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INTERNATIONAL v. 25.07.2005



How does a company manage imitation and innovation at the same

time? Aren’t these two competing goals?
G.V. Prasad, Vice Chairman & CEO, Dr. Reddy’s
This case was written by
Anand Jha (MBA 2002) and For the year closing March 2003, Dr. Reddy’s Laboratories Ltd
Professor Bala Chakravarthy (Dr. Reddy’s), a company quoted on the New York Stock
as a basis for class discussion Exchange, showed revenues of $393 million. Its sales had grown
rather than to illustrate either at a compound annual rate of nearly 30% over the previous five
effective or ineffective handling years, and its return on equity in 2003 stood at a healthy 19%
of an administrative situation. (refer to Exhibit 1). Dr. Reddy’s enjoyed a price/earnings ratio
of 19, one of the highest among its peers. An important
challenge for Prasad was to maintain the company’s hard earned
reputation as a leading generic drug company, while
simultaneously transforming it over the long term into a
discovery led global drug company.
Talking to the case writers in his modest office in Hyderabad,
India, Prasad remarked:

Our current identity is that of an imitator, a strong generics company

with global aspirations. We have to continue delivering the
profitability and growth that our present business model promises and
yet find a way to invest in opportunities that will give us non-linear
and explosive growth in the future. The financial markets will not just
buy into our vision like they did for the dot.coms. We will be
competing in a well-established business domain. The markets will
want results year-after-year, even during our transformation. I don’t
know whether this kind of a metamorphosis has been successfully
achieved in any industry. But that is what we are aiming for.

Copyright © 2003 by IMD - International Institute for Management

Development, Lausanne, Switzerland. Not to be used or reproduced without
written permission directly from IMD.

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Dr. Reddy’s: Humble Beginnings

Anji Reddy, a PhD chemist, founded two companies in 1984, Dr Reddy’s
Laboratories (DRL) and Cheminor Drugs Limited (Cheminor). These were
subsequently merged in 2000 to create Dr. Reddy’s.

In the 1970s the Indian government had chosen to adopt a process patent regime
for the Indian drug industry, whereby a manufacturer could produce any drug
whose product patent was still valid, as long as the process used to manufacture
the drug differed from that of the innovator/patent holder. Anji Reddy recalled
that this offered a unique window of opportunity to do some good for the country
by offering quality drugs at a fraction of world prices, as well as to build one’s
own financial fortune. Anji Reddy made a personal investment of $40,000 and
borrowed an additional $120,000 from the banks to launch DRL, a company
dedicated to manufacturing Active Pharmaceutical Ingredients (APIs)1 for other
drug companies. Soon DRL was formulating its own drugs and selling them under
its brand names. Since all Indian competitors provided the same molecule, they
had to distinguish themselves by their brands. Cheminor, on the other hand, sold
high quality bulk actives to western pharmaceutical companies, primarily in the
US. Typically the bulk active sold was for drugs whose patent had expired. When
a pharmaceutical product was no longer protected by patent, its active constituent
could be manufactured and sold under its generic name, or a new brand name, by
anyone satisfying regulatory controls relating to manufacture and marketing. By
1989 Cheminor had become the largest exporter of “ibuprofen” (a bulk active
substance) to the US, Italy, Spain and Japan.

The Anji Reddy Miracle

The 1990s (refer to the Appendix for major milestones in the company’s brief
history) saw four parallel evolutions in the group’s strategy: product
diversification, international expansion with branded formulations, growth in the
generics business and the building of capabilities for discovering new drug

Dr. Reddy’s diversified the number of active ingredients (APIs) that it

manufactured and sold them both in the Indian market and in fifty other countries.
Concurrent with its growth in the active ingredients business, Dr. Reddy’s also
pursued aggressive diversification of its branded formulations portfolio. By 2000
it was an industry leader within India in three therapeutic areas: pain management,
gastroenterology and cardio-vascular. The company also started building its
position in neutraceuticals, women’s healthcare, styptics and dental care; and
began diversifying into the diagnostics and instruments business. Along with its
product diversification, Dr. Reddy’s rapidly built its marketing infrastructure from
its home base in south India to cover the entire country. By 2000 there were
nearly 1,500 sales persons in its national detailing network helping the company
to reach prescribing physicians in all major Indian markets.

Active Pharmaceutical Ingredients (APIs), also known as active pharmaceutical products or bulk actives,
are the principal ingredients in any formulation. Active pharmaceutical ingredients become formulations
when the dosage is prepared together with other inactive ingredients in a form ready for human consumption
such as in a tablet, capsule or liquid form.

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The company had six factories for the manufacture of active ingredients, each
capable of producing products to the standards of the US Food and Drug
Administration (US FDA). It had three additional formulation plants, also built to
international standards, for manufacturing its branded formulations. By 2000 the
company had built an impressive supply chain capable of reaching 2,000 stockists
and 100,000 retailers in India, and of exporting efficiently to over 50 countries.
Dr. Reddy’s was a pioneer among Indian drug companies in that it looked to
international markets for its growth. Countries in Eastern Europe, South East Asia
and Latin America, that had loose patent regimes, were the first to be targeted
with exports. However, the real targets were the big markets of Russia, China,
Brazil and Mexico. Dr. Reddy’s started exporting to Russia in 1992 and
subsequently set up a 76:24 joint venture there in 1995. The 51:49 Chinese joint
venture became operational in 2001. The company had a subsidiary in Brazil and
was planning to expand its operations in Latin America.
Through Cheminor, Dr. Reddy’s sold active ingredients and generic drugs to
markets in the developed world that were tightly regulated. It had offices in the
US and Europe to increase its bulk active sales to the west. The company began
forward integrating into the formulation of its own generic drugs and eventually
set up a state-of-the-art manufacturing facility for formulating generic drugs.
It was clear to Anji Reddy from the beginning that just being a copycat
manufacturer would not lead the company to greatness. He started Dr. Reddy’s
Research Foundation (DRF) in 1993 to focus on drug discovery. He chose to keep
discovery research separate, in order to protect it from the every day operating
frenzy. DRF was meant to be a small organization, fast and flexible, with top
employee strength of 200. Furthermore, employees were split into smaller teams
of 30 to 40, each focusing on a distinct therapeutic area.
Finding researchers for this new activity was a big problem. The available
scientific pool was more oriented toward process chemistry. The few Indian
scientists skilled in drug discovery had either migrated abroad or worked for
western multinationals in India. DRF hired fresh PhDs from universities and
began grooming them for drug discovery research. In order to expand this talent
pool, the company instituted “spirit of excellence” scholarships in select Indian
universities. Besides a good salary and stock options, DRF’s perks included
financial support for attending national and international conferences, and
encouragement for pursuing a doctorate while working for the company. There
were also opportunities to work with foreign universities and hospitals.
Besides the research facility in Hyderabad, Dr. Reddy’s operated a discovery
laboratory in Atlanta, Georgia. It had also set up Aurigene Discovery
Technologies, a service organization to help the discovery efforts of big
pharmaceutical companies, with research facilities in Boston and Bangalore.
Working in partnership with the R&D departments of other drug discovery
companies, Aurigene sought to build competencies in the drug discovery process
and to help accelerate the discovery operations of its drug company clients,
including Dr. Reddy’s.
Money was raised in foreign capital markets to fund the company’s diversification
activities as well as to expand its generics business and support its new drug

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discovery efforts. The company’s GDR2 issue in July 1994 netted $48 million. It
subsequently raised an additional $115.5 million in the US market in April 2001
through an ADR3 issue, becoming the first non-Japanese Asian pharmaceutical
company to be listed on the New York Stock Exchange.

The End of an Era

As noted earlier, DRL and Cheminor, although sister concerns, operated as

separate entities until 2000. Similarly, despite being a part of DRL, DRF (the
research foundation) also operated independently. Before Anji Reddy handed the
baton to Prasad he started the process of bringing the three entities together under
a common corporate entity, Dr. Reddy’s Laboratories (Dr. Reddy’s). In 2000,
while remaining Chairman, Dr. Reddy entrusted active management of the
company to his son-in-law, G V Prasad (Vice Chairman and CEO), and to his son
Satish Reddy (Managing Director and COO). He remained close to his first love,
the company’s new drug discovery efforts. The market capitalization of
Dr. Reddy’s was around $1.5 billion in 2000. The Reddy family owned nearly a
quarter of the company’s shares.
Prasad had done his undergraduate work in chemical engineering at the Illinois
Institute of Technology, and his graduate work in industrial administration at
Purdue University, in the US. Satish Reddy did his undergraduate work in
chemical engineering in India and followed that up with a graduate degree in
medicinal chemistry at Purdue University. Prasad was 39 and Satish Reddy 34
when they assumed leadership of the company.

Prasad Takes Charge

Prasad inherited an excellent base to start his ambitious journey. The company
had a very healthy balance sheet and a robust business model. But there were new
challenges. India’s prosperous pharmaceutical industry was in for a big change.
Since the beginning of the 1990s, the leading pharmaceutical firms in the world
had started to lobby governments and trade associations to enact stricter patent
protection laws, claiming that if they were unable to recoup their high R&D
investments new drug discovery would suffer. The average number of patents
protecting a drug also increased from 2 in 1993 to 12 in 2003. TRIPS (Trade-
Related Aspects of Intellectual Property Rights)4 came into effect on January 1,
1995. TRIPS required the domestic legislation of GATT member countries to

Global Depositary Receipts (GDRs) give access to two or more markets, most frequently the US market
and the Euromarkets, with one fungible security. GDRs are most commonly used when the issuer is raising
capital in the local market as well as in the international and US markets, either through private placement or
public offerings.
American Depository Receipt (ADR). Introduced to the financial markets in 1927, an ADR is a stock that
trades in the United States but represents a specified number of shares in a foreign corporation. ADRs are
bought and sold on American markets just like regular stocks, and are issued/sponsored in the US by a bank
or brokerage.
TRIPS was administered by the World Trade Organization (WTO) through the TRIPS council.

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cover: intellectual property (IP) protection of pharmaceutical and biotechnology

products; banning the production of cheaper versions of a patented drug by
generic manufacturers; and 20 years of monopoly rights for the manufacture and
marketing of patented drugs. Developed, developing and “least developed”
countries were given 1, 5 and 10 years respectively to implement the agreement.
India had to implement the agreement by March 2005. The new TRIPS rules
would not apply to drugs patented before 1995, and copies of drugs produced
between 1995 and the implementation were unlikely to be withdrawn. With the
anticipated enforcement of TRIPS in 2005, India’s drug makers would have to
start honoring international pharmaceutical product patents for the first time since
the 1970s. Implementation was just two years away.
The immediate task for Prasad was to complete the integration of Dr. Reddy’s. A
new logo and identity was created for the group and a new daring vision
enunciated: “To become a discovery led global pharmaceutical company” (refer
to Exhibit 2). Generics was the new growth segment for Dr. Reddy’s. Bulk
actives and branded formulations provided the ballast. But both of these
businesses were getting very competitive. Dr. Reddy’s faced two fierce Indian
competitors in its bulk actives and branded formulations businesses, Ranbaxy and
Cipla. The generics business was also very competitive. Two of the largest
generics companies, the Israeli Teva and Swiss Novartis Generics, only enjoyed
around 5.5% market share each.
Dr. Reddy’s Business Segment Data (all figures in $ thousand)
1998 1999 2000 2001 2002 2003

Branded formulations 46,341 55,961 78,603 116,631 131,200 149,130

Bulk actives and intermediates 59,048 82,174 88,169 108,202 113,851 137,848

Generics 0 0 0 4,992 98,408 93,130

Diagnostics, critical care, biotech 2,126 3,070 4,217 7,439 9,327 9,304

Drug discovery 1,274 2,174 1,942 0 2,712 0

Others 139 184 465 1,319 5,865 3,410

Total 108,928 143,563 173,396 238,583 361,363 392,822

Growing the Generics Opportunity

By 2001 generic drugs represented a $40 billion market opportunity, growing at
10% to 12% each year. What helped this growth was that governments in the US,
major European countries and Japan were all under pressure to reduce health care
costs. In the US, the Drug Price Competition and Patent Restoration Act of 1984
gave generic drug manufacturers new opportunities. This law, colloquially called
the Waxman-Hatch Act after the two lawmakers who drafted it, provided generics
companies with access to the active substance, allowed them to undertake all
preparatory work to apply for registration requirements and file registration
applications before the patent on the originator product expired, and thus be fully
prepared for a market entry immediately on the expiry of a patent. Patents for over
$30 billion-worth of blockbuster drugs were due to expire by 2005, and generics
manufacturers had the opportunity to cash in.

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The Hatch-Waxman Act also permitted generic drug manufacturers to file

Abbreviated New Drug Applications (ANDAs)5 for generic versions of all post-
1962 approved pharmaceutical products. The innovator company was given a
five-year exclusivity period in the US (called New Chemical Entity or NCE
block). An application to provide a generics substitute could only be filed after
this period. In the European Union this period was eight years, with a further two-
year market exclusivity period during which the generic substitute could not be
marketed even if it received regulatory approval.

The generic player could file a patent challenge in the US one year before the
NCE block period ended. In order to get approval, the manufacturer had to submit
detailed information regarding the bioequivalence of the drug they were proposing
and the manufacturing process to be used; proving that the generic version was
equivalent to the branded version. Each bioequivalence study cost the company
anywhere from $500,000 to $2 million. The first ANDA filing by Dr. Reddy’s
was in 1997 for Ranitidine 75 mg tablets in the US market. It subsequently filed
numerous other ANDAs in the US and other developed markets.
An ANDA filing didn’t have to wait until the patent on a drug was set to expire.
The generics competitor could also submit what was called in industry jargon a
Paragraph IV application (alluding to that paragraph in the Act), claiming that the
patent being challenged was invalid, unenforceable, or would not be infringed by
the generic drug that was sought to be introduced by the filer. The law allowed the
patent holder to sue the applicant within 45 days of such a filing, in which case it
automatically got a 30-month stay period. If either the patent holder lost the
lawsuit during this period or no decision was available from the courts at the end
of it, the US FDA could approve the ANDA and give the first generic applicant a
180-day exclusivity period to start marketing its drug.
Dr. Reddy’s spent several million dollars in 2001 fighting Eli Lilly’s patents on
the 40-milligram dose of the blockbuster anti-depressant drug Prozac. After a six-
month court battle Dr. Reddy’s finally prevailed and won the right to market its
generic drug exclusively for six months. The company achieved $68 million in
sales in the exclusivity period alone, at a gross margin estimated in excess of 90%.
As of early 2003, 11 ANDAs had been approved and Dr. Reddy’s had
successfully marketed these products. The company was awaiting decisions on 23
additional applications, 17 of which involved patent challenges. However,
whether or not to jump at an ANDA approval depended on a host of factors. As
one investment analyst observed:

Rewards from a litigation-based strategy are substantial but the predictability of success
and timing are low. Risks emanate from litigation/set backs/delays, regulatory
changes/delays and R&D failures.6

Drug prices of generics in the exclusivity period were typically 60% to 70% of the
original patented drug. After the exclusivity period, with the entry of other

Abbreviated New Drug Application: completed dossier filed by suppliers of generic version of
a drug when it was set to go off patent.
Deutsche Bank’s Research Report on Dr. Reddy’s

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generics, prices quickly dropped to 15% to 20% of the peak price. This would be
an argument for quick entry. However, if the winner of an exclusivity application
went ahead with the marketing of its drugs and subsequently lost the original
lawsuit or an appeal by the patent holder, there were compensation costs to be
considered. Of course, if everything worked well, there were huge profits to be
made. The generics manufacturer typically had a 57% cost advantage over the
patent holder. This was estimated to be even higher (76%) for Indian generics

Specialty: An Exciting New Bet

Specialty referred to generic drugs that were sold under a company’s own brand
name, unlike conventional generics that were sold under the molecule name. Dr.
Reddy’s saw this as an exciting new segment to grow in. Specialty drugs were
also different from the original innovator product in that they usually offered an
improved/different version of the original compound (better dosage, compliance,
convenience, etc.). The original patent holder often challenged this claim in
courts. The regulatory authorities also asked for clinical evidence to support the
claims made for the specialty drug. If both of these hurdles were met, the
company launching a specialty drug could enjoy market exclusivity for about
three years. However, since the new drug was not a straight bio-equivalent of an
approved drug, pharmacists were not permitted to routinely substitute a prescribed
drug with its specialty competitor. The company launching this new specialty
drug had to market it to prescribing physicians. The new drug had to be prescribed
by its brand name before a pharmacist could fill it.
In December 2002 Dr. Reddy’s won its first court battle to launch a specialty drug
in the US market. A US District Court in New Jersey ruled that the amlodipine
maleate molecule of Dr. Reddy’s did not infringe the existing patent of
“Norvasc,” Pfizer’s blockbuster blood-pressure drug. Norvasc had generated $3.8
billion in sales for its rival in 2001. Even a modest 15% market share would be a
financial bonanza for Dr. Reddy’s. But as Prasad observed, this was not without
its downside:
Whereas in the generics business all we have to show is the bio-equivalence of the
substitute product being offered, the specialty business requires doing clinical trials that
may sometimes involve thousands of patients! The costs of these trials can run anywhere
between $10 million and $30 million. In addition, we will have to invest in new detailing
capabilities in the US. Prescribing physicians have to be educated on the new drug. We
would have to hire a minimum of 200 to 300 sales representatives just to create a base
presence in the market. This could easily double our financial exposure. While we would
like to move quickly, an adverse appeals court ruling can be disastrous for us. Pfizer has
promptly appealed the District Court’s verdict. We generate about $50 million in free cash
flows each year. We have to reserve half of that for investments in our existing businesses.
If we overreach in our pursuit of opportunities in the specialty area our whole portfolio
could be at risk. An option is to look for a partner to pass on some of this risk. But then we
would have to share in the upside as well.

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A Cautious Approach to New Drug Discovery

The initial focus of new drug discovery was on therapeutic areas that were less
competitive. Diabetes care was one such. Not much was happening on this
research front and Dr. Reddy’s saw it as an opportunity to catch up with the
established international players.

Following through on all phases of the drug discovery process was deemed
prohibitively expensive, costing hundreds of millions of dollars. Dr. Reddy’s
concentrated only on the pre-clinical research phase, since it was less capital
intensive and low on risk. On a shoestring budget of $10 million, it was able to
develop 10 to 14 new drug candidates, four to six times the industry average on
productivity. Dr. Reddy’s out-licensed two anti-diabetic molecules to Novo
Nordisk and one to Novartis, getting milestone payments in return. The company
had also developed a robust pipeline, including nine NCEs (New Chemical
Entities) covering four therapeutic areas: diabetes, metabolic disorder, anti-
infective and cancer.

Managing a Global Company

Dr. Reddy’s sought a presence in all major world markets. By 2002 it already had
operations or sales offices in 60 countries. It had subsidiary companies in the US,
Brazil, UK, France, Holland and Singapore. Revenues from the company’s US
operations were fast catching up with revenues generated in India. In fact by 2002
international revenues began dominating domestic revenues by a factor of nearly
Dr. Reddy’s - Geographic Mix of Revenues ($ thousand)
1999 2000 2001 2002 2003

India 80,086 103,317 121,558 131,566 141,056

US 14,159 16,509 38,836 131,244 127,229

Russia & other FSU 15,465 13,270 26,864 35,366 45,823

Europe 7,119 14,323 10,964 16,979 30,457

Others 26,734 25,977 40,361 46,208 48,257

Total 143,563 173,396 238,583 361,363 392,822

Yet, given the manufacturing cost advantages that India offered (one fifth of the
US cost), it made sense to house the company’s fixed assets primarily in India.

This vast geographical spread for a mid-sized company like Dr. Reddy’s brought
with it its own challenges. As Prasad noted:
It is a challenge to manage across cultures, across time zones and geographies. The
company has to maintain a matrix-type structure, keeping the interests of each business in
mind while at the same time extracting the maximum from each geography. This is a new

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Autonomy and Sharing

In 2001 Dr. Reddy’s structured itself around seven strategic business units--SBUs
(refer to Exhibit 3). Bulk actives was Dr. Reddy’s oldest business. This and
branded formulations were two SBUs that had their roots in the old DRL
company. The generics business and its specialty spin off came from Cheminor.
Discovery was a business unit created to capture the erstwhile activities of Dr.
Reddy’s Research Foundation (DRF). In addition to these five SBUs, two other
SBUs were created. The Custom Chemical Services (CCS) business catered to the
needs of pharmaceutical companies that wished to outsource their requirements
for contract research, custom synthesis and contract manufacturing. It served as a
single point of contact for customers and was capable of delivering products
ranging from a few grams to multi tons. The seventh SBU combined two
emerging businesses, biotechnology and critical care. Dr. Reddy’s sought to
exploit its unique competencies in recombinant proteins technology through its
biotechnology business; and the critical care business catered to specialty
segments like Oncology. Each SBU was a separate profit center with single point
accountability. The generics, specialty and discovery SBUs were run out of the
US, and the rest from India.

The SBUs were supported by a set of shared corporate services. The corporate
center played the role of a “strategic controller,” focusing on developing
individual SBU-specific strategies and managing financial performance, while
participating only in critical operational decisions. But with this added autonomy
Prasad feared that cooperation among the SBUs could suffer:

This kind of a structure can put a blinker on each unit. But we can and must create
additional value across businesses. For example, products coming out of the new specialty
business run out of the US can also be of great interest to the branded formulations SBU in
another country, say China or Korea. How do we facilitate the free flow of ideas within the
organization, when each SBU has its own well-defined targets, interests and issues? We
have to instill a sense of sharing together with the granting of more autonomy to the

A leadership team, the management council, consisting of 14 members, made all

major decisions for the company. 50% of the council members were non-Indian
by passport and 6 of them were based in the US. The non-Indians in the council
were seen by their Indian peers to stress short-term performance and autonomy of
action, over their own preference for long-term growth and sharing. Satish Reddy,
the company’s COO, acknowledged:

The council still has to mature as a decision making body. It is currently more of a forum for
sharing information than for serious brainstorming. With time we expect the council to provide
the glue that binds the SBUs together and leads them in unison towards a shared vision.

Prasad added:
We have our own internal checks and balances within top management to achieve our
vision. Dr. (Anji) Reddy is a passionate champion for new drug discovery, and Satish
watches over the interests of our legacy businesses, bulk actives and branded formulations.
I must not only focus on growing our generics and specialty businesses, but also ensure that
our portfolio is in balance.

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People Issues
A new human resources model was announced for the company that built on the
three pillars of innovation, entrepreneurship and globalization. The company
sought to develop a critical mass of research scientists who could expand the
company’s opportunity horizon and also act as a source of inspiration for young
aspirants. Employees were encouraged to take risks and not to give up easily. The
third pillar, globalization, acknowledged that the company’s top and senior
management team would have to comprise of different nationalities. Dr. Reddy’s
sought close relationships with research institutes and universities in the key
strategic locations that it operated throughout the world. These links were
expected to produce a rich source of new talent for the company. The company
actively encouraged movement of employees across functions and countries. It
hoped to create a globally shared human resource pool. Talent management also
became a priority. Reflecting on the need for this, Prasad observed:
The ever-changing business model of Dr. Reddy’s causes problems. We used to be a
chemicals company. We then moved on to drug formulation. We have started seeing
success recently as a generics player. Our ambition is to grow over the medium term
through specialty, and over the long term through new drug discovery. As the relative
importance of each business changes in our portfolio, there are new heroes. This leads to
emotional issues with people who were very important at one point in time and then
suddenly find themselves sidelined in the newer scheme of things.

Experienced and skilled executives were brought in from the outside and
represented nearly half of the company’s senior managers. Nearly 10% of
Dr. Reddy’s 5,500 employees worldwide were non-Indians. The largest
concentration was a team of 200 in China, followed by 160 in Russia. The
Americans, while smaller in numbers, were key members of the senior
management team. Managing this global workforce was not easy. Compensation
was a big issue. For example, an Indian manager moving to the US could make
more there than a local hire. There was little incentive for this manager then to
accept the next transfer out of the US. Any planned job rotation had to be
tempered by the fear of losing an employee. Also, the large infusion of external
recruits highlighted the need for better internal training and personal development.
The company’s rapid transformation did not give employees either the time or the
right opportunity to acquire new skills. The old timers naturally felt neglected.
The company’s HR policy was transformed from its prior emphasis on job
security to a new emphasis on employability, focusing more on employee learning
and development, talent management and on developing a performance-orientated
culture. The company introduced individual KRAs (key result areas), regular
reviews and feedback, annual superior and self-appraisal, performance-linked
compensation, bonus and stock options. Competency-based development
programs were offered to employees at all levels with courses on communication,
analytical and negotiation skills. Employees with high potential were sponsored
for graduate degrees at reputed business schools.

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Managing Dilemmas
As the meeting with the case writers drew to a close, Prasad concluded:
Life at Dr. Reddy’s is full of dilemmas these days.

How can we be an imitator [in the generics business] and an innovator [in the drug
discovery business] at the same time? We have to maintain a fine balance between
producing profits today and investing in future growth. The company just cannot invest in
specialty and drug-discovery and then wait for returns…it has to deliver year-on-year
results. We need to take care of our legacy businesses. But then, how can we forge out-
licensing alliances with large pharmaceutical companies [in the drug discovery business]
and at the same time challenge their patents around the world [in the specialty and generics

Some may argue that we really cannot manage imitation and innovation under one roof,
that the two business models are different, and we should separate the bulk actives and
generics business from the specialty and new drug discovery business. My challenge is to
prove them wrong. Finding organizational synergies between these seemingly different
businesses is another critical challenge for us.

Managing these interconnected strategy, organizational and people dilemmas successfully

is key if we have to realize our daring vision. We have our work cut out for us.

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Exhibit 1
Dr. Reddy’s Financial Statements
(In $ thousand, except ratios, Year closing March 31st)

Dr. Reddy's Financial Statements (in $ thousand, except ratios)

Exchange rate: $1 = Rs.46
5 Year Income Statement 1999 2000 2001 2002 2003
Sales 141,389 171,454 238,583 356,713 392,822
License fees 2,174 1,942 - 2,712 -
Services - - - 1,938 -
Total Revenues 143,563 173,396 238,583 361,363 392,822
Cost of Revenues 92,602 103,296 124,692 149,325 170,412
Gross Profit 50,961 70,100 113,891 212,038 222,410
Operating Expenses
Selling, general and administrative expenses 31,561 37,135 61,280 79,730 109,137
Research and Development expenses 5,746 7,638 11,062 16,123 29,889
Amortization expenses 4,763 6,629 10,486 10,603 9,118
Other expenses (-gain) 6,513 (45) (1,350) (4,543) 1,524
Total Operating expenses 48,583 51,357 81,478 101,913 149,668
Operating Income 2,378 18,743 32,413 110,125 72,742
Income taxes(-benefit) 2,667 5,582 6,987 3,344 8,654
Net Income (3,870) 6,149 16,129 106,979 76,790

5 Year Balance Sheet 1999 2000 2001 2002 2003

Cash and Cash Equivalents 9,115 12,120 10,413 111,073 158,117
Accounts Receivable 30,119 37,904 51,733 82,863 78,696
Inventories 34,508 35,677 41,725 47,702 60,645
Total Current Assets 84,863 95,413 115,386 258,247 328,845
Property, Plant and Equipment 68,251 70,687 70,515 82,589 105,010
Invested securities 773 457 464 246 189
Investment in affiliates 1,194 876 6,195 5,702 3,700
Intangible assets 48,106 72,863 62,812 62,292 62,338
Total Assets 205,830 242,711 258,324 412,326 501,993
Liabilities & Shareholders equity
Current Liabilities
Borrowings from Banks 29,337 53,394 55,850 2,159 3,181
Current portion of long term debt 11,820 6,202 8,250 140 3,126
Trade accounts payable 22,601 19,409 14,877 24,406 36,639
Total Current Liabilities 75,246 93,233 98,096 51,321 67,465
Long term debt 17,735 25,159 21,813 1,023 889
Total Liabilities 108,440 141,954 144,053 76,295 92,605
Shareholder's Equity
Minority interest - 164 348 - -
Common equity shares 6,867 6,867 6,867 8,317 8,317
Additional paid-in-capital 93,395 93,395 93,395 219,239 219,239
Retained earnings (2,724) 413 13,633 108,402 180,931
Equity shares in controlled trust (106) (106) (106) (106) (106)
Accumulated other comprehensive income (42) 24 134 179 1,007
Total stockholder's equity 97,390 100,593 113,923 336,031 409,388
Total Liabilities & stockholders equity 205,830 242,711 258,324 412,326 501,993
Earnings per equity share
Basic (0.06) 0.10 0.26 1.41 1.00
Diluted (0.06) 0.10 0.26 1.40 1.00
Number of shares
Basic 63,177,560 63,177,560 63,177,560 76,027,565 76,515,948
Diluted 63,177,560 63,177,560 63,177,560 76,149,568 76,516,731
Financial Ratio Analysis 1999 2000 2001 2002 2003
Gross Profit Margin 36.04 40.89 47.74 59.44 56.62
Operating Profit Margin 1.68 10.93 13.59 30.87 18.52
Net Margin (2.74) 3.59 6.76 29.99 19.55
Return on Equity (3.97) 6.11 14.16 31.84 18.76
Assets Turnover 68.69 70.45 92.36 86.51 78.25

Source: Company information

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Exhibit 2
Dr. Reddy’s New Identity

Our new identity is a sunny abstract that can be interpreted as a person with outstretched arms. It
expresses joy, warmth, vitality, and the boundless possibilities in the search for a healthier life.
The new form sums up our essential driving force in three words: Life. Research. Hope

Life: We are all bound by a common thread that gives a purpose behind every heartbeat, every
breath, every thought. It is what we call life. A gift so unique and precious that it needs to be
constantly enriched and nurtured.

Research: For us, the spirit of human endeavor is best exemplified by the quality of our research.
Meaningful research that leads to innovative products. Discoveries that make a significant impact
in the life of everyone who needs them. All tempered by the finest scientific minds, across the

Hope: It is hope that dwells eternally in the human heart. Hope that inspires us, as humans, to
strive, achieve and excel. When hope springs from the promise of a healthy life, the job of living is
more than complete.

Core purpose

To help people lead healthier lives


To become a discovery-led global pharmaceutical company

Core Values
x E – Excellence
x Q – Quality
x R - Respect for the Individual
x I - Innovation & Continuous learning
x C - Collaboration & Team Work H - Harmony & Social ResponsibilityThe
company’s business practices are guided by the highest ethical standards of truth, integrity and

Source: Company information

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Exhibit 3
Organizational Chart

Chairman – Dr. K. Anji Reddy

CEO – GV Prasad

COO – Satish Reddy

CCS Bulk Actives Branded Emerging Corporate Corporate Generics Specialty Discovery
Formulations Businesses Center India Center US

P resident P resident P resident P resident Exec VP Exec VP CSO

A Mukherjee Arun Sawhney Jaspal Bajwa Bus Dev. M Hart man Adam Levitt Uday Saxena
Ca meron Reid

Manufacturing India Emerging Biotech Finance Bus Dev & NCE Operations Discovery
V M Dholiye Markets S Singhai VS Vasudevan Commercialization A Malhotra Research
Ti m Crew Rajgopalan
Critical Strategic HR
Mfg Coord MSN Reddy Manufacturing S. Chakarborty
Care Finance Regulatory Research

from Sep 2018 to Dec 2018.

Om Reddy KB Sankar Rao P Saira m V Reddy Affairs Scientist
Advisor -IP W McIntyre J Iqbal
S Venkatra man
Busi Dev. Marketing Raghu Cidambi
General Counsel
Kaprowski A Vasudeva Clinical
SCM Andy Miller CEO – UK
BR Reddy CIO Neil Gregory
NR Srinivas
Medical S Ra makrishna
Domestic Mktg Services
Dr. Bakshi Corporate
CVN Rao R P illaresetti
NS Yadav
LRM Mktg
Krishna Reddy Russia
BM Sundaram
Regulated P . Anthony
Mktg – Terry China
MV Ra mana


Source: Company information

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Major Milestones in Dr. Reddy’s History

Year Milestones
1984 Company incorporated (DRL & CDL separately)
1989 Introduces ranitidine for the first time in India
1989 Largest exporter of ibuprofen to US, Spain, Italy, Japan
1990 Introduces famotidine and diltiazem for the first time in India
1990 Exports the molecules ciprofloxacin & norfloxacin, first time in India
1992 Establishes Reddy-Cheminor Inc. in the US
1993 Establishes Reddy-Cheminor SA in France for European market
1993 Launches domperidone, anti emetic, for the first time in India
1994 Launches dextromethorphan, anti tissue, for the first time in India
1994 GDR issue of $48 m
1995 Enters into strategic alliance with PAR pharmaceuticals, US
1996 Launches naproxen for the first time in India
1997 Enters into strategic alliance with Schein pharmaceuticals, US
1997 Submits first ANDA for Ranitidine 75 mg tabs
1997 Develops doxazocin mesylate, first after the innovator
1997 Receives “best vendor” award from Organization of Pharmaceutical
Producers of India
1997, Out-licenses two new molecules to Novo Nordisk for clinical trials, getting
1998 milestone payments for each
1999 Out-licenses another molecule to Novartis for clinical trials
1999 Acquires Chennai-based American Remedies Ltd
2000 DRL & CDL merge together to form Dr. Reddy’s Group
2001 First Asian, non-Japanese Pharma company to be listed on the NYSE,
raising a capital of $115.5 m through its ADR issue
2001 First Indian pharmaceutical company to get a 180-day marketing
exclusivity for generic version of Eli Lilly’s blockbuster drug “Prozac”
2001 Dr. Reddy’s adopts new corporate identity and philosophy of “Life –
Research – Hope”
2002 Featured in the Forbes 200 list of small companies
2002 Acquires BMS Laboratories and Meridian Healthcare in the UK--among
the few Indian companies to undertake acquisitions in developed
2002 National award for excellence in corporate governance
2002 US District Court ruling in favor of Dr. Reddy’s. The company’s
amlodipine maleate molecule was not found in infringement of Pfizer’s
patent for Norvasc, a blockbuster blood pressure drug.

This document is authorized for use only in Dr. Debendra P Kar; Prof. Dhananjay Singh; Mr. Ashish Pati's Strategic Management-II-2018 at Institute of Management Technology - Hyderabad
from Sep 2018 to Dec 2018.