Dr Reddy’s Laboratories Ltd is knocking on Japan’s doors, aiming to tap the world’s second-largest drug market behind the US.
“We are evaluating ways of entering the Japanese market. It will be a partnership model as we may not have the expertise to plunge into the market right away on our own,” said G.V. Prasad, chief executive officer.
An $80 billion (Rs3.52 lakh crore) annual market—second only to the US, which spends $252 billion each year on drugs—Japan is attractive because the market share of generic drugs is very low and is expected to increase. Generic, or non-patented, drugs are Dr Reddy’s forte.
Meanwhile, the Japanese government has given strong indications that it will start encouraging use of non-patented drugs attracting a slew of companies, especially from India.
A bevy of generic drug makers including Ranbaxy Laboratories, Lupin, Torrent Pharmaceuticals and Zydus Cadila have already shown interest in the Japanese drug market. Despite the growing interest, Japan is “a small generics market and yet to open up,” says Prasad.
Dr Reddy’s interest in Japan comes even as it continues to beef up an already strong European presence.“We have set up a small representative office in Spain recently. We will establish a presence in Italy in the next six months... France is next on our plans. These, along with the UK and Germany, are our core markets where we will look for both organic as well as acquisition opportunities,” added Prasad. He declined to give details on the investment or revenue expectations from these ventures.
While Japan is still on the radar of the drug giant, Europe contributed 18% to the company’s topline of $546 million last fiscal. That share increased to 23% for the nine months ended 31 December 2006, when the company’s revenue touched $1.1 billion.
Dr Reddy’s Labs is only the second Indian pharma company, after Ranbaxy, to post revenues exceeding $1 billion.
But all isn’t well in Europe for the Hyderabad-based company. Trouble has been brewing over its German unit Betapharm Arzneimittel GmbH which it acquired for $ 570 million, the biggest ever buyout by an Indian drug-maker.
The German government has undertaken two rounds of price cuts for generic drugs, squeezing profit margins.
“There are significant risks related to Betapharm because of the price cuts imposed by the government as they try to reduce healthcare costs,” said Nimish Mehta, assistant vice-president, Edelweiss Capital.
Concedes Prasad: “Betapharm has taken a 10-15% hit on the topline as government regulations in Germany have exerted pricing pressures. However, we expect that in the next 18-20 months, the benefits of the acquisition are going to start flowing into Dr Reddy’s.”
In that period, a lot of manufacturing will be shifted to India and Dr Reddy’s products will start filling Betapharm’s pipeline, he said
Even the US strategy of Dr Reddy’s is undergoing a shift. While the US generics market has proved a moneyspinner, Dr Reddy’s is now looking to enter new speciality segments, such as dermatology.
Prasad says: “We want to be a player in the speciality-branded segment in the US and would be launching two-three dermatology products.
“The process might take three years or so as clinical trials will have to be undertaken.”
Dr Reddy’s is currently investing about $10 million annually on these drugs, which qualify as novel drug delivery systems. The segment is estimated to generate revenues worth $5.3 billion in the US .
With about 46% of its US revenues during the quarter ended December coming from just one drug, Simvastatin, Dr Reddy’s fortunes in the US are overly dependent on it.
Dr Reddy’s financials got a big leg-up when Merck authorized it to sell versions of its branded cholesterol drug, Zocor, in the US for six months with limited competition.
The US contributions to the company’s revenues are expected to continue, with the company receiving exclusive rights to sell Ondansetron, GlaxoSmithKline’s $ 639 million anti-nausea drug, in that country for the next two quarters.
A Mumbai-based analyst, who didn’t want to be named, predicts revenues from Ondansteron would be roughly $50 million.