Hyderabad: India’s second largest pharmaceutical company by revenue, Dr Reddy’s Laboratories Ltd (DRL), is revamping its business model to focus on niche services in an effort to beat competitive pressures in generic drug manufacturing.
As part of the strategy, DRL has combined its custom pharmaceutical services (CPS) and active pharmaceutical ingredients (API) divisions to form a new segment called Pharmaceutical Services and Active Ingredients (PSAI). CPS involves providing research and manufacturing services to meet the specific requirements of clients. Typically such services, involving complex chemical molecules, are offered in high-value business deals.
Active pharmaceutical ingredients are the clinically active chemical components in a drug, and most pharma firms engaged in the business bulk-manufacture the ingredients at a low cost for the company that holds the drug patent.
Creating value: Dr. Reddy’s plant in Andhra Pradesh. The company has combined its custom pharmaceutical services and active pharmaceutical ingredients divisions to form a new segment. Amit Bhargava / Bloomberg
“Over the last two decades, we have created a huge wealth of expertise. We are trying to create value for innovators by leveraging that knowledge base,” said Abhijit Mukherjee, senior vice-president at DRL heading the PSAI business. Mukherjee is also a member of DRL’s Management Council, a top decision making body at the drug maker.
From the first quarter of the current financial year, DRL started reporting financial performance data for the PSAI business. In 2007-08, CPS and API division together contributed $415 million (Rs1,872 crore), or over 30%, of DRL’s total revenue and management expects revenue from this segment to grow at a more than 40% pace in the coming years.
The services offered through PSAI vertical will include defining and demonstrating technology for drug manufacturing which involves process synthesis and analytical development, documentation of newly defined drug manufacturing processes for submission to regulators as well as legal services for regulatory compliance in multiple jurisdictions.
Generics contributed $825 million, or nearly two-thirds, of the company’s 2007-08 revenue and will continue to be DRL’s mainstay in the short term, in the context of nearly $47 billion worth of drugs going off patent in the US market in the next three years.
However, DRL says it is keen to generate new streams of revenue in order to continue growing and beat the competition in manufacturing where barriers to entry are comparatively less.
DRL’s strategic move is geared towards exploiting an emerging opportunity in the global pharma industry.
“Multinationals are now increasingly looking at outsourcing business functions such as process synthesis, analytical development, and manufacturing, to focus on drug discovery and brand management in an attempt to develop costeffective business models,” according to a report by consulting firm KPMG and the Confederation of Indian Industry, a lobby group.
DRL is positioning itself as a service provider that will enable companies to take their innovations to the market in the most cost-efficient and least time consuming fashion.
“This service model is part of DRL’s effort to deal with increasing competitive pressure in the generics business and to ensure comfortable margins in the long run,” said Sarabjit Kour Nangra, vice-president (research) and pharma sector specialist at Mumbai-based Angel Broking Ltd. “By associating with innovator companies, they will get more visibility as well.”