Dr Reddy’s renews efforts to push India biz amid US pricing pressure

Pharmaceutical major Dr Reddy’s Laboratories will provide a major thrust to its domestic formulation business in coming quarters, including possible acquisitions to fast track growth.

“India is a very important market for us and we are absolutely going to invest in this business,” said Erez Israeli, Chief Operating Officer at Dr Reddy’s during a recent investor call.

“We want to do a few things in India. First is to leverage our brand by enhancing the brands we have and launching new brands; secondly, this is a market that we will pursue if we can through possible inorganic moves; thirdly, this is the place we would thrive a new business model and innovate,” Israeli added.

Dr Reddy’s got Sandeep Khandelwal on board to head the India business in October last year. Khandelwal headed sales and marketing of Abbott India’s Women’s Health, Gastroenterology, Hepatic & OTC therapies. Abbott is the second largest player in domestic formulations market.

Dr Reddy’s is banking on Khandelwal’s experience to build a sustainable domestic business. The company is also said to be working on improving sales force productivity and adding marketing capabilities.

There were some positive signs. After a sub-par FY18 performance in India where Dr Reddy’s sales grew at just 1.8 percent versus market growth of 6.3 percent due to GST de-stocking, the company made a bounce back in FY19, by registering a growth of 11.3 percent against the market growth of 10.5 percent for the year. The ranking too improved 16 to 13 in the same period, as per IQVIA data.

Indian businesses constituted about 16 percent of Dr Reddy’s Rs 15,385 crore revenue in FY19, compared to North America’s 39 percent.

But the growth of North American business has been flat on account of increased pricing pressures in the key US market. This is prompting the drugmaker to shift part of its focus on expanding and investing in the Indian business.

Not an easy market

The complexity of the domestic market is huge. It is a branded generics market, where hundreds of companies deploy thousands of marketing representatives to push their brands to doctors. Given much of the spend on medicines in India is out-of-pocket, the market is price sensitive, in addition to government drug price controls.

Even with years of experience and resources, Dr Reddy’s found the domestic formulation business a tough nut to crack.

To be sure, the company is not a small set up in India. As per their website, the company has a portfolio of over 300 brands spanning gastroenterology, oncology, pain management, cardiovascular, dermatology, urology, nephrology, rheumatology and diabetes.

And while it employs a sales force of 5,000 people to push these brands, only seven, including legacy brands such as Omez, Nise, Stamlo, and Razo among others have made it to top-300.

This is not the first time, the company tried to set things right. Some years back, the company undertook a major restructuring of its domestic formulation business, recalibrated focus from acute to chronic, and acquired a portfolio of drugs from Brussels-based UCB in April 2015.

The company also tied up with US drugmaker Amgen to market and distribute its patented portfolio of five drugs to treat cancer and cardiac diseases. However, despite those efforts, market share has been stuck at around two percent.

Missing pieces

Analysts point out that the company, given its heavy reliance on exports markets, especially the US, never really put in the kind of effort needed to succeed in a branded generics market such as India.

“Dr Reddy’s was never a marketing-driven company. Its expertise is in R&D of complex drugs and manufacturing. It never built a right product portfolio mix or marketing strategy to stay ahead of rivals in the domestic market,” Amey Chalke, pharma analyst at HDFC Securities pointed out.

“It is taking the company a very long time to adapt from an acute dominated portfolio to high growth chronic segment,” Chalke added.

Surya Patra of Phillips Securities echoed the same. “They are laggards when it comes to the domestic formulation business and are back at a time when things have become challenging in the US. It is a short term approach. Now all are chasing the domestic market, the competition is very strong,” he said.

Both Chalke and Patra, however, say that Dr Reddy still has the scope to expand its Indian business, but needs to have the right kind of strategy and product portfolio to grow.