cash flow management- dr reddy

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CONTENTS:-

1.Introduction 1-22.Theoretical framework of cash flow management 3-15

3.Methodology 16-17

I. Need of the study

II. Scope and period of the study

III. Objectives of the study

IV. Methodology

V. Limitations of cash flow analysis

4.Profile of the industry 18-34

5.Profile of the company 35-48

6.Analysis and interpretation 49-91

7.Findings and suggestions 92

8.Conclusions 93

9.Bibliography 94

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CASH FLOW STATEMENT:

INTRODUCTION

From the financial point of view a firm basically generates cash

and spends cash. It generates cash when it issues securities, rises a

bank loan sells a product disposes an asset, so a so forth. It spends cash

when it redeems securities, pays interest and dividends. Purchases

materials, acquires an asset etc. The activities that generate cash and

called sources of cash and the activities that absorb cash are called uses

of cash.

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MEANING OF CASH FLOW STATEMENT

A cash flow statement is a statement depicting change in cash

position from one period to another. For example, if cash balance of a

business is shown by its balance sheet on 31st

December 1978 at rs 20,000 while the cash balance as its balance sheet on 31stDecember

1979is Rs 30,000 there has been an inflow of cash rs 10,000 in the

year 1979 as compared to the year 1978. The cash statement explains

the reasons for such inflows or out flows cash, as the case might be. It

also helps management in making plans for the immediate future. A

projected sash flow statement of a cash budget will help the management

in ascertaining how much cash will be available to meet obligations to

trade creditors, to pay bank loans and to pay dividend to the

shareholders. A proper planning of cash resources will enable the

management to have cash available whenever needed and put it to some

profitable or productive use in case there is surplus cash available.

The term cash here stands for cash and bank balances it has

already been explained in the previous chapter that the term funds will

exclude from its purview all other current assets and current liabilities

and the terms funds flow statement and cash flow statement will have

synonymous meanings. However, for the purpose of this study, we are

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calling this part of this study cash flow analysis and not funds flow

analysis.

PREPARATION OF CASH FLOW STATEMENT

A cash flow statement can be prepared on the same pattern on

which a funds flow statement is prepared. The change in the cash

position from one period to another is computed by taking in to sources

and application of cash .

Sources of cash:sources of cash can be both internal as well as

external.

1.Internal sources:

Cash from operations is the main internal source. The net profit

shown by the profit and loss account will have to be adjusted for non-

cash items for finding out from operations. Some of these items as

follows:

i. Depreciation:

Depreciation does not result in out flow of cash and therefore net profit

will have increased by the amount of depreciation or development rebate

charged in order to find out the real cash generated from operations.

ii. Amortization of intangible assets:

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Goodwill , preliminary expenses, etc. when written off against profits

reduce the net profits without effecting the cash balance. The amounts

written off should, therefore ,be added back to profits to find out the

cash form operations.

iii. Loss on sale of fixed assets :

It does not result in outflow of cash and , therefore , should be added

back to profits .

iv. Gains form sale of fixed assets :

Since sale of fixed assets is taken as a separate source of cash, it should

be deducted from net profits.

v. Creation of reserves :

If profit for the year has been arrived at after charging transfers to

reserves, such transfers should be added back to profits .in case

operations show a net loss, such net loss after making adjustments

for non cash items will be shown as an application of cash.

Thus ,cash form operations is computed on the pattern of

computation of Funds from operations ,as explained in the earlierchapter. However, to find out real cash from operations ,as explained

in the earlier chapter. However to find out real cash from operations

,adjustments will have to be made for changes in current assets and

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current liabilities arising on account of operations ,viz., trade debtors,

trade creditors ,bills receivable ,bills payable ,etc.

For the sake of convenience computation of cash from operations

can be studied by taking two different situations :

1)When all transactions are cash transactions ,and

2)When all transactions are not cash transactions.

A.When all transactions are cash transactions :

The computation of cash from operations will be very simple in

this case. The net profit as shown by the profit and loss account will be

taken as the amount of cash form operations.

B.When all transactions are not cash transaction :

In the example given above , we have computed cash from

operations on the basis that all transactions are cash transactions. Itdoes not really happen in actual practice. The business sells goods on

credit. It purchases goods on credits. Certain expenses are always out

standing and some of the incomes are not immediate realized. Under

such circumstances, the net profit made by a firm can not generate

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Cash from operations = Net profit


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equipment amount of cash. The computation of cash from operations in

such a situation can be done conveniently if it is done intwostages :

1)Computation of funds (i.e., working capital) from operations as

explained in the preceding chapter and

2)Adjustments in the funds so calculated for the changes in the

current assents (excluding cash) and current liabilities.

Adjustments for changes in current assets and current liabilities

In the illustration given above the cash from operations has been

computed on the same pattern on which funds from operations are

computed. As a matter of fact, the funds from operations in this case.

This is because of the presumptions that are all cash transactions and

all goods have been sold . however, there may be credit purchases ,credit

sales, outstanding and prepaid expenses,etc.

In such a case from operations. This has been explained in the

following pages :

I.Effect of credit sales :

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In business there are both case sales and credit sales. In case, the total

sales are Rs .30000 out of which the credit sales are Rs.10000 it means

sales have contributed only on the extent of Rs.20000in providing cash

from operations.

Thus, while computing cash from operations. It will be necessary

that suitable adjustments for outstanding debtors are also made.

The cash from operations can calculated on the basis of the

Cash from operations =Net profit+Debtors outstanding at the beginning

of the Accounting year

-Debtors outstanding at

the end of the Accounting year

Or

II.Effect of credit purchases:

Whatever has been stated regarding credit sales is also applicable

to credit purchase. The only difference will be that decrease in creditors

from one period to another will result I decrease of cash from operations

because it means more cash payments have been made to the creditors

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Cash from operations = Net profit + Decrease in debtors

Or

- Increase in debtors


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which will result I out flow of cash. On the other hand increase in

creditors from operations from because less payment has been made to

the creditors for goods supplied which will result in increase of cash

balance at the disposal of the business.

Thus, the effect of credit purchases can be shown with the help of

the following equation in computing cash from operations:

+ increase in creditors

Cash from operations =Net profit or

-decrease in creditors

Effect of opening and closing stock:

The amount of opening stock is charged to the debit side of the

profit and loss Account. It thus reduces the net profit without reducing

the cash from operations. Similarly, the amount of closing stock is put on

the credit side of the profit and loss Account.It thus increases the amount of net profit without increasing the cash

from operations.

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The effect of change in stock on cash from operations can now be

put as follows.

+Decrease in stock

Cash from operations =Net profit or

- Increase in stock

Effect of out standing expenses, incomes received in advance, etc.

The effect of these items on cash from operations is similar to the effect

of creditors. This means any increase in these items will result in

increase in cash from operations while any decrease means decrease in

cash from operations. This is because net profit from operations is

computed after charging to all expenses has not been paid; this will

result in decrease in net profit without of a corresponding decrease in

cash from operations. Similarly, income received in advances not taken in

to account while calculating profit from operations, science it relates to

the next year. It therefore, means cash from operations will be higher

then the actual net profit as shown by the profit and loss Account.

Thus the effect of income received in advance and out standing

expenses on cash from operations, can be shown as follows:

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+increase in outstanding expenses

+increase in income received in advance

Cash from operations = Net profit

-decrease in outstanding expenses


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Effect of prepaid expenses and outstanding incomes:

The prepaid expenses and outstanding income on cash from operations

is similar to the effect of debtors. While computing net profit from

operations, the expenses only for the accounting year are charged to the

profit and loss account. Expenses paid in advance are not charged to the

profit and loss account. Thus, pre-payment of expenses does not

decrease net profit for the year but it decrease cash from operations

.similarly, income earned during a year is credited to the profit and loss

account whether it has been received or not. Thus, income, which hasnot been received but which has become due, increases the net profit for

the year without increasing cash form operations.

Thus, the effect of prepaid expenses and accrued incomes in cash

from operations can be shown in the following equation:

The over all effect of stock, debtors, creditors, outstanding expenses,

income, received advance, prepaid expenses and accrued income can be

shown in the form of the following formula:

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+decrease in prepaid expenses

+decrease in accrued income

Cash from operations =Net profit

-increase in prepaid expenses

+ Decrease in debtors

+Decrease in stock

+ Decrease in prepaid expenses

+ Decrease in accrued income

+Increase in creditors

+Increase in outstanding expenses

Cash from operations= Net profit

- Increase in debtors

- Increase in stock

-Increase in prepaid expenses

- Increase in accrued income


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The above formula may be summarized in the form of following

general rules:

AND

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Increase in a current asset

Decrease in a current liability

Results in


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2.External sources:

The external sources of cash are:

1) Issue of new shares:

In case shares have been issued for cash, the net cash received (ie. after

deducting expenses on issue of shares or discount on issue of shares will

be taken as a source of cash.

2) Raising long-term loans:

Long term loans such as issue of debentures, loans from industrial

financial corporation, state financial corporations, I.D.B.I.Etc., are

sources of cash. They should be shown separately.

3) Purchase of plant and machinery on deferred payments:

In case plant and machinery has been purchase on a deferred payment

system, it should be shown as a separate source of cash to the extent of

deferred credit. However, the cost of machinery purchased will be shown

as an application of cash.

4) Short term borrowings cash credits from banks:

Short term borrowing, etc.From banks increase cash available and they

have to be shown separately under this ahead.

5) Sale of fixed assets, investments, etc:

It results in generation of cash and therefore, is a source of cash.

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Decrease in current asset

Increase in current liability

Results in


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Decrease in various current assets and increase in various current

liabilities may be taken as external sources of cash, if they are not

adjusted while computing cash from operations.

Application of cash:

Application of cash may take any of he fallowing forms:

Purchase of fixed assets:

Cash may be utilized for additional fixed assets or renewals or

replacement of existing fixed assets.

Payment of long term loans :

The payment of long term loans such as loans from financial

institutions or debentures results in decrease in cash. it is therefore an

application of cash.

Decrease in deferred payment liabilities:

A payment for plant and machinery purchases on deferred

payment basis has to be made as for the agreement. It is there fore an


Loss on amount of operations:

Loss suffered on amount of business operations will result in out

flow of cash.

Payment of tax:

Payment of tax will result in decrease if cash and hence it is an


Payment of dividend:

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This decreases the cash available for business and hence it is


Decreased in unsecured loans, deposits:

The decrease in these liabilities denotes that they have been paid

off to that extant. It results, therefore, in out flow of cash.

UTILITY OF CASH FLOW ANALYSIS

A cash flow statement is useful for short-term planning. A

business enterprise needs sufficient cash to meet its various obligationsin the near future such as payment of debts maturing in the near future,

expenses of the business, etc. A historical analysis of the difference

sources and applications of cash will enable the management to make

reliable cash flow projections for the immediate future. It may then plan

out for investment of surplus or meeting the deficit if any. Thus a cash

flow analysis is an important financial tool for the management its chief

advantages are as follows:

Help in efficient of cash management:cash flow analysis helps in

evaluating financial policies and cash position. Cash is the basis for all

operations and hence a projected cash flow statement will enable the

management to plan and coordinate the financial operations properly.

The management can known how much cash is needed, from which

source will be derived, how much can be generated internally and how

much can be obtained from outside.

Help in internal financial management:cash flow analysis provides

information about funds, which will be available from operations. This

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will help the management in determining policies regarding internal

financial management eg. possibility of repayment of long term debt

dividend policies of planning replacement of plant and machinery.

Discloses the movement of cash:cash flow statement discloses the

complete story of the cash movement. The increase in or decrease of cash

and the reasons therefore can be known , it discloses the reasons for low

cash balance in spite of heavy operating profits of for heavy cash balance

in spite of low profits.

However , comparison of original forecast with the actual resultshighlights the trends of movements of cash, which may otherwise go

undetected.

Discloses the success or failure of cash planning:the extant of

success or failure of cash planning can be known by comparing the

projected cash flow statement and necessary remedial measures can be

taken.

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CASH FORECASTS

The cash forecasts help in determining the amount of cash

required and the sources from which it will be obtained during different

time periods. This is also known as cash budgeting .the different

methods of cash budgeting or making cash forecasts are explained in the

chapter budgetary control given later in the book.

Classified cash flow statement

The cash flow statements are classified in to three classes.

Cash flows from operating activities

Cash flows from inverting activities

Cash flows from financing activities

Through this format calls for more details. It provides useful

information on how cash flows have been influenced by different kinds of

decisions. Given the greater informational contact of such a format , the

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discussion paper on cash flow statements prepared by the accounting

principles board of the institute of charted accounting of India

recommends this format. Incidentally the listing guidelines of stock

exchanges in India now require that all listed companies must include a

cash flow statement prepared accounting to the format suggested in he

decision proper in their annual reports.

Format of cash flow statement

CASH FLOW STATEMENT

For the year ending on

Balance as on 1-1-200

Cash balance .. ..

Bank balance ..

Add : sources of cash

Issue of shares

Raising of long term loans .

Sale of fixed assets ..

Short term operations ..

Cash from operations

Profit as per profit and loss account

Add/Less: adjustment for non cash items

Add: increase in liabilities

Decrease in current assets Less: increase in current assets

Decrease in current liabilities . ..

Total cash available (1) ..

Less: Applications of cash:

Redemption of redeemable preference shares

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Redemption of long term loans ..

Purchases of fixed assets ..

Decrease in deferred payment liabilities ..

Cash out flow on account of operations

Tax paid

Dividend paid

Decreased in unsecured loans deposits etc .

Total applications (2)

Closing balance *

Cash balance ..

Bank balance .*it should tally with the balance as shown by

NEED OF THE STUDY:

To study has great significance and will provide benefits to various

parties who directly or indirectly interact with the company.

It is important because it is beneficial to the employs and offer

motivation by showing how actively they are contributing for the

companys growth.

It is beneficial to the management of the company as it provides a clear

cut picture with regard to the cash flow statements.

SCOPE AND PERIOD OF THE STUDY:

The scope of the study is limited toDr. Reddys laboratories

limited only and the period of he study 2013-2014

OBJECTIVES OF THE STUDY:

To assess the ability of the enterprise.19


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To plan and coordinate the financial operations properly.

To know much cash is needed from which source it will be derived,

to know how much will be available to meet obligations to trade

creditors.

How much can be generated internally and how much could be

obtained from out side.

METHODOLOGY:

For the study of cash flows of Dr. Reddys laboratories limited. The

secondary data that is, the financial report of the company from the year2013-2014 are taken into consideration.

The theoretical contents are gathered from eminent text books and

reference library at Dr. Reddys laboratories limited.

The financial data and information is gathered from annual reports

of the co internal records.

Interpretations and conclusions are purely based on my opinion.

TITLE OF STUDY:

The title of the study is CASH FLOW MANAGEMENT in

DR.REDDYS LABORATORIES LTD, tech ops, unit-1, bollaram.

LIMITATIONS OF CASH FLOW ANALYSIS:

Cash flow analysis is a useful tool of financial analysis. However, it has

been own limitations. These limitations are as under :

Cash flow statement can not be equated with the income

statement. An income statement takes into account both cash as

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well as non cash items and, therefore, net cash flow does not

necessarily mean net income of the business.

The cash balance as disclosed by the cash flow statement may not

represent the real liquid position of the business since it can be

easily influenced by postponing purchases and other payments.

Cash flow statement cannot replace the income statement or the

funds flow statement. Each of them has a separate function to

perform.

In spite of these limitations, it can be said that cash flow statement is a

useful supplementary instrument. It discloses the volume as well as the

speed at which the cash flows in the different segments of the business

this helps the management in knowing the amount of capital tied up in a

particular segment of the business. The technique of cash flow analysis,

when used in conjunction with ratio analysis, serves as a barometer in

measuring the profitability and financial position of the business.

INDUSTRIAL PROFILE:-

1. IntroductionIndias pharmaceutical sector has been the subject of much

conjecture recently because evolving intellectual property (IP) laws are

sure to alter the status quo. As a knowledge driven industry,

pharmaceuticals are especially sensitive to regulatory changes that affect

IP. In the past, Indian pharmaceutical firms have derived considerable

revenues by selling copies of Western companies patented products. In

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2012, this practice will likely come to an end, when India implements

stronger IP protection laws. What is less obvious is how the industry

will react in the post-2012 environment. Existing research has analyzed

2012 from a number of angles, ranging from consumer-focused to

investor-focused, and used both theoretical (top-down) and company-

specific (bottom-up) methods.

By focusing on the strategic activities of twelve influential

companies, this paper makes projections about how the Indian

pharmaceutical industry might develop in the coming decades. It can be

argued that this method puts too much emphasis on the role of the firm

in the larger industry context, and overlooks other factors such as patent

enforcement, market segmentation, and demand. However, given that

firm strategies are derived from assessments of external factors, it is

reasonable to invest some confidence in them. Furthermore, the extent to

which pharmaceutical companies control their own destinies must beobserved. Consider, for example, the prospect of creating new drugs in

India. Indias capacity to produce its own IP is very much contingent on

the success of firms such as Dr. Reddys

Laboratories (DRL) and Ranbaxy.

1.1 Structure of paper

The principal objective of this paper is to project the effects that

2012 IP laws are likely tohave on the Indian pharmaceutical industry.

Section 2 provides background on pharmaceuticals in India, whilesection 3 strikes at the heart of the issue in question by reporting and

analyzing how companies are preparing for 2012.

1.2 Summary of findings

This research supports a number of conclusions about the impact

of reforms on the pharmaceutical industry. Increased patent protection

need not spell disaster for Indian pharmaceutical companies, even

though the current practice of profiting from other companies

IP will likely cease to be a strategic option. The future success of Indian

pharmaceutical companies hinges on their ability to find productive roles

for themselves in the post-2012 environment.The most publicized reaction of Indian firms to 2012 has been the

development of drug discovery programs by companies such as DRL,

Ranbaxy, Wockhardt, and Dabur, who plan to use product patent

protection as an incentive to produce their own IP. To be sure, Indian

drug discovery programs are still in their infancy and there remain

considerable obstacles on the horizon. Indian companies have neither

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the capital bases nor the experience of their multinational company

(MNC) competitors. On the other hand, odds are high that some firms in

India will succeed in drug discovery within the next few years. If

successful, India will be the one of the first emerging economies to

produce cutting-edge technology. Not all Indian pharmaceutical firms

possess the resources, the will, or the know-how to initiate drug

discovery, but there is hope for lesser-endowed companies after 2012.

Consider the following points. First, 90 percent1 of the Indian

pharmaceutical market consists of second and third generation drugs

that are no longer subject to patent protection in the developed world.

After 2012, Indian companies will be able to continue to produce such

drugs. It has even been suggested that the market for these older drugs

will increase as the prices for newer, on-patent drugs increase. Some

companies have already established themselves as exporters of generic

drugs to the developed world, and 2012 patent legislation does not pose athreat to these revenue sources. Second, Indian drug companies have

advantages over MNCs in the Indian market in a number of no

technological areas, including marketing, distribution, and traditional

medicines. Some Indian companies are leveraging these no technological

strengths (and even building entire businesses around them) as they

approach 2012. Third, mergers and acquisitions (M&A) have become

increasingly common. By matching companies with complementary

strengths, the M&A process promises to better equip Indian companies to

compete with MNCs in years ahead. To the extent that M&A activity has

occurred between Indian and multinational firms, the distinctions

between the two groups are increasingly blurred. Four of the twelve firms

in the sample for this paper were MNC subsidiaries. Accordingly, the

paper also offers insights into these companies 2012-related strategies.

Most MNCs that already have a presence in India are building up the

capacity to localize further their post-2012 Indian operations, pending

the specific nature of the new patent environment. The recently passed

Exclusive Marketing Rights (EMR) amendment to Indias patent act has

demonstrated to MNCs that the government will try to accommodate

their interests in coming years, but the post-2012 scenario for patentprotection is still far from clear. Section 3.3.7 details the currents that

underlie localization decisions for MNCs. MNCs without Indian presence

will undoubtedly enter the market after 2012. It is likely that a

considerable share of new entrants will rely on co-marketing

arrangements with local companies and other MNCs to distribute their

products.

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2. OverviewThis section provides the background to strategic issues discussed

in section 3. It is comprised of four subsections, each of which offersdifferent perspectives on pharmaceuticals in India. Section 2.1 highlights

major developments in the industry over the past century; section 2.2

presents a functional model of the pharmaceutical product cycle; and

section 2.3 examines the regulatory environment in which

pharmaceutical companies operate. Finally, section 2.4 considers the

evolution of domestic demand for drugs.

2.1 A Brief History (19001999)

The Indian pharmaceutical industry traces its roots to the 1903

formation of Bengal Chemical and Pharmaceutical Works in Calcutta by

Professor P.C. Roy. During the first half of the twentieth century, however,

and despite modest efforts on the part of the colonial government to spur

local production, India remained largely dependent on the UK, France,

and Germany for medicines.

The new and independent government in 1947which emphasized

industrialization to achieve self-relianceinvested heavily in

pharmaceuticals (among other industries) and curbed imports. 2 Yet, in

contrast to its policies toward other sectors, the government did not

discourage foreign firms from competing in India. In other sectors, self-reliance was pursued at high cost, but pharmaceutical policies

emphasized national health. Because there was no local substitute for

MNCs technology, the government did not discourage their presence in

the country. In fact, until 1970, the Indian pharmaceutical industry

consisted almost entirely of MNCs, most of which maintained minimal

physical operations in India.

The government took its first concrete steps toward self-reliance in

pharmaceuticals with the establishment of Hindustan Antibiotics Ltd.

(HAL) in 1954 and Indian Drugs and Pharmaceuticals Ltd. (IDPL) in

1961. IDPL (in spite of its grossly inefficient character) became

instrumental in the development of the industry by serving as the vehicle

for a comprehensive Soviet-sponsored program in which Russians

supplied machinery, personnel, and technical know-how to produce

antibiotics. The IDPL development program helped self-reliance in several

ways. First, it showed that it was possible to produce drugs in India at

competitive costs. Second, it developed human and physical capital,

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some of which moved in due course to other companies. Third, it spurred

the existence of a network of support institutes, pharmacy colleges, and

up and down stream businesses.

The IDPL program alone was insufficient to jumpstart local

industry. Local companies needed a way to compete with more

experienced and better endowed foreign firms; only then would the

industry have the critical mass to sustain itself. The 1970 Patent Act

made headway toward this end by recognizing patents on processes but

not patents on products, which in turn enabled local firms to legally

produce compounds that were patented elsewhere. Consequently, scores

of Indian pharmaceutical companies evolved to reverse-engineer and

cheaply sell copies of all major drugs. Although many Western observers

criticize the 1970 Patent Act on ethical grounds, it cannot be denied that

the legislation helped to develop Indias pharmaceutical industry. Over

the next thirty years, the industry would grow from a handful of MNCplayers to todays 16,000 licensed pharmaceutical companies. From

1970, local Indian firms reverse-engineered bulk drugs, which they

either sold wholesale or processed into simple formulations. Meanwhile,

MNCsreluctant to expose their IP in such a lawless marketlimited

their exposure to India. By 1997, MNCs had come to account for 30

percent of bulks and 20 percent of locally produced formulations.4 Most

MNCs did the bare minimum needed to stay in the Indian market (such

as producing simple formulations from imported bulks), while awaiting

the arrival of stronger patent protection. The few MNCs that have been

bullish toward India over the past thirty years have local managers to

thank for their aggressive posture.

Even without strong patent protection, the Indian pharmaceutical

industry matured during the 1980s. In particular, local companies grew

less reliant upon reverse-engineering for revenues. By increasingly

focusing on attributes such as novel delivery systems, Indian firms were

on their way to creating revenues based on their own added value.

Companies also started to produce products better tailored for their

markets than typical MNC products. For example, Lupin Labs introduced

its AKT-4 kits, which combined four antituberculosis (anti-TB) drugs thatwere generally administered together into a single package. The AKT-4

kits were well received by TB patients, who no longer had to worry about

the lack of availability of any one drug. (Selective discontinuation of anti-

TB drugs can lead to resistance and even relapse in TB patients.)

2.2 The Pharmaceutical Production Cycle

Pharmaceutical production consists of a number of discrete

activities. Because different phases of the pharmaceutical production25


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cycle require different types of resources and levels of funding, it is useful

to examine firms strategies within their operational contexts. In fact,

many of the conclusions drawn in section 3.3.1 are relevant only within

certain phases of the product cycle. This paper assumes that the product

cycle has four main components: 1) discovery, 2) clinical trials, 3)

production and manufacturing, and 4) marketing and distribution.

Large MNCs typically have activities that span all of these areas.

However, smaller companiesin India and elsewhereoften specialize in

one or more functions.

2.2.1 Discovery

In principle, discovering new drugs is a straightforward process.

First, chemists supply research scientists with compounds for testing, a

process referred to as lead generation. Generally, such compounds are

closely related molecules within a given disease area. In the West,

because the success of a discovery operation is at least partiallycontingent upon the number of leads, drug companies have recently

turned to combinatorial chemistry in order to accelerate the lead

generation process. (Combinatorial chemistry, with its high costs and

unproven effectiveness, has not yet gained widespread acceptance in

India.) Second, scientists screen molecules in a lab environment by

conductingin vitro(Petri dish) tests. Next, compounds with attractive

medical qualities are advanced to an animal house forin vivotests.In

vivotests are used to determine the minimum dosage necessary to

produce the intended results (efficacy) and the maximum nonlethal dose(toxicity) of the drug in question in animal subjects. Companies usually

file for patent protection of promising compounds midway throughin vivo

testing. Additionally, research scientists note any side effects that may be

associated with the drugs administration. Following the completion ofin

vivotests, companies may apply to conduct clinical trials on their

compounds in their desired markets. Permission to conduct clinical trials

depends on the results of both thein vitroandin vivotests, and their

conformity to generally accepted standards, as they are determined in

individual countries.

2.2.2 Clinical Trials

While testing on animals provides valuable and necessary insights

into a drugs medical characteristics, regulatory authorities in virtually

all markets require comprehensive clinical trials on human subjects

before granting production and marketing approval. The standards for

clinical trials are considerably more stringent than those for animal

testing. Doctors and other professionals who administer trials are

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required to pass reviews that are administered by independent

Institutional Review Boards (IRBs).6 Trials must employ double-blind test

procedures. Production facilities should be in accord with Good

Manufacturing Practices (GMP) as determined by the relevant regulatory

authority.7 This list is not exhaustive; clinical trials are exacting and,

consequently, expensive to administer. Furthermore, since different

countries have different standards, it is necessary to conduct clinical

trials in multiple locations (or at least simultaneously in the same

location) to achieve global distribution. Several analysts have suggested

that India is well suited for clinical trials because it has a strong

university system capable of producing low-cost human capital, and a

large population of poor and relatively disease-ridden potential test

subjects. Some local companies namely Cedilla and Ranbaxyhave

begun to fill this role. However, the issues alluded to above still prevent

global clinical trials from being a viable option for most Indianpharmaceutical companies. Therefore, while MNCs may begin to use

India for clinical trials in the near future, local companies will likely

enlist other firms to assist them in this capacity as

they discover new drugs.

2.2.3 Production and Manufacturing

Pharmaceutical production consists of bulk drug manufacturing

(in which active compounds are synthesized on an industrial scale) and

formulation manufacturing (in which active and inactive ingredients are

packaged into tablets, capsules, liquids, and injectibles. Bulk drugmanufacturing is more technology-intensive than formulation

manufacturing because, while the former draws from reverse-engineering

skills and requires knowledge of chemical processes, the latter merely

approximates the job of the local pharmacist on a larger scale. Indian

companies have proven themselves capable in both areas, as barriers to

entry are modest and domestic manufacturing guidelines are liberal.

However, to export products to developed markets, companies must bring

their factories into conformance with GMP standards (see section 2.3.1).

U.S. Food and Drug Administration (FDA) and UK Department of Health

and Social Services (DHSS) sanctioned factories are consequentlypremium assets in India. According to D.M. Gavaskar, managing director

of Knoll Pharmaceuticals, GMP-compliant facilities are 25-30 percent

more valuable than noncompliant facilities. This cost premium renders it

difficult for smaller companies to compete in manufacturing.

2.2.4 Marketing and Distribution

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Since fixed costssuch as those for R&D and clinical trials

represent a considerable portion of the total costs for developing drugs,

pharmaceutical profit margins are largely contingent upon the number of

customers reached. Therefore, companies strive to build their reputations

with doctors who prescribe pharmaceuticals and the patients who use

them. The largest pharmaceutical companies in India use field sales

forces, ranging in size from 500 to over 2,000, to bring their products to

the domestic market. According to Uday Bhansali of Arthur Andersen,

Indian companies have a decisive edge over MNCs in terms of

distribution because they better understand the nuances of the Indian

market for drugs.

Until recently, the Indian market alone provided sufficient

profitability for Indian pharmaceutical companies. But as this market

becomes more congested and the costs for producing new products

grows, it is increasingly necessary for companies to look for customersbeyond India and the developing world. Unfortunately, most Indian

companies do not produce enough products to justify investments in

global marketing and distribution. Established MNCs, on the other hand,

enjoy rapport throughout the worlds pharmaceutical markets. When

Merck develops a new product, for example, it can insert it into a large

distribution system. In order for Indias pharmaceutical companies to

match the distribution capabilities of the major international players,

they will likely have to join their own local forces, or enlist the support of

MNCs to supplement their efforts.

2.3 Regulatory Environment

It is almost impossible to engage in a discussion about

pharmaceuticals without addressing regulation. This is true for two

reasons. First, since drugs affect the health and well being of so many

citizens, government has an interest in assuring their adherence to

medical standards (see section 2.3.1) and availability (see section 2.3.2).

Second, in light of the fact that patentable research can represent up to

ten percent of a given drug companys cost structure, IP protection is

essential to provide firms with incentives to develop new drugs.2.3.1 Approval Process

Unlike other products, drugs must undergo extensive approval

procedures before they may be marketed. Indias domestic approval

standards are quite low, but export products must comply with

standards in all destination markets. Approvals are required for both

products and processes. After a new drug is developed, regulatory

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authorities oversee clinical trials, which determine efficacy, toxicity, and

side effects (see section 2.2.2). Companies are free to manufacture and

formulate all approved products for which they have production rights

(whether newly patented molecules or off-patent substances) as long as

the relevant authorities determine that their production facilities comply

with global GMP standards. GMP standards apply to equipment,

sanitation, and documentation.

2.3.2 Price Controls

Price controls are not nearly as important in todays

pharmaceutical sector as are other regulatory issues. This is partly

because market-clearing prices for controlled drugs have typically fallen

at or below price-controlled levels since the late 1970s. In cases where

price controls did pose problems, companies simply adjusted their

product portfolios accordingly, toward noncontrolled drugs. But price

controls are still worthy of mention insofar as past price control ordershave shaped current pharmaceutical operations. Furthermore, it is

plausible that price controls will assume a role of increasing importance

in the near future. In 1970, the government introduced the Drug Price

Control Order (DPCO) to guarantee public access to essential drugs, to

provide a reasonable rate of return to companies, and to ensure quality.9

In response to the DPCO, many firms concentrated on production of

(nonessential) drugs outside its scope. Some even divested themselves

completely of controlled drugs.

Prior to 1970, India employed Western-style patent legislation, andrecognized product patents in addition to process patents on drugs.

Under that environment, MNCs prospered while local companies lacked

the resources to enter the industry. The 1970 Patent Act, which

represented a change in favor of local producers, consisted of the

following key clauses:

1)No pharmaceutical product patents are admissible, only process

patents are acknowledged;

2)The term for a process patent is fourteen years;

3)Three years from filing, patents are deemed to be endorsed as

license of right;4)Patents must be worked within three years of filing;

5)The Indian government may use or authorize others to use the

patented invention.

In 1995, the government amended the 1970 Patent Act to conform

to the TRIPS accord of the Uruguay round of GATT. The main provisions

of the 1995 ordinance were:

1)The recognition of product patents;29


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2)Exclusive marketing rights (EMR) for new products from 2000

2012;

3)A mailbox provision for filing product patent applications during

the transitional

1.period from 19952012;

4)Twenty-year patent life;

5)Shifting of the burden of proof to the alleged infringer;

6)The extension of protection to include imported materials and

products.

2.3.4 Other Regulatory Issues

Aside from approvals, price controls, and patent policies, the

Indian government has used other tactics to regulate the pharmaceutical

and other sectors. These are primarily those of classic protectionism

(e.g., tariffs on imports, mandatory licensing, restrictions banning

imports, etc.). Liberalization efforts of 19911992 sought to disassembleprojectionist barriers and allow foreign firms to compete on more even

footing with their Indian counterparts. The main components of this

19911992 liberalization included:

a)MNCs treated as equal to Indian companies.

b)Automatic approval for 51 percent foreign equity proposals.

c)Automatic approval for foreign technology agreements.

d)Most bulk drugs (and their forms) delicensed.

e)Provision for a higher rate of return for companies

undertaking production from basic stages.2.4 The Indian Market

The previous three subsections have dealt primarily with factors

pertaining to pharmaceutical supply. This section examines the

characteristics of pharmaceutical demand. There is much anticipation

concerning the future of the Indian market for pharmaceuticals. With a

population of 950 million and a plethora of diseases, India is a desirable

market for drug companies. Furthermore, in spite of their low incomes,

Indian consumers have exhibited extraordinary pharmaceutical

purchasing habits. According to Ranjit Shahani, managing director of

Novartis India Limited, even though the dollar value of the Indian drugmarket is still too small to warrant serious attention, the market is one of

the largest in the world in terms of volume. For the Indian market to

justify large pharmaceutical investments, incomes and drug prices need

to rise, and it is safe to assume that this will occur. Barring unlikely

political collapse, India is bound to maintain its course of rapid

development. IMS Health estimates 8.6 percent annual growth for the

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Indian pharmaceutical market between 1998 and 2002, and forecasts

that the Indian market will be worth $7.8 billionits figure for the North

American drug market is $169.1 billionin 2002.16 Despite the

apparent precision of such projections, several unknowns complicate the

marketing initiatives of pharmaceutical companies. In particular, there is

insufficient information about: 1) the time frame of Indias rise to

economic prosperity, 2) the market reaction to liberalization (i.e.,

customers willingness to tolerate price increases), and 3) the structure of

the post-2012 market.

3. Impact of 2012 on Firm StrategiesThis section explores how Indian companies are reacting to

anticipated changes in patent protection following 2012. It will be

demonstrated that firm strategies are contingent upon expectations

about and capacities to adapt to the new patent environment.

3.1 Expectations

There are still many unknowns concerning the anticipated patent

legislation in 2012. Even if (as is expected) the new patent law nominally

complies with WTO guidelines, much uncertainty persists about its

specific operation. For example, the law may be interpreted in a manner

that favors Indian companies over MNCs. Furthermore, courts might be

unwilling or unable to enforce decisions.

3.1.1 New Delhis will to affect changeIn evaluating the degree to which the New Delhi government will

support stronger patent protection, it is useful to consider its standpoint

with respect to the costs and benefits associated with patent protection.

If perceived costs, such as increased prices and local firms weakened

competitive position, outweigh the benefits associated with innovation,

then New Delhi will be inclined to choose weak legislation and

enforcement. If the government believes that strong patent protection will

contribute positively to Indias overall social and industrial welfare, the

reverse will be true.

3.1.2 New Delhis ability to affect change

Even if the 2012 patent law fully complies with OPPI specifications,

it will be ineffective without proper enforcement. Patent examiners

possess skills not easily attainable in India, and they generally command

premium compensation. Lanjouw estimates that the Indian patent and

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trademark office (PTO) currently spends $330,000 per year, whereas its

U.S. counterpart operates on a $300 million budget.19 Obviously, New

Delhi will have to allocate more resources to its PTO if it is to function

effectively. In addition, India lacks other complementary private sector

features that are required of a well-functioning patent system, such as

patent attorneys and a general appreciation of IP issues.20

3.1.3 Firms views

In the final analysis, patents will probably not be as strong or as

well enforced as the OPPI firms and Western governments want, but the

post-2012 scenarioagainst the apparent wishes of New Delhiis sure

to represent a significant departure from the status quo. The potential

range of possible outcomes poses significant problems for firms

attempting to draft post-2012 strategies. Several of the MNCs covered in

this study have decided to refrain from making a judgement about 2012

until after the fact, but have devised expansion plans to distribute higherrevenue, easily prepared, first generation drugs in India. Other firms,

such as Sun Pharmaceuticals, have made detailed guesses about the

degree of patent protection they will receive, and have initiated costly,

irreversible investments based on their assumptions. A third set of firms,

such as Wockhardt, is more forward-looking than the first group, but

places a higher value on workable contingency strategies than the

second.

3.2 Capabilities

Because different companies have different strengths andweaknesses, two companies may well put forth identical analyses of the

post-2012 patent environment, yet react in completely different ways.

This subsection attempts to highlight some of the features that

differentiate companies from one another. Figure 1 presents a qualitative

snapshot of the functional capabilities of the companies that comprise

this papers sample. According to the sample, in all four areas of the

product cycle, the most prominent Indian companies are competitive with

MNCs in the domestic market. Indian companies excel particularly in

domestic marketing and distribution. For the MNCs, the domestic figures

may be somewhat misleading, because MNC subsidiaries often rely upontheir parent companies for assistance in specific areas, rather than

duplicating work themselves.

3.3.1 Size

Historically, large companies have dominated the global

pharmaceutical industry. This has been the case primarily because

certain phases of the product cycle (see section 2.2), such as clinical

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trials and (global) marketing, require substantial investment. In India,

three factors have reduced the importance of companies size, as

compared with elsewhere in the world. Local companies did not have to

engage in discovery and clinical trials, limited their operations to India

and its neighbors, and finally, were offered substantial protection under

the drug price control order (DPCO). For these reasons, bigger did not

necessarily mean better in India.

3.2.2 Markets

Some of the companies covered in this study, such as Lupin

Laboratories, Dabur Research, and Knoll Pharmaceuticals, sell the vast

majority of their products within India. Others, such as Sun

Pharmaceuticals, sell large percentages of output to India and other

emerging markets that have low approval and patent standards. A third

group sells bulks and branded generic formulations all over the world.

3.2.3 Present Technological Capabilities

Technological competence is developed gradually. Therefore, firms

that already have technologically intensive operations have a better

chance at rising to the level of their MNC competitors than those that do

not.

3.3 Strategies

This section evaluates some of the measures companies areadopting to ensure solvency after 2012.

3.3.1 Technological Strengthening

The most common strategic concern that 2012 has raised for

Indian pharmaceutical companies is the perceived need for technological

strength. Companies are faced with the realization that the only way they

can continue to sell first generation drugs (in the absence of licensing or

distribution agreements) is by discovering and developing them

indigenously. For Indian firms, there are two routes to this end. They can

either latch onto the skills of MNCs or they can embark on programs to

develop their own technical capacities.

Most Indian firms surveyed here have decided that new drug

discovery is an unfeasible short term goal and have consequently

pursued more modest technological programs. Sun and Lupin fall into

this category. While acknowledging that new drug discovery belongs on

their long-term horizons, they have devised strategies that afford

profitable operations without new drugs. Both have worked to bring more

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of the production process under their own control (through forward and

backward integration) while simultaneously sharpening their existing

R&D practices. Lupine, for example, prides itself on its innovative line

extensions. Even if these companies had more capital at their disposal,

they would be unlikely to pursue new drug discovery programs because

their managers firmly believe that technological competence needs to be

fostered gradually.

3.3.2 Redefining New Drug Discovery

Several Indian companies (e.g., Ranbaxy, DRL, Dabur, and

Wockhardt) are turning the prospect of increased patent protection to

their advantage by spearheading new drug discovery programs. Their

efforts have attracted much attention. Skeptics assert that Indian

companies are not large enough to discover and develop their own drugs

successfully. Indian companies also lack the experience of the major

players; leading MNCs have spent the better part of the twentieth centuryhoning R&D skills.

3.3.3 Public research

Most individuals surveyed for this paper were decidedly negative

about Indias public research facilities. In theory, public R&D labs should

be an invaluable resource to Indias smaller drug companies because

they allow them access to lead molecules and other specialized R&D

functions that they could not otherwise afford. In practice, however, the

current quality of such labs is so poor that relying on them for survival,

in the opinion of most experts, is one of the biggest mistakes companiescan make. A notable exception to this maxim is the Indian Institute of

Science (IIS), which has been quite successful at conducting clinical

trials. Whether or not other public research labs can follow IIS example

remains to be seen.

3.3.4 Leveraging Nontechnological Strengths

On the surface, 2012 seems to call for Indian companies to become

more technologically focused, and indeed, a number of Indias more

prominent firms (e.g. Ranbaxy, DRL, and Wockhardt) are pursuing this

goal by developing U.S. FDA-approved processes and drug discoveryprograms. As 2012 draws nearer, however, Indias pharmaceutical

companies must also expand and develop their nontechnological

strengths to keep pace with MNC competition. In keeping with this

broader development strategy, some companies (e.g. Sun, Lupin, etc.) are

undertaking less technologically oriented initiatives. Sun, for example,

recently expanded its R&D operations to place greater emphasis on

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developing state-of-the-art processes and novel delivery systems. Such

endeavors fall short of new drug discovery, but they represent important

steps toward technological self-sufficiency.

3.3.5 Growing Larger

Section 3.2.1 demonstrated that only large pharmaceuticalcompanies can engage in all four phases of the pharmaceutical

production cycle. Indian companieswhich have traditionally limited

themselves to domestic production and distributionmust therefore

grow larger to enter discovery and clinical trialsin addition totheir

current operations, and/or to expand to developed export markets. This

section reviews the means by which these companies are growing.

3.3.6 Help from Parent Companies

Some MNC subsidiaries (e.g., HMR, Knoll, and Glaxo) have adopted

a more relaxed posture toward 2012 than India-based companies. For

them, adaptation consists of waiting to see where opportunity lies andthen capitalizing on it by transferring resources from their parent

organization.

3.3.7 Export Focus

Liberalization has substantially increased the global

competitiveness of Indian pharmaceutical products, as local companies

have been forced to compete alongside MNCs in their home market.

Moreover, as the Indian market becomes more crowded, companies are

increasingly pressured to look elsewhere in order to expand their

revenues. For these reasons, the majority of the Indian companiesprofiled for this paper have taken specific measures to boost exports.

3.3.8 Localization of Operations for MNCs

Pharmaceutical industry experts have long argued that India is

especially well suited for drug production and discovery because it

possesses an abundant supply of highly skilled labor, a wide range of raw

materials, and a strong domestic market. However, a considerable portion

of pharmaceutical MNCs have either avoided India altogether or

maintained the minimum presence necessary to gain market access.

4. Appendix: Company ProfilesThis appendix reviews the operations of the companies surveyed

for this paper. Each company is reviewed with respect to principal lines

of business and strategic considerations for 2012.

4.1 Dabur Research Foundation

Dr. D.B. Ananatha Narayana,Head of R&D

Dr. Ravi Jain,Senior Manager

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Dabur was founded in 1884 as a pharmaceutical company, but in

the ensuing years, has greatly diversified into product lines ranging from

cheeses to veterinary products. Only 5 percent of 1994 turnover was

derived from pharmaceuticals, because since 1993, Dabur has

consciously undiversified and concentrated on doing fewer things

better. Still, Daburs scope of operations is vast when juxtaposed with

that of other pharmaceutical companies. Liberalization has affected

Dabur in a number of ways. First, increased competition has eroded

profit margins in many of Daburs markets. In the past, Dabur produced

as many products as possible to capitalize on its distribution expertise.

Now, Indias infrastructure is greatly improved and specialists can sell

products for less than Daburs total cost. In response to falling margins,

Dabur has abandoned failing products and pursued productivity-

enhancing measures such as freight cost control, process automation,

and a proposed merger with Dabur Research Foundation (at present,R&D is done a contract basis with the research foundation). Second,

stronger IP protection has enticed Dabur to build up its pharmaceutical

business and pursue new drug discovery.

4.2 Dr. Reddys Laboratories (DRL)

Dr. K. Anji Reddy,Chairman

Mr. K. Suresh,General Manager

Mr. T. Balamurali Krishna,Manager

Dr. M, Satyanarayana Reddy,General ManagerMr. P.V. Sankar Dass,Marketing Manager

Dr. G.O.M. Reddy (DRL Research Foundation),Vice President

DRL was founded as a bulk drug company in 1984. It has since

added formulations and new drug research to its docket of business

activities. DRL prides itself on its ability to reverseengineer any molecule

in six months. Its product mix comprises an even balance of high volume

(e.g., antibacterial) and high margin (e.g., cardiovascular) drugs. DRLs

primary objective is to serve the Indian market, but it is much more

involved in export markets than most of its competitors. In addition toexporting to other emerging markets, DRL exports a sizeable volume of

bulk drugs to Western markets. Along with Ranbaxy and Cipla, DRL has

evolved into a key player in the global generics market. DRL attempts to

have a physical presence in all of its export markets, through joint

venture tie-ups, wholly owned subsidiaries, and contractual

arrangements. Perhaps the most notable aspect of DRLs current strategy

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is its vigorous support of new drug discovery in India; in this respect, it

is arguably the most advanced Indian company.

4.3 Glaxo India Ltd.

Mr. Madhav B. Kurdekar,Executive Vice President

Glaxos global strength has traditionally been the design andproduction of leading edge, high margin drugs. For the past seventy-five

years, in order to participate in the Indian market, Glaxo has been forced

to sell its best drugs at prices well below what it charges elsewhere in the

world. Glaxo India also produces bulk drugs and formulations, and sells

drugs on behalf of other foreign companies that do not have Indian

presence. Glaxo India does not sell the entire product line of its parent

company, UK-based Glaxo

4.4 Hindustan Antibiotics Ltd. (HAL)

Mr. M.C. Abraham,Managing Director

Mr. S.R. Naik,General Manager

Founded in 1954, HAL is a state-owned company, and one of the

key building blocks of the Indian pharmaceutical industry. The

companys original objectives were threefold: job creation, life saving, and

technological diffusion. Today, HAL manufactures seventy-eight

formulations and four bulk drugs.

HALs corporate practices will not be affected by the advent of

stronger patent protection in 2012 becauseas a state-owned company

it has never engaged in semi-ethical practices such as reverse-engineering. However, other facets of liberalization and rising levels of

competition have challenged HAL. As other firms become more

competitive and more productive, HAL remains shackled by its

intractable bureaucracy.

4.5 Hoechst Marion Roussel Ltd. (HMR)

Mr. Debabrata Bhadury,Managing Director

HMR is a multinational chemical company that has had operations

in India since 1956. Over the past several years HMR India has

abandoned its petrochemical divisions in order to focus efficiently onpharmaceuticals, a practice which mirrors the intent of its parent

company. HMRs efficiency drive has also consisted of taking full

advantage of economies of scale by centralizing certain functions in

Frankfurt and establishing good communication throughout the HMR

family. As a result, HMR India is much more closely integrated with its

parent company than are most other MNC pharmaceutical subsidiaries

in India. Although it invests large sums of money to support pro-patent

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lobbies in New Delhi, HMR, like other MNCs, is unsure of what to expect

of the post-2012 patent regime. Rather than subjecting itself to such

uncertainty, it has pursued a strategy of relying on headquarters in

Frankfurt for products, technology, and marketing programs on an as-

needed basis. Meanwhile, it has divested itself of its local primary/bulk

R&D facilities. Interestingly, HMR has filed more patents in India than

any other drug company, and pending attractive patent protection, it may

well reinvest in its Indian operations after 2012. Whether or not it does

so will have almost no impact on the types of products it is able to

produce and sell in India.

4.6 Knoll Pharmaceuticals Ltd. (BASF Pharma)

Mr. D.M. Gavaskar,Managing Director & President

Dr. A.V. Prabhu,Vice President

In 1997, BASF acquired UK-based Boots Pharmaceuticals.

Subsequently, Boots India was restructured under Knoll, BASFs U.S.-based pharmaceutical subsidiary. In India, Knoll acts with considerable

autonomy from its corporate parent. D.M. Gavaskar, its managing

director and president, believes that autonomy is necessary for Knoll to

serve its markets adequately. Two reasons underlie this belief. First,

complex matrix structures, in which employees perform both regional

and functional duties, tend to inhibit distribution relationships, which

are critical to success in India. Second, in many respects the Indian

market differs fundamentally from the global market. For example, cough

and cold medicines are currently the second largest functional segmentin India, although they are of trivial importance on the world scene.

Adopting a more centralized approach would weaken Knolls individual

capacity to promote cough and cold remedies. In general, a certain

degree of autonomy is necessary to capitalize on Knolls strengthsa

strong distribution network and an intimate knowledge of the Indian

market for drugs. Knoll does not involve itself in exports (only 3 percent

of its products are exported).

4.7 Lupin Laboratories Ltd.

Mr. Lalit Kumar,President

Mr. Shrikant Kulkarni,General Manager

Lupin is a twenty-seven year-old Indian pharmaceutical company.

In the past, Lupin derived a considerable portion of its revenues from

producing bulk and intermediate drugs with no infringing processes,

many of which were bound by product patents in more developed

countries. It specializes in anti-TB medications and cephalosporins

(antibiotics derived from theCephalosporiumgenus of fungi).

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With the onset of government liberalization and the prospects of

increased patent protection after 2012, Lupin has decidedly changed its

course in several ways. First, it has shifted focus from low-margin bulks

to higher value-added products, such as novel delivery systems and

niche products for selective markets. Second, it has adopted an export

focus; in 1997, 55 percent of turnover came from exports.

4.8 Nicholas Piramal India Ltd. (NPIL)

Dr. A.G. Seshdrinathan,Vice President

Established in 1947, NPIL is engaged in the sale of

pharmaceuticals and glass products for the pharmaceutical industry.

Within pharmaceuticals, NPIL has a presence in the cardiovascular, anti-

infective, antacid, and dermatological segments of the market. With the

exception of cardiovascular, these are high-volume segments. NPILs

principal strategy is to build economies of scale in the production ofhigh-volume drugs, which it then markets in India and other countries

with similar drug markets, such as Africa, Southeast Asia, and Russia.

As it is strong in marketing and distribution, NPIL has also been

particularly active in marketing MNC products in India.

4.9 Novartis India Ltd.

Mr. Ranjit Shahani,Chief Executive Officer

Novartis India Ltd. was formed in 1997, following the merger of

Sandoz (India) and Hindustan Ciba-Geigy. The old Hindustan Ciba-Geigy(India) had traditionally focused on producing formulations of its parent

companys products for the Indian market, as well as a small number of

export markets with conditions similar to those of India. More recently,

Novartis India, as it is now called, has begun to produce bulk drugs for

use in local formulations and for export to other Novartis plants.

4.10 Ranbaxy Laboratories

Dr. J.M. Khanna,Executive Vice President & Member of the Board

Dr. Sudarshan Arora,Executive Director (New Drug Discovery)Dr. M.R. Marathe, Assistant Director

Ranbaxy is the largest Indian drug company, second only to Glaxo

India in terms of overall pharmaceutical market share. Because of its size

and global ambitions, Ranbaxy has received a large amount of press in

the last several years. Indeed, many analysts believe that Ranbaxy is

especially well positioned to compete alongside multinationals in future

decades. Parvindar Singhthe 55 year-old chairman of Ranbaxyis39


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convinced that Indias pharmaceutical industry is evolving in a way that

will make complacency a losing strategy in years to come. He believes

that Indian companies need drastically to reorient themselves to remain

competitive in the post-2012 marketplace.26 Ranbaxy is pursuing three

initiatives in response to its changing environment: new drug discovery,

globalization, and domestic strengthening. The company has also vowed

not to introduce any more pirated drugs, as doing so will threaten its

credibility.

4.11 Sun Pharmaceuticals Laboratories Ltd.

Mr. Rakesh Mehta,Vice President

Sun Pharmaceuticals, founded in 1983, makes formulations and

bulk drugs that are suitable for Indias market needs and those of foreign

markets with similar conditions. Within this context, Sun offers bundles

of branded generics in three therapeutic areasneurology, psychiatry,

and cardiologyas well as specialized, high margin products in segments

such as gastroenterology. None of these segments is subject to Indias

price control regime. Industry experts applaud Suns diverse product line

and its innovative marketing initiatives.

4.12 Wockhardt Ltd.

Mr. Vinod Pabi,Senior Vice President

Mr. Javed Hussain,Deputy General Manager

Dr. M.V. Patel,Director

Dr. S.K. Agarwal,Senior Scientist

Dr. Sudarsan Jagannathan,Scientist

Wockhardt is an Indian pharmaceutical company engaged in the

production and sale of bulks and formulations, large volume parenterals,

infant foods, and agricultural products. Its specialty therapeutic

segments are systemic antibiotics, cough and cold remedies,antispasmodics/anticholinergics/gastroprokinetics, analgesics,

antiseptics/disinfectants, and biotechnology. For the most part,

Wockhardt focuses on drugs with relatively high barriers to entry in

terms of technology. Wockhardts approach to pharmaceuticals is also

diseaseoriented.

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The company targets areas of medical need and then builds

baskets of drugs accordingly.

Prior to the governments liberalization programs in the early

1990s, Wockhardt restricted itself to formulation production, using bulks

purchased from other sources. Since then, it has emerged as a

prominent producer of bulks in its own right, and now produces almost

its entire requirement of bulk drugs. This has helped the company to

achieve relatively high operating profitability compared with its

competitors.

COMPANY PROFILE

Introduction

Dr. Reddys laboratories were founded by Dr. ANJI Reddy, a

entrepreneur scientist in 1984. The DNA of the company is drawn from

its founder and his vision to establish Indias first discovery led

global pharmaceutical company. The company is focused on creating

and delivering innovative and quality products to help people lead the

healthier lives.

Dr. Reddys is the research based company with vertically integrated

operations . The company develops ,manufacturers and markets a

wide range of pharmaceutical products in India and overseas. The

basic research program of Dr. Reddys focuses on cancer diabetes,

bacterial infections and pain.

Dr. ANJI Reddy, having moved out of sol ltd{ standard organics

limited } a company he had successfully co-founded, started Dr. Reddys

laboratories with $40,000 in cash and $1,20,000 in bank loan.

Today, the company with revenues of rs.194t company and youngest

among its peer group.

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Dr. Reddys create and deliver innovative pharmaceutical health

care solutions that help people enjoy longer healthier and more

productive lives through two parallel objectives.

A.Delivering affordable and accessible mediation to all parts of the

world.

B.Discovering , developing and commercializing innovative

medicines that satisfy unmet medical needs.

Scope of DR. Reddys world markets

I.Reddys generic formulations have also become very popular in

quality conscious regulated markets such as the us and Europe.

II.Reddys is the first pharmaceutical company from Asia pacific

(outside Japan) to be listed in new York stock exchange on

April 11,2001.

III.We manufacture active pharmaceutical ingredients and finished

dosage forms and market globally with a focus on united states,

Europe ,India, Russian.

IV.Generics businesses started operations in 2001 and focusesprimarily on the north America and Europe markets.

V.API is one of the major business divisions of Dr. Reddys, where

they are equipped with six multi-ton, state of the art facilities

which offer over 100 varieties of bulk actives and several key

intermediates. Where their API are exported worldwide, which

include both emerging as well as developed markets .

VI.Principal markets in the business segment include north America,

united states and Canada, Europe, middle east, south east Asiaand India.

VII.Dr. Reddys branded formulations are marketed in the country

across Russia ,Latin America ,south Asia, china and Africa.

MAKING OF DR.REDDYS

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In1973after gaining six years of expertise and experience in

the manufacturing and implementation new technologies in bulk drugs

from public sector company IDPL HYD. Dr .Reddys decided to set up a

basic drug unit at that time there were few other players in the

private sector at the end of the pharmaceutical value chain.

Reddys aim was to develop and manufacturing a wide spectrum

of bulk drugs to enable the pharmaceutical industry to launch their

formulations unfettered.

In the yr1976to manufacture for the first time in India ,a drug

calledmetrodinazolefor the treatment of amoebic dysentery the drugbecame a hit.

Dr .Reddys played a major role in pioneering the technology and

production ofsulphamethonazolean antibacterial in India.

MISSION :

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To be the first pharmaceutical company that successfully

discovers

takes its products from discovery to commercial launch globally.

CORE PURPOSE :

STATEMENT :To help people lead healthier lives.

The purpose of this statement answers the question why

do we exist ? we exist as an organization to help people lead healthier

lives by innovating to meet unmet medical needs and by

making pharmaceutical products affordable and available to a

larger cross section of society.

VISION :

STATEMENT :

To become a discovery led global pharmaceutical company .

The vision statement underlines two aspects of what Dr. Reddys

wants to become discovery led and global. In the words ofDr. ANJI

Reddy Dr. Reddys laboratories will innovate again not just for

mankind.

Vision statement helps in the following steps:

It provides long term direction to the company .

It challenges and inspires every member of Dr. Reddys .

It unites all members of the Dr. Reddys family in the pursuit of

a common goal.

It motivates us to define global benchmarks for each business

activity in Dr. Reddys.

VALUES :

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Quality :we are dedicated to achieving the highest levels of quality

In everything we do to delight customers, internal and external, every

time .

Respect for individual :we uphold the self esteem and dignity of

each other by creating an open culture conducive for expression of

views and ideas irrespective of hierarchy.

Innovative and continuous learning :we create an environment of

innovation and learning that fosters ,in each one of us, a desire to

excel and willingness to experiment .

collaboration and teamwork :we seek opportunities to build

relationships and leverage knowledge expertise and resources to

create greater value across functions, businesses and locations .

Harmony and social responsibility :we take utmost care to protect

our natural environment and serve the communities in which we

liveand work .

EXCELLENCE :we strive for excellence in everything we think say and do .

Excellence means continuously improving .

Striving to be the best .

Creating a benchmark for others to follow .

Excellence is execution .

It has no place for mediocrity .

Dr. Reddys being a one of the leading pharmaceutical industry to

launch their formulations , unfiltered. There were only a couple of

pharmaceutical companys at that time with the capacity to develop

newer drugs , bit they would not sell the bulk to other formulators .

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Here ,Dr. Reddys played a major role in pioneering the technology

and production of sulphamethonazole an anti bacterial in India.

Another dream was to do it on his own , because that was the

time that his second experiment with partnership was also rumbling.

He realize his dream shortly thereafter then he established Dr. Reddys

laboratories in 1984. The process and production of methyldopa was the

ultimate challenge. Chemists at Dr. Reddys streamlined and simplified.

The unit process for it in spite of the complicated nature of the

process for it and within a matter of 6 months the company was

ready to manufacture the drug.

The company has several distinctions to its credit. Being the

first pharmaceutical company from Asia pacific to be listed on the

new York stock exchange is only one among them.

Dr. ANJI Reddy is well know for his passion for research and

drug discovery. Dr. Reddys started its drug discovery programmed in

1993 and within three years it achieved its first break through by out

licensing an anti-diabetes molecule to novo nor disk in march 1997.with

this very small but significant step, the Indian industry went through a

paradigm shift in its image from being known a just copycats to

innovators!

Through its success, Dr. Reddys pioneered drug discovery in

India. There are several such inflection points in the companys

evolution from a bulk drug {API} manufacture into a vertically integrated

global pharmaceutical company today.

Today , the company manufactures and markets API(bulk

actives), finished dosages and biologics in over 100 countries

worldwide, in addition to having a very promising drug discovery

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pipeline . when Dr. Reddys started its first big move in 1986 from

manufacturing and marketing bulk actives to the

domestic(Indian)market to manufacturing and exporting difficult-to-

manufacture bulk actives such as methyldopa to highly regulated

overseas market, it had to not only overcome regulatory and legal

hurdles but also battle deeply entrenched mind-set issues of Indian

pharmacy industry, in stark contrast, is know globally for its proven

high quality-low-cost advantage in delivering safe and effective

pharmaceuticals .

This transition although and often-perilous one, was made

possible thanks to the pioneering efforts of companies such as Dr.

Reddys laboratories.

Today, Dr. Reddys continues its journey. Leveraging on its low

cost, high intellect advantage. Foraying into new markets and new

businesses .

Taking on new challenges and growing stronger and more

capable . Each failure and each success renewing the sense of purpose

and helping the company evolve.With over 950 scientists working

across the globe around the clock , the company continues its

relentless march forward to discover and deliver a breakthrough

medicine to address an unmet medical need make a difference to

peoples lives worldwide . and when it does that, it would only one the

beginning an yet it would be the most important step. As Lao Tzu

wrote long time ago, Even a 1000 mile journey starts with a single

step.

BUSINESSES :

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DR. Reddys is a vertically integrated , global pharmaceutical

company with proven research capabilities and presence across the

pharmaceutical value chain . we manufacture active pharmaceutical

ingredients and finished dosage forms and market them globally, with

a focus on united states ,Europe , India and Russia .In addition , the

drug discovery arm of the company conducts basic research in the

areas of diabetes ,cardiovascular, inflammation and bacteria infection.

CORE AREAS :

The core businesses of active pharmaceutical ingredients (API)

and branded formulations are well established with an impressivetrack record of growth and profitability. Our generics business started

operations in 2001 and focuses primarily on the North America and

EU markets . we have built a robust pipeline of generic products ,

which will help us drive growth in the medium and long term . in

addition ,the company is investing in creating businesses of the future

the innovation led businesses- of specialty and drug discovery.

The revenues for fiscal 2012 wereU.S.$446 million.

ACTIVE PHARMACEUTICAL INGREDIENTS :

Active pharmaceutical ingredients (API) is one of the major

business divisions of Dr. Reddys . we are equipped with six multi-ton,

state-of the art facilities, which offer over 100 varieties of bulk actives

and several key intermediates. our active pharmaceutical ingredients

are exported worldwide ,which include both emerging as well as

developed markets . Principal markets in this business segment

include north America (the united states and Canada),Europe, Middle

East , SE Asia and India .

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Their expertise in organic synthesis ,process development and a

controlled supply chain enables us to provide our customers with

high quality bulk actives at competitive prices . we are aggressively

building our product portfolio to cater to generic players in the emerging

markets and generic and patent challenge formulators in regulated

markets .

Dr. Reddys offers an unparalleled portfolio to its customers ,

who include innovators and generic formulators world wide . The

products are well documented according to the latest ICH and other

regulatory guide lines.

All the above advantages make Dr. Reddys API ,an ideal partner in

the product development efforts.

INTEGRATED RODUCT DEVELOPMENT :

The key element in generic drug development is the need for

speed . there is a growing need to reduce the time in which a cheaper

generic alternative is provided to the masses , staying within theregulatory framework and honoring the IP imperatives . They have as

many as 200 scientists working on process innovation and

simplification manufacturing cycle time reduction , waste and energy

reduction and continuous process improvement.

Rachna , is a project management approach that drives their

product development process. This approach ensures a smooth work

flow from product selection developing the synthesis route in R&D

LAB(s), plant scale-up and validations- finally culminating in the filing

of a drug master file.

The focus is on using the most advanced techniques in the

product identification and structure elucidation . our scientists have

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cash flow management- dr reddy

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