, Dr. Reddy’s started construction of a finished dosages facility at Bachupally,
Hyderabad. The construction of this plant was completed in 1996.

Dr. Reddy’s issued GDR and raised USD 48 million through the issue.

Dr. Reddy’s Research Foundation (DRF) discovered one of the most potent glitazones [DRF
2593 (Balaglitazone)] and on March 1, 1997 licensed it to Novo Nordisk A/s of Denmark, the
world leader in the diabetes. Dr. Reddy’s also became the first Indian pharmaceutical
company to out-license an original molecule. Balaglitazone belonged to thiazolidinedione
class of insulin sensitizers, later elucidated to be a partial PPAR agonist. The US Patents and
Trademarks Office granted the first patent to DRF in December 1997 for the discovery of
Troglitazone Polymorphs, a molecule with anti-diabetic properties.

Dr. Reddy’s filed its ANDA with the United States Food and Drug Administration for
Ranitidine. Ranitidine created ripples not only in India but also in the global pharmaceutical
circles.

Reddy Biomed Ltd was inaugurated in Moscow on March 26, 1997 by the then Prime
Minister of India Shri H. D. Deve Gowda. Dr. Reddy’s also started a Joint Venture in Brazil
in September 1997. Reddy Pharmed started as a Joint Venture in Tashkent, Uzbekistan in
October 1997.

Dr. Reddy’s Foundation, the CSR arm of Dr. Reddy’s, that was inaugurated in 1996, initiated
the Child and Police (CAP) Project in 1997 in association with the Andhra Pradesh State
Police, creating a public-private partnership aimed at providing children access to quality
education.

Dr. Reddy’s acquired American Remedies Limited (ARL) and the combined entity occupied
5th Rank in India as per ORG. The acquisition helped Dr. Reddy’s focus on improving the
efficacy of co-prescribed drugs. American Remedies’ products complemented and enriched
Dr. Reddy’s portfolio and strengthened Dr. Reddy's marketing and distribution network.

Incorporated in 1986, American Remedies Limited had earned itself a name for its innovative
marketing strategies and for pioneering the concept of nutraceuticals in India. ARL’s strong
portfolios of brands like Mucolite, Antoxid, BioE, Becozinc, GLA and Optisulin, among
others became part of Dr. Reddy’s.

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 Dr. Reddy’s: Strategy in Turbulent Environment
Phase-III: Growing Globally (2000-2012)

Dr. Reddy's became India's third largest pharmaceutical company with the merger of
Cheminor Drugs Limited (CDL) a group company, on December 11, 2000. G.V. Prasad took
over as Executive Vice-Chairman and CEO, and Satish Reddy becomes the MD and COO of
the merged entity.

This merger gave Dr. Reddy’s the critical mass to compete, raise resources, attract and retain
talent. It also enabled the company to lower the risk inherent in some of its businesses- bulk
drugs, generics, branded formulations, discovery and biotech. The merger resulted in
significant synergies in common functions and businesses and the diversification in the
portfolio enabled Dr. Reddy’s to spread the risk.

Dr. Reddy’s became the first Asia Pacific pharmaceutical company, outside Japan, to list on
the New York Stock Exchange. It got listed on NYSE with the symbol ‘RDY’ on April 11,
2001. This listing gave the company visibility in the world’s largest pharmaceutical market
and ensured stronger financial support. Dr. Reddy’s IPO was not only oversubscribed but
also became the best performing IPO for the year.

Dr. Reddy’s became the first Indian pharmaceutical company to obtain 180-day exclusive
marketing rights for a generic drug in the US market with the launch of Fluoxetine 40 mg
capsules on August 3, 2001.

Dr. Reddy's Laboratories Limited acquired BMS Laboratories Limited and Meridian
Healthcare (UK) Limited, a wholly-owned subsidiary of BMS Laboratories. This was Dr
Reddy's' first overseas acquisition. The acquisition was valued at Great Britain Pound (GBP)
9.05 million.

BMS Group is engaged in the manufacturing and marketing of generic pharmaceutical

products in the United Kingdom (UK). BMS and Meridian have fully-integrated
manufacturing facilities for oral solids, liquids and packaging located in London and
Beverley, UK.

Dr. Reddy’s new Technology Development Centre (TDC) became operational. The 10,000
sft centre of excellence for chemistry process development was inaugurated on 6th May
2002.

Dr. Reddy’s launched Ibuprofen in the U.S. in January 2003. It was the first generic product
to be marketed under the “Dr. Reddy’s” label in the US. The Ibuprofen launch was a
significant event in Dr. Reddy's' endeavour to build a strong and sustainable US generics
business.

Dr. Reddy’s released its first “Corporate Safety, Health & Environment (SHE) report for the
year 2002 - 2003” on September 15, 2003 becoming the first Indian Pharma company to
release a SHE report.

Dr. Reddy’s acquired Roche’s API business at the state-of-the-art manufacturing site in
Cuernavaca, Mexico including all employees and business supply contracts for a total
investment outlay of USD 59 million including working capital.

This strategic acquisition provided an opportunity for the company’s CPS business to grow
from USD 10 million to USD 100 million in 18 months. It provided a strong foundation to
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drive the next wave of growth in CPS business. This acquisition also added unique steroids
manufacturing capabilities to Dr. Reddy’s. The Cuernavaca site at Mexico was approved by
U.S.FDA and other international regulatory agencies.

Dr. Reddy’s acquired betapharm, the fourth-largest generic pharmaceuticals company in

Germany, for a total enterprise value of € 480 million in cash.

They obtained 180-day marketing exclusivity for Ondansetron, Dr. Reddy's second 180-day
marketing exclusivity for a generic drug in the US market

Revenues touched USD 1 Billion in December 2006. Dr. Reddy’s became the fastest in
Indian Pharma to reach this landmark.

Dr. Reddy’s Launched Reditux™, brand of rituximab, a monoclonal antibody (MAb) used in
the treatment of Non-Hodgkin’s Lymphoma. Reditux™ was the world’s first monoclonal
antibody (MAb) biosimilar. The launch event was held in Hyderabad on 27th April 2007 with
over 100 leading oncologists from the country attending this event.

Dr. Reddy’s finished the financial year with revenues of USD 1.5 billion and became the
number one pharmaceutical company in India in turnover and profitability. Dr. Reddy’s and
Rheoscience commenced the first Phase III clinical trial of Balaglitazone (DRF 2593), a
novel TZD candidate for treatment of diabetes mellitus.

In April 2008, Dr. Reddy’s acquired a portion of Dowpharma Small Molecules business
associated with its United Kingdom sites in Mirfield and Cambridge.

The research facility at Cambridge had proprietary chiral and biocatalysis technology and it
employed chemists of exceptional quality. Their highly specialized knowledge of
Chemocatalysis and Biocatalysis had been creating an immense value for innovator
companies worldwide. The factory at Mirfield manufactured intermediates and APIs, was
FDA and UK MHRA approved and caterd to customer in North America, Europe and Japan.

Dr. Reddy’s acquired BASF’s pharmaceutical contract manufacturing business and related
facility in Shreveport, Louisiana, USA. The 42-acre Shreveport facility manufactured and
packaged prescription and OTC pharmaceutical products, liquids, tablets and creams for the
North American market. The acquisition enabled Dr. Reddy’s to strengthen its supply chain
for North America, provided a strong platform for pursuing additional growth opportunities.

On 22nd September 2008, Dr. Reddy’s formally announced its US Specialty Business,
Promius Pharma, LLC, a wholly-owned subsidiary of Dr. Reddy’s Laboratories located in
Bridgewater, with a focus on branded dermatology market in the US based on a platform of
strategic licensing initiatives and internal product development activities.

Dr. Reddy’s announced a strategic partnership with GlaxoSmithKline plc (GSK) *** to
develop and market select products across emerging markets outside India. Under the terms
of the agreement, GSK would gain access to Dr. Reddy’s portfolio branded pharmaceuticals
in fast growing therapeutic segments such as cardiovascular, diabetes, oncology,
gastroenterology and pain management.
*** “We are extremely pleased to combine forces with GSK, a global leader, to fully realize the potential of our strengths in
technology, product development and manufacturing across a range of high growth emerging markets. We hope to take our
purpose of providing affordable and innovative medicines to a much wider population through this partnership.” G V
Prasad, Vice Chairman and CEO, Dr. Reddy’s

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 Dr. Reddy’s: Strategy in Turbulent Environment
Effective 1st June 2009, the Drug Discovery operations of the company were reorganized
with the merger of Dr. Reddy's Research Foundation in Hyderabad with Aurigene, Dr.
Reddy’s wholly-owned drug discovery subsidiary in Bangalore. The employees, facilities and
infrastructure became resources of Aurigene, and it was to operate out of two sites -
Bangalore and Hyderabad.

In 2010, Dr. Reddy launched darbepoetin alfa in India under the brand name ‘Cresp®’-
world’s first generic darbepoetin alfa and the only in India.

In 2011, GlaxoSmithKline and Dr. Reddy’s agreed to the sale of US penicillin facility and
products.

FUJIFILM and Dr. Reddy’s established an exclusive joint venture for developing,
manufacturing and promoting generic drugs in Japan. They also expanded the R&D centre in
Cambridge, United Kingdom.

Fondaparinux and olanzapine 20 mg tablets was approved and launched.

It became the first Indian company to celebrate its 10-year anniversary at the NYSE on 15
April 2011. In 2012 Dr. Reddy’s crossed USD 2 billion in revenues and became the fastest in
Indian pharma to reach this milestone.

Dr. Reddy’s products and services are detailed in Appendix-I

Indian Pharmaceutical Industry

Indian Pharmaceutical Industry witnessed a robust growth from US$ 11.4 billion in 2010 to
US$ 13 billion in 2011 with a scorching pace of growth of 15%. The industry ranks 3rd in
terms of volume and 14th in terms of value globally. Showing tremendous progress in terms
of infrastructure development, technology base creation and a wide range of products, the
Indian pharmaceutical industry has established its presence and determination to flourish in
the changing environment.

The Indian pharmaceutical market is forecasted to grow at an estimated compounded annual

growth rate (CAGR) of 16% between 2010 and 2015 and cross USD 20 billion. Increase in
health awareness and higher prevalence of lifestyle-related diseases is resulting in greater
demand for pharmaceutical products in India. Among the therapeutic areas, gastrointestinal
(GI) and diabetes would continue to hold the largest market share of 25%. Cardiovascular
and oncology, at expected CAGRs of 16% and 15% respectively, would register high growth
over the next five years. Further, higher spending and focus on personal care is driving
growth in the cosmetology segment.

Projects worth more than 1.2 billion dollars are currently under implementation on various
products, suggesting massive investments by Indian pharmaceutical companies

Despite the above, a formidable challenge for the Indian pharmaceutical market in the next
few years would be to counter the impact of the proposed changes in the pricing regulations.
The Government of India is currently in the process of introducing a change in the manner of
pricing drugs in the country. It has announced the draft National Pharmaceutical Pricing
Policy, 2011 (NPPP), to put in place a regulatory framework for drug pricing so as to ensure
the availability of ‘essential medicines’ while providing sufficient opportunity for innovation
and competition to support industry growth. The list of drugs proposed to be regulated by this

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 Dr. Reddy’s: Strategy in Turbulent Environment
policy is based on essentiality of drugs as contained in the National List of Essential
Medicines (NLEM). There are concerns within all sections of the industry that its
implementation could not only impact the availability of ‘essential drugs’ but also affect the
competitive dynamics in the Indian pharmaceutical market.

India based pharmaceutical companies are not only catering to the domestic market and
fulfilling the country’s demands, they are also exporting to around 220 countries. They are
exporting high quality, low cost drugs to countries such as the US, Kenya, Malaysia, Nigeria,
Russia, Singapore, South Africa, Ukraine, Vietnam, and more. Currently, US is the biggest
customer and accounts for 22 percent of the sector’s exports, while Africa accounts for 16
percent and the Commonwealth of Independent States (CIS) places around eight percent of
orders. The details of Indian Pharmaceutical companies are given at Appendix-III.

Major Govt of India initiative and its impact on Indian Pharmaceutical Industry is given at
Appendix-IV

Global Pharmaceutical Markets

The global pharmaceutical market is currently estimated at around USD 850 billion. It is
anticipated to reach nearly USD 1,100 billion by 2015. Of this, the pharmerging****
countries are expected to add USD 150 billion, contributing close to 28% of the global
pharmaceutical market. Region wise market size break-up and prominent pharmaceutical
companies ranked according to pharmaceutical revenues are given at Appendix-V.

It is estimated that there would be an accelerating shift in spending towards generics, rising to
39% of the total spend by 2015 — up from 20% in 2005. This will be due to generic
competition in new molecules arising out of patent expiries, alternative generic opportunities
and increased incentives for the usage of generics in many markets.

The US market which registered prescription sales of close to USD 330 billion during 2011,
is presently transforming from a small molecule-centric market to one driven by alternative
drug opportunities. The total value of patent expiries beyond 2012 is estimated at USD 73
billion for the next four years, and represents an equivalent value in the four years preceding
2012. It is indicative of the generic opportunity on account of products going off patent will
continue to remain stable in the range of USD 15 to USD 20 billion annually over the next
four years.
Therapeutic areas of central nervous system followed by infectious diseases and
cardiovascular offer the greatest number of opportunities in respect of small molecule
products that have not yet become generic. In addition to these, the growth of generic
companies would remain robust because of strong product pipelines that are potentially
attractive owing to their complexities. These include generic injectables, dermatology,
biosimilars, specialty generics (complex generics), super generics (differentiated
formulations), novel drug delivery systems and oral contraceptives.
Original large molecule biologic products with US sales of over USD 22 billion are due to
expire over 2015–20, giving rise to significant biosimilar development opportunities that
would additionally complement stable small molecule growth.
-----------------------------------------------------------------------------------------------------------
****Pharmerging countries include China, Brazil, India, Russia, Mexico, Ukraine, Turkey, Poland, Venezuela, Argentina,
Indonesia, South Africa, Thailand, Romania, Egypt, Pakistan and Vietnam.

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 Dr. Reddy’s: Strategy in Turbulent Environment
The largest growth in the next five years is expected to be from pharmerging markets, driven
by improved access to drugs, increased purchasing power and strengthening economies
resulting in higher demand, primarily for generic drugs. Pharmerging markets are now
displaying patterns of diseases remarkably similar to those of the developed world - with a
changing trend from anti-infectives to lifestyle oriented diseases such as cancer, diabetes and
diseases of the heart. Currently at 56% of global incremental generic revenues, pharmerging
economies are expected to contribute two-thirds of the incremental growth of the global
market over the next five years. Thus, global generics spending in 2015 is expected to be
between USD 400 billion and USD 430 billion — up from USD 234 billion in 2010 — 70%
of which is expected to be from pharmerging markets.
Growth prospects in key emerging markets and challenges therein for pharmaceutical
companies are given in Appendix-VI

With over USD 100 billion worth products going off patent over the next five years Super
generics (differentiated formulations) and specialty generics (complex generics) are gradually
emerging as the alternative revenue opportunities, since the market for such products is
limited to a few players. Diseases involving lifestyle change and an ageing population —
such as those of the central nervous system and metabolism — are driving growth for super
generics (differentiated formulations). Super generics (complex generics) are superior to the
original / innovator product on account of either bioavailability, or delayed action, fewer side
effects, or are in a form which is more acceptable to the patient. Specialty generics (complex
generics) are distinct on account of difficulty in sourcing raw material, complex formulation,
development characteristics and special handling requirements. This may include modified
release, high potency drugs, oncology products, topical products, and biogenerics. Specialty
generics (complex generics) may also be products that are restricted to niche markets and are
therefore too small to attract competition from the major generic players. Being below the
radar of most generic companies, these attract little or no competition.

Expiring patent of biologic products between 2012 to 2020 provides a significant sustainable
growth opportunity for biosimilars manufacturers. A number of factors such as lower
development costs compared to original biologic products and reduced risk of pipeline failure
coupled with higher acceptability by patients have contributed to the consistent growth
potential of biosimilars. There are also a growing number of navigable approval pathways,
with the US Food and Drug Administration (US FDA) and European Medical Agency
(EMA), each issuing draft guidelines in relation to clinical trials and approval of biosimilars.
In terms of savings on healthcare spend; the European Generic Medicines Association (EGA)
expects to save Euro 1.6 billion (USD 2.2 billion) on account of introduction of biosimilars in
the European Economic Area based on just six off-patent biologics being made available in
biosimilar form. The US government is expected to save USD25 billion by 2018 with
genericization of original biologic products. With 177 biosimilars and copy biologics,
oncology is currently the largest target therapeutic area for development and marketing of
biosimilar /copy biologics.

Given the foray of generic companies across the globe into alternative opportunities and
emerging markets, alliancing and consolidation through mergers and acquisitions (M&A)
have emerged as key drivers for growth. Pharmaceutical M&As seek to promote building
capabilities or buying scale, simplifying and optimizing supply chain, reducing total cost of
delivery, and re-aligning costs and scale efficiency. In this context, M&A activity around the
Asia- Pacific region in the past five years has been on the rise. China and India dominated the
M&A scene, contributing to 34% and 27% respectively of the total deals in this region
between 2007 and 2011.

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The US FDA introduced the Generic Drug User Fee Act (GDUFA) program, with an
objective to bolster its financial resources to accelerate ANDA / DMF processing and remove
application backlogs over the next five years. Expected to be implemented from October
2012, the program would involve collection of fees every year from generic companies for
processing of ANDAs / DMFs and also for the inspection of formulation / API facilities. As a
part of this Act, the US FDA also aims to bring the US and overseas manufacturing facilities
at par in terms of the frequency of re-inspection — thus raising the quality bar for all
overseas US FDA approved facilities. It is expected that faster reviews would enhance the
competitive intensity of the US generics market and favour cost competitive and vertically
integrated players.

In February 2012, US FDA released draft guidelines in relation to scientific and quality
consideration for determining the biosimilarity of a protein product vis-à-vis the reference
product. The US FDA has stated that the user fee for biosimilar products would be the same
as that for biologic products. However, uncertainty remains over the reduction of biologic
exclusivity requirements from 12 to 7 years, a move that could save the US government USD
25 billion by 2018. The EMA has issued draft guidelines on clinical development of
biosimilars and concept paper on biosimilars with the objective to facilitate biosimilar
approval. Both EMA and US FDA have announced that they are seeking to collaborate with
procedures likely to allow producers to submit one approval package to both agencies,
thereby drastically lowering the cost of market entry for biosimilars. The Indian government
has also issued draft guidelines for pre-clinical evaluation of copy biologics.

Strategic Options

In a dynamic business environment, the Company’s base business model in pharmaceuticals

is exposed to considerable volatility, both upwards and downwards. While the upsides create
a non-linear value for the organization, the need of the hour for survival is to protect it against
the downsides.

The key challenges faced by the company and also common to the industry are potential
implementation of the new pricing policy in India, increasing competitive pressure in the
chronic segments, aggressive approach such as authorized generics by innovators in the US
and healthcare reforms in European markets .

Strategic decisions are required to be taken for each product and geographical market.
Strategy for value creation and value capturing in all its offerings through development of
right products and services and its efficient placement to target customers, is necessary.

Forging strategic relationship with alliance partners on a win-win principle would also be one
of the calls to be taken urgently by the management.

Dr. Anji was also thinking of the news clipping related to stents used for artillery blockage
treatment (from Times of India attached at Appendix-VIII), quick estimate of which was
indicative of a substantial market size and was also in line with Dr. Reddy’s philosophy of
using SEA (Science, Education and Accessibility) for healthier lives.

He was optimistic in presuming that next morning is going to be a pleasant sunny morning.

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Products and Services Appendix – I
Global Generics

Branded Generics
Dr. Reddy’s Branded Generics portfolio offers over 200 products in the major therapeutic areas of gastro-
intestinal, cardiovascular, pain management, oncology, anti-infectives, paediatrics and dermatology. Brands like
Omez, Ciprolet, Nise, Enam, Ketorol, Exifine and Cetrine enjoy leadership positions in several key markets,
including India, Romania, Venezuela, Russia & the CIS countries.
Unbranded Generics
Dr. Reddy’s generics offerings deliver quality at cost-effective prices in the highly regulated markets of the United
States, UK and Germany. In the US, Dr. Reddy is among the top 12 generic companies, with 34 product families
being marketed and a large pipeline pending approval. In the UK, Dr, Reddy has more than 30 products in the
market. With acquisition of betapharm, Germany's 5th largest generics company, Dr. Reddy further consolidated
its presence in the European Union (EU), with 145 products in the market.
Active Pharma Ingredients (API)

Dr. Reddy is among the leading generic API players globally. Dr. Reddy’s expertise in organic synthesis and
process development complemented by a controlled supply chain enable it to provide customers with high quality
Bulk Actives at competitive prices. Dr. Reddy’s API business is supported by technologically advanced Product
Development infrastructure. The Product Delivery Teams, the Centres of Excellence and IP teams help create
value through Intellectual Property and proactive patenting; early development work on certain promising
molecules; breakthrough product delivery; and by delivering cost leadership in API.
Dr Reddy is one of the highest DMF filers worldwide, boasting of around 150 products in the portfolio, 40 in the
pipeline, multiple filings in US, EU, Japan, Korea, Brazil and presence in almost 60 countries through API sales
alone
Custom Pharma Services (CPS)
Dr. Reddy's Custom Pharmaceutical Services (CPS) business serves several ‘innovators’, both Big Pharma and
emerging biotech, and a large number of emerging Pharma companies. Dr. Reddy has the capability to supply
both small-scale clinical trial quantities and commercial-scale requirements. Its end-to-end services and
competitive pricing makes a compelling value proposition to global ‘innovator’ customers.
Niche technology-led acquisitions have made Dr. Reddy a one-stop shop for many customers. Acquisition of
Roche's API manufacturing unit in Mexico added the capability to manufacture niche steroidal APIs. The
acquisition of the Small Molecule business of Dow Pharma at its Mirfield and Cambridge sites in the UK has
further strengthened its portfolio and service offerings for customers. Dr. Reddy also offer a pool of chiral
technologies, including biocatalysis.
New Chemical Entities (NCEs)

Dr. Reddy is engaged in the discovery, development, and commercialization of novel small molecule agents to
address significant clinical unmet needs. Dr. Reddy was the first Indian pharmaceutical company to start NCE
research at Hyderabad-based research laboratory in 1993. Dr. Reddy's was also the first Indian pharmaceutical
company to out-license an original molecule to an innovator pharmaceutical company in 1997. Dr. Reddy’s
therapeutic areas of focus are bacterial infections (caused by multi-drug resistant pathogens such as
Staphylococcus Aureas, Pseudomonas Aeruginosa, and Acinetobacter Baumannii), metabolic disorders (that
address insulin resistance, obesity, low HDL cholesterol and Atherosclerosis), and pain/ inflammation (products
with improved efficacy and side-effect profiles in several areas of acute and chronic pain).

Differentiated Formulations

Dr. Reddy’s Differentiated Formulations portfolio consists of developing novel formulations of currently
marketed drugs or combinations thereof to enhance patient comfort. Dr. Reddy’s develops synergistic
combinations as well as technologies that enhance the drug’s safety and/or efficacy profile by modifying its
pharmacokinetics.Dr. Reddy’s advanced Differentiated Formulations are in dermatology, where it has launched
several effective and innovative products through wholly owned subsidiary Promius Pharma™.
Promius Pharma
wholly-owned subsidiary, headquartered at Bridgewater, New Jersey (US) develops and markets differentiated
formulations for important dermatological indications. Promius Pharma has entered into successful partnerships
with companies such as Ceragenix, Foamix, Sinclair and Antares for in-licensing of products.
Biosimilars

Dr. Reddy’s position in this industry is:

 Eleven biosimilars in various stages of development and commercialization.
 A fully integrated biosimilar development team includes R&D, clinical operations, medical affairs and
global pharmacovigilance.
 A WHO certified cGMP manufacturing facility, which includes E.coli and mammalian cell culture
facilities.

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 Dr. Reddy’s: Strategy in Turbulent Environment
Appendix – II

Financial Performance of Dr. Reddy’s for Last Five Years

YEAR FY2012 FY2011 FY2010 FY2009 FY2008
ALL FIGURES IN RS. MILLION EXCEPT EPS
Income Statement Data:
Total revenues 96737 74693 70277 69441 50006
Cost of revenues 43432 34430 33937 32941 24598
Gross profit 53305 40263 36340 36500 25408
As a % of revenues 55 54 52 53 51
Operating Expenses:
Selling, general and administrative expenses 28867 23689 22505 21020 16835
Research and development expenses 5911 5060 3793 4037 3533
Write-down of intangible assets 1040 - 3456 3167 3011
Impairment of Goodwill - - 5147 10856 90
Other Operating (income) / expenses, net (765) (1115) (569) 254 (402)
Total operating expenses 35053 27634 34332 39334 23067
Operating income 18252 12629 2008 (2834) 2341
As a % of revenues 19 17 3 (4) 5
Finance Costs, net:
Finance income 1227 173 369 482 1601
Finance expenses (1067) (362) (372) (1668) (1080)
Finance (expense) / income, net 160 (189) (3) (1186) 521
Equity in loss of affiliate 54 3 48 24 2
Profit before income tax 18466 12443 2053 (3996) 2864
Income tax benefit / (expense) (4204) (1403) (985) (1172) 972
Profit for the year 14262 11040 1068 (5168) 3836
As a % of revenues 15 15 2 (7) 8
Net income / (loss) per equity share (EPS)
— Basic 84.16 65.28 6.33 (30.69) 22.88
— Diluted 83.81 64.95 6.30 (30.69) 22.80
Dividend per share (Rs.) 13.75 11.25 11.25 6.25 3.75
Balance Sheet Data:
Cash and cash equivalents 7379 5729 6584 5596 7421
Operating Working capital* 35189 25194 16009 21831 12529
Total assets 119477 95005 80330 83792 85634
Total long-term debt excluding current portion 16335 5271 5385 10132 12698
Total stockholders’ equity 57444 45990 42915 42045 47350
Additional data:
Net cash provided by / (used in):
Operating activities 16305 8009 13226 4505 6528
Investing activities (18820) (8658) (6998) (3472) (9367)
Financing activities 3734 (377) (5307) (2527) (7865)
Effect of exchange rate changes on cash 499 141 246 (114) (372)
Expenditure on property, plant and equipment & (8660) (11606) (4283) (4761) (6685)
Intangible
1. All figures are based on IFRS Financials.

*Operating Working capital = Trade receivables + Inventories -Trade payables

Performance of shares of Dr. Reddy’s for Last Five Years at BSE

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 Dr. Reddy’s: Strategy in Turbulent Environment
Appendix – III

Leading Indian Players by Sales (Total Revenue#)

Company Sales in US $Mn Year End

Cipla 6,368.06 March 2011
Ranbaxy Lab 5,687.33 December 2010
Dr Reddy's Labs 5,285.80 March 2011
Sun Pharma 1,985.78 March 2011
LupinLtd 4,527.12 March 2011
Aurobindo Pharma 4,229.99 March 2011
Piramal Health 1,619.74 March 2011
Cadila Health 2,213.70 March 2011
Matrix Labs 1,894.30 March 2010
Wockhardt 651.72 December 2011

# Because of realignment in the business portfolio of pharmaceutical companies taking place at a global level (i. e.
pharma companies spinning off non-pharma activities such as animal husbandry, health care services etc.), now
it is an emerging trend to evaluate/rank pharma companies in terms of pharma revenues only, however, here
total revenues is used because in case of Indian companies share of non-pharma business is not significantly high.

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 Dr. Reddy’s: Strategy in Turbulent Environment
Appendix – IV

GOI Initiatives and its Impact on Indian Pharmaceutical Industry

Government initiatives in the public health sector have recorded some noteworthy successes over time with focus
on investments related to better medical infrastructure, rural health facilities etc.

 100 per cent FDI is permitted for health and medical services under the automatic route.
 The National Rural Health Mission (NHRM) had allocated US$ 10.15 billion for the upgradation and
capacity enhancement of healthcare facilities.
 Moreover, in order to meet revised cost of construction, in March 2010 the Government allocated an
additional US$ 1.23 billion for six upcoming AIIMS-like institutes and upgradation of 13 existing
Government Medical Colleges.

As a result, FDI inflow in hospital and diagnostic centres was US$ 1.1 billion during April 2000 and November
2011, according to Department of Industrial Policy & Promotion (DIPP) data. FDI inflow in medical and surgical
appliances stood at US$ 472.6 million during the same period. The drugs and pharmaceuticals sector has
attracted FDI worth US$ 5.0 billion between April 2000 and November 2011

Budget 2012: Union Budget 2012-13, is positive for the pharmaceutical sector. The government has again
increased budgetary allocation for healthcare spending, which would be an overall positive for the sector. Indian
pharmaceutical companies have been investing on the R&D front to tap opportunities in the domestic and global
markets. To encourage the same, the weighted deduction on R&D expenditure to 200% (in-house research) was
extended for a further period of five years. R&D sops would continue to be positive for the sector as a whole.

Budget Proposal Impact

Proposal to extend weighted deduction of 200% for
R&D expenditure in an in-house facility for a further
period of five years beyond March 31, 2012.
Allocation for NRHM proposed to be increased from
Rs 18,115cr in FY2011-12 to Rs 20,822cr in FY2012-13.
Proposal to continue to allow repatriation of dividends
from foreign subsidiaries of Indian companies at a
lower tax rate of 15% up to March 2013.
Introduced MAT on partnership firm.
Positive for all Indian pharmaceutical companies.
Positive for all pharmaceutical companies.
Positive for all pharmaceutical companies, mainly
Indian companies, as they generate the highest revenue
from export markets.
Would negatively impact some of the companies.

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 Dr. Reddy’s: Strategy in Turbulent Environment
Appendix – V

Top 20 Pharmaceutical Companies based on 2011 pharma revenues in million USD

1 Pfizer $57,747
2 Novartis $47,935
3 Sanofi $42,779
4 Merck $41,289
5 GlaxoSmithKline $35,594
6 AstraZeneca $32,981
7 Johnson & Johnson $24,368
8 Eli Lilly & Co. $22,608
9 Abbott Laboratories $22,435
10 Bristol-Myers Squibb $21,244
11 Takeda Pharma $17,257
12 Teva $16,689
13 Boehringer-Ingelheim $14,058
14 Bayer Schering $13,853
15 Astellas $12,311
16 Daiichi-Sankyo $11,338
17 Otsuka Pharmaceutical $9,935
18 Gilead Sciences $8,102
19 EISAI $7,710
20 Mylan $6,106

Region wise Break up of Global Pharmaceutical Market

According to Global Pharmaceutical Market Forecast to 2012, global pharmaceutical industry is projected to grow at a
CAGR of around 6.5% during 2011-2013. The growth will be driven by low cost factor, increasing prevalence of diseases
worldwide, and rising per capita income of consumers. The pharmaceutical market is dominated by US with the top
position globally, and then followed by the European Union and Japan.

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 Dr. Reddy’s: Strategy in Turbulent Environment

Appendix – VI

Key Emerging Markets

Markets Growth Prospects Challenges Positioning of Indian Players

Russia Market Growth – ~13-14% over
medium term
Growth Drivers
- Per capita spending on
healthcare is higher than other
emerging markets but remains
low
- Transition to the OTC segment
offers strong growth prospects
Brazil Market Growth
Largest pharmaceutical market
in Latin America, growing at a
CAGR of ~15%
Growth Drivers
- Low per capita spending on
healthcare
- Govt. interference is much
lower; out-of-pocket spending is
significant
South Africa Market Growth
- Relatively small market but
growing at fast pace; in FY11
market grew by 8%
Growth Drivers
- Implementation of NHI to
encourage the penetration of
generics
- The Government is playing an
increasing active role in regulating
market access as well as
controlling prices of essential
drugs through reference pricing
mechanism
- The market is gradually
transforming from a high out-of-
pocket driven market to a
western European model of
centralized reimbursements
- In the long run, the Government
also aims to encourage local
manufacturing by offering
incentives to promote R&D
- Despite being a branded
generics, it has been a difficult
market to penetrate given the
strong dominance of local players
which control over 60-70% of the
market
- Prices increases are generally
restricted and controlled by the
Government
- Industry works on a ‘Single Exit
Price’ mechanism for essential
drugs which essentially means
that companies are mandated to
sell their products at same price
to all customers
Key Indian Players - Ranbaxy, Dr. Reddy’s,
Lupin and Glenmark
For instance, Dr. Reddy’s is ranked 15th in
Russia and is the third most important
market after US and India with 17%
contribution to turnover
Key Indian Players – Ranbaxy, Torrent
Pharma
Torrent is one of the leading Indian player
in the Brazilian market with a share of 6.8%
in the representative market
Ranbaxy is also ranked 9th (M.S. 2.8%) in
generics
Participation in Govt. tenders also is
significant among Indian players
Key Indian Players – Cipla, Ranbaxy, Lupin
Cipla through its partner Medpro has major
presence in South Africa among Indian
players.
Lupin acquired Pharma Dynamics (ranked
19th & 6th in generics); currently is working
on moving manufacturing to India &
augmenting product portfolio

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 Dr. Reddy’s: Strategy in Turbulent Environment
Appendix – VII

Explanation of Some Important Abbreviations/terms

ANDA – Abbreviated new drug application

API - Active Pharmaceutical ingredient

Biologics - Biologics or large molecule pharmaceuticals are complex, highly targeted and generally
expensive therapies that are a growing contributor to overall global healthcare spends. Patent
expiries in the immediate future present opportunities to serve the global population with high
quality, low cost equivalents of proprietary biopharmaceuticals, commonly known as biosimilars.

Biosimilars - are biologic medical products whose active drug substance are made by a living
organism or derived from a living organism by means of recombinant DNA or controlled gene
expression methods.

Custom Pharma Services (CPS) - Custom Pharma Services (CPS) business develops / manufactures
Active Pharma Ingredients (APIs) and formulations (dosage forms) and offerings it in terms of service
for customers.

DMF – Drug Master Filings – are confidential, proprietary assets that present to the US FDA the
formulae, processes, test methodology, and other data relevant to the manufacture of products

EMA – European Medical Agency

Generics - molecular copy of an off-patent drug with a trade name

MSD - is a global healthcare leader

New Chemical Entities (NCEs) - New chemical entities (NCEs) are patent-protected pharmaceutical
compounds that may be produced only by the patent holder or any company authorised for their
production or usage.

NYSE – Newyork Stock Exchange

TZD - Oral Medication - Thiazolidinediones – TZD's – Glitazones TZDs help insulin work better in
muscle and fat; they lower insulin resistance and have a small effect on slowing the release of sugar
from the liver

USFDA – United States Food and Drugs Administration

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 Dr. Reddy’s: Strategy in Turbulent Environment
Appendix – VIII

Clipping of news item from Times of India Web edition (a prominent daily newspaper in India)

“Stents, the scaffolding devices inserted into blood vessels to keep them open, are used if the
patient has more than 70% block of an artery. But doctors confide that stents are used even when
the block is less than 30%. This not only inflates the bill, but increases the risk of a heart attack, say
cardiologists. In fact, a study by National Heart and Lung Institute in the US found that 1-2% of
people who have stented arteries develop a blood clot at the stent site which can cause a heart
attack or stroke.

According to unofficial estimates, around 3,00,000 stents are used in India every year. At present,
three kinds of stents are available: bare metal stents (BMS) which hit the market in the late 1980s,
drug eluting stents (DES), which are coated with a drug and the more recent bioabsorbable stents
which dissolve in the artery after a year.

While DES accounts for 70% of the market, BMS accounts for 25% and the more expensive bio
absorbable stents, 5%, say stent manufacturers. "It is a booming industry. Previously most of our
stents were imported but now competition within the country is stiff. In Chennai, there are close to
20 stent suppliers," says Suresh Kumar of SNK Cardio Stents Enterprises. International giants like
Abbott and Johnson & Johnson are active players in the Indian market.”

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As gathered from several hospitals in Delhi (National capital of India) – cost of one stent (as charged
to patient) is in the range of Rs. 0.07 to Rs 0.125 million depending upon the type of stent. Quick
estimate for stent market in India is in the range Rs.21000 million to Rs. 30000 million per year.

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