| |
Jun 24, 2003
Dr Reddy’s Lab: R&D driving growth
Continuing with our series of articles evaluating the business structure of major pharma companies, consider Dr. Reddy’s Laboratories (DRL) in this article. DRL is one of India’s fastest growing pharma companies. The foresightedness in recognizing generics opportunity in developed markets and initiatives like spearheading basic pharma research in the country demonstrates management vision. The company is fast emerging as a speciality pharma company. DRL’s new drug discovery research initiatives have resulted in the company having the most enviable NCE pipeline in the domestic industry.
Geographical distribution of revenues (%)
| Region |
FY01 |
FY02 |
FY03 |
| India |
54 |
39 |
36 |
| USA |
15 |
34 |
32 |
| Europe |
2 |
2 |
8 |
| Russia |
7 |
8 |
9 |
| RoW |
22 |
17 |
15 |
DRL derives 64% of its revenues from exports. There has been a sharp increase in contribution from the US. This has been possible due to the company’s policy of challenging existing drug patents in USA through Para 4 ANDA filings and launching generic version of the same at a lower cost. This has helped DRL reduce its dependence on the Indian market, which is characterised by intense competition and lack of pricing power. With the acquisition of BMS and Meridian in FY03 in the UK, DRL has further consolidated its presence in Europe.
Revenue mix (%)
| |
FY01 |
FY02 |
FY03 |
| Bulk drugs |
44 |
31 |
35 |
| Branded formulation |
50 |
36 |
38 |
| Generics |
3 |
27 |
24 |
| Others |
3 |
6 |
3 |
Branded formulations contributed 38% of DRL’s total revenues in FY03, with the domestic market contributing 24% of sales. The company has a major presence in the pain management, gastro intestinal and cardiovascular therapeutic segments. For many years, ‘Nise’ had been DRL’s power brand contributing 15% of domestic branded sales. However, with safety concerns being raised, the company has decided to discontinue production of this brand.
Financial overview
| |
FY01 |
FY02 |
FY03 |
| Revenues (Rs m) |
9,127 |
15,211 |
15,136 |
| PAT (Rs m) |
1,445 |
4,597 |
3,921 |
| OPM (%) |
26.6 |
31.5 |
28.3 |
| NPM (%) |
15.8 |
30.2 |
25.9 |
| R & D (% of Revenues) |
4.6 |
6.4 |
7.6 |
DRL has been able to successfully challenge existing patents due to the company’s increased thrust on research and development. R&D investments as a percentage of net sales have gone up from 4.6% in FY01 to 7.6% in FY03. In FY03, DRL has filed 14 Abbreviated New Drug Applications (ANDAs) of which 10 were Para 4 filings. Thus, the total number of ANDAs pending for US FDA approval stands at 23. Recently, DRL had won a patent case for the launch of ‘Amlodipine Maleate’, a generic version of Pfizer’s patented drug ‘Norvasc’. Pfizer has appealed against the order, and the case in pending with the higher courts. If DRL wins the case, it will be able to generate profits to the tune of US$ 98 m, which is higher than its FY03 profits of US$ 74m.
More on pharma R&D
DRL has also started developing New Chemical Entities (NCE), which is a molecule that could after clinical trials be used for curing a disease. The company licenses out the NCEs to foreign companies for conducting clinical trails and receives upfront and milestone payments for the same. In FY02, DRL received upfront and milestone payments (Rs 389 m) in respect of two NCEs DRF-2725 and DRF-4158 licensed to Novo Nordisk and Novartis respectively.
Dr Reddy's NCE pipeline
| Therapeutic segment |
Stage of development |
| Pre clinical stage |
Clinical trials |
| Phase 1 |
Phase 2 |
| Diabetes |
- |
- |
DRF 2593 |
| Metabolic disorder |
DRF 4832, DRF 10945 |
- |
- |
| Cancer |
DRF1644 |
DRF 1042 |
- |
| Bacterial infection |
DRF 11057 |
- |
- |
However, DRL’s research has had its share of failures as well. Clinical trials in respect of two of the three molecules licensed have been discontinued. Novo Nordisk terminated clinical trials for the NCE DRF-2725, while Novartis AG discontinued further development of DRF-4158. This has come as a major setback to DRL, as it would not be receiving any further milestone payments in respect of these two molecules. NCE research and new drug development being a high-risk activity, DRL could show volatility in performance.
Apart from R&D failure risks, with DRL aggressively challenging existing patents, the legal expenses of the company could record a sharp rise. Moreover, the discontinuance of its leading brand ‘Nise’ could have a marginal effect on the performance of the company.
The stock currently trades at Rs 1,058 implying a P/E multiple of 16.6x annualised 1QFY04 earnings. DRL’s strategy of increasing R&D expenditure indicates the company’s preparedness to face the future. In the near term, due to the high-risk ventures that DRL has undertaken, the performance of the company may be affected. However, for the long term, prospects of the company are bright.
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