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Business News/ Companies / News/  Beyond best practices at Dr Reddy’s Laboratories

Beyond best practices at Dr Reddy’s Laboratories

A profile of Dr Reddy’s and what makes its board a winner

Dr Reddy’s vice-chairman and chief executive officer G.V. Prasad says corporate governance is more than ‘just ticking the checkboxes’. (Dr Reddy’s vice-chairman and chief executive officer G.V. Prasad says corporate governance is more than ‘just ticking the checkboxes’.)Premium
Dr Reddy’s vice-chairman and chief executive officer G.V. Prasad says corporate governance is more than ‘just ticking the checkboxes’.

(Dr Reddy’s vice-chairman and chief executive officer G.V. Prasad says corporate governance is more than ‘just ticking the checkboxes’.)

Hyderabad: Dr Reddy’s Laboratories Ltd was founded in 1984 by technocrat-entrepreneur Kallam Anji Reddy with an initial capital outlay of 25 lakh to manufacture and supply active pharmaceutical ingredients (APIs), or bulk drugs, through reverse engineering, taking advantage of a liberal Indian patent regime that recognized process patents over product patents.

The company commenced commercial operations with API methyldopa, a hypertension drug, in 1985. The success of methyldopa helped Dr Reddy’s become a high-quality supplier and exporter of APIs. The company went public in May 1986, raising 2.46 crore, and in the same year entered the finished dosage business in India with the launch of antibiotic norfloxacin under the brand name Norilet.

A key breakthrough came in 1987, when Dr Reddy’s received approval from the US Food and Drugs Administration to make the painkiller ibuprofen API, opening up that country’s market. Dr Reddy’s also became the first Indian drug maker to export norfloxacin and ciprofloxacin to Europe and the Far East.

Dr Reddy’s completed its first overseas acquisition in 2002 when it took over BMS Laboratories Ltd and Meridian Healthcare (UK) Ltd, a wholly-owned subsidiary of BMS, for £9.05 million (around 79 crore today). In 2005, Dr Reddy’s acquired Roche Holding AG’s API business in Cuernavaca, Mexico, for $59 million (around 319 crore today).

The company acquired Betapharm, the fourth largest generic pharmaceuticals maker in Germany, for a total enterprise value of €480 million (around 3,384 crore today) in cash in 2006, the largest acquisition by an Indian company at that point of time.

In April 2011, Dr Reddy’s became the first Asia-Pacific pharmaceutical company outside Japan to list on the New York Stock Exchange.

The company has had to cope with adversity on several fronts in recent years. The Betapharm acquisition hasn’t worked out for the company as Germany, the second largest generics market after the US, shifted to a tender-based system for drug purchases that saw prices dropping. The prize acquisition soon turned into a liability. The company has also faced setbacks in its drug discovery programme, which it has put on the backburner because of funding constraints and commercial risks. Last year, the US Food and Drug Administration issued an import alert against the company’s plant in Mexico, advising US entities against importing drugs manufactured in the plant; the import alert was revoked this year.

Despite the challenges it faces, Dr Reddy’s has stayed independent and improved its financial performance. In the year ended March, net profit rose 29% to 1,426.2 crore and sales rose 30% to 9,673.7 crore, 80% of which is from exports. The company has a market capitalization of around 30,000 crore.

The drug maker’s management philosophy is one of the elements of its success. Corporate governance is more than “just ticking the checkboxes", said G.V. Prasad, vice-chairman and chief executive officer.

“Compliance doesn’t build a great company. I am not a fan of ‘best practices’ or ‘checkbox’ kind of governance," he said. “We have gone much beyond that."

Once every two years, the board evaluates its performance and deliberates on future strategy. The board is currently undergoing a performance evaluation, the last such exercise having been held in 2010.

“We had a good reflection of our own contribution to the board and probably a mirror held to our blind spots as one thing. The second thing is we have actually restructured the way the board functions, so it becomes more efficient and I think that has helped us organize ourselves much better," Prasad said.

Independent directors on the board say the company’s approach to corporate governance goes beyond what’s laid down as best practices.

“I think it’s phenomenally open and the management does not make PowerPoint presentations to only highlight the positive aspects of the business," said Kalpana Morparia, chief executive of JPMorgan India, who joined the board in June 2007.

“There are very engaging, collective debates that are not pre-determined in terms of outcome by the management. The outcome can be different from what the management may have wanted," said Morparia.

The company, which is led by Anji Reddy’s son-in-law Prasad and son Satish Reddy, who is the managing director and head of operations, has also been setting up a family governance structure. In July, the family formed the APS Trust with Anji Reddy, Prasad and Satish Reddy as trustees.

“Family governance is at the very initial stages for us. I think the company is pretty much run very professionally," Prasad said.

Overall, the company is able to engage with its independent directors to ensure long-term sustainability of the business model, Morparia said. “I find it one of the most engaging boards I have been part of," she said.

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Updated: 12 Dec 2012, 10:52 PM IST
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