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Dr Reddy's research initiative to get a boost

Oct 6, 1999

According to newspaper reports, Dr Reddy's Limited is finalising plans to acquire a research boutique in the United States. The acquisition is expected to cost US$ 1.5 m. The company to be acquired has a bank of new pharmaceutical research molecules. Dr Reddy's is one of the fastest growing companies in the pharmaceutical sector having a 1.4% market share in domestic formulations. The company has developed from being a purely bulk drug based company to a formulation-based company. The company is one of the leading spenders on R&D (5% of FY99 sales) in India.

The company's move is in line with its focus of converting itself into a research based pharmaceutical outfit. Dr Reddy's has successfully developed and licensed new molecules and will now have access to a whole bank of new molecules. Although the company lacks resources to undertake research right from the stage of basic research to product launch, it will nevertheless be able to capitalise on the new bank of molecules. This it can do by developing promising molecules further and then licensing them out to multinational companies to carry on the more complex research and trials.

The acquisition will instantly give the company a lead over its other Indian peers in their attempts to develop new molecules.

However, as already mentioned, the company will continue to be dependent on international pharmaceutical majors to carry on the more expensive and complex research and trials as the development of molecules enters advanced stages. Dr Reddy's will, thus, only get a small share of the profits that accrue if the drug were to be successful.

The long term competitiveness of the Indian pharmaceutical companies will depend on their ability to convert themselves into research based outfits, with capabilities to conduct complex research and trials. This will also require access to large resources. Any failure on this part, could lead to a marginalisation of India companies, which could then either exist as manufacturers of bulk drugs or enter into alliances with international majors.

Market View:
Analysts are increasingly getting convinced of the seriousness of the R&D efforts of the company. They are recommending a 'BUY' as they expect the R&D efforts to yield returns for the company in the future.

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