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Dr Reddy's: From Rs 25 lakh to Rs 5,800 crore

June 12, 2007 10:02 IST
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It was the spring of 1970 and the then prime minister Indira Gandhi, in a deft political move, announced the promulgation of a new Act -- one that would usher in a new beginning for the pharmaceutical industry in India, 'The Indian Patents Act.'

Indian companies were now given the freedom to produce generic medicines that were patented abroad. . . healthcare would never be the same and would be affordable, and for Indian drug manufacturers this was a Godsend opportunity.

The Patents Act signalled the arrival of good times for the pharmaceutical companies. Soon after the Act was announced, hundreds of companies started reverse engineering of western pharmaceutical products. There was a virtual explosion in the pharma space, with entrepreneurs making most of this opportunity.

This also beckoned a young researcher, Kallam Anji Reddy from a small village near Vijaywada. In 1974, the 34-year-old Reddy quit his job with the government-owned Indian Drugs and Pharmaceuticals Limited (IDPL) to set up his own company and he called it Uniloids.

Managing Editor, The Smart Manager, Gita Piramal, told CNBC-TV18, "The entrepreneur in Shri Anji Reddy could not be restrained. He is one of the very few PSU managers who has made it on his own."

Kallam Anji Reddy, chairman, Dr Reddy's Laboratories, adds, "One of the reasons I left IDPL was that I said, 'I am doing all this hard work for a few rupees but if I become an entrepreneur -- there was import duty on all the imported drugs -- and if my technology is as good as western technology, then I could make money from day one.' This is what compelled me to come out and start on my own."

Uniloids was Anji Reddy's first brush with entrepreneurship but he was not to rest there. By the early 1980s, he had started a few more ventures in quick succession. He set up Standard Organics Ltd in 1980 and Cheminor in 1981, with an NRI partner Murali Divi. For Anji Reddy, the march to success had just begun.

Small ventures prepared Anji for bigger things. While he worked on the manufacture of generic drugs, his real strength lay in research. In 1984, Dr Reddy pooled in all his resources and thrust himself completely into research and set up Dr Reddy's Laboratories (DRL) in Hyderabad.

With an initial capital outlay of Rs 25 lakh (Rs 2.5 million), DRL started as a manufacturer of active pharmaceutical ingredients and soon it went out to surprise its competition by introducing branded formulations at half the prevailing prices.

Reddy now needed to sustain his aggressive growth plans and he needed cash. DRL decided to go public with an IPO of equity-linked debentures aggregating Rs 2.46 crore (Rs 24.6 million) in May 1986. Reddy says, "The reason we wanted to get money this way was for expansion and, of course, the inspiration was (Reliance founder) Dhirubhai Ambani who said, 'Why do you want to take money at 15%-18% interest from IDBI when -- if you are good at making profits for investors -- it's better to go to the stock markets.' And we did just that."

Between 1985 and 1986, DRL created a scarce drug, 'Methydopa.' Although international manufacturer Merck had its own Methyldopa, its Indian subsidiary had no access to it. Reddy approached Merck with its samples of the drug but was rejected almost immediately and that turned the fortunes in Dr Reddy's favour.

Reddy recalls, "Merck's partner in 1984-85 was Tata and it was called Merind (Merck + India) and they had a formulation which Merind obviously wanted to import from Merck USA, where the specifications are laid down according to their requirements. But the government of India would not import because it was more expensive and it was trying to import Methyldopa from Hungary which would not pass the specifications of Merck." "That is where I got into the act. Because there was no Methyldopa available, I took it as a challenge and within three months, we produced Methyldopa equal to Merck's quality and acceptable to them."

Reddy got another phenomenal break in 1987 when he got approval from the United States Food and Drugs Administration, USFDA, to make Ibuprofen. This was again a giant stride on DRL's road to success. And this approval to make Ibuprofen opened a whole new world of opportunities for Reddy.

He now had access to the biggest market for the drugs in the world, but he would soon face a hurdle that would rein in his ambition to become a global exporter and there was cause also for a bigger concern -- a reshuffle was waiting to happen in his own backyard.

In 1990, Anji Reddy's joint venture partner in Cheminor -- Murali Divi -- decided to move out of the partnership to set up his own venture Divi's Laboratories.

Retaining joint venture partners was a niggling worry for Reddy and one that he had faced since his initial start-up days and so now he decided to assign key management responsibilities only to his family members. He brought in his son-in-law GV Prasad and son Satish Reddy.

On the July 31, 1991, a major American manufacturer of bulk drugs -- Ibuprofen Ethyl Corporation -- filed an anti-dumping administrative complaint against Cheminor. The price offered by Cheminor was deemed less than fair in the US and Flavine International (Cheminore's sole distributor) cancelled all its orders.

After a long drawn legal battle, Cheminor was left with no option but to withdraw from the US market.

Reddy was now ready to move beyond generic drug development and venture into new drug discovery capabilities and research. It was time to take big strides and during the same year, it made a global depository receipt, or GDR, issue in Europe to raise funds for expansion. The issue fetched a whopping $50 million.

Reddy explains, "All the investors knew that it is a long-term story and they bought the shares. My primary concern was my scientists. They have come from cushy, safe jobs from other labs and I need to have enough corpuses to keep them going. This was my main concern and also the expansion. We were expanding at a terrific speed at that time, so we would rather go for a GDR."

By the mid-90s Reddy was gearing up to go global. In March 1997, it achieved its first breakthrough by licensing out an anti-diabetes molecule to the world leader in diabetes drugs -- Novo Nordisk of Denmark. In fact, this small step taken by DRL proved to be a giant stride for the Indian pharmaceutical industry.

The pharmaceutical industry went through an instant paradigm shift in its image from being known just as copycats to innovators.

Piramal says, "He wanted to be a research company. He didn't want to be just a copycat all his life. But Novartis and Nordisk retuned his molecules saying that they didn't work. His friends and his rivals asked him why does he want to push for drug discovery in an industry, which is flourishing on reverse engineering?"

In 1997, DRL filed for its first abbreviated new drug application (ANDA) process for Ranitidine. It was also planning its next round of expansion. In 1999, DRL took over a pharmaceutical company based in Chennai -- American Remedies -- where he bought out 45% of the company's stake at Rs 175 per share.

DRL would now be able to cash in on the American Remedies strong prescription base of over hundred thousand specialist doctors.

The 1990s ended on a high note for Anji Reddy. His businesses had both expanded and consolidated over the last two decades and he had already made inroads into the international pharmaceutical market. In 2000, he became the third largest pharmaceutical company in India but Reddy was keenly eyeing for much more -- beyond Indian shores.

On the April 11, 2001, Dr Reddy's Laboratories was listed on the New York Stock Exchange. The issue was dubbed as the year's best performing American depositary receipt, or ADR. It fetched DRL $133 million at a time when stock markets across the world were at their lowest end.

Reddy says, "When we went on talking about our company we told them what we have done so far and then we promised them a few things that we will do. And on April 11, 2001, we listed and we went on fulfilling those promises -- for example, we said we have a patent challenge going on but we think we will win."

"We won the patent challenge for Prozac and we got the company $100 million profits and then we licensed and we said we have got more drugs in the pipeline and we will license them out. So, we licensed DRF 4158 to Novartis. So, when we fulfilled these promises that year, Dr Reddy's was called the best performing stock in the New York Stock Exchange."

But the initial highs of 2001 soon met with reversals of fortune. On the August 3, DRL won a protracted battle against Eli Lilly. It went ahead to make Norvasc drug that had been patented by Pfizer since the early 1980s and now a battle with Pfizer was brewing.

In February 2003, when Pfizer's patent for Norvasc expired, DRL saw an opportunity. Pfizer still had sole marketing rights, but DRL decided to produce the drug with different components and through a different method.

It also applied for approval from the USFDA, but Pfizer did not sit easy, it decided to take legal action against DRL. DRL promptly filed a motion to dismiss Pfizer's complaint. The new formula of DRL got the USFDA approval and a New Jersey court ruled in DRL's favour.

Piramal says, "To crack the US market to get your product on a shop shelf means you have to win the right and that right actually comes from the courts of law. Reddy knew that if he wanted to succeed he would have to fight for this right. He had seen other companies from other countries succeeding in this. He had seen that other Indian companies were shying away from it but he was sure of himself that he would do it at whatever the cost and the cost was definitely high. Fighting in an American court against American companies in a very patriotic country is not easy. The American companies had far deeper pockets, but to his credit, Anji did win some stupendous victories and got some money back, but there were some expensive defeats also."

These stumbling blocks hindered, but couldn't stop, DRL's growth, and in 2005, DRL purchased Roche's API business at the state of the art manufacturing plant in Cuernavaca, Mexico, with a total investment of $59 million. That wasn't all -- the next acquisition made DRL a frontrunner in the European pharmaceutical industry.

DRL moved to Germany in early 2006 and acquired Betapharm Arzneimittel -- one of the largest generic drug companies in Germany for Rs 2,250 crore (Rs 22.50 billion). It was the biggest every overseas acquisition by an Indian pharmaceutical company.

DRL was now gearing up to become a global company with a presence in all the key markets of the world with a net worth of Rs 5,800 crore (Rs 58 billion). From Rs 25 lakh in 1984, DRL today is one of the most significant companies in the global pharmaceutical industry.

Driving this success has been Reddy's unflinching conviction that what they (the MNCs) can do, he can do better.

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