Hyderabad: Dr Reddy’s Laboratories Ltd missed its revenue target for 2009-10, and in the first quarter of 2010-11, its revenue was below analyst estimates. However, managing director and chief operating officer Satish Reddy remains confident of meeting a revenue target of $3 billion (around Rs14,000 crore) by 2013, though he insists that this not be seen as a guidance. Edited excerpts:
You have projected a revenue of $3 billion in 2013, but many analysts say they do not see Dr Reddy’s touching that figure. How confident are you about reaching this target?
These are all analyst estimates. They don’t know which products we will launch and what our growth drivers are, and I cannot reveal them because it is competitive information. If you ask us whether we have the entire $3 billion mapped out product by product—obviously not. The $3 billion is a directional target. It can go either way. It is not to be seen as guidance for a particular year.
But there is a lot of execution risk. You missed your revenue guidance in FY10. In the first quarter of this year too, revenue was below estimates.
You can never predict what happens quarter to quarter. A pharma company is dependent on growth coming from product launches that are not specific to any date, unless it is para IV (part of the patent challenge process in the US where, if the applicant wins its challenge to launch the generic or copycat version of a patented drug, it gets a 180-day marketing exclusivity for this drug; most winners launch their products within this period). The outcome of litigation can push something by four years.
Sometimes launches get deferred, but they don’t get dropped. The size of the opportunity remains the same, and at the end of it, the product does get launched. FDA (the US Food and Drug Administration) approval also takes time in a drug such as Fondaparinux, which is synthetic heparin (an anti-clotting agent). The average product approval time in the US has gone up from 18 months to 24 months. So a quarterly outlook has no meaning.
Does the lumpiness of revenue even out over the year then? What about a guidance for FY11?
We don’t give revenue guidance at all anymore.
What will Dr Reddy’s look like in 2013 then? How much will the regulated markets, emerging markets, and your pharmaceutical services and active ingredients (PSAI) business contribute?
The $3 billion target has three components. The global generics piece currently forms about two-thirds of revenue. Its primary driver is the US portion. It will probably form the same chunk of the total in 2013, or possibly larger.
The global generics will grow faster than PSAI. In generics, the US generics business, the biggest driver of growth, has potential to grow to $1 billion from about $350 million currently. It will be led by new product launches— we are in the position to launch 15 a year from now on. These include routine ones that go off patent and (those we can launch because of) para IV (challenges).
They also include limited competition products of which we will launch at least one or two every year. Omez (an ulcer drug) falls here. So does Fondaparinux —the patent is over, but the technology is so complex that we don’t expect many players. Since we are the first in the game, we expect only limited competition.
Our base business in US of about $200 million will continue expanding. For example, we have Simvastatin (a cholesterol lowering drug) in this base. When another drug in the same class like Atorvastatin (another cholesterol lowering drug) goes off patent, we will launch that.
The second component is branded generics with India and Russia as main drivers.
Here, we are established. In India, we are looking at 15%-plus growth, and Russia (growth) is in double digits too. So we only have to improve our rankings (or market share).
The alliance with GSK (GlaxoSmithKline Plc and Dr Reddy’s signed a deal in 2009 to develop and market certain products in several emerging markets other than India) won’t be a major contributor by 2013, but revenues will start playing out (soon).
The third component is PSAI.
How will PSAI pan out? Growth in this area has been disappointing in the last quarter—what kind of recovery do you expect?
Last year, in bulk actives, everybody showed a decline. This was due to the economic crisis and inventory correction that took place in most markets. There was steep price erosion, which also played out in the first quarter. Finally, there were no significant product launches compared to the previous years.
If you look at a five-year time period, our reported sales have grown at a compound annual growth rate of 25%, but last year that’s not happened. It will also be somewhat muted this year, but it will start picking up.
In the next few quarters, significant product launches will happen in the US market. You can get a direction from products going generic and a significant part of this will go to the API (active pharmaceutical ingredients) business. There are major products lined up like clopidogerel (for the treatment of heart diseases), atorvastatin, montilukast (an asthma drug).
As we start complementing pipeline custom synthesis services for innovators with our API manufacturing part, we also expect margins to revert to 30%-plus levels from where they had fallen last few quarters.
What is the status of the Betapharm acquisition? (Dr Reddy’s acquired German generics firm Betapharm for $480 million in 2006; however, with the German government subsequently reducing the reference prices for generic drugs, the company’s profitability eroded.) Given its extremely small size now, is there any chance you may exit? What about the plans to address the non-tender, prescription-driven business in Germany?
There is no reason for us to exit Betapharm now. The tender market is in transition so we can’t put a size to it. As the tender business is eroding, the non-tender business is growing, so our plans are not concrete yet to talk about.
As for the outlook of Betapharm, it is a very small part of the entire picture. Much water has flown under the bridge from the time of the acquisition. We spoke about a $205 million contribution from Betapharm two years back, but it has dropped quite steeply to about $162 million now. The bottoming out has happened. Growth will be muted certainly—it could be single digits, double digits, anything.
Russia, India and the US will be the main drivers of growth. India is a Rs2,000 crore business, Russia is a $203 million business, and the US is a $350 million business. Those are the ones that excite me, not Germany.
Any new acquisitions planned?
We had decided not to acquire anything major for 18 months. Half that period is now over and we are sticking to it. But if something adds certain value to our business, we won’t shut our eyes to it. But there will be no major acquisitions like Betapharm.