Continuing tribulations in the US drug market is impelling pharmaceutical firms to look for growth elsewhere. Dr Reddy’s Laboratories Ltd, with a sizeable presence in emerging markets (EMs), is further sharpening its focus on China. It aims to grow ahead of the market in India, while scaling up its operations in China.

The move is well-timed. China’s $160-billion drug market, the world’s second-largest after the US, is reforming. Jefferies India Pvt. Ltd says the country offers fast-track approvals and incentives for generic drugs.

Of the Indian firms, Dr Reddy’s is ahead in building a business in China. It notched $95 million in revenue for the first nine months of FY19. Further, it has a sizeable product range, with approvals in developed markets that can be introduced in China.

Nomura Financial Advisory and Securities (India) Pvt. Ltd says Dr Reddy’s has 70-80 products with $8 billion in sales that could be filed in China. “(China) is a competitive market. However, with early moves, certain products have revenue potential in excess of $30 million," it said in a note.

Dr Reddy’s stock reflects the optimism. Compared to a 9% rise in the Nifty Pharma index, it has gained 33% in the past year. It did well as business in EMs gained traction, aiding overall revenue. Total revenue rose 6.6% in the first nine months of FY19. In the year-ago period, it was up just 1%.

Part of the optimism can also be attributed to the forthcoming large product launches in the key US market, which can give a fillip to revenues from the region. But, for the growth-focused long-term investor, China is the key variable.

The country is intensely competitive. Jefferies India says that a national tender has seen price cuts of around 50%. Further, for business to scale, Dr Reddy’s needs to streamline distribution and find a local partner, which would require investments.

How well the company manages this will determine future earnings. “While the reforms make China an attractive market, ramp-up and profitability will have significant challenges," Jefferies India said in a note. “Unlike the US, distribution is important in China and will need a local partner and higher spend. Additionally, with the Chinese government focus on developing local industry, imports from India will not be a preferred option requiring a local manufacturing setup." 

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