DR REDDY·S LAB

STRATEGIC MANAGEMENT REPORT

Group 3:Abhilash | Abhishek |Anil |Kuldeep | Manoj

Contents
Executive ummary ................................ ................................ ................................ ................................ ...................... 4
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armaceutical
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ndian
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arma ndustry................................ ................................ ................................ ................................ ................ 4

ndustry overview ................................ ................................ ................................ ................................ .................... 4

Structural changes in industry over period: Historic evolution ................................ ................................ ............... 5 Pre-patent Regime (Before 2005- Phases I to IV) ................................ ................................ ................................ ... 6 Post-patent Regime (After 2005-Phase V) ................................ ................................ ................................ ............... 6 urrent tructure ................................ ................................ ................................ ................................ .................... 7
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Value chain ................................ ................................ ................................ ................................ ................................ .. 7 Suppliers (Chemicals manufacturers) ................................ ................................ ................................ ....................... 7 API/Bulk drug manufactures ................................ ................................ ................................ ................................ ...... 7 Formulations Manufactures² Industry players, market shares................................ ................................ .............. 8 egulatory Environment in ndia ................................ ................................ ................................ ........................ 13 utloo of the ndustry ................................ ................................ ................................ .......................... 14 
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Future

Medium erm: 

Long em: 


orter·s Five Forces Analysis of current tructure ................................ ................................ ....................... 15 

a) he threat of new entrants ................................ ................................ ................................ ............................. 15 ) he argaining ower of uyers ................................ ................................ ................................ .................... 17
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c) he argaining ower of uppliers................................ ................................ ................................ ................ 19 d) he hreat of ubstitutes ................................ ................................ ................................ ............................... 20 e) ntensity of rivalry among competitors ................................ ................................ ................................ ........ 21 f) Exit arriers ................................ ................................ ................................ ................................ ......................... 23 Analysis of effect of external environment on current structure ( EST) ................................ ..................... 23 SWOT Analysis of ndian harmaceutical ndustry ................................ ................................ ............................ 24 usiness Strategy................................ ................................ ................................ ................................ ......................... 24 
      

eneral Analysis ................................ ................................ ................................ ................................ ..................... 24
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Value net analysis ................................ ................................ ................................ ................................ ................... 25 ustomers ................................ ................................ ................................ ................................ ........................... 25

Substitutors ................................ ................................ ................................ ................................ ......................... 26 Suppliers................................ ................................ ................................ ................................ ............................... 26
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omplementors ................................ ................................ ................................ ................................ ................. 26

A TS Analysis ................................ ................................ ................................ ................................ ....................... 26 layers ................................ ................................ ................................ ................................ ................................ .. 26 

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ustry

efinition................................ ................................ ................................ ........................... 4

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enerics Focus ................................ ................................ ................................ ...................... 14

iversification................................ ................................ ................................ ................................ 14

Added Values: ................................ ................................ ................................ ................................ ..................... 27 ules: ................................ ................................ ................................ ................................ ................................ .... 27 Tactics: ................................ ................................ ................................ ................................ ................................ . 27 Scope ................................ ................................ ................................ ................................ ................................ .... 27 Technology Strategy................................ ................................ ................................ ................................ ................... 27
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S-Curve Framework - roduct
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evelopment by

r. eddy·s ................................ ................................ .... 28

nternational Strategy................................ ................................ ................................ ................................ ................. 29
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Strategic ntent and Alliance of Current Strategy ................................ ................................ ............................... 29 Competitive Advantage ................................ ................................ ................................ ................................ ............. 30 esource ased Framework................................ ................................ ................................ ................................ 30 V O framework Analysis ................................ ................................ ................................ ............................... 30 Competitive advantage through structural position: ................................ ................................ ................ 31 Competitive advantage through process execution:................................ ................................ ................. 31 Competitive advantage through alliances and leadership: Company ................................ .................... 31 ecommendations ................................ ................................ ................................ ................................ ...................... 31
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Executive Summa y
In this report we analysed the pharmaceuticals industry of India, and the competitive advantage and strategy of Dr Reddy¶s Laboratories. We briefly give the industry definition describing the scope of the industry considered for this analysis. We looked into current industry structure and changes in the industry structure over a period. We analysed the current industry structure using Porter¶s Five Forces Analysis and SWOT analysis. We analyse the impact of external environment on the current structure. Towards the end we gave the medium and short term outlook of the industry. In the firm analysis, we looked into factors contributing to sustainable competitive advantage of Dr Reddy¶s and analysed the resources of the firm using VRIO framework. We looked into business strategy of the firm and analysed it using Generic business strategy, value net and PARTS Analysis. We also analysed the International and Technology strategy of the firm.

Pha maceutical Industry Definition
We define Indian Pharmaceuticals industry as the set companies producing formulations and bulk drugs/APIs in India. Formulations are defined as end products/drugs produced in ready to use forms (capsules, tablets, syrups and injections) and are administered to patients to cure their different ailments. Bulk Drugs/APIs are defined as chemical compounds prepared using different intermediates and chemicals and are used as raw materials to produce formulations. Formulations are broadly classified into patented drugs and generics. A patented drug is innovative formulation by company that is usually patented for a period of 20 years, so that company recovers its R&D expenses and spends it viciously to develop new drugs. A generic drug is copy of an expired patented drug which is similar in dosage, strength, safety, method of consumption, performance and intended use. Cost of generics generally will be very low compared to patented versions are R&D expenses are not factored in. For this analysis, we consider consumer healthcare, customer pharma services and animal healthcare as outside the industry scope. As currently the size of customer pharma services is very less compared to formulations and bulk drugs production, so scoping out customer pharma services will not result in much deviation. Also we considered exports market in the scope of our analysis.

Indian Pharma Industry
Industry overview
The Indian Pharmaceuticals industry has grown from a mere Rs 1500 crores turnover in 1980 to approximately Rs 100611 crores in 2010. The country is now ranked 3rd in terms of volume of production (10% of global market share) and 14th largest by value. One reason for lower value share is due to low penetration levels in India and lower costs in India ranging from 5% to 50% less compared to developed countries. As seen in table below, the total pharma market has grown at a CAGR of 13.25% in last 5 years. This growth is mainly driven by strong exports which grew at a CAGR of 20.07%. The domestic market has grown at a modest CARG of 10.56%.

%

%

ns m acc nts to 65 of market and bulk drugs account to In 2009-10 F m rest 35 market s are. Thus formulations market value is around Rs 69050 cores and it grew at a C R of 16.56 for last 5 years. Further in formulations generics market expanded at a C R of 13 in last 5 years. Bulk drugs market value is Rs 31561 crores and grew at a C R of 7 for last 5 years. Exports market accounts for major share of bulk drugs produced in India.
& 6 )' D 254(1 C 6 9 8 6 9 8 6 9 8 7 '3210) (' & B B A 6 @

Structura chan es n ndustry ver period Historic evolution
We see that Pharma Industry in India has under gone structural changes for good number of times. Most of the times these changes are influenced by external political environment in the form of Indian Government rules and regulations Indian Government played a key .

role in shaping the current pharma industry structure. Over years structure has hanged c from minuscule domestic market with MNCs mainly catering to Indian market through imports to current structure where domestic companies predominantly cater to the 95 of the market. Below figure briefly describes the structural changes undergone:
E

Pre-patent egime ( efore 2005- Phases I to I )
It started with MNCs completely dominating the Indian market in s and s In s, Indian Government took many initiatives like increasing import duties, implementing process patents, etc to cut MNC power and promote domestic industry. The process patents helped the pharmaceutical industry of India to grow significantly by reengineering the patented products and marketed successfully in domestic markets. In the next stage the export initiatives (export subsidies, liberalization, etc) gave strong boost to the industry and attracted many small players resulting in current highly fragmented structure. Towards the very end of this regime, there is increased focus on R&D and upgrading of manufacturing process to meet with high quality standards due to high competition.
S PU T R PQ PI H

Post-patent egime (After 2005-Phase )
From January Indian regulatory authority introduced Product patent regime. Product patent introduction was done to encourage new drug discoveries in the long run in Indian markets. The recognition of product patents is now gradually increasing MNCs· participation in the Indian market. This can been seen from recent acquisitions and alliances in theindustry.
H IPPV

S

S TT

G

F

F

Current tructure Value chain
Below figure clearly explains the value chain of the Indian pharma industry. We describe each part of the chain in detail below.
W

Suppliers (Chemicals manufacturers)
Organic and Inorganic chemicals form key raw mat rials in manufacturing bulk drugs e chemical compounds. The industry of these chemicals is India is hig fragmented and hly dispersed with over 40000 units in both large and small scale sectors. There are no big notable players in the organic and inorganic chemicals industry in India. Basic raw to 60 ) in the chemical materials constitute major portion of cost of production (30 industry. At times the manufacturers are unable to pass -on the cost escalation to end consumers. The key characteristics of the industry are low capacity levels low R&D levels (0.3 of sales) low use of technology, unbranded products, little product differentiation and focus on the domestic market.

API ulk drug manufactures
Number of players Competition
The industry is highly fragmented with the top 10 players commanding only 30 percent of the market. There are over 350 units in the organised sector and many morein the unorganised sector. Some big players are Ranbaxy, Shasun, Cipla, Dr. Reddy's, Cheminor, Lupin, IPCA, Sun, Cadilla, Wockhardt, Aurobindo, Kopran etc. Increased , competition in the domestic market, especially in large and old products, heavily impacted margins of bulk drug producers. In order to maintain profitability, many of them have forward integrated into manufacturing formulations. Large bulk drug producers have also increased exports of new molecules to semi regulated markets, where margins are relatively higher.
b

a nufacturing

Y

X

X

Y

Y

X

a`

c

Setting up new manufacturing bulk drugs plant is low capital intensive. A USFDAapproved API manufacturing facility costs up to Rs 150 -200 million as compared to Rs 3050 million for an unapproved facility. The average gest tion period for a USFDA approved a manufacturing facility is 18-24 months as compared to 6 -12 months for an unapproved facility. Indian bulk drug manufacturers are increasingly resorting to signing contract manufacturing deals with global players, by provi ing services such as custom synthesis d and manufacturing bulk drugs for both off patent and patented drugs . Below chart describe the average cost structure:

Profitability
The sales turnover of large size players increased at a CAGR of 20.5 pa for last ive f years and an average operating margin of 20.9%. Whereas, sales turnover of small size players increased at a CAGR of 24.5% for last 5 years and had an average operating margin of 14.2%.
h g d

ormulations

Number of Players C ompetition
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Indian companies dominate the domestic formulations market by occupying seven out of the top ten spots and serving 95% of domestic demand Top 5 companies have 22.5% of . total formulations market share. The industry is highly fragmen ted with around 300-400 companies in organized sector and around 15000 unorganized small scale units. Altogether these players manufacture over 100000 drugs. Some of the major players and their market shares are shown in the chart below. Recent deals in em erging markets and an increasing number of tie-ups with generic firms indicate that branded pharma

f

e

anufactures Industry players market shares

companies are moving into the generic space. Companies like Pfizer, GSK, Sanofi, AstraZeneca and Abbott have already made moves in this direction and this co ld result u in increased pricing pressure. Competition in generics is intensifying due to increase of focus many players on generics exports because of huge generics opportunity opening for next 5 years.

Manufacturing
Setting up new manufacturing bulk drugs plant is low capital intensive. Setting up a USFDA approved formulations manufacturing plant costs about Rs 200 -300 million as compared to Rs 120-150 million for an unapproved facility. Average gestation period for a USFDA approved manufacturing facility is 18 -24 months as compared to 6 -12 months for an unapproved facility. Players follow GMP practices. Average cost structure of the company is shown below:

Profitability
Turnover of large players (aggregate of 7 comp anies) registered a CAGR of 21.4 per cent between 2005-06 and 2009-10. Revenues of medium -sized players (aggregate of 10 companies) posted a CAGR of 21.3 per cent during 2005 -06 to 2009-10. Average operating margin of large and medium size players in the ndustry is around 21.5%. i

Distribution channel
Long channel of distribution and incidence of brand substitution make allSKUs to be available 24X7. Drug distribution in India has wit nessed a paradigm shift. C learing and forwarding agents (CFAs) are primarily responsible for maintaining stock and forwarding SKUs downstream. Unlike a CFA that can handle the stock of one company, a stockist (distributor) can simultaneously handle 30 ±50 different companies. From the CFA the stocks are supplied either to the stoc kist, sub-stockist, or hospitals. The retail pharmacy obtains products from the stockist or sub -stockist through whom it finally reaches the consumers (patients). Certain small manufacturers directly supply the drugs to the super stockist.

Buyers consist of health care providers (e.g. hospitals, managed care organizations (MCOs), government agencies) and drug retailers In India, doctor¶s prescription is . required to access most medicines. Marketing of prescription drugs by pharmaceutical companies is therefore largely directed at medical practitioners, with whom they wield a significant influence. Depending on the medical condition, there may b several different e drug treatments available differing in efficacy, ease of use, side effects and cost effectiveness. Buyers show greater price sensitivity in case of low cost generics drugs.

Market (domestic market-major therapeutic demand segments and th eir expected growth rates, exports market)
Indian formulations market can be broadly classified as shown in the below chart:

p

Buyers (retailers hospitals patients and customers of export demand -nature of buyers their size, power)
p p

Acute has market share of about 69% and rest is of Chronic. Among therapeutic categories, growth was primarily driven by chronic segments such as cardiac, antidiabetic, gastrointestinal, gynaecology, while anti infectives also grew steadily. Over the next few years, the therapeutic category mix is expected to gradually move in favour of speciality therapies. However, mass therapie such as anti-infectives and gastrointestinal s will continue to grow stably, due to rising demand from rural areas, which don't have proper sanitation facilities and are thus more prone to acute ailments. Currently, tierII cities (with a population of less than 1 lakh) and rural markets constitute about 40 per cent of the total market size. Demand from these markets is expected to grow at a much faster rate than tier-I cities.

Substitutes
The main substitutes to branded drugs are generics and biosimilar (also known as s follow-on biologics) and alternative or holistic medicines. Generics are low cost versions and Biosimilars are subsequent versions of innovator biopharmaceutical products made by a different sponsor following patent and exclusivity expiry on the innovator product. These substitutes are relatively inexpensive. They pose a significant threat to OTC medicines than prescription medicines.

Complements
The main complements are professional healthcare providers and medical insurance companies. Through the provision of professional medical services to patients, companies can not only effectively coordinate between patients, physicians, social workers, and care managers, but also advertise to the general public and conduct clinical trials with greater

ease. Cooperation with medical insurance companies also helps patients purchase the pharmaceutical products at lower costs.
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Regu tor En ronment in ndi
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The Drugs and Cosmetics Act, 1940 (Drugs Act) and Drugs and Cosmetic Rules, 1945 (Drug rules) regulate the import, manufacture, distribution and sale of drugs in India. Central and State government both are responsible to enforce disciplines under these acts. State authorities are responsible for regulating the manufacturing, sale and distribution of drugs, whereas the central authorities are responsible for approving new drugs and clinical trials, laying down the standards for drugs, controlling the quality of imported drugs and co-ordinating the activities of state drug control organisations.

Source: Crisil Research

Regulation in India is done on patents, price and quality.

Patent :
Till 2004 the focus was on process patents. That resulted in a lot of unethical reengineering of existing products. From 2005 product patents started in India. This prevents the reengineered products in the market.
w

Price:

The Drug Price Control Order (DPCO) fixes the ceiling price of some APIs and formulations. The APIs and formulations falling under the purview of the legislation are called scheduled drugs and scheduled formulations.

Quality:
No drug in India can be stocked, sold or distributed unle it meets the quality standards ss laid down by Drugs Act.

Future Outlook of the ndustry
Indian pharmaceutical companies have thrived on the model of leveraging its process skills and low-cost manufacturing advantage. This strategy had worked initially to gain opportunity abroad. But lately the focus has been on R&D and innovation.But the Global players¶ innovation of New Molecular Entities (NMEs) has slowed down in recent years. It eventually forces the Indian players to loo at newer avenues for growth. k
x

Medium Term: Generics Focus In the medium term i.e. years period, Indian firms should focus on generics as$130 billion of new
drugs going off-patent during this period and open up huge generics opportunity.
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Long Tem:

iversification

With the generics market set to become extremely competitive in the long term (next 10 years), Indian players will look to make the most of the current generic opportunity and achieve a substantial scale of operations.

Porter·s Five Forces Analysis of current tructure a) The threat of new entrants
ECONOM E OF CALE:
Economies of scale exist in the pharma industry. From the below table we can see that proxy variable (TE/TA) decreases with increase in assets indicating presence of economies of scale. This reduces the thre at of new entrants and increases incumbent¶s attractiveness. Company Total Expenses(TE) Total Assets(TA) TE/TA
… „ ‚ ƒ 

Dr Reddys Lab 4,048.00 7,465.00 0.542

Cipla 4,408.85 5919.16 0.745

Ranbaxy 4,536.77 9393.11 0.482

Lupin 3,496.90 4135.95 0.845

Domestic market is branded market i.e. doctors generally prescribe the brand name. Different branded medicines exist for same disease and are perceived differently by both doctors and patients. So there exists product di fferentiation in domestic formulations market. However, the product differentiation is very less in the domestic bulk drugs market. The perceived product differentiation is less in exports market as it is mostly development market where doctors prescribe t e underlying molecule. On a whole there h exists product differentiation, and reduces the threat of new entrants and increases incumbent¶s attractiveness.

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PRO UCT

FFERENT AT O N :

Economies of cale
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Low Low Low
Low

Moderate Moderate Moderate
Moderate

Average Average Average
Average

Strong Strong Strong
Strong

High High High
High

Product

ifferentiation

Capital Requirement Switching Cost Access to technology Access to Raw Material
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Access to

istbn Ch

Govt Policy

CAPITAL R EQUIREMENTS:
Below table shows the capital requirements and gestation periods USFDA approved plant Unapproved plant Rs 20 ± 30 crores Rs 12 ± 15 crores Gestation-18-24 months Gestation-6-12 months Bulk Drugs Rs 15-20 crores Rs 3-5 crores Gestation-18-24 months Gestation-6-12 months Above table clearly indicates low capital requirement and gestation period. However, the cost of producing an innovator drug is very high due to huge R&D expenses and also requires expertise in the drug discovery process. . On a whole there is low capital requirement, and increases the threat of new entrants and decreases incumbent¶s attractiveness. Formulations

SWITCHING COSTS :
In the domestic formulations market, there are switching cost in terms of side effects from switching drugs and doctors/patients hesitation t shift to new brand or some o unidentified generic version. However there are no switching costs for bulk drugs and exports market. On a whole there are switching costs, and decreases the threat of new entrants and increases incumbent¶s attractiveness.

A CCESS TO TECHNOLOGY/KNOW -HOW:
Before 2005, when there are process patents instead of product patents, companies used to reverse engineer the product and get access to the technology and know -how. However, post 2005 as the era of product patents started g etting access to technology/know-how has become difficult. However the molecules for which patents have expired can be reverse engineered and there are many patent expired drugs brands like Lipitor, Nexium, Zyprexa and Plavix providing huge opportunity. Ona whole we can

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Low Low Low Low

Moderate Moderate Moderate Moderate

Average Average Average Average

Strong Strong Strong Strong

High High High High

say that there is moderate difficulty in getting access to technology and know-how and makes the industry moderately attractive for incumbents.

Below is the Value chain of Pharma Industry

Getting access to chemicals/intermediates and APIs is relatively easy as there are many suppliers. So there is threat of new entrants and incumbent¶s attractiveness is low.

Medical representatives, distribution warehouses, doctor¶s prescription and medical stores constitute the distribution channel for most of the drugs. In India it is easy to get access to these all distribution resources. So there is threat of new entrants and incumbent¶s attractiveness is low.

Indian Government regulates the pharma industry in terms of Patents, Price and Quality. Though government requires adhering to patent rules and quality standards, it has taken lot of initiatives to promote domestic pharmaceutical industry. It increased import duties for foreign drugs, recognized pharma as knowledge based sector, reduced interest rates for exports financing, tax deductions for R&D expenses, plans to setup VC for pharma financing, SEZs for pharma, Pharma Vision 2020, 3000 Jan Aushadhi stores and reduced the drugs under price control. So there is threat of new entrants and incumbent¶s attractiveness is low. On a whole, we see that Government gives lot of push to encourage new players in the industry increasing threat of new entrants and decreasing incumbent¶s attractiveness.

b) The bar ainin power of buyers
NUMBER
BUYERS:

For the formulations, patients are the actual end users. But they use it mostly on doctor¶s prescription. So doctors can be considered as final buyers and have considerable power. This considerably reduces the number of buyers and increases their bargaining power.

As seen earlier, there exists product differentiation reducing bargaining power of buyers.

Major substitutes are generics, biosimilars, and holistic medicines like homeopathy and aurvedhic medicines. Currently use of all these substitutes is very less compared. Use of

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A VAILABILITY

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PR DUCT DI

ERENTIATI

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SUBSTITUTES :

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P L ICY/P R TECTI N :

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biosimilars and generics is considerably increasing and can pose as a proper subst itute in the long run. So currently influence of substitutes is less and reduces the bargaining power of buyers.

Number of Buyers
j

Low
Low Low

Moderate
Moderate Moderate

Average
Average Average

Strong
Strong Strong

High
High High

Product

ifferentiation

Availability of Subst Switching Cost Buyer·s Portability Buyer·s Threat of B. Int. Industry·s threat of F. Int Contbn to Buyer Qlty Contbn to Cost

Low Low Low Low
Low

Moderate Moderate Moderate Moderate
Moderate

Average Average Average Average
Average

Strong Strong Strong Strong
Strong

High High High High
High

Low

Moderate

Average

Strong

High

SWITCHING COSTS :
As seen earlier, there are switching costs reducing bargaining power of buyers.

BUYER · S PROFITABILITY:
In the pharma industry doctors can be considered as buyers for medicines and formulations manufacturers are buyers for bulk drugs. Both of them have considerable profits reducing their bargaining power.

BUYER · S THREAT OF BACKWARD INTEGRATION:
There is no buyer¶s threat of backward integration as most of the market is retail. So we can say there is no threat of backward integration from buyers and reduces their bargaining power.

INDUSTRY· S THREAT OF FORWARD INTEGRATION :
There is little threat of forward integration i.e. formulations manufacturing opening up hospitals, as organized health care sector is small compared to unorganised sector. So there is no threat of forward integration from industry and increases bargaining power.

CONTRIBUTION TO BUYER· S QUALITY:
Formulations and bulk drugs contribute extensively to the buyer¶s quality. Effectiveness of medicines prescribed by a doctor will determine the quality of service provided by

doctor and the API molecule supplied by bulk dru manufacturer forms core of g formulations preparation. This reduces the buyer¶s bargaining power.

CONTRIBUTION TO COST:
Contribution of medicines to the health care costs and bulk drugs to formulations cost is high. This provides reason for buyers to barg ain and increases their bargaining power.

c) The bargaining power of Suppliers Low
Low Low

Number of Suppliers Substitute Availability Switching Cost Supplier threat if F.Int. Buyer·s Portability Buyer·s Threat of B. Int. Industry·s threat of F. Int Indstry·s Imp to Supplier Diff of Supplier Product Contbn to Buyer Qlty Contbn to Cost

Moderate
Moderate Moderate

Average
Average Average

Strong
Strong Strong

High
High High

Low Low Low Low
Low

Moderate Moderate Moderate Moderate
Moderate

Average Average Average Average
Average

Strong Strong Strong Strong
Strong

High High High High
High

Low Low Low

Moderate Moderate Moderate

Average Average Average

Strong Strong Strong

High High High

NUMBER OF SUPPLIERS ( CONCENTRATION RATIO ):
Chemical companies and API producers form the key suppliers to the pharma industry. Number of chemical companies compared to bulk drug producers and number API producers compared to Formulation manufacturers is high. So, bargaining power of suppliers is less. Also most of the top pharma firms make their o wn APIs completely eliminating the supplier power.

A AILABILITY OF SUBSTITUTES :
Only inorganic compounds of chemicals, intermediates and APIs form the raw materials to the industry. There are no other substitutes available. This leads to high bargainingpower of suppliers.
k

SWITCHING COSTS :
There are no switching costs involved in changing from one supplier to another. More or less these raw materials are commodity chemicals without much differentiation, so there are no switching costs. This leads to low supplier bargaining power.

SUPPLIER S THREAT OF FORWARD INTEGRATION :
There is considerable threat of supplier forward integration. There are instances in the past of this integration happening. Orchid Chemicals and Sashun Chemicals were basically chemical companies, who turned themselves into pharmaceutical companies. This threat results in higher bargaining power of suppliers.

INDUSTRY · S THREAT OF BACKWARD INTEGRATION :
There is also considerable threat of backward integration, with bulk drug manufactures entering into chemicals business and formulations manufacturers into bulk drugs business. All top pharma companies have their own bulk drugs business. This reduces bargaining power of suppliers.

INDUSTRY · S IMPORTANCE TO THE SUPPLIER :
Many chemical companies and bulk drug makers produce their products exclusively for pharma industry, so industry¶s importance is very high for suppliers. This reduces the bargaining power of suppliers.

DIFFERENTIATION OF SUPPLIER PRODUCTS :
There is not much differentiation in the supplier products. So there is no supplier bargaining power.

CONTRIBUTION TO QUALI TY:
Chemicals and API form the core of products manufactured in the pharma industry. So supplier¶s contribution to the quality of product produced is high. For this r eason all top pharma companies either produce APIs themselves or implement strict supplier code of conduct. This results in increase of suppliers bargaining power.

CONTRIBUTION TO COST :
Supplier¶s also contribute significantly to the manufacturing costs o f pharma industry. Raw material costs constitute about 40-50% of total costs incurred. We can see that latest total raw material costs for group of 31 companies in the industry is Rs 16282.3 crores out of 33784 crores of total expenditure(around 48%). This reduces the bargaining power of suppliers.

d) The Threat of Substitutes
A VAILABILITY OF CLOSE SUBSTITUTES :
In India, substitutes are available in terms of unbranded generics, biosimilars, and holistic medicines like homeopathy and aurvedhic medicines. Currently use of all these

l

substitutes is very less compared to branded halopathy medicines. Use of biosimilars is considerably increasing and can pose as a proper substitute in the long run. Growth in insurance business in India might also increase usage o generics as in developed f markets and can replace the current branded medicines. So we can say availability of substitutes is high and the threat is high.

Availability of Close Subs Switching Cost Substitute·s Price
m

Low Low

Moderate Moderate Moderate Moderate

Average Average Average Average

Strong Strong Strong Strong

High High High High

alue

Low Low

Profitability of Prdcrs

SWITCHING COSTS :
There are considerable switching costs involved in changing to usage of substitutes. Switching to substitutes might also involve changing completely the treatment plan which is costly. Also there can be severe side effects because of switching to substitutes .On a whole due to high switching costs, threat of substitutes is low.

SUBSTITUTE· S PRICE-VALUE:
Generics, Homeopathy and Aurvedhic medicines are considerably cheaper than the branded medicines. This might pose as a threat of substitutes.

PROFITABILITY OF PRODUCERS OF SUBSTITUTES:
Profitability of substitute producers is high compared to the pharma industry as their costs are very low. Generics manufacturer will not have any R&D costs and has less fi xed costs due to less capital requirements. Though the prices of these substitutes are also less, their profitability margin is high compared to branded drugs manufacturer. So there is high threat of substitutes.

e) Intensity of rivalry among competitors
NUMEROUS OR EQUALLY BALANCED COMPETITORS:
industry is highly fragmented with around 300 -400 companies in organized sector and around 15000 unorganized small scale units. Altogether these players manufacture over 100000 drugs. Top player in the industry Ci pla has 5.4% market share and top 10 companies have only 33% of total market share. Thus the concentration ratio is very low. After Indian Government¶s rule to implement product patents, now many foreign MNCs are eying to enter Indian pharma industry. Big global pharma companies like Pfizer and Glaxo are actively pursuing Indian markets. This will in turn intensify the rivalry in the industry. On a whole this factor indicates high intensity of rivalry and makes industry unattractive.

Numerous Competitors Slowing Ind Growth Fixed or Storage Cost Product Differentn Switching Cost Excess Capacity Levels Exit Barriers

Low Low Low
Low

Moderate Moderate Moderate
Moderate

Average Average Average
Average

Strong Strong Strong
Strong

High High High
High

Low Low Low

Moderate Moderate Moderate

Average Average Average

Strong Strong Strong

High High High

SLOWING INDUSTRY GROWTH:
Indian pharma sector has grown at a CAGR of 15% over last decade and is expected to grow at the same rate for next 5 years. About 108 bn dollars sales worth drugs are going off patent in next 5 years presents huge generics opportunity. Also contract research and clinical trials services are expected to grow at 15-17% for next 5 years. All these indicate good industry growth prospects which will reduce the intensity of rivalry among competitors as there will be less price war to capture the existing market.

FIXED OR STORAGE COSTS:
The fixed asset turnover, which is one of the gauges of fixed cost requirements, is in the range of 3.5 to 4 times for bigger companies. For smaller companies, it is even higher. High fixed asset turnover indicates high motivation to create excess capacity and chances for price cutting. Also we can see from latest figures that the fixed costs form 25% of total expenditure (8740 crores out of 33784 crores). This is considerably high and indicates high chances of intense rivalry.

PRODUCT DIFFERENTIATION :
As seen earlier, there is product differentiation and perceived brand image for some companies. This reduces the intensity of rivalry.

SWITCHING COSTS :
In the domestic formulations market, there are switching costs in terms of side effects from switching drugs. Switching costs make t intensity of rivalry low. he

EXCESS CAPACITY LEVELS:
As capital requirement and gestation period are low, all top players add new capacities as demand grows. However presence of many small players creates excess capacity levels and intensifies the rivalry.

EXIT BARRIERS:

Low exit barriers in the pharma industry make it easy for unprofitable firms to quit then add to capacity of industry. This lowers the intensity of rivalry.

f) Exit Barriers
A SSET SPECIALIZATION :
Capital requirement is very low for pharma plants. Except the intangible assets like patents, there is not much asset specialization required for pharma. So exit barriers are low.

FIXED COST OF EXIT :
Fixed costs of exit are low. So exit barriers are low.

GOVERNMENT RESTRICTIONS:
There are no exit restrictions imposed by Government. So exit barriers are low.

Analysis of effect of external environment on current structure (PEST)

SWOT Analysis of Indian Pharmaceutical Industry

Strength
‡ Matured Industry Large Home Market ‡ Fast Changing Lifestyle ‡ Low cost manufacturing ‡ Quick adoption of new technology ‡ Increasing population and per caipta Income

Weakness
‡Lack of pricing, Power impact growth ‡Low margins ‡Lower investment in D ‡Highly fragmented industry ‡Intense competition ‡High exposure to global markets - both political and currency risk ‡High input costs due to inflation
n o

Opportunity
‡ Potential to absorb high priced products ‡ Opening of OTC segment ‡ Large number of drugs going off patent ‡ Increasing penetration of Insurance industry ‡ Biosimilars

T reat
‡ Non tariff barrier imposed by developed countries ‡ Internal fragmentation ‡ Chinese intrusion into domestic markets ‡ Small number of discoveries ‡ Outdated sales and marketing methods ‡ Increasing influence of foreign MNCs

Business Strategy
General Analysis

Dr Reddy¶s core purpose is to provide affordable medicines to enable people lead healthier lives. Through its branded and unbranded generics company offers low cost alternatives to highly priced innovative brands. Some examples are company successfully introduced Fluoxetine (generic version of Prozac), Donepezil hydrochloride tablets (generic version of Aricept), Venlafaxine (generic version of Effexor R) and Letrozole (generic version of Femara). Company capitalizes on low labour and manufacturing costs in India by producing and exporting these generic drugs to other markets. It also capitalizes on economies of scale achieved through centralized production. Company also produces and markets APIs/bulk drugs at low costs to both domestic and exports market. Thus company follows overall cost leadership business strategy in case of Generic drugs and APIs. Dr Reddy¶s is also using its R&D to bring differentiated formulations and New Chemical Entities (NCEs) into the market. Its strategy with respect to these products is overall Differentiation as it tries to bring new effective drugs into the market. Dr Reddy¶s operates in highly dynamic environment due to intense rivalry in the industry and changing regulations. So we analyse the value addition to the company though game played using Value net and PARTS analysis.

Value net analysis
Customers
Company¶s strategy from beginning is to provide low cost and high quality drugs to the customers. In this direction it has launched generic versions of many patented drugs (Lipitor, Prozac, etc) and made good profits. Company has launched 65 products last years and is planning to launch another 55 products this year. It is not big work for company as it has already launched these products in several other markets. Made an agreement with GSK to sell its products in markets other than India through GSK¶s global marketing network. This step will increase the market access to Dr Reddy¶s in some emerging economies like Brazil, Latin America, Africa, the Middle East and Asia Pacific, excluding India. The Company has entered into an agreement with its customers for the API segment to set-up their facilities near the manufacturing operations unit of Dr. Reddy¶s. This has ensured higher switching costs for the buyers of Dr. Reddy¶s. Dr Reddy¶s is fastly making steps to provide its drugs to rural customers. It has put together a new brand portfolio for such markets (Redikate, Redihealth and Redihope, to name a few) based on the insight that rural prescriptions are often different from urban prescriptions. Dr Reddy's is trying three models to reach the customers in rural areas: y The first plan is to use local entrepreneurs who can diagnose ailments like hypertension and refer patients to doctors. They could be paid for every referral. The model, like Hindustan Unilever¶s Shakti, is self-sustaining and scalable The second plan is to link people through health camps. In fact, Dr Reddy's has held anaemia camps in the last three months for 50,000 villagers, of which 40 per cent were found anaemic

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The third plan is to use the infrastructure of agencies and programmes which are already there in villages, like the World Health Foundation and ITC's e-choupal

Substitutors
Dr Reddy¶s is in all game to increase its market share in India. Seeing that urban markets are saturated with huge presence of competitors from domestic and foreign MNCs, it is putting as its efforts to quickly penetrate into rural markets. It has increased its field force by adding 1000 representatives to quickly setup network with doctors and medical practitioners in the rural areas. The problem is Substitutors are also eager to join the rural bandwagon. So company is making fast steps to quickly capture the market and gain the first mover advantage. In US markets, company has been aggressive in litigious para IV filings to launch new generic drugs. In the late 1990s Dr. Reddy's was the original action hero in taking on the large multinationals and launching generic versions of their products. It was also the early one to start the trend of settling with multinationals to arrive at a middle ground to launch drugs. In 2006 company changed its US strategy to special therapy segments from core segments in the face of lost litigations against Pfizer. As an additional differentiation, Dr. Reddy's is increasing its focus on bio generics, an area not many large companies are focusing on. It already has three products, though it competes with Roche, the innovator company of the drugs.

Suppliers
Dr Reddy¶s API manufacturing plants supply most of the raw materials required for the company¶s formulations manufacturing. This gives the company lot of flexibility and control with regards to raw materials supply and also minimizes the raw materials cost which forms almost 40% of total cost. In case of other required materials it uses broad base of suppliers in order to minimize the risk arising from dependence on a single supplier. It prescribes strict supplier code of conduct and requi res its suppliers to be US FDA approved plants.

Complementors
In order to enhance business, Dr Reddy¶s frequently seeks to acquire or make strategic investments in complementary businesses or products, or to enter into strategic partnerships or alliances with third parties. In September 2005, it entered into a co development and commercialization agreement with Denmark based Rheoscience A/S for the joint development and commercialization of Balaglitazone (DRF 2593), a partial PPAR gamma agonist, for the treatment of type 2 diabetes. During the year ended March 31, 2011, it entered into collaborations with discovery biotechnology companies to initiate new chemical entities (³NCEs´) and differentiated formulations programs in the therapeutic areas of interest. In addition company has in house R&D division working on several differentiated formulations, biosimilars, ANDAs for generics and new molecule innovations. Some of its developments were in Clinical trials and human trials phases.

PARTS Analysis
Players: In the Indian Pharmaceutical market players are mainly the domestic companies
and foreign MNCs. As the industry is highly fragmented and competition is high, these players are always on their toes to retain and increase their market share. Other players include Suppliers (in most cases the companies themselves), Indian Government and

Regulatory framework, US FDA, buyers (doctors, hospitals, retailers and patients), Alliance partners (R&D houses).

Added Values: Dr Reddy¶s has done much value add activities from its inception. It is
successful in bringing many low cost generic version drugs making them affordable to many customers across. It did so by taking litigation gambling of fighting Big Pharma through para IV filings. It entered into alliance with GSK to market and distributes its products to Latin America and Asia pacific markets where GSK has strong distribution network. It formed alliances with other domestic and foreign R&D houses to innovate new molecules, differentiated formulations and ANDAs. It cut down its API manufacturing business as it became little value add due to decreased margins. It sources raw materials for its generics manufacturing from its own API plants, thus reducing supplier dependency, costs and increasing flexibility.

Rules: It followed GMP (Good Manufacturing Practices) to manufacture high quality
products. It enforced strict supplier code of conduct to ensure high quality of raw materials supplied.

Tactics: Company played generics tactic in US. It used its R&D to develop ANDAs and
launched these generics in US to gain the market share. In expanded though acquisitions and alliances in international markets and became the world¶s top five generics producer. But, throughout it ignored domestic market. Failures in some International markets (Germany) made the company rethink its strategy and made company realise that it is cost competitive but not cost conscious. It moved its focus now to only its top five markets and is aiming to be in top 5 in all these markets. It has fired all its cylinders and is aggressively launching various products across to gain the market share. It sees huge Indian rural market potential and it making fast steps to gain first mover advantage in this market. . In 2002 -03 when the Indian Pharma companies were at crossroads of choosing between R&D and generics development, it has chosen a R&D route different from the competition. As the company consistently believed in R&D and product innovation to develop new molecules. It formed alliances in this regard with foreign R&D houses.

Scope: DR Reddy¶s started as API manufacturer. It soon increased its product scope to
bring in Generics and branded formulations seeing the patent expiries and capitalizing on India¶s process patents rule. It increased its market scope by rapidly expanding into countries like UK, Russia, Germany, etc. It formed alliances to expand into other small markets. Now it is all guns to gain domestic share and is rapidly laying path to capture rural in roads.

Technolo y Strate y
y y Generics ± Generic Drugs are low cost reinforced versions of actual patented drugs. Here, the core concept, basic mix and linkages are not changed Biosimilars ± High Quality and bio equivalent alternative of the innovative drugs. Here the core concept is not changed but the architecture is changed to bio equivalents Differen iated Formulations/N E s: These are new drug innovations of the company to cure the diseases

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S-Curve Framework - Product Development by Dr. Reddy·s

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Biosimilars/NCEs are relatively new products and are going through high development cost and time consuming stage. So they are in initial stages Generics on the other hand are expecting huge market growth due to expiration of patents in next five years On similar lines API market is saturated and is in maturity stage

International Strate y

DR Reddy¶s has followed Global international strategy. It produced standardized drugs mostly through its plants in India, and marketed and sold in different international markets. It has achieved economies of scale through centralized manufacturing in six FDA approved plants in India. It also benefited from low labor and manufacturing costs in India.

Strate ic Intent and Alliance of Current Strate y
Company¶s strategic intent is to provide affordable and innovative medicines to the customers. It entered into generics and aligned its business strategy to achieve the low cost leadership which makes the drugs affordable. It grew through internal growth and acquisitions and became a one of the world¶s leading generics drugs producers. It aims to become top 5 in its top five markets of India, US, UK, Germany and Russia. To make innovative products company regularly invested in R&D and formed alliances with foreign companies. Below chart describes different acquisitions of the company

Some of the alliances are:

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1) 2) 3) 4) 5) 6) 7)

With Fujifilm to produce low cost and high quality generic drugs With R-pharma to share high technology manufacturing knowhow With GSK to get ownership of penicillin manufacturing plants in US With Vitabiotics to get exclusive marketing rights of two of its products With Cosmederm for India distribution of its products With Albemarle to get global distribution rights of its API With Rheoscience to carry out clinical trials for its latest anti-diabetes drug, Balaglitazone 8) With Clintec to carry out R&D on solid tuumors This indicates that company¶s current business strategy is in alliance with company¶s strategic intent. Also the company¶s strategy is in alliance with medium and long term future outlook of the industry. In the medium term company¶s strategy to increase its domestic and international market shares in generics business. The generics opportunity opening up in the future due to patented drugs going off paten t provides very good chance to the company to achieve this objective. In the long term company plans to innovate and develop new products, along with this it should also focus on diversifying into outsourcing clinical research, etc.

Competitive Advantage
Resource Based Framework
Indentified key resources of the company are Human Capital, Supply chain resources, Manufacturing processes, Technology know -how, R&D capabilities, ANDAs, DMFs and Brand name. We applied VRIO framework on these resources to check if it has any sustainable competitive advantage

VRIO framework Analysis

Entity Valuable

Yes/No Yes

Rare

Yes

Difficult to imitate

No

Remarks The resources of Dr. Reddy¶s are valuable because they help the company in introducing new products at regular intervals and hence stay ahead of the competition. The R&D expertise coupled with skilled scientists helped the company to enter into biosimilars which are giving the company a fist mover advantage. The manufacturing processes and supply chain resources give the company the cost advantage needed to strengthen its position in cost driven generics market. The biggest resource for any pharmaceutical company wh ich is mainly into generics is the ANDAs and DMFs. These are rare resources that enable a firm to bring new products into the market. Dr. Reddy¶s is one of the market leaders in terms of the IPRs that it possesses. The resources such as strategic partnerships for distribution channels are moderately rare due to the due diligence and the gestation period involved in such strategies. Dr. Reddy¶s directly compete with generics drug manufactures. These are the players who produce off-patent drugs and hence the competitors of Dr. Reddy¶s can get access to some of the generic formulations that the company is involved into. Though the company is in R&D for some time, it is still in the process of building differentiated formulations /NCEs (which are difficult to

imitate) and develop new drugs. E loited Yes Company has made fair use of its resources in producing generics by of low cost and high quality. It made huge profits in earlier years Organiza by optimally exploiting these resources tion Conclusion: Temporary Competitive Advantage

Competitive advantage through structural position: We also looked at structural position
of the company in terms of customers, rivalry, substitutes, suppliers and threat of new entrants. We see that company has no special competitive advantage in any of these structural aspects.

Competitive advantage through process execution: Company has vertical integration in
terms of producing its own API requirements for the formulations. But vertical integration is common phenomenon in the industry and is not a competitive advantage. Company has fashioned an intricate and complex supply chain which has ramped up its growth. In India the company has a well-defined and uncluttered distribution system which allows products to flow smoothly to the consumer .

Competitive advantage through alliances and leadership: Company has formed many
alliances to gain new business. Also company has strong stable leadership. Dr Anji Reddy has been the started and carefully nurtured the company to become global leader in the pharma sector. He is still associated with company and constantly monitors the day to day activity of the company. G.V. Prasad, MD and CEO of the company, has been considered as greater thinker and played a crucial role in shaping the company. K. Satish Reddy, COO of the company, has strong execution skills. This trio provides a stable and strong leadership to the company.

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