“Satisfaction is death,” reads the pinup board in G V Prasad’s office, echoing George Bernard Shaw. And minions at Dr Reddy’s Laboratories will tell you the vicechairman and CEO is hard to satisfy, particularly when it comes to performance.

So, it did not come as a surprise when Prasad told C Chitti Pantulu 2007-08 was not a great year. But then, it was also one when the company laid the foundation for a better year ahead. Given the scorching pace with which Dr Reddy’s kicked off the current year, announcing three acquisitions in April and promising a turnaround of German subsidiary betapharm, one might well believe 2008-09 will be the beginning of a better period at the country’s second-largest pharma company. Excerpts from an interview:

How is the situation in the pharma industry and how is the US slowdown affecting it?

There is a lot of activity. But the US is in a complete mess.

One would have imagined the economic situation would not impact healthcare… Not directly, but it does slow down the overall energy levels. Financing will become difficult and market caps will go down. But, overall, I think India and China will continue to grow while the traditional markets will slow. Our business is not so dependent on the macro-economic trends and global economics. But, in emerging markets, the rise of incomes does have an impact. We have seen growth in India picking up because of prosperity.

So you think there is no reason for de-risking in the US?

I still feel there is value to be derived in the US, though not in the same level as five years back. The pure generic market has become purely commoditised. But, it is certainly profitable if you find the right niche. One has to find products that are unique, have a competitive selling presence and a very high service level. In the past, one could file an ANDA (abbreviated new drug application) and make some money and come back. Today, you have to differentiate yourself and be unique.

And how are you going about doing that?

Talking about Dr Reddy’s, there was a lot of emphasis on product development in the past. Now, we are looking at supply chain, local production and development, niche products and better service levels, rather than just a broad-based approach. While that is one growth driver in the generics business,we are also concentrating on other growth drivers like custom pharmaceuticals (CPS) and biologics and have invested on the right facilities.

You will see good visibility in CPS and rest of the world biologics, though prospects from regulated markets is still uncertain. Though CPS is growing aggressively — last year it was $135 million — this year it will be slightly less because last year our Mexico facility had a massive upside.

Biologics is currently limited to just one market. The focus is to expand it to markets where patents are allowed. We have eight products. This year we will launch two of them. Every year we plan to launch two products and expand them to all markets. Europe launch will happen three years from now. Overall, organically, we will grow 30% year-on-year.

Talking of Europe, you have had a major write-off on betapharm last quarter. How does it look now?

It is looking good. Volumes are going up and we have moved the production of eight bigger products to India. Another four-five will move next quarter. This should improve margins and more importantly supply chain issues should be addressed. The throughput will increase dramatically. For instance, as a result of moving its production here, we have seen dramatic increases in our market share for omeprazole in Germany.

We are seeing a lot of M&A activity and consolidation in pharma. How do you view it, both as an acquirer and as a target?

We are an acquirer, not a target. We have 25%-plus equity in the company. We are looking at increasing that through some warrants and other means, but we have not finalised our strategy yet. I don’t think it is necessary too much. As long as you are doing a good job, shareholders should be satisfied. The only way is to deliver value and keep your share price high enough and not so low for it to become an attractive target. Some companies that have been acquired had a collapse of market price.

We have been facing some lows on account of betapharm, but that will improve. We have taken a board resolution for the conversion of warrants to the extent of 5% of equity but we have not exercised that and have not gone to the shareholders yet.

While you are digesting betapharm you have also started this string-of-pearls drive. Is that because of the betapharm experience?

We should be completing the betapharm process this year. We are not closed to any transformational acquisition. We are not a company that goes and does a hostile bid. We look at what is available, but if there is a huge transformative opportunity that makes immense sense, we will not close our eyes to it. But, deliberately, we have followed a strategy of accelerating our progress in various businesses through right transactions. Roche was one such. Then came Dow and now BASF. Each has a strong rationale. BASF is to provide strong infrastructure for Dr Reddy’s North American operations. Dow was because of its technology platform. We could never create that kind of a setup from scratch. It comes with a lot of heritage and good science. It is immensely valuable not for our CPS business and innovation in general. So, our acquisitions are strategic, but business growth will not depend on them. If some nice opportunity comes along we will go for it. So, large pharma rationalisation, technology plays, branded business in the US and geographic expansion through small acquisitions in Europe is the focus where inorganic play is concerned.

These are our strategic priorities. We screen a lot of opportunities. For every successful one, there are about three that do not go through. Our bias is towards small ones these days. I think we want to completely digest betapham first and show value to shareholders before we venture on a big adventure.

How are your product development initiatives going on across platforms?

In generics, there are about 50 products; a similar number in APIs (active pharmaceutical ingredients). In specialty products like dermatology, there are a dozen ideas we are working on. Maybe one or two will hit the market as there is a sizeable attrition. We are tying to create differentiated products. In biologics, we have eight products that we are working on. In NCEs (new chemical entities), we are focused on metabolic disorders and have scaled down the number of targets. We had eight candidates, but it will come down to five or six.

Your NCE play was targeted at long-term value creation. But, somehow, that does not seem to be working out. What are the issues?

That is the nature of the segment. It is high risk. We have had some challenges and attrition. To see significant impact on our NCE, it will take some more time. It is still early days.

Talking of Perlecan, what has been your experience? You started off with four molecules?

It is now two molecules, as two have been dropped. Work on the AMPK and Perlecan platforms is continuing. The other two, there has been a drawback.

So, what are the investors saying? I believe they want to exit and you have the option of buying them out?

Yes, but we don’t have anything to share on this. I cannot talk about any intent. It was a very novel idea at that time. We did look at other models like hiving off R&D into a separate entity the way other companies have done. But, we saw a lot of interconnection between our businesses so we dropped that idea.

While we cannot get into specifics given your annual results later this month, generally speaking, how was 2007-08?

It was a difficult year and there was nothing great. That is especially because the year prior to it was gung-ho, a blockbuster if you will. So, in comparison, this will not look as exciting. But, this is a year when we consolidated, increased our operational excellence and laid a foundation for the next year, which should be much better qualitatively.

Source : DNA