DR REDDY·S LAB
STRATEGIC MANAGEMENT REPORT
Group 3:Abhilash 3:Abhilash | Abhishek |Anil |Kuldeep | Manoj
Contents Executive ummary...... ummary ............ ........... ........... ........... ......... .... ........... ................ ........... ............ .......... .... ........... ................ ........... ............ .......... .... ............ .................. ........... ........... ......... ... ........... ................. ........... ..... 4
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armaceutical
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ndian £
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ustry
efinitio efinition........... ................. ........... ........... .......... .... ........... ................. ............ ........... ......... .... ........... ................ ........... ........... .......... ..... ............ .................. ........... ......... .... 4
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arma ndus ndustry...... try............ ........... ........... ........... ......... .... ........... ................ ............ ............. ......... ... ........... ................. ........... ........... .......... .... ............ .................. ............ ........... ........ ... ........... ................ ..... 4 £
ndus ndustry overview ........... ................ ........... ............ .......... .... ........... ................ ........... ............ .......... .... ........... ................. ........... ........... .......... .... ............ ................. ........... ........... ......... .... ........... ................ ......... .... 4
........... ........... ............ .......... .... ........... ................. ............ ............ ......... ... ........... ............... .... 5 Structural changes in industry over pe riod: Historic evolution..... evolution ........... Pre-patent Regime (Before 2005- Phases I to IV)...... IV)........... ........... ............ ........... ......... .... ........... ................ ............ ............ ......... .... ........... ................ ........... ............ .......... .... ... 6 Post-patent Post-patent Regime (After ( After 2005-Phase V)...... V) ........... ........... ........... ........... .......... .... ........... ................. ............. ............ ........ ... ........... ................ ........... ........... .......... ..... ........... ............... .... 6 urrent tructure..... tructure ........... ........... ........... ............ .......... .... ........... ................ ........... ............ .......... .... ........... ................. ........... ........... .......... .... ............ ................. ........... ........... ......... .... ........... ................ ......... .... 7
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Value chain...... chain ........... ........... ............ ........... ......... .... ........... ................ ............ ............ ......... .... ........... ................ ........... ............ .......... .... ........... ................. ........... ........... .......... .... ........... ................. ........... ........... .......... .... .. 7 Suppliers (Chemicals manufacturers)..... manufacturers) ........... ........... ........... ............ .......... .... ........... ................. ............ ............ ......... ... ........... ................. ............ ........... ......... .... ............ ................. ........... ...... 7 API/Bulk drug manufactures...... manufactures ........... ........... ........... ........... .......... .... ............ ................. ............ ............ ........ ... ........... ................ ........... ........... .......... ..... ........... ................. ........... ........... .......... .... ...... 7 Formulations Manufactures² Manufactures² Industry I ndustry players, market shares...... shares........... ........... ........... ........... .......... .... ........... ................. ............ ........... ......... .... ............ ................ 8 ©
egulato egulatory Enviro Environment in ndia ........... ................. ............ ........... ......... .... ........... ................ ............ ............ ......... .... ........... ................ ........... ............ .......... .... ........... ................. ........... ......... 13
Future
utloo utloo of the ndus ndustry..... try........... ............ ........... ........... .......... .... ........... ................. ............ ........... ......... .... ............ ................. ........... ........... ......... .... ............ ................. ........... ......... ... 14
Medium erm:
Long Long em:
enerics enerics Focu Focuss ........... ................ ........... ........... .......... ..... ........... .................. ............ ........... ......... ... ........... ................. ........... ........... .......... .... ............. .................. ......... .... 14
ivers iversificatio ification ........... ................. ........... ........... .......... .... ........... ................. ............ ........... ......... .... ........... ................. ........... ........... .......... .... ............ ................. ........... ........... ......... .... 14
orter·s rter·s Five Five Force Forcess Analy Analyssis of of current tructure ........... ................. ........... ........... .......... .... ........... ................. ............ ........... ......... .... ........... ................ ........... ........ 15 ¨
a) he threat of new f new entrants entrants ............ ................. ........... ........... ......... .... ........... ................ ........... ............ .......... .... ........... ................. ........... ........... .......... .... ............ .................. ........... ........... ...... 15
) he argaining ower of uyers uyers........... ................. ........... ........... .......... .... ........... .................. ............. ........... ........ ... ............ ................. ........... ........... ......... .... ............ ................. ........ ... 17
c) he argaining ower of uppliers uppliers........... ................ ........... ........... .......... ..... ........... ................ ........... ............ .......... .... ........... ................. ........... ........... .......... .... ............ ................ .... 19
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d) he hreat of ubs ubstitutes titutes ........... ................. ........... ........... .......... .... ........... ................. ............ ........... ......... .... ........... ................ ........... ........... .......... ..... ........... ................. ........... ........... ......... ... 20
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e) ntens ntensity of rivalry amo among competito mpetitors ........... ................. ........... ........... .......... .... ........... ................. ............ ........... ......... .... ........... ................ ........... ........... .......... ..... ........ ........ 21
f) Exit arriers arriers ........... ................ ........... ........... .......... ..... ........... ................ ........... ............ .......... .... ........... ................. ........... ........... .......... .... ............ .................. ............ ........... ........ ... ............ ................. ............ ......... 23
Analys nalysis of of effect of external f external enviro environment on current structure ( EST) ........... ................. ........... ........... .......... .... ........... ................. .......... .... 23
SWOT Analys nalysis of of ndian harmaceutical ndus ndustry ........... ................. ........... ........... .......... .... ............ ................. ............ ............ ........ ... ........... ................ ........... ........... ....... 24
usiness iness Strategy..... Strategy ........... ........... ........... ........... .......... ..... ........... ................ ........... ............ .......... .... ........... ................. ........... ........... .......... .... ............ .................. ............ ........... ........ ... ............ ................. ........... .......... 24 eneral Analys nalysis ........... ................. ........... ........... .......... .... ........... ................. ............ ........... ......... .... ........... ................ ........... ........... .......... ..... ........... ................. ........... ........... .......... .... ........... ................. .......... .... 24
Value net analys analysis ........... ................ ........... ........... .......... ..... ........... ................ ........... ............ .......... .... ........... ................. ........... ........... .......... .... ............ ................. ........... ........... ......... .... ............ ................. ......... 25 ustomers mers ........... ................. ........... ........... .......... .... ............ .................. ............ ........... ........ ... ........... ................ ........... ........... .......... ..... ............ .................. ........... ........... ......... ... ........... ................. ........... .......... ..... 25
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Subs Substituto titutors ........... ................ ........... ........... .......... ..... ........... ................ ........... ............ .......... .... ........... ................. ........... ........... .......... .... ............ .................. ............ ........... ........ ... ............ ................. ............ ......... 26 Suppliers.... Suppliers......... ........... ........... ........... ............ ...... ........... ................ ............ ............. ......... ... ........... ................. ........... ........... .......... .... ............ .................. ............ ........... ........ ... ............ ................. ........... ............ .......... 26 omplemento mplementors ........... ................. ........... ........... .......... .... ........... ................. ............ ........... ......... .... ........... ................ ........... ........... .......... ..... ............ ................. ........... ........... ......... .... ........... ................ ....... 26
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A TS Analys nalysis ........... ................. ........... ........... .......... .... ........... .................. ............ ........... ......... ... ........... ................. ............ ........... ......... .... ............ ................. ........... ........... ......... .... ........... ................ ........... ........ 26 ©
layers layers ........... ................. ........... ........... .......... .... ........... .................. ............. ........... ........ ... ........... ................ ........... ........... .......... ..... ............ .................. ........... ........... ......... ... ........... ................ ........... ............. .......... ... .. 26
Added Values alues:........... ................. ........... ........... .......... .... ........... ................. ............. ............ ........ ... ........... ................ ........... ........... .......... ..... ........... ................. ........... ........... .......... .... ........... ................. .......... .... 27
ules ules: ........... ................ ........... ........... .......... ..... ........... ................ ........... ............ .......... .... ........... ................. ........... ........... .......... .... ............. .................. ........... ........... ........ ... ........... ................ ........... ............ .......... .... .... 27
Tactics Tactics: ........... ................. ........... ........... .......... .... ........... ................. ............ ........... ......... .... ........... ................ ........... ........... .......... ..... ............ .................. ........... ........... ......... ... ........... ................. ........... ............ .......... ... . 27 Sco Scope ........... ................ ........... ........... .......... ..... ........... ................ ........... ............ .......... .... ........... ................. ........... ........... .......... .... ............. .................. ........... ........... ........ ... ........... ................ ........... ............ .......... .... .... 27 Techno Technology Strategy..... Strategy ........... ........... ........... ........... .......... ..... ........... ................ ........... ............ .......... .... ........... ................. ........... ........... .......... .... ............ ................. ........... ........... ......... .... ............ ................. ......... 27 S-Curve Framewo ramework rk - roduct !
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evelo evelopment by
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r. eddy·s eddy·s ............ ................. ........... ........... ......... .... ........... ................ ........... ............ .......... .... .... 28
nternatio nternational Strategy..... Strategy ........... ............ ........... ........... .......... .... ........... ................. ............ ........... ......... .... ........... ................ ........... ........... .......... ..... ............ ................. ........... ........... ......... .... ........... ................ ....... 29
Strategic ntent and Alliance of Current Strategy..... Strategy ........... ........... ........... ........... .......... ..... ........... ................. ............ ............ ......... ... ........... ................. ........... ........... ......... ... 29 #
Competitive Advantage..... dvantage ........... ........... ........... ........... .......... ..... ........... ................ ........... ............ .......... .... ........... ................. ........... ........... .......... .... ............. .................. ........... ........... ........ ... ........... ............... 30
esource source ased Framewo ramework ........... ................. ........... ........... .......... .... ........... ................. ............ ........... ......... .... ........... ................. ........... ........... .......... .... ............ ................. ........... ........... ......... .... 30 $
V O framewo framework A rk Analys nalysis ........... ................. ........... ........... .......... .... ........... ................. ............ ........... ......... .... ........... ................ ........... ........... .......... ..... ........... ................. ........... ........... ......... ... 30
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Competitive advantage thro through structural positi ositio on: ........... ................. ............ ........... ......... .... ........... ................ ............ ............ ......... .... ........... ................ ..... 31 Competitive advantage thro through pro process cess executio execution:...... n:........... ........... ........... ........... .......... .... ........... ................. ............ ........... ......... .... ........... ................ ....... 31 Competitive advantage thro through alliances alliances and leaders leadership: Company...... mpany ........... ........... ........... ........... .......... .... ........... ................ ......... .... 31
eco ecommendatio mmendations ........... ................. ........... ........... .......... .... ........... ................. ............ ........... ......... .... ........... ................ ........... ........... .......... ..... ............ ................. ........... ............ ......... ... ........... ................. ........... ..... 31
ecu utive Exec
Summa y %
In this report we analysed the pharmaceuticals industry of India, and the competitive advantage and strategy of Dr Reddy¶s Laboratories. We briefly give the industry definition describing the scope of the industry considered for this analysis. We looked into current industry structure and changes in the industry structure over a period. We analysed the current industry structure using Porter¶s Five Forces Analysis and SWOT analysis. We analyse the impact of external environment on the current structure. Towards the end we gave the medium and short term outlook of the industry. In the firm analysis, we looked into factors contributing to sustainable competitive advantage of Dr Reddy¶s and analysed the resources of the firm using VRIO framework. We looked into business strategy of the firm and analysed it using Generic business strategy, value net and PARTS Analysis. We also analysed the International and Technology strategy of the firm.
Pha ma mace ceu utic tical al Ind Indu ustr y Definition Definition %
We define Indian Pharmaceuticals industry as the set companies producing formulations and bulk drugs/APIs in India. Formulations are defined as end products/drugs produced in ready to use forms (capsules, tablets, syrups and injections) and are administered to patients to cure their different ailments. Bulk Drugs/APIs are defined as chemical compounds prepared using different intermediates and chemicals and are used as raw materials to produce formulations. formulations. Formulations are broadly classified into patented patented drugs and generics. A patented drug is innovative formulation by company that is usually patented for a period of 20 years, so that company recovers its R&D expenses and spends it viciously to develop new drugs. A generic drug is copy of an expired patented drug which is similar in dosage, strength, safety, method of consumption, performance and intended use. Cost of generics generally will be very low compared to patented versions are R&D expenses are not factored in. For this analysis, we consider consumer healthcare, customer pharma services and animal healthcare as outside the industry industry scope. As currently the size of customer pharma services is very less compared to formulations and bulk drugs production, so scoping out customer pharma services will not result in much deviation. Also we considered exports market in the scope of our analysis.
Indi ndia an Pha Phar r ma ma Ind Indu ustr y Ind ndu ustr y overview The Indian Pharmaceuticals industry has grown from a mere Rs 1500 crores turnover in 1980 to approximately approximately Rs 100611 crores in 2010. The country is now ranked 3rd i n terms of volume of production (10% of global market share) and 14th largest by value. One reason for lower value share is due to low penetration levels in India and lower costs in India ranging from 5% to 50% less compared to developed countries. As seen in table below, the total pharma market has grown at a CAGR of 13.25% in last 5 years. This growth is mainly driven by strong exports which grew at a CAGR of 20.07%. The domestic market has grown at a modest CARG of 10.56%.
In 2009-10 F m ns m acc nts nts to 65 of m of market and bulk drugs drugs account ccount to res rest 35 market s are. Thus Thus form formulations ulation s market value is i s around Rs Rs 69050 cores ores and it grew at a C R of 16. 16.56 for las last 5 years years. Further in form formulations ulation s generics generics market expanded at a C R of 13 of 13 in las last 5 years years. Bulk drugs drugs market value is i s Rs 31561 crores rores and grew at a C R of 7 for las last 5 years year s. Exports Exports market acc account ounts s for major share of bulk drugs drugs produc produced in India. &
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Str uc uc tur a chan es n ndus ndustr tr y ve ver r pe perio riod d Histori toricc ev ol ol utio tion n @
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We see that Pharm Pharma Indus Industry in India has has under gone struc tructural changes hanges for good num number of tim times. Mos Most of the tim ti mes thes these changes hanges are influenc influenced by external politic politi cal environm environment in the form form of Indian Governm Government rules rules and regulations regulations. Indian Governm Govern ment played a key
role in shaping the current pharm pharma indus industry struc tructure. Over years years struc tructure has has hanged h c anged from from minusc inu scule ule dom domestic tic market with MNCs MNCs mainly catering to Indian market through imports ports to current struc tructure where dom domestic tic companies panies predom predominantly cater to the 95 of the market. Below figure briefly desc describe ribes s the struc tructural changes hanges undergone: E
P re-pa re-pate ten nt
egime ( efore 2005 2005-- P h hase ases I to I )
F
G
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It started with MNCs completely ompletel y dominating the Indian market in s and s In s, Indian Gov Government took many many initiativ initiatives like inc increasing import duties, implementing pro cess patents, etc et c to cut MNC power and promote domestic domesti c industry. industry. The proc pro cess patents helped the pharma ceutic eutical industry industry of India to grow signific signifi cantly antly by reengineering the patented produ cts and marketed succ successfull essfullyy in domestic domestic markets. markets . In the next stage the export initiati ves (export subsidies, liberalization, etc) etc) gav gave strong boost to the industr y and attrac attracted many many small play players resulting in current highly highl y fragmented struc stru cture. ture . Towards the very ery end of this regime, there there is inc in creased foc fo cus on R&D and upgrading of manufac manufa cturing proc pro cess to meet with high quality qualit y standards due to high competition. ompetition. I
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P ostt-pa pate ten nt
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From January January Indian regulatory regulator y authority authority introduc introdu ced Produc Product patent regime. regime . Produc Product patent introduc introduction was done to enc en courage new drug disc dis coveries in the long run run in Indian markets markets. The rec recognition of produc product patents is now gradually gradually inc increasing MNCs· partic parti cipation in the Indian market. market. This can been seen from rec re cent ac acquisitions and allianc allian ces in theindustr theindustry. y. V
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Curr ent ent truc ructtur e W
V al ue
chaiin cha
Below figure clearly explains explain s the value chain of the Indian pharm pharma indus industry. We de d escribe scribe eac each part of the chain in detail below.
Supp upplier lier s (Chemi (Chemica cal l s manu anuf f ac ac turer s) s) Organic Organi c and Inorganic Inorganic chem hemicals als form form key raw materials erials in manufac anufacturing bulk drugs drugs chem hemical compounds pounds. The indus indu stry of thes these chem hemi cals als is India is i s hig hi g hly hl y frag fr agm mented and dis dispers persed with over 40000 units units in both large and small small scale scale sectors tors. There are no big notable players players in the organic organi c and inorganic inorgani c chem hemicals als indus indu stry in India. Bas Basic raw materials aterial s cons onstitute major portion of cost of produc production (30 to 60 ) in the chem hemical indus indu stry. At tim ti mes the manufac anufacturers turers are unable to pass pass-on the cost escalation scalation to end cons onsumers ers. The key charac haracteris teristics tics of the indus industry are low capac apacity levels levels low R&D levels level s (0. (0.3 of s of sales ales) low us use of tec technology, unbranded produc products,little produc product differentiation and foc focus on the dom domestic tic market. X
X
Y
Y
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AP I ulk d r r u g manu anuf f ac ac ture ress `
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Nu mber o f p l a y er s er s C o m p etitio etition n b
The indus industry is i s highly fragm fragmented with the top 10 players players commanding mmanding only 30 perc percent of the market. There are over 350 units units in the organis organised sector and many morein orein the unorganis unorganised sector. Som Some big players players are Ranbaxy, Shas Shasun, Cipla, Dr. Reddy's Reddy' s, Chem heminor, Lupin, IPC IP CA, Sun, Cadilla, Wockhardt, Aurobindo Au robindo,, Kopran, etc etc. Inc Increas reased competition in the dom do mestic tic market, es espec pecially in large and old produc produ cts, heavily impac pacted margins argins of bulk drug produc producers ers. In order to maintain profitability, many of them them have forward integrated into manufac anufacturing form formulations ulations. Large bulk drug produc produ cers ers have als also inc increas reased exports exports of new molec olecules ules to sem-i regulated markets arkets, where margins argins are relatively relatively higher. c
a n u f ac t ac t u ri n g
Setting up new manufac anufacturing bulk drugs drugs plant is i s low capital intens inten sive. A USF USFDADAapproved API manufac anufacturing fac facility costs up to Rs Rs 150 15 0-200 -20 0 million as as compared to Rs Rs 303050 million for an unapproved fac fa cility. The average ges ge station ation period peri od fo r a USF USFDA approved manufac anufacturing fac facility is i s 18-24 months onths as compared to 6-12 months onths for an unapproved fac facility. Indian bulk drug manufac anufacturers turers are inc increas reasingly res resorting to signing contrac ontract manufac anufacturing deals deals with global players player s, by providing ding servic ervices such as custom tom synthes ynthesis and manufac anufacturing bulk drugs drugs for both off -patent and patented drugs drugs. Below chart desc describe ribe the average cost struc tructure:
r ofit a bilit y y P rofita The sales ales turnover of large size players players inc in creas reased at a CAGR of 20. 20.5 pa for las last ive f years years and an average operating margin of 20 of 20.9%. .9%. Whereas hereas, sales ales turnover of sm of small all size players players inc increas reased at a CAGR of 24. 24.5% for las last 5 years years and had an average operating margin of 14 of 14..2%. d
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ormu orm ul atio tions ns
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anuf f ac anu ac ture ress Indus Industr tr y pl pl ay ay er er s market sha share ress g
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Nu mber o f P l l a y er s er s C o m p etitio etition n i
Indian companies panies dom dominate the dom domestic tic form formulations ulation s market by occ occupying upying seven out of the top ten spots pots and serving 95 95% of dom domestic tic dem demand. and. Top T op 5 companies panies have 22. 22.5% of total form formulations ulation s market share. The indus industry is is highly fragm fragmented with around arou nd 300-400 companies panies in organized sector and around 15000 unorganized small small scale scale units units. Altogether thes these players players manufac anufacture over 100000 drugs drugs. Som Some of the major players players and their market shares hares are shown in the chart below. Rec Recent deals deals in em e merging markets arkets and an inc in creas reasing num number of tie-ups ups with generic generi c firms firms indic indicate that branded pharm pharma
companies panies are moving into the generic generi c spac pace. Companies panies like Pfizer, GSK, Sanofi, AstraZenec traZene ca and Abbott have already made moves oves in this thi s direc direction and this thi s co uld result in inc in creas reased pric pricing press pressure. ure. Competition in generics generi cs is intens intensifying due to inc in creas rease of foc focus many players player s on generics generics exports exports bec becaus ause of huge generics generics opportunity opening for next 5 years years.
ac t u ri n g M a n u f ac t Setting up new manufac anufacturing bulk drugs drugs plant is i s low capital intens inten sive. Setting up a USF USFDA approved form formulations ulations manufac anufacturing plant costs about Rs Rs 200 -30 -3 00 million as as compared to Rs Rs 120-150 million for an unapproved fac fa cility. Average Average g estation period for a USF USFDA approved manufac anufacturing fac facility is i s 18-24 months onths as compared to 6-12 months onths for an unapproved fac facility. Players Player s follow GMP prac practic tices. Average cost struc tructure of the company is is shown below:
r ofit a bilit y y P rofita Turnover of large players players (aggregate of 7 of 7 compani an ies) regis registered a CAGR of 21 of 21..4 per cent between 2005-06 and 2009 200 9-10. -10. Revenues Revenues of medium edium-sized -sized players players (aggregate of 10 companies) panies) pos posted a CAGR of 21. 21.3 per cent during 2005 20 05-06 to 2009 2009-10. -10. Average operating margin of large and medium edium size players players in the ndus n i dustry is i s around 21. 21.5%. D i s trib tribu u t io n
chann el channel
Long channel of dis di stribution and inc in cidenc idence of brand subs ubstitution make allSKU allSKUs s to be available 24X7. 24X7. Drug dis distribution in India has has witness witnessed ed a paradigm paradigm shift. Clearing and forwarding agents agents (CFA (CFAs) are prim primarily res respons ponsible for maintaining stoc tock and forwarding SKUs SKUs downs downstream tream. Unlike a CFA CFA that can handle the stoc tock of one company, a stoc tockis kist (dis distributor) tributor) can simultaneous ultaneously handle 30±50 ±5 0 different companies panies. From rom the CFA CFA the stoc tocks are supplied either to the stoc tockis kist, sub-s ub-sto toc ckis kist, or hos ho spitals pital s. The retail pharm pharmacy obtains obtain s produc products from from the stoc tockis kist or sub-sto -stoc ckis kist through whom whom it finally reac reaches hes the onsumers ers (patients) patients).. Certain small anufacturers turers direc directly supply the drugs drugs to the super cons small manufac stoc tockis kist.
er s B u y er s
( r et a iler s h o sp it a l s pa t i e n t s and customer cus tomer s o f ex ex p p or t d em em an d - n a t u r e o f b u y er s er s t h ei r s ize, p ower ) p
p
p
Buyers Buyers cons onsist of health care providers providers (e.g. hos hospitals pital s, managed care organizations organizations (MCOs), s), governm government agenc agencies) ies) and drug retailers retailers. In India, doc do ctor¶s tor¶s presc prescription ription is is required to acc acce ess most medic edicines ines. Marketing of presc prescription ription drugs drugs by pharm pharmaceutic euti cal companies panies i s therefore largely direc directed at medic edical prac practitioners titioners, with whom who m they wield a signific ignificant influenc influen ce. Depending on the medic edical condition, there may be several different drug treatm treatments ents available differing in effic effi cacy, eas ease of us use, side effec effects and cost effec effectiveness tiveness.. Buyers Buyers show greater pric price sens ensitivity in case of low cost generics generics drugs drugs. M a rket
( d o me s ti c m a rket-m rket-maj aj o r t h e r a p e u t i c d e m and segme s egmen n t s and t and th ei r ex ex p p e c t e d growth growt h r a t e s , ex ex p p o rt s m a rket ) Indian form formulations ulation s market can be broadly class lassified ified as as shown in the below chart:
Acute has has market share of about 69% and res rest is of Chronic hronic. Among therapeutic therapeutic categories ategories, growth was was prim primarily driven by chronic hronic segm egments ents such as cardiac ardiac, antiantidiabetic diabeti c, gas ga strointes trointestinal, gynaec gynaecology, while anti-infec infectives tives als also grew steadily. Over the next few years years, the therapeutic therapeuti c category mix i s expec expected to gradually move in favour of spec peciality therapies therapies. However, mass therapies such as a s antianti-infec infectives tives and gas gastrointes trointestinal will continue to grow stably, due to ris ri sing dem demand from from rural areas areas, whic which don't have proper sanitation fac facilities ilities and are thus thu s more prone to ac acute ailm ail ments ents. Currently, tier -II cities ities (with a population of les le ss than 1 lakh) lakh) and rural markets arkets cons on stitute about 40 per cent of the total market size. Dem Demand from from thes these markets arkets i s expec expected to grow at a much fas faster rate than tiertier-I cities ities.
S u b s ti t u t e s The main subs ubstitutes titutes to branded drugs drugs are generics generics and bios bio similars (als also known as as followfollow-on biologics) biologics) and alternative or holis holi stic tic medic edicines ines. Generics Generics are low cost vers versions ion s and Bios Biosimilars ilars are subs ubsequent vers versions ion s of innovator in novator biopharm biophar maceutic euti cal produc products made by a different spons pon sor following patent and exc exclus lusivity expiry on the innovator produc produ ct. Thes These subs ubstitutes titutes are relatively inexpens inexpensive. They pos po se a signific ignificant threat to OTC OTC medic edicines ines than presc prescription ription medic edicines ines.
C o m p leme lemen nt s The main complem plements ents are profess professional ional healthc health care providers providers and medic edical ins in suranc urance companies panies. Through the provis provi sion of profess professional ional medic edical servic ervices to patients patients, companies panies can not only effec effectively coordinate between patients patients, phys physicians ians, social workers workers, and care managers anagers, but als also advertis advertise to the general public publi c and conduc onduct clinic lini cal trials trial s with greater
eas ease. Cooperation with medic edical ins in suranc uran ce companies panies als also helps helps patients patients purc purchas hase the pharm pharmaceutic euti cal produc products at lower costs.
Reg egu u tor En ro ronment nment in nd ndii q
s
r
t
u
v
r
The Drugs Drugs and Cosmeti smetics cs Act, 1940 (Drugs Drugs Act) and Drugs Drugs and Cosmeti smetic c Rules Rules, 1945 (Drug rules) rules) regulate the im i mport, manufac anufacture, dis di stribution and sale of drugs drugs in India. Central and State governm govern ment both are res re spons pon sible to enforc enforce disc discipline iplines s under thes these acts. State authorities authorities are res respons ponsible for regulating the manufac anufacturing, sale and dis distribution of drugs drugs, whereas whereas the central authorities authorities are res respons ponsible for approving new drugs drugs and clinic lini cal trials trial s, laying down the standards tandards for drugs drugs, controlling the quality of imported drugs drugs and co-ordinating the ac activities tivities of s of state drug control organis organi sations ation s.
Source: Crisil Research
Regulation in India is i s done on patents patents, pric price and quality.
Pa tent
w
:
Till 2004 the foc focus was was on proc process patents patents. That res resulted in a lot of unethic unethi cal reengineering of exis exi sting produc products. From rom 2005 produc product patents patents started in India. This Thi s prevents prevents the reengineered produc products in the market.
P r ic e :
The Drug Pric Pri ce Control Order (DPC DPCO) fixes fixes the ceiling pric pri ce of some APIs APIs and form formulations ulation s. The APIs APIs and form formulations ulation s falling under the purview of the legis legi slation are called scheduled scheduled drugs drugs and scheduled scheduled form formulations ulations.
Q u al i t y : No drug in India can be stoc tocked, sold or dis di stributed unless it meets eets the quality standards tandards laid down by Drugs Drugs Act.
Futtur e Ou Fu Outtlook of t of the nd ndus usttr y x
Indian pharm pharmaceutic euti cal companies panies have thrived on the model of leveraging its its proc process skills kill s and low-c low-co ost manufac anufacturing advantage. This Thi s strategy had worked initially togain opportunity abroad. But lately the foc fo cus has has been on R&D and innovation.But innovation.But the Global players¶ players¶ innovation innovation of New Molec Molecular Entities Entities (NMEs) NMEs) has has slowed down in rec recent years years. It eventually forc forces the Indian players players to look look at newer avenues avenue s for growth.
Med ediu ium m Ter m: Gene Generics rics Focus In the medium term i. i .e. years period, Indian firms should fo cus on generic generi cs as$130 billion billion of new y
drugs drugs going off -patent during this thi s period and open up huge generics generi cs opportunity.
em:: Long Tem
ive iv ersific rsifica atio ion n
With the generics generics market set to bec become extrem extremely competitive in the long term term (next 10 years) years),, Indian players player s will look to make the most of the current generic generic opportunity and achieve a subs ubstantial scale scale of operations operations.
Por ter·s ter·s Five Five Forc Force es An Anal aly ysis of curr ent ent truc ructtur e
a) Th The e thr eat of of new new ent entr r ant ntss ECONOM E OF CAL E:
Econo onom mies ies of scale scale exis exist in the pharm phar ma indus industry. From rom the below table we can see that proxy variable (TE /TA /TA)) dec decreas reases with inc in creas rease in ass asset ets s indic indicating pres presenc ence of ec econo onom mies ies of scale. scale. This Thi s reduc reduces the threat threat of new n ew entrants entrant s and inc increas reases inc incumbent¶s bent¶s attrac attractiveness tiveness.. Company Total Expenses(TE) Total Assets(TA) TE/TA
PR O U CT
Dr Reddys Reddys Lab 4,048. 048.00 7,465. 465.00 0.542
Cipla
Ranbaxy
Lupin
4,408. 408.85
4,536. 536.77
3,496.90 .90
5919.16 9.16
9393.11
4135.9 4135.95 5
0.745
0.482
0.845
FFER FFE R ENT AT ON :
Dom Domestic tic market is is branded market i.e. doc doctors tors generally presc prescribe ribe the brand nam name. Different branded medic edicines ines exis exist for same dis di seas ease and are perc per ceived differently by both doc doctors tors and patients patients. So there exis exists produc product differentiation in dom do mestic tic form formulations ulation s market. However, the produc product differentiation is i s very less less in the dom do mestic tic bulk drugs drugs market. The perc per ceived produc product differentiation is is less less in exports exports market as as it is mostly developm development market where doc doctors tors presc prescrib ribe e the he underl un derlying ying molec olecule. On a whole there exis exists produc product differentiation, and reduc redu ces the threat of new entrants entrant s and inc increas reases inc incumbent¶s bent¶s attrac attractiveness tiveness..
Econ Economie s of cale ale
Low
Moderate
Average
Stro St rong ng
High
Prod roduct uct
Low
Moderate
Average
Strong
High
Capi Capittal Requir eq uir ement ement
Low
Moderate
Average
Strong
High
Swi Switching ching Cost ost
Lo w
Moderate
Average
Strong
High
iff er enti entiation ion
Acce Acce ss to tech techn nology
Low
Moderate
Average
Strong
High
Acce Acce ss to Ra w Materi terial al
Low
Moderate
Average
Strong
High
Acce Acce ss to
Low
Moderate
Average
Strong
High
istbn istbn Ch
Govt Govt Policy icy
Low
Moderate
Average
Strong
High
PITA TAL R EQUIR IREMENT EMENTS S: CAPI
Below table shows hows the capital requirem requirements ents and ges gestation periods periods USF USFDA approved plant Unapproved Unappro ved plant Rs 20 ± 30 crores rores Rs 12 ± 15 crores rores Ges Gestation-18-24 tation-18-24 months onths Ges Gestation-6-12 tation-6-12 months onths Bulk Drugs Drugs Rs 15-20 crores rores Rs 3-5 crores rores Ges Gestation-18-24 tation-18-24 months onths Ges Gestation-6-12 tation-6-12 months onths Above table clearly indic indi cates ates low capital requirem requirement and ges gestation period. However, the cost of produc producing an innovator drug is i s very high due to huge R&D expens expenses and als al so requires requires expertis expertise in the drug disc discovery overy proc process. ss. . On a whole there is i s low capital requirem requirement, and inc in creas reases the threat of new entrants entrants and dec decreas reases inc incumbent¶s bent¶s attrac attractiveness tiveness.. Form ormulations ulations
S W WII TCHI CHING NG CO STS : In the dom domestic tic form formulations ulation s market, there are switc witching cost in terms terms of side effec effects from from switc witching drugs drugs and doc doctors/ tors/patient patients s hes hesitati it ation on to shift to new brand or some unidentified generic generic vers version. However there are no switc witching costs for bulk drugs drugs and exports exports market. On a whole there are switc witching costs, and dec decreas reases the threat of new entrants entrant s and inc increas reases inc incumbent¶s bent¶s attrac attractiveness tiveness.. CCE ESS TO TECH TECHNO NO L OGY /KNO KNO W W -HO W: ACC
Before 2005, 2005, when there are proc pro cess patents patents ins instead of produc product patents patents, companies panies used to revers reverse engineer the produc product and get acc acce ess to the tec technology and know -how. However, pos post 2005 as the era of produc produ ct patents patents started tar ted g ettin ett ing g acc acce ess to tec technology /know /know--how has has bec become diffic difficult. However the molec olecules ules for whic which patents patents have expired can be revers reverse engineered and there are many patent expired drugs drugs brands brands like Lipitor, Nexium Nexiu m, Zyprexa and Plavix providing huge opportunity. Ona whole we can
say that there is moderate difficulty in getting access to technology and know-how and makes the industry moderately attractive for incumbents.
ACCESS
RAW
A
ERIALS
Below is the Value chain of Pharma Industry
Getting access to chemicals/intermediates and APIs is relatively easy as there are many suppliers. suppliers. So there is threat of new entrants and incumbent¶s attractiveness is low.
ACCESS
DIS RIB
I
CHA CH A
ELS
Medical representatives, distribution warehouses, warehouses, doctor¶s prescription a nd medical stores constitute the distribution channel for most of the drugs. In India it is easy to get access to these all distribution resources. So there is threat of new entrants and incumbent¶s attractiveness is low. V ER
P LI LICY CY /P R
ENT
TE CTI
N:
Indian Government regulates the pharma industry in terms of Patents, Price and Quality. Though government requires adhering to patent rules and quality standards, it has taken lot of initiatives to promote domestic pharmaceutical industry. It increased import duties for foreign drugs, recognized pharma as knowledge based sector, reduced interest rates for exports financing, tax deductions for R&D expenses, plans to setup VC for pharma financing, SEZs for pharma, pharma, Pharma Vision 2020, 3000 Jan Aushadhi stores and reduced the drugs under price control. So there is threat of new entrants and incumbent¶s attractiveness is low. On a whole, we see that Government gives lot of push to encourage new players in the industry increasing threat of new entrants and decreasing incumbent¶s incumbent¶s attractiveness.
T he
b)
ba r ainin power of buy uyers ers
NUM B ER
BUYERS :
For the formulations, patients are the actual end users. But they use it mostly on doctor¶s prescription. prescri ption. So doctors can be considered as final buyers and have considerable considerabl e power. This considerably reduces the number of buyers and increases their bargaining power.
PR DUCT DI
ER ENT IA TI
N:
As seen earlier, there exists product differentiation reducing bargaining power of buyers.
AVAILABILI TY
SUBST I TUTES :
Major substitutes are generics, biosimilars, and holistic medicines like homeopathy and aurvedhic medicines. Currently use of all these substitutes is very less compared. Use of
bios biosimilars ilar s and generics generics is cons onsiderably inc increas reasing and can pos pose as as a proper subs ubsitute t in the long run. So currently influenc influen ce of subs ubstitutes titutes is less less and reduc reduces the bargaining power of buyers buyers.
Average
Low
Moderate
Prod roduct uct
Low
Moderate
Average
Strong
High
Ava Availab lability of S of Subst
Low
Moderate
Average
Strong
High
Swi Switching ching Cost ost
Low
Moderate
Average
Strong
High
Buye Buyer·s r·s Por tability
Low
Moderate
Average
Strong
High
Low
Moderate
Average
Strong
High
Indus ndusttr y·s thr e at of F. Int
Low
Moderate
Average
Strong
High
Contbn to Buye Buyer r Qlty
Low
Mod erate
Average
Stro ng
High
Contbn to Cost ost
Low
Moderate
Average
Strong
High
j
iff er enti entiation ion
Buye Buyer·s r·s Thr eat of B. Int. nt.
Stro St rong ng
High
Numbe Numberr of Buye Buyers rs
S W WII TCHI CHING NG CO STS : As seen earlier, there are switc witching costs reduc reducing bargain b argaining ing power of buyers buyers.
BUYE UYER R · S PR PROF OFII TAB TABII L I TY: In the pharm pharma indus industry doc doctors tors can be cons onsidered as as buyers buyers for medic edicines ines and form formulations ulation s manufac anufacturers turers are buyers buyers for bulk drugs drugs. Both of them them have cons onsiderable profits profits reduc reducing their bargaining power.
BUYE UYER R · S THR HREAT EAT OF BAC BACK W WA ARD I NTEG NTEGR R AT ATII ON: There is is no buyer¶s buyer¶s threat of bac backward integration as as most of the market is is retail. So we can say there is i s no threat of bac backward integration from from buyers buyers and reduc reduces their bargaining power.
INDUSTR Y·S THR HREAT EAT OF FOR FO R W WA ARD I NTEG NTEGR R AT ATII ON : There is is little threat of forward integration i.e. for mulations ulation s manufac anufacturing opening up hos hospitals pital s, as organized health care sector is i s small small compared to unorganis unorganised sector. So there is is no threat of forward integration from fro m indus indu stry and inc increas reases bargaining power. ONTRI RIBUT BUTIION TO BUYER BUYE R· S QUA L I TY: CONT
Form ormulations ulations and bulk drugs drugs contribute extens extensively to the buyer¶s buyer¶s quality. Effec Effectiveness tiveness of medic edicines ines presc prescribed ribed by a doc do ctor will determ determine the quality of servic ervice provided by
S WI TCH CHII NG CO COS STS : There are no switching costs involved in changing from one supplier to another. More or less these raw materials are commodity chemicals without much differentiation, so there are no switching costs. This leads to low supplier bargaining power.
SUPPLI ER S THR EAT OF FO FORWARD RWARD I NTEGRA TI ON : l
There is considerable threat of supplier forward integration. There are instances in the past of this integration happening. happening. Orchid Chemicals and Sashun Chemicals were basically chemical companies, who turned themselves into pharmaceutical companies. This threat results in higher bargaining power of suppliers.
INDUSTRY ·S THREAT OF BA BACK CK WARD INTEGRATI O N : There is also considerable threat of backward integration, with bulk drug manufactures entering into chemicals business and formulations manufacturers into bulk drugs business. All top pharma companies have their own bulk drugs business. This reduces bargaining power of suppliers.
INDUSTRY ·S I MPOR TANCE TO THE SUPPLI ER : Many chemical companies and bulk drug makers produce their products exclusively for pharma industry, so industry¶s importance is very high for suppliers. This reduces the bargaining power of suppliers.
DIFF ER ENT IA TION OF SUPPLIER PRO PR ODUCTS : There is not much differentiation in the supplier products. So there is no supplier bargaining power.
CONT RIB UTION TO QUALI TY: Chemicals and API form the core of products manufactured in the pharma industry. So supplier¶s supplier¶s contribution contribution to the quality of product produced produced is high. For this r eason all top pharma companies either produce APIs themselves or implement strict supplier code of conduct. This results in increase of suppliers bargaining power.
CONT RIB UTION TO CO COS ST : Supplier¶s Supplier¶s also contribute contribute significantly to the manufacturing costs o f pharma i ndustry. Raw material costs constitute about 40-50% of total costs incurred. We can see that latest total raw material costs for group of 31 companies in the industry is Rs 16282.3 crores out of 33784 crores of total expenditure(around expenditure(around 48%). This reduces the bargaining power of suppliers.
d)
The Thre rea at
of Su Substit bstitu utes
AVAILABILI TY OF CL OSE SUBS TITUTES : In India, substitutes are available in terms of unbranded unbranded generics, biosimilars, and holistic medicines like homeopathy and aurvedhic medicines. Currently use of all these
subs ubstitutes titutes is very less less compared to branded halopathy medic edicines ines. Use of bios biosimilars ilar s is cons onsiderably inc increas reasing and can pos po se as a proper subs ubstitute in the long run. Growth in ins insuranc urance bus business iness in India might als al so inc increas rease usage of gener g eneriics as in developed markets arkets and can replac replace the current branded medic edicines ines. So we can say availability of subs ubstitutes titutes is high and the threat is i s high.
Ava Availab lability of Cl of Clos ose e Subs
Low
Moderate
Average
Stro St rong ng
High
Swi Switching ching Cost ost
Low
Moderate
Average
Strong
High
Substitute·s te·s Price rice
m
alu alue
Profit rofitability of P of Pr dcrs
Low
Moderate
Average
Strong
High
Low
Moderate
Average
Strong
High
S W WII TCHI CHING NG CO STS : There are cons onsiderable switc witching costs involved in changing to us u sage of subs ubstitutes titutes. Switc Switching to subs ubstitutes titutes might als al so involve changing completely the treatm treatment plan whic whi ch is costly. Als Al so there can be severe side effec effects bec becaus ause of s of switc witching to subs ubstitutes titutes .On a whole due to high switc witching costs, threat of s of subs ubstitutes titutes i s low.
SUB UBS STI TUTE· S PRIC PRICE E-VA L UE: Generics Generics,, Hom Homeopathy and Aurvedhic Aurvedhi c medic edicines ines are cons onsiderably cheaper than the branded medic edicines ines. This This might pos pose as as a threat of s of subs ubstitutes titutes.
PR OF OFII TAB TABII LI TY OF PR PRO O DUCER S OF SUB UBS STI TUTE TUTES S: Profitability of subs ubstitute produc producers ers is high compared to the pharm pharma indus industry as as their costs are very low. Generics Generics manufac anufacturer will not have any R&D costs and has has less less fixed costs due to less less capital requirem requirements ents. Though the pric prices of thes these subs ubstitutes titutes are als also less less,, their profitability margin is i s high compared to branded drugs drugs manufac anufacturer. So there is high threat of s of subs ubstitutes titutes.
e) Inten ntensi sity ty of rival rivalr r y among co com mpet etiitors UMER R OU OUS S O R EQUA LL Y BAL AN ANC CED COM OMP PET ETII TO TOR R S: NUME
indus indu stry is is highly fragm fragmented with around 300 30 0-400 -4 00 companies panies in organized sector and around 15000 unorganized small small scale scale units units. Altogether thes these players players manufac anufacture over drugs. Top player in the indus indu stry Cpla i has has 5.4% market share and top 10 100000 drugs companies panies have only 33% 33% of total market share. Thus Thus the conc on centration ratio is i s very low. After Indian Governm Government¶s ent¶s rule to im implem plement produc product patents patents, now many foreign MNCs MNCs are eying to enter Indian pharm phar ma indus industry. Big global pharm pharma companies panies like Pfizer and Glaxo are ac actively purs pursuing Indian markets arkets. This Thi s will in turn intens inten sify the rivalry in the indus indu stry. On a whole this thi s fac factor indic indi cates ates high intens intensity of rivalry and makes akes indus indu stry unattrac unattra ctive.
Nume Numerous rous Competi etitors
Low
Moderate
Average
Stro St rong ng
High
Slo wi wing Ind Gro wth wth
Low
Moderate
Average
Strong
High
Fixed or St or Stor or age Cost ost
Low
Moderate
Average
Strong
High
Prod roduct uct Diff er entn entn
Low
Moderate
Average
Strong
High
Swi Switching ching Cost ost
Low
Moderate
Average
Strong
High
Ex ce ss Cap Capacity city Levels
Low
Moderate
Average
Strong
High
Exit Barrie rriers
Low
Moderate
Average
Strong
High
SL O W WII NG I NDUSTR Y GR G R O W WT T H: Indian pharm pharma sector has has grown at a CAGR of 15 of 15% % over las last dec decade and is i s expec expected to grow at the same rate for next 5 years years. About 108 bn dollars dollars sales ales worth drugs drugs are going off patent in next 5 years years pres presents ents huge generics generics opportunity. Als Al so contrac ontract res researc earch and clinic lini cal trials trial s servic ervices are expec expected to grow at 15-17% 15-17% for next 5 years years. All thes these indic indicate good indus industry growth pros prospec pects whic which will reduc reduce the intens intensity of rivalry am among competitors petitors as there will be less less pric price war to capture the exis existing market. IXE ED O R STO TOR R AGE CO STS: FIX
The fixed ass asset et turnover, whic whi ch is i s one of the gauges gauges of fixed cost requirem requirements ents, is i s in the range of 3.5 to 4 tim times for bigger companies panies. For smaller smaller companies panies, it is i s even higher. High fixed ass asset et turnover indic indicates ates high motivation to create exc excess capac apacity and chanc hances for pric price cutting. Als Al so we can see from from lates latest figures figures that the fixed costs form form 25% 25% of total expenditure (8740 crores rores out of 33784 crores) rores).. This Thi s is cons on siderably high and indic indi cates ates high chanc hances of intens intense rivalry.
PR ODUCT DI DIFFE FFER R ENT ENTII AT ATII ON : As seen earlier, there is i s produc product differentiation and perc perceived brand im image for some companies panies. This Thi s reduc reduces the intens intensity of rivalry. WII TCHI CHING NG CO STS : S W
In the dom domestic tic form formulations ulation s market, there are switc witching costs in terms terms of side effec effects from from switc witching drugs drugs. Switc Switching costs make the the inten i ntens sity of rivalry low. XCE E SS CA PACI CITY TY L EVEL S: EXC
As capital requirem requirement and ges gestation period are low, all top players player s add new capac apacities ities as dem demand grows grows. However pres presenc ence of many small small players players creates reates exc excess capac apacity levels levels and intens intensifies ifies the rivalry. rivalry.
EXI XIT T BARR BA RR I ER S:
Low exit barriers in the pharma industry make it easy for unprofitable firms to quit then add to capacity of industry. This lowers the intensity of rivalry.
f )
Exit
Barriers Ba rriers
ASS ET SPECIALIZA TION : Capital requirement is very low for pharma plants. Except the intangible assets like patents, there is not much asset specialization required for pharma. So exit barriers are low.
FIX ED COST OF EXIT : Fixed costs of exit are low. So exit barriers are low. GO VER NMENT RESTRI RIC C TI O N S:
There are no exit restrictions imposed by Government. Government. So exit exi t barriers are low.
Analy alysis sis of effect of extern ternal al environ environm ment on current str uct ctu ure (PEST)
SWOT SW OT An A nal aly ysis of I of Ind ndiian Phar maceutic ical al Ind ndus usttr y
Str St r ength ength
We W eak ness ness
Oppor tunity
T r eat
Matured Industry Industr y Large Home Market Fast Changing Lifesty Lifestyle Low cost manufac manufacturing uick adoption of Q uic new tec technology hnology Inc Increasing population and per caipta Inc Income
Lac Lack of pric pricing, Power impac impact growth Low margins Lower investment in D H ighly ighly fragmented industry industry Intense competition H igh exposure to global markets - both politic political and currency urrency risk H igh input costs due to inflation
Potential to absorb high pric priced produc products O pening of OTC segment Large number of drugs going off patent Inc Increasing penetration of Insuranc Insuran ce industry industr y Biosimilars
Non tariff barrier imposed by by developed countries Internal fragmentation Chinese intrusion into domestic domestic markets Small number of disc discoveries O utdated sales and marketing methods Inc Increasing influenc influence of foreign MNCs
Busine Busi ness ss St Str r ategy Gene ener r al al Anal aly ysis
o
n
Dr Reddy¶s core purpose is to provide affordable medicines to enable people lead healthier lives. Through its branded and unbranded generics company offers low cost alternatives to highly priced innovative innovative brands. Some examples are company successfully introduced Fluoxetine (generic version of Prozac), Donepezil hydrochloride tablets (generic version of Aricept), Venlafaxine (generic version of Effexor R) and Letrozole (generic version of Femara). Company c apitalize apitalizes s on low l abour and manufacturing costs in India by producing and exporting exporting these generic generic drugs to other markets. It also capitalizes on economies of scale achieved through centralized production. production. Company also produces and markets APIs/bulk drugs at low costs to both domestic and exports market. Thus company follows overall cost leadership business strategy in case of Generic drugs and APIs.
Dr Reddy¶s is also using its R&D to bring differentiated formulations and New Chemical Entities (NCEs) into the market. Its strategy with respect to these products is overall Differentiation as it tries to bring new effective drugs into the market. Dr Reddy¶s operates operates in highly dynamic environment due to intense rivalry in the industry and changing regulations. So we analyse the value addition to the company though game played using Value net and PARTS analysis.
Value Valu e net a naly alysis sis Custo stom mers Company¶s strategy from beginning is to provide low cost and high quality drugs to the customers. In this direction it has launched generic versions of many patented drugs (Lipitor, Prozac, etc) and made good profits. Company has launched 65 products last years and is planning to launch another 55 products this year. It is not big work for company as it has already al ready launched these products products in several other markets. Made an agreement with GSK to sell its products in markets other than India through GSK¶s global marketing network. This step will increase the market access to Dr Reddy¶s in some emerging economies like Brazil, Latin America, Africa, the Middle East and Asia Pacific, excluding India. The Company has entered into an agreement with its customers for the API segment to set-up their facilities near the manufacturing operations unit of Dr. Reddy¶s. This has ensured higher switching costs for the buyers of Dr. Reddy¶s. Dr Reddy¶s is fastly making steps to provide its drugs to rural customers. It has put together a new brand portfolio for such markets (Redikate, Redihealth and Redihope, to name a few) based on the insight that rural prescriptions are often different from urban prescriptions. Dr Reddy' Reddy 's is trying three models to reach the customers in rural areas : y
y
The first plan is to use local entrepreneurs who can diagnose ailments like hypertension and refer patients to doctors. They could be paid for every referral. The model, like Hindustan Unilever¶s Shakti, is self -sustaining and scalable scalable The second plan is to link people through health camps. In fact, Dr Reddy 's has held anaemia camps in i n the last three months for 50,000 villagers, of which 40 per cent were found anaemic
y
The third plan is to use the infrastructure of agencies and programmes which are already there in villages, like the World Health Foundation and ITC' ITC's e-choupal
Substit Su bstitu utors Dr Reddy¶s is in all game to increase its market share in India. Seeing that urban urban markets are saturated with huge presence of competitors from domestic and foreign MNCs, it is putting as its efforts to quickly penetrate into rural markets. It has increased its field force by adding 1000 representatives to quickly setup network with doctors and medical practitioners in the rural areas. The problem is Substitutors are also eager to join the rural bandwagon. So company is making fast steps to quickly capture the market and gain the first mover advantage. In US markets, company has been aggressive in litigious para IV filings to launch new generic drugs. drugs. In the late 1990s Dr. Reddy Reddy''s was the original action hero in taking on the large multinationals multinationals and l aunching generic generic v ersions of their products. products. It was also the early one to start the trend of settling with multinationals to arrive at a middle ground to launch drugs. In 2006 company changed its US strateg strategy y to special thera therapy py segments s egments from core segments in the face of lost litigations against Pfizer. As an additional differentiation, Dr. Reddy 's is increasing its focus on bio generics, an area not many large companies are focusing on. It already has three products, though it competes with Roche, the innovator company of the drugs.
Suppliers Suppl iers Dr Reddy¶s API manufacturing plants supply most of the raw materials required for the company¶s formulations manufacturing. This gives the company lot of flexibility and control with regards to raw materials supply and also minimizes the raw materials cost which forms almost 40% of total cost. In case of other required materials it uses broad base of suppliers in order to minimize the risk arising from dependence on a single supplier. It prescribes stri ct supplier code of conduct and and requi res its suppliers to be US FDA approved plants.
Compl Co mple ementors In order to enhance business, Dr Reddy¶s frequently seeks to acquire or make strategic investments in complementary businesses or products, or to enter into strategic partnerships partne rships or alli ances with third parties. parties. In September September 2005, i t entered into a co development developm ent and commercialization commerciali zation agreement with Denmark based Rheoscience A/S for the joint development development and commercialization of Balaglitazone Balaglitazone (DRF 2593), a partial PPAR gamma agonist, for the treatment of type 2 diabetes. During the year ended March 31, 2011, it entered into collaborations with discovery biotechnology companies to initiate new chemical entities (³NCEs´) and differentiated formulations programs in the therapeutic areas of interest. In addition company has in house R&D division working on several differentiated formulations, biosimilars, ANDAs for generics and new molecule innovations. Some of its developments were in Clinical trials and human trials trials phases.
PAR TS An Analy alysis sis Players Play ers: In the Indian Pharmaceutical market players are mainly the domestic domestic companies and foreign MNCs. As the industry is highly fragmented and competition is high, these players are always on their toes to retain and increase their market share. Other players include Suppliers (in most cases the companies themselves), Indian Government and
Regulatory framework, US FDA, buyers (doctors, hospitals, retailers and patients), Alliance partners (R&D houses).
Added Valu Values es: Dr Reddy¶s has done much value add activities from its inception. It is successful in bringing many low cost generic version drugs making them affordable to many customers across. It did so by taking litigation gambling of fighting Big Pharma through para IV filings. It entered into alliance with GSK to market and distributes its products to Latin America and Asia pacific markets where GSK has strong distribution network. It formed alliances with other domestic and foreign R&D houses to innovate new molecules, differentiated formulations and ANDAs. It cut down its API manufacturing business as it became li ttle value add due to decreased decreased margins. It sources raw materials for its generics manufacturing from its own API plants, thus reducing supplier dependency, depend ency, costs and increasing flexibility.
Rules Rul es: It followed GM G MP (Good Manufacturing Practices) to manufacture high quality products. It enforced strict supplier code of conduct to ensure high quality of raw materials supplied supplied.. Tactics:
Company played generics tactic in US. It used its R&D to develop ANDAs and
launched these generics in US to gain the market share. In expanded though acquisitions and alliances in international markets and became the world¶s top five generics producer. But, throughout it ignored domestic market. Failures in some International markets (Germany) made the company rethink its strategy and made company realise that it is cost competitive but not cost conscious. It moved its focus now to only its top five markets and is aiming to be in top 5 in all these markets. It has fired all its cylinders and is aggressively launching various products across to gain the market share. It sees huge Indian rural market potential and it making fast steps to gain first mover advantage in this market. . In 2002-03 when the Indian Pharma companies were at crossroads of choosing between R&D and generics development, it has chosen a R&D route different from the competition. As the company consistently believed in R&D and product innovation to develop new molecules. It formed alliances in this regard with foreign R&D houses.
Sco cop pe: DR Reddy¶s started as API manufacturer. It soon increased its product scope to bring in Generics and branded formulations seeing the patent expiries and capitalizing on India¶s process patents rule. It increased its market scope by rapidly expanding into countries like UK, Russia, Germany, etc. It formed alliances to expand into other small markets. Now it is all guns to gain domestic share and is rapidly laying path to capture rural in roads.
ech hno nollo Tec
y Str Str ate y
y
Generics ± Generic Drugs are low cost reinforced versions of actual patented drugs. Here, the core concept, basic mix and linkages are not changed Biosimilars ± High Quality and bio equivalent alternative of the innovative drugs. Here the core concept is not changed but the architecture is changed to bio equivalents
y
Differen
y
iated Formulations/N E s : These are new drug innovations of the company to cure the diseases
S-C SCurve Fr amewor am ewor k - Prod P rodu uct Deve evellopm pment ent by Dr. Dr. Redd eddy y·s
y
y
y
Biosimilars/NCEs are relatively new products and are going through high development developme nt cost and time consuming stage. So they are in initial stages Generics on the other hand are expecting huge market growth due to expiration of patents in next five years On similar lines API market is saturated and is in maturity stage
Intern nterna ation tional al Str Str ate y
DR Reddy¶s has followed Global international strategy. It produced standardized drugs mostly through its plants in India, and marketed and sold in different international markets. It has achieved achi eved economies economies of scale scal e through centralized manufacturing manufacturing in six FDA approved plants in India. It also benefited from low labor and manufacturing costs in India.
Str ate ic Intent and All Alliiance of of C Current Str ate y
Company¶s strategic intent is to provide affordable and innovative medicines to the customers. It entered into generics and aligned its business strategy to achieve the low cost leadership which makes the drugs affordable. It grew through internal growth and acquisitions acquisitions and became a one of the world¶s leading leading generics drugs producers. It aims to become top 5 in its top five markets of India, US, UK, Germany and Russia. To make innovative products company regularly invested in R&D and formed alliances with foreign companies. Below chart describes different acquisitions of the company
Some of the alliances are: are :
1) 2) 3) 4) 5) 6) 7)
With Fujifilm to produce low cost and high quality generic drugs With R-pharma to share high technology manufacturing knowhow With GSK to get ownership of penicillin manufacturing plants in US With Vitabiotics to get exclusive marketing rights of two of its products With Cosmederm for India distribution of its products With Albemarle to get global distribution rights of its API With Rheoscience to carry out clinical trials trials for its latest latest anti-diabetes drug, Balaglitazone 8) With Clintec to carry out R&D on solid tuumors This indicates that company¶s current business strategy is in alliance with company¶s strategic intent. Also the company¶s strategy strategy is in alliance with medium and long term future outlook outlook of t he industry. In the medium term company¶s strategy to increase its domestic and international market shares in generics business. The generics opportunity opening up in the future due to patented drugs going off paten t provides very good chance to the company to achieve this objective. In the long term company plans to innovate and develop new products, along with this it should also focus on diversifying into outsourcing outsourcing clinical research, etc.
Comp Co mpetitive etitive Adv dva ant ntag age e Reso esou urce Ba Based sed Fr amewor amewor k k Indentified key resources of the company are Human Capital, Supply chain resources, Manufacturing processes, Technology know-how, R&D capabilities, ANDAs, D MFs and Brand name. We applied VRIO framework on these resources to check if it has any sustainable competitive advantage
VRIO VRI O fr amewor amewor k An Analy alysis sis
Entity Valuable
Yes/No
R emarks emarks
Yes
R are are
Yes
Difficult to imitate
No
The resources of Dr. Reddy¶s are valuable because they help the company in introducing new products at regular intervals and hence stay ahead of the competition. The R&D expertise coupled with skilled scientists helped the company to enter into biosimilars which are giving the company a fist mover advantage. The manufacturing processes and supply chain resources give the company the cost advantage needed to strengthen its position in cost driven generics market. The biggest biggest resource for any pharmaceutical company which wh ich is mainly into generics is the ANDAs and DM D MFs. These are rare resources that enable a firm to bring new products into the market. Dr. Reddy¶s is one of the mar ket leaders in terms of the IPRs that it possesses. The resources such as strategic partnerships for distribution channels are moderately rare due to the due diligence and the gestation period involved in such strategies. Dr. Reddy¶s directly directl y compete with generics drug manufactures. These are the players who produce off-patent drugs and hence the competitors of Dr. Reddy¶s can get access to some of the generic formulations that the company is involved into. Though the company is in R&D for some time, it is still in the process of building differentiated formulations/NCEs (which are difficult to
imitate) and develop new drugs. Company has made fair use of its resources in producing producing generics of low cost and high quality. It made huge profits in earlier years by optimally exploiting these resources
E loited Yes by Organiza tion Conclusio n: Temporary
Competitive Advantage
Comp Co mpetitive etitive adv dva ant ntag age e thro rough ugh str uct ctu ur al al position position: We also looked at structural position of the company in terms of customers, rivalry, substitutes, suppliers and threat of new entrants. We see that company has no special competitive advantage in any of these structural aspects.
Comp Co mpetitive etitive adv dva ant ntag age e thro rough ugh process process exec ecu ution: Company has vertical integration in terms of producing its own API requirements for the formulations. formulations. But vertical integration is common phenomenon in the industry and is not a competitive advantage. Company has fashioned an intricate and complex supply chain which has ramped up its growth. In India the company has a well-defined and uncluttered distribution system which allows products to flow smoothly to the consumer.
Comp Co mpetitive etitive adv dva ant ntag age e thro rough ugh alli alliances and leaders dersh hip: Company has formed many alliances to gain new business. Also company has strong stable leadership. Dr Anji Reddy has been the started and carefully nurtured the company to become global leader in the pharma sector. He is still associated with company and constantly monitors the day to day activity of the company. G.V. Prasad, M D and CEO of the company, has been considered considered as greater thinker and played a cruc ial role in shaping the company. K. S atish Reddy, COO of the company, has strong execution skills. This trio provides a stable and strong leadership to the company.
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