Dr Reddy's inks pact with Russian firm R-Pharm

Drug firm Dr Reddy's Laboratories today said it has signed a pact with Russia-based R-Pharm for co-development of high technology products and collaboration in manufacturing and marketing.

The company has entered into a licencing, technology transfer, manufacturing and marketing agreement with R-Pharm of Russia, Dr Reddy's Laboratories said in a statement.

"The agreement allows us to bring innovative medicines to the Russian people with active collaboration of a local pharmaceutical company-R Pharm ," Dr Reddy's MD and COO Satish Reddy said.

The collaboration is in the area of high technology and works on a profit sharing model.

"It will entail licensing of manufacturing know how of products by Dr Reddy's, local manufacturing of products in Russia, co-development of high technology products and knowledge sharing between both parties at regular intervals," it added.

Dr Reddy's net rises 32%

Pharmaceutical major Dr Reddy’s Laboratories today reported a 31.93 per cent increase in net profit to Rs 286.7 crore for the quarter ended September 30 as compared to Rs 217.3 crore during the same time last year. Its revenues were Rs 1,870.4 crore, up two two per cent from Rs 1,836.8 crore last year.DRL Chief Executive Officer GV Prasad attributed the increase in profitability to launch of new products and increased sales in the US and other markets.

However, revenues grew at a lower-than-expected pace due to slowdown in generic and active pharmaceutical ingredient markets as outsourcing has been reduced. The company could also not launch some products as scheduled.

The selling, general and administrative expenses increased to Rs 570.9 crore, seven per cent more from Rs 533.6 crore, as the company increased its network in Russia, particularly for the over-the-counter (OTC) segment.

At Rs 1,366.7 crore, generics revenues are about eight per cent more than Rs 1,270.6 crore last year. The revenues from active pharmaceutical ingredients fell 14 per cent to Rs 461.7 crore this quarter from Rs 537.5 crore last year.

Of all geographies, India had the best 21 per cent growth, contributing Rs 381.3 crore, as compared to Rs 3,150 crore last year. Russia and CIS markets also did well with 17 per cent increase in revenue contribution to Rs 275.1 crore this year compared to Rs 235.1 crore last year. The growth in North America fell two per cent to Rs 546.4 crore from Rs 558.8 crore and in Europe by 14 per cent to Rs 410.2 crore from Rs 474.3 crore last year.

Chief Operating Officer K Satish Reddy said the company could not launch a flu vaccine in the key markets and this affected the top line. He said Germany, notwithstanding the inventory provision this quarter, would be a key market from next year. The company expects price erosion to stop and profits to increase from the next financial year.

“It will take two more quarter. The prices have almost bottomed out. We expect them to rise,’’ he said, adding the company was also bidding in the second phase of the AOK tenders.

Interview :Satish Reddy, MD and COO, Dr Reddy's Labs

With the global pharmaceutical business becoming more complicated and older business models being challenged by competition, Hyderabad-based Dr Reddy's Laboratories (DRL) is carrying out changes across the company to create what it terms as the 'winning infrastructure'. DRL has targeted to achieve a turnover of $3 billion by 2013 and emerge as the top five pharmaceutical companies in the US.

In an interview, DRL's Managing Director and Chief Operating Officer Satish Reddy said the new initiatives would deliver value and drive the company's growth. Edited excerpts:

What are the changes being carried out across the company to create what you call the winning infrastructure?

In the last three years, the major changes that have taken place in the company are choosing the strategy of alliancing with multinationals and exiting from 31 countries (earlier present in over 40 countries) belonging to emerging markets. Thus, we have narrowed our presence to just a few countries where we want to compete. This apart, we have simplified our company into three clear business units: global generics, pharmaceutical services and active ingredients (PSAI), and proprietary products including biosimilars, differentiated formulations and new chemical entities.

Why do you want to exit from most of the emerging markets?

What we had been doing earlier for the emerging markets was to develop products and then take them to as many markets as possible. The problem in that kind of a model was complexity in operations. For instance, huge quantities had to be supplied to markets like India or Russia while we had to make very small batches for smaller countries like Trinidad. We wanted to reduce this complexity.

Besides, large markets like Brazil, Mexico and Turkey require huge investments and the outcome of the investments will be over a long period of time. So, we thought we can find a better way to deal with such markets than waiting for a long time. As a result, we forged an alliance with GSK (GlaxoSmithKline Plc) through which our products are now present in more number of countries in the emerging markets than before.

What kind of alliance do you have with GSK?

The whole deal is a revenue sharing arrangement. It is a very strategic kind of a partnership and not a cost-plus outsourcing kind of model. This is a big change in our model. Now, we can stick to what we are good at — product development and manufacturing — and continue our presence in the emerging markets through GSK.

Like GSK, are you planning to forge some more strategic alliances?

Not really. The GSK alliance is specifically for emerging markets. It does not leave room for any other alliance.

What targets have you set for the company?

The immediate target is to emerge as one of the top five pharmaceutical companies in the US (now it is among the top 10) and achieve a revenue of $3 billion by 2013 (last year's revenue was at $1.56 billion). We are also targeting leadership positions in global generics and PSAI. In PSAI, we want to be the preferred partner of choice.

What kind of revenues do you expect from Betapharm this year?

Betapharm has somewhat bottomed out in terms of revenues. Last year, its revenues stood at euros 110 million , much less than what we had projected two years back. It will not be a significant contributor to the company.

So, you don't expect Europe to contribute significantly to your revenues?

Not Europe. Germany will not be. The contribution from Germany will not be what it was two years back.

What will be the impact of healthcare reforms in the US and cost-saving legislative or regulatory action in other countries?

The impact of healthcare reforms is something that would be clear in three or four years. The positive side is that the volumes will increase because more and more people will be covered under insurance. But this positive aspect is for the entire industry and not confined to one company. I think it increases the size of the pie.

What are your plans in the biosimilars segment?

Biosimilars is a lucrative segment for growth. In this segment, we are currently focusing on the complex products, which enables us to be first in the market. The immediate strategy is to launch the products in India and then launch them in the emerging markets, which do not have patent protection for these products. This will not only generate revenues but also provide us enough data for analysis. The bigger opportunity comes when these products make it to the regulated markets, particularly the US and Europe. That presents a huge opportunity for us and by 2013 Dr Reddy's expects to get a bigger chunk of revenues from biosimilars.

So, what will be the share of biosimilars in your total revenues three years down the line?

There is time to assess that. We are still in the initial stage.

What kind of partnerships do you want to forge in Japan and at what stage are the company's initiatives in this regard?

People say Japan is a lucrative market. More generic penetration is expected in the country through government initiatives. Our thinking is that there are various options available for expanding our presence in Japan. We are in very early stages of exploring partnerships.

In the past 26 years, DRL emerged as one of the most successful pharmaceutical companies in the country and to some extent in the world. What is the road ahead?

The journey of the company in the past 26 years can be divided into three phases. The first phase was all about developing strong capabilities on the active ingredients side, which enabled us to compete in the generics space. The second phase, mostly in the 1990s and early 2000, was about internationalising the company. The third phase is about discovery, innovation, proprietary products and biosimilars. Now, we are capitalising on these strengths to achieve leadership position in the markets that we have chosen in the global generics space and to be a preferred partner of choice in the PSAI segment.

Dr. Reddy's: Benefit from Obama and India with One Stock

As a continuation of my previous piece on Perrigo Company (PRGO), the second health care company I would recommend is Dr. Reddy's Laboratories (RDY). The company is based in India and has been a major player in the generic drug business for some time. It is not as large as TEVA (TEVA) or Barr Pharmaceuticals (BRL) but is on the next tier down, ranking in the top 12 generic drug manufacturers in the U.S.

Dr. Reddy's products are positioned mainly against prescription pharmaceuticals. Although they produce some over-the-counter products, for the most part they cover a different segment of the market than Perrigo.

The company also conducts research on their own behalf in the areas of cancer, diabetes, metabolic disorders, and cardiovascular diseases. But their main business is creating generic products when the patents of mainstream drugs produced by the major pharmaceutical companies expire.

Overall, their pipeline looks promising with several new drugs at an advanced stage of development.

The company has over 11,000 employees worldwide. Most of their facilities are in India but they also have manufacturing operations in the U.S. and Mexico. They have over 160 products marketed in the U.S.

The stock has been constrained by a long-standing patent infringement case brought against them by AstraZeneca (AZN). However, Dr. Reddy's recently received a favorable summary judgment ruling and since then the stock has begun to recover from the low of $7.27 reached during the March meltdown. It closed on Friday at $15.30. The added benefit of this company is that it is located in India so you can play the Indian resurgence story as a by-product of this trade.

Dr. Reddy's reported fiscal year-end results on March 31. Revenue grew by 39% over 2008 with all divisions contributing. EBITDA was up by a very healthy 50%. The company pays a small dividend (9c per share annually) but the main opportunity here lies in its continued ability to grow. To my mind, it's the right kind of company, in the right part of the world, if you're looking for ways to profit from President Obama's proposed health care revolution.

Glaxo, Dr Reddy to develop emerging market drugs

LONDON -- Pharmaceutical company GlaxoSmithKline PLC said Monday it had reached a deal with Indian drug developer Dr. Reddy's Laboratories Ltd. to develop and market selected products across many emerging markets.

London-based Glaxo did not reveal terms of the deal, which is effective immediately but excludes India.

Under the agreement, Glaxo will gain exclusive access to Dr. Reddy's portfolio and future pipeline of more than 100 branded pharmaceuticals in fast growing therapeutic segments such as cardiovascular, diabetes, oncology, gastroenterology and pain management.

The products will be manufactured by Dr. Reddy's and licensed and supplied by Glaxo in various countries in Africa, the Middle East, Asia Pacific and Latin America.

In some markets, products will be co-marketed by Glaxo and Dr. Reddy's. Revenues will be reported by Glaxo, and shared with Dr. Reddy's, Glaxo said.

"This is another significant step forward in our strategy to grow and diversify GSK's business in emerging markets," said Abbas Hussain, president for emerging markets at GlaxoSmithKline ( GSK - news - people ). "Growth in both population and economic prosperity is leading to increased demand for branded pharmaceuticals."

Glaxo shares closed down 1.7 percent at 1,097 pence ($17.84) on the London Stock Exchange.

Pharma cos adhere to EHS to attract global business

Globalisation seems to be driving the Indian pharma industry towards better environmental, health and safety (EHS) performances. In order to elevate their global image, several Indian companies are complying with EHS standards to widen their horizons and attract international players.

EHS auditing is becoming a global practice as organisations around the world develop audit standards. Big players across diverse industrial sectors especially from US and European countries are opting for EHS compliance as one of the key mandate in the process of manufacturing outsourcing.

Most pharma companies like Ranbaxy Laboratories, Alembic, Dr Reddy's Laboratories, Cadila Pharmaceuticals, Zydus Cadila, Arch Pharmalabs and USV, among others have ensured a proper EHS management system and other environmental initiatives to attract additional business opportunities in the global arena.

"The Indian pharma world has evolved around industrial development zones set up by various state governments. In earlier years, most of the units could take benefit of the then prevalent lax environmental laws. But now US and European customers are looking beyond our local compliance levels and want companies to adhere to their standards, which are quite exacting and taxing from an investment perspective. This has led to a big challenge for the Indian pharma industry, particularly small scale units, which either have investment concerns or limitations of growth beyond their allotted unit areas in these industrial zones. These developments are bound to result in various units getting disqualified for supplies leading to elimination and consolidation in the pharma world. With quality and cost efficiency as a given, it is only EHS compliance that will stand out for a vendor," says Ajit Kamath, chairman and managing director of Arch Pharmalabs, which has a standalone turnover of Rs 750 crore.

Kamath adds that at a macro level, both China and India have long been viewed as countries with suspect EHS compliance. Companies with orientation of exports to the Western world are faced with no choice but to adhere to EHS. Besides customer audits, many Indian companies have been proactively seeking out ISO14000 and ISO18000 standards to signal EHS compliance.

To be in sync with the green policy of the western world, Indian companies seem to be proactive in adopting a number of green initiatives, including a proper EHS management system.

For Alembic, EHS functions as a major focus are along with other green initiatives like water conservation, replacement of furnace oil by solid fuel bio-mass and stopping the use of ozone depleting chemicals. "Alembic is a 101 year old company and we put a lot of focus in EHS. At present we are working with a number of multinational pharmaceutical companies and this is an important pre-requisite for them in considering Alembic as a partner for their global outsourcing. A good EHS system such as the one we have at Alembic also helps us in terms of an accident free zone, awareness about the safety and periodically training our team and a pollution free environment. Besides, EHS has become a critical area for the leading Indian pharmaceutical companies as more people are investing in it due to the numerous benefits such as safety and health of employees as well as a commitment to the environment. This also results in the enhancement of productivity," says Pranav Amin, director and chief business development officer at Alembic Limited.

According to Amin, an environment-friendly policy could result in additional business opportunities which would affect the top line and bottom-line as an environmentally friendly policy is well respected by pharmaceutical companies all over the world.

The EHS guidelines were created by the International Finance Corporation in 1998. The objective of EHS is to safeguard life, property and the environment. It enables industries to manage risk better, reduce cost and improve health & safety of people in general. Most global pharma companies use environmental, health and safety performance criteria to assess and select contract manufacturers, key API suppliers, contract research and development labs and even logistics centers. This is primarily done to protect the reputation of the global pharma companies while they outsource to India.

Mumbai-based pharma major USV has invested significantly in resources to reduce the ecological footprint of its operations.

The company has put in place the integrated implementation of environmental, occupational health and safety management systems, popularly known as ISO 14001 and OHSAS 18001, at its manufacturing locations in Lote, Baddi and Daman. "In our business, we must also respond to the growing stringency of statutory EHS norms. In this respect, our environmental performance has consistently extended beyond the statutory requirements, like provision of RO plants for recycling of treated effluent to the maximum extent possible, safe solid waste disposal and emission reductions. To increase health and safety awareness across the organisation, we have created a detailed work flow for reporting accidents or incidents, enabling us to better track and analyse these incidents. All our manufacturing plants have fully equipped with occupational health centers. Also, this year all our manufacturing sites have achieved Zero LTA," says Debabrata Gupta, director and chief operating officer at USV.

Pharma companies headed for slower earnings growth: analysts

Mumbai/New Delhi: Indian pharmaceutical firms are likely to post a decline in earnings growth for the quarter ended 31 March as they take a hit from mark-to-market and foreign exchange losses and regulatory action in export markets.

With top players set to announce results this week—beginning with Wockhardt Ltd on 21 April—the average growth in sales in the sector for the quarter is likely to be less than 11%, compared with 14% for the corresponding quarter last year.

Declining sales: A scientist works in a Sun Pharmaceutical laboratory in Mumbai. The average net profit of the Top 10 listed drug makers in India, including Sun Pharmaceutical, is likely to increase by around 9%. Bloomberg

The projection is based on a Mint analysis of results previews by five brokerages—ICICI Securities Ltd, Motilal Oswal Securities Ltd, Angel Broking Ltd, Prabhudas Lilladher Pvt. Ltd and Sharekhan Ltd.

The review showed that the average net profit for the Top 10 listed drug makers—including Ranbaxy Laboratories Ltd, Cipla Ltd, Sun Pharmaceutical Industries Ltd, Dr Reddy’s Laboratories Ltd, Aventis Pharma Ltd, GlaxoSmithKline Pharmaceuticals Ltd, Piramal Healthcare Ltd, Wockhardt Ltd, Cadila Healthcare Ltd and Lupin Ltd—will increase only by 8.8%.

Ranbaxy, the country’s largest drug maker, controlled by Japan’s Daiichi Sankyo Co. Ltd, will likely post a net loss, largely on account of forex losses and a ban on sales in the US on a chunk of its drugs.

Increased interest cost on outstanding foreign currency debts, mark-to-market (MTM), losses and a high income base effect from the corresponding quarter last year are the key reasons cited for the decline in profits. Market-to-market is an accounting practice that values an asset or a liability at current market prices and not at cost.

For several companies, regulatory action in the key export markets such as the US and Europe, coupled with shrinkage in the domestic markets is expected to have had an adverse impact on revenues.

“Operationally, the growth will be strong for Indian pharma companies. The numbers from January to March have been pretty good for the Indian market at least,” said Hemant Bakhru, a pharma analyst with the Hong Kong-headquartered stock broking firm CLSA Ltd. “The export margin will benefit due to the depreciation of the rupee, though concurrently there will be forex losses for companies like Ranbaxy, Biocon (Ltd) and Cipla.”

“With the rupee depreciating by 6.5% in the quarter-on-quarter comparison, many pharmaceutical companies would face MTM transnational forex losses on outstanding foreign currency loans and hedges,” said Motilal Oswal’s preview on pharma earnings.

For example, Ranbaxy and Jubilant Organosys Ltd are likely to report significant MTM losses on foreign currency loans and hedges, though the exact quantum of such losses will depend on the closing rupee-dollar exchange rate on 31 March, the Motilal Oswal report said.

The expected growth of the pharmaceutical companies is lower than that seen in the previous quarters due to a general slowdown in the domestic market—which moderated to 10.8% in this quarter compared with 12-14% in the preceding quarters—and the high base of the year-ago quarter for companies such as Sun Pharmaceutical and Glenmark Pharmaceuticals Ltd, said an earnings analysis by Sharekhan.

During the January-March quarter of 2008, revenues of Sun Pharmaceutical and Glenmark were boosted by their exclusive marketing rights in the US. For Glenmark, a one-time milestone payment that it received from licensing its original research molecules was added towards overall revenue in that quarter. This time, however, there are no such gains.

Sun Pharmaceutical’s revenue from the US market was boosted in the 2008 January-March quarter by its six-month exclusive right in the US generic market for three drugs—Oxcarbazepine, Pantoprazole and Ethyol.

Glenmark, too, had recorded a high margin in the year-ago quarter due to the receipt of milestone income and Oxcarbazepine exclusivity in the US.

In the quarter under review, Sun Pharmaceutical’s US sales, however, were affected following the US drug regulator’s action against its US subsidiary Caraco Pharmaceutical Laboratories Ltd. The regulator held up all new drug approvals for Caraco, though its sales by sourcing products from India remained unaffected.

In the case of Cadila Healthcare Ltd and Torrent Pharmaceuticals Ltd, Sharekhan said, rising staff costs and foreign exchange losses on trade receivables would cause margin pressure.

Ranbaxy will also see declining US revenue and the impact of the import alert will be felt this quarter. For Sun Pharmaceutical, Caraco will be weak since there have been no fresh drug approvals for the company in the US, said Bakhru of CLSA.

The higher interest and depreciation costs (due to acquisitions and/or expansion in capacities) would also affect profits of Cadila, Orchid Chemicals and Pharmaceuticals Ltd, Ipca laboratories Ltd and Opto Circuits India Ltd.

According to another pharma analyst in Mumbai, who didn’t want his firm or himself to be identified, companies with a presence in India and the US will do well but those with high exposure in emerging markets will continue to feel the pinch of trade-level destocking and cross-currency fluctuations.

“Overall, it will be a mixed quarter. Aggregate numbers will not be impressive because three large companies—Ranbaxy, Glenmark and Sun Pharma—will report lower numbers,” he said.