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Chapter-1 Introduction to DR REDDYS LABORATORIES LTD.

Dr Reddy's Laboratories Ltd is an integrated global pharmaceutical company, committed to providing affordable and innovative medicines for healthier lives. The company offers a portfolio of products and services including Active Pharmaceutical Ingredients (APIs), Custom Pharmaceutical Services (CPS), generics, biosimilars, differentiated formulations and News Chemical Entities (NCEs) through their three businesses - Pharmaceutical Services and Active Ingredients, Global Generics and Proprietary Products. Their Therapeutic focus is on gastro-intestinal, cardiovascular, diabetology, oncology, pain management, anti-infective and paediatrics. It operates in over 60 countries with their major markets being India, USA, Russia and CIS, Germany, UK, Venezuela, S. Africa, Romania, and New Zealand.

Dr Reddy's Laboratories was incorporated in the year 1984 in Hyderabad. The company was established by Dr Anji Reddy with an initial capital outlay of Rs 25 lakh. The company made their beginning with the manufacture of Active Pharmaceutical Ingredients and Intermediates (API) and commenced operations with a single drug in a 60-tonne facility near Hyderabad, India. In the year 1986, the company shares were listed on the Bombay Stock Exchange

PURPOSE Providing Affordable Medicines

Our Global Generics business helps reduce drug costs for individuals and governments by bringing generic drugs to market as early as possible, and making them available to as many patients as possible. We market both generic small-molecule drugs and generic biopharmaceuticals. In markets with guidelines for approval, our Biologics business offers more affordable and equally effective generic biopharmaceuticals or biosimilars. We supply pharmaceutical ingredients to other generic companies through the API arm of our PSAI business, which contributes to our goal of providing affordable medicine. We will continue to promote affordability in significant ways and work to expand our product offering of generics, focusing on increasing access to products with significant barriers to entry. We will continue to look for new opportunities to take generics to more patients, in collaboration with other companies.

Developing Innovative Medicines

Despite the great advances of medical science, there are still many unmet medical needs. Our Proprietary Products businesses address some of these unmet medical needs, by developing and bringing to market new drugs. Through innovation in science and technology, combined with a deep understanding of underlying disease pathways, we develop and commercialise new formulations of approved products. We also develop new chemical entities with improved and wellcharacterised safety and efficacy profiles. We focus our research on the therapeutic areas of pain, anti-bacterials and metabolic disorders. Our Custom Pharmaceutical Services arm of our PSAI business helps innovator companies get their proprietary medicines to patients faster, by providing a range of technology platforms and services.

In pursuit of our purpose of providing affordable and innovative medicines for healthier lives, we will create an environment of innovation and learning while continually reaching for higher levels of excellence. 1. Integrity and Transparency: We will uphold the highest standards of integrity and transparency in all our interactions. 2. Safety: We are committed to providing safe working environments through continuous improvement of our infrastructure, work practices and behaviors. 3. Quality: We are dedicated to designing quality into our products and processes to delight our stakeholders. 4. Productivity: We strive to achieve more with less through a culture of innovation, continuous improvement and a sustained focus on elimination of waste. 5. Respect for the Individual: We are committed to creating a work environment that encourages diverse perspectives and upholds the dignity of work and of individuals. 6. Collaboration and Teamwork: We will leverage expertise and resources from across our global network to create greater value for our stakeholders. 7. Sustainability: We will create value for all our stakeholders in a manner that respects our natural environment and serves the best interests of the communities in which we live and work.



DEEP UNDERSTANDING . PARTNER OF CHOICE Humanitys health needs are greater than any one companys ability to solve them; yet we can work with others to bring new drugs quickly to the market and provide the building blocks of affordable medicines. Through our PSAI business, which comprises the Active Pharmaceutical Ingredients (API) and Custom Pharmaceutical Services (CPS) businesses, we offer IP advantaged, speedy product development and costeffective manufacturing services to our customers generic companies and innovators. This allows us to help make good medicines available to more people around the world. The core strengths of our PSAI business are the state-of-the-art infrastructure, resources and skills we are able to offer to our customers:

Large and diverse product portfolio Eight FDA-inspected plants and three technology centers World class chemistry expertise Robust, large-scale manufacturing capabilities Intellectual Property (IP) driven product development for freedom to operate Total, seamless supply chain management

(2) GLOBAL GENERICS GLOBAL ACCESS TO AFFORDABLE MEDICINES Both in the developing and developed world, it is a grim fact that millions of people suffer from treatable illnesses and disease simply because they cannot afford the medicines that will restore them to health. Even in high income countries like the US, brand name drugs are often prohibitively expensive, particularly for the growing numbers of uninsured. Around the world, having access to lower-cost generic medicines can mean the difference between health and sickness, solvency and bankruptcy for countless people.

Generic drugs hold great promise for the future. Growing acceptance of generics and favorable legislation in much geography, combined with the large volume of branded products losing patent protection over the coming years is expanding the generic pharmaceuticals market.

Through our branded and unbranded Global Generics business, we fulfill our purpose of providing affordable medicines to more people around the world by offering lower-cost alternatives to highly-priced innovator brands both directly and through key partnerships. Our capabilities span the entire value chain from process development of the active pharmaceutical ingredient (API) to submission of the finished dosage dossier to the regulatory agencies giving us control over the supply chain and the ability to offer high quality products at the right time and at competitive prices. Our state-of-the-art manufacturing facilities are ISO14001 and ISO9001 certified and have an excellent record of regulatory compliance. Our generics business is supported by our integrated Product

Development Infrastructure which is dedicated to bringing new medicines to the market. Today, we have a strong presence both in highly regulated markets like the US, UK and Germany and in emerging markets, including India, Russia, Venezuela, Romania, and CIS

(3) PROPRIETORY PRODUCTS MEETING UNMET MEDICAL NEEDS Science and innovation hold the key to unlocking the mysteries of diseases that continue to afflict humanity. While scientific advances have either obliterated many deadly diseases or brought them under control, there are still far too many diseases that lack satisfactory treatments or cures. These unmet medical needs of humanity drive our research enterprise. Our Proprietary Products business comprises NCE research, Biologics and Differentiated Formulations. In each of these areas, we are building world-class capabilities and partnerships to accelerate the discovery and development of new and improved therapies.

Within our highly advanced and integrated R&D infrastructure, scientists with diverse functional expertise seek innovative solutions to medical needs in the therapeutic areas of metabolic diseases, anti-infectives and inflammatory disease. Our scientific capabilities span a wide range of areas, such as medicinal chemistry, analytical chemistry, pharmacology, genomics, proteomics, molecular biology, microbiology, toxicology, formulation and clinical development.



Differentiated Formulations
The emerging Differentiated Formulations portfolio consists of developing novel formulations of currently marketed drugs or combinations thereof to enhance patient comfort. They develop synergistic combinations as well as technologies that enhance the drugs safety and/or efficacy profile by modifying its pharmacokinetics. The most advanced Differentiated Formulations efforts are in dermatology, where we have launched several effective and innovative products through our wholly owned subsidiary Promius Pharma.


New Chemical Entities (Nces)

The incidence of hospital acquired infections is growing as

drug-resistant bacteria are becoming even more difficult to treat. There are significant challenges in adequately treating infections caused by multi-drug resistant pathogens such as Staphylococcus Aureas, Pseudomonas Aeruginosa, and Acinetobacter Baumannii. The resultant infections are often serious and life-threatening. We are working to identify new approaches to treat these infections with products that have improved efficacy and tolerability profiles. Metabolic Disorders:

Globally, cardiovascular diseases are one of the leading causes of death. Many patients suffering from Cardio Vascular disease (CVD) are also afflicted with insulin resistance, Type-2 Diabetes, Dyslipidemia, and obesity. While there are several treatment options for a few of these conditions, a need persists for effective and safe therapies that address insulin resistance, obesity, low HDL cholesterol and Atherosclerosis. We have several programs targeting one or more of these disease conditions. Pain / Inflammation: The prevalence of chronic and acute pain is growing steadily as our population ages and diagnosis rates improve. Although there are a number of medications to treat chronic and acute pain, new treatments that are both safe and tolerable remain essential. We are developing products with improved efficacy and side-effect profiles in several areas of acute and chronic pain.

(3) Global Generics

Our Branded Generics portfolio offers over 200 products in the major therapeutic areas of gastro-intestinal, cardiovascular, pain management, oncology, antiinfectives, paediatrics and dermatology. Brands like Omez, Ciprolet, Nise, Enam, Ketorol, Exifine and Cetrine enjoy leadership positions in several key markets, including India, Romania, Venezuela, Russia & the CIS countries. Our 2,000 plus representatives, armed with technology enabled devices and supported by a well integrated back-end service deliver value to our customers on every call. Deep customer relationships, quality medicines and consistently delivered promise make us a trusted brand across the world.

Unbranded Generics In the unbranded generics space, we have capitalized on every opportunity to bring

our high-quality products to more people around the world. A synchronized supply chain that leverages our strong product development capabilities, state-of-the-art manufacturing and vertical integration with our own APIs has created a creditable track record of successful Day 1 launches, with significant market shares in all our key markets. Our transparent and strong relationships with pharmacy chains, insurance funds and other distributor networks help us deliver upon our promise to customers and patients globally. Our generics offerings deliver quality at cost-effective prices in the highly regulated markets of the United States, UK and Germany. In the US, we rank among the top 12 generic companies, with 34 product families being marketed and a large pipeline pending approval. In the UK, we have more than 30 products in the market. Our acquisition of betapharm, Germany's 5th largest generics company, further consolidated our presence in the European Union (EU), with 145 products in the market.

4) Active Pharma Ingredients (Api)

Dr. Reddy's offers an unparalleled portfolio to our customers, who include innovators and generic formulators worldwide. With a strong product portfolio of products, including niches like oncology and hormones, and our first in, last out approach, it is little wonder that we are today among the leading generic API players globally. Our goal is always to enable our customers to be the first-to-launch a generic product and to provide value added services to help them remain competitive and profitable for the entire life cycle of the product. We have built the capabilities to consistently deliver on this promise in scale and across the largest product range. Our expertise in organic synthesis and process development complemented by a controlled supply chain enables us to provide our customers with high quality Bulk Actives at competitive prices. We are aggressively building our product portfolio to cater to generic players in the emerging markets and generic and patent challenge formulators in regulated markets.

Our API business is supported by our technologically advanced Product Development infrastructure, which identifies new products and is engaged every step of the way, from the conceptual stage to delivery of drugs to the market place. The Product Delivery Teams, the Centres of Excellence and IP teams help create value through Intellectual Property and proactive patenting; early development work on certain promising molecules; breakthrough product delivery; and by delivering cost leadership in API. A highly skilled global team focuses on timely delivery of products, product development, technology leadership, cost competitiveness, the highest levels of customer service, and full compliance with regulatory and quality requirements.

(5) Biosimilars
Biologics, or large molecule pharmaceuticals are complex, highly targeted and generally expensive therapies that are a growing contributor to overall global healthcare spend. The burden on patients and payers has resulted in an increasing demand for generic alternatives to off-patent biologics, most commonly known as biosimilars.

Patent expiries in the immediate future present opportunities to serve the global population with high quality, low cost equivalents of proprietary biopharmaceuticals, commonly known as biosimilars. Our proven product development capabilities coupled with commercial reach has positioned us as a global leader in this industry with:

Eleven biosimilars in various stages of development and commercialization A fully integrated biosimilar development team includes R&D, clinical operations, medical affairs and global pharmacovigilance.

A WHO certified cGMP manufacturing facility, which includes E.coli and mammalian cell culture facilities.

Biosimilars represent an ideal opportunity for Dr. Reddys to accomplish its corporate mission of providing affordable and innovative medicines to help patients lead healthier lives.

(6) Custom Pharma Services (Cps)

Our Custom Pharmaceutical Services (CPS) business serves several innovators, both Big Pharma and emerging biotech, and a large number of emerging Pharma companies. Within a short span, we have become the largest CPS player from India and a partner-ofchoice to innovators, offering top-end technical expertise, tailor-made pharma solutions and a track record of bringing innovations to the market quickly, efficiently and economically. We offer both speed and flexibility. We have the capability to supply both smallscale clinical trial quantities and commercial-scale requirements. Our end-to-end services and competitive pricing makes a compelling value proposition to our global innovator customers. Niche technology-led acquisitions have made us a one-stop shop for many customers. Our acquisition of Roche's API manufacturing unit in Mexico added the capability to manufacture niche steroidal APIs. The acquisition of the Small Molecule business of Dow Pharma at its Mirfield and Cambridge sites in the UK has further strengthened our portfolio and service offerings for our customers. We now also offer a pool of chiral technologies, including biocatalysis. We aim to be the preferred partner for innovator companies by providing a complete range of services that are necessary to take their innovations to the market with greater speed, efficiency and lower capital expenditures.

Dr. Reddys Board of Directors comprises eminent individuals from diverse fields. The Board acts with autonomy and independence in exercising strategic supervision, discharging its fiduciary responsibilities, and in ensuring that the management observes the highest standards of ethics, transparency and disclosure. Our directors are experts in the diverse fields of medicine, chemistry and medical research human resource development, business strategy, finance, and economics. They review all significant business decisions, including strategic and regulatory matters. Every member of the Board, including the non-executive directors, has full access to any information related to our company. Committees appointed by the Board focus on specific areas, take decisions within the authority delegated to them and make specific recommendations to the Board on matters in their areas or purview. Board of Directors of Dr. Reddys 1. Dr. K Anji Reddy (Chairman) 2. Mr. G V Prasad (Vice Chairman & CEO) 3. Mr. Satish Reddy (Managing Director & COO) 4. Mr. Anupam Puri 5. Dr. Bruce Carter 6. Dr. J P Moreau 7. Ms. Kalpana Morparia 8. Dr. Omkar Goswami 9. Mr. Ravi Bhoothalingam 10. Dr. Ashok Ganguly 11. Mr. Sridar Iyengar


Corporate social responsibility at Dr. Reddy's transcends cheque-book charity. It is about enhancing healthcare, imparting education, developing skills, providing opportunities, and unlocking the doors of progress. It is not an expense, but an investment into our collective future. Our focus has primarily been on three life-altering areas: Patient Care, Education and Livelihood. The company channels its wide network of social activities through Dr. Reddys Foundation (DRF), addresses health education needs and patient care activities through Dr. Reddys Foundation for Heath Education (DRFHE) and creates positive impact on communities through Corporate Social Responsibility (CSR) teams in each location. 1. DR. REDDYS FOUNDATION ( Its activities span two broad areas of social intervention:

Livelihoods: Create, implement and disseminate sustainable and replicable livelihood models through partnerships through the livelihood Advancement Business School (LABS) program Education: Provide learning opportunities for those who have never been to school, or are dropouts, while improving quality of education across schools.

2. OUR APPROACH TO COMMUNITY CARE: We inject business efficiency into community care and invest professional resources, talent and technical expertise in it. We approach community interventions as we do successful product launches. We research community needs, develop and pilot new projects, scale them up, and once proven, collaborate with the government and various Non-Governmental Organizations (NGOs) to roll them out.


Manufacturing Infrastructure and R&D Capabilities

Pharma Services & Active Ingredients Six FDA-approved plants in India One FDA-approved plant in Mexico One FDA-approved plant in Mirfield, UK

Three Technology development centers (Two in Hyderabad, India; One in Cambridge, UK)

Product Development

Integrated Product development Capabilities that includes API development, Formulations development and analytical development skills.

One Integrated Product development facility in Hyderbad, India.

Global Generics

Seven Formulation plants in India (Two USFDA inspected) Two USFDA inspected plant in USA

New Chemical Entities

Research bacterials,


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metabolic, cardiovascular, antiinflammation. Biologics

Biologics development center GMP production E coli and mammalian cell platforms












from Biopharma Singapore 2012 for exhibiting visionary leadership, leading and communicating change, building partnerships, portraying business acumen, promoting optimal results, and outstanding commitment to disease prevention and treatment.

Dr. K. Anji Reddy, Founder and Chairman of Dr. Reddy's Laboratories Ltd. has been honoured with the Lifetime Achievement in Health award in the Asian Voice Political & Public Life Awards for 2012 at London for his lifetime commitment to medical research, and improving the lives of others.

Award for Learning & Talent Initiative Excellence 2nd STAR News HR & Leadership Awards at World HRD Congress in Mumbai

NDTV Profit Business Leadership Award The award for Business Leader in the PharmaceuticaL Sector was conferred on Dr. Reddys at the NDTV Profit Business Leadership Awards 2010.

Dr. Reddys in Forbes 2010 Asia Fabulous 50 companies list The Company was recognized as one of the Best of Asia-Pacifics biggest listed companies that are publicly traded and have sales or market capitalization of over USD 3 bn. The list comprises of 50 companies in Asia that boast of solid financial track records, coupled with great management and entrepreneurial skill.

Dr. Reddys wins ICSI Award for Excellence in Corporate Governance 2010 The company was conferred the ICSI National Award for Excellence in Corporate Governance 2010 by Pranab Mukherjee, Honble Finance Minister of India. The Institute of Company Secretaries of India (ICSI) bestows the ICSI National Award for Excellence in Corporate Governance every year to the best-governed companies in India

Award for Talent Management:-6th Employer Branding Awards at World HRD Congress in Mumbai

Chapter -2 Introduction To pharmaceutical Industry


The earliest drugstores date to the Middle Ages since before 18th AD. The first known drugstore was opened by Arabian pharmacists in Baghdad in 754, and many more soon began operating throughout the medieval Islamic world and eventually medieval Europe. By the 19th century, many of the drugstores in Europe and North America had eventually developed into larger pharmaceutical companies. Most of today's major pharmaceutical companies were founded in the late 19th and early 20th centuries. Key discoveries of the 1920s and 1930s, such as insulin and penicillin, became mass-manufactured and distributed. Switzerland, Germany and Italy had particularly strong industries, with the UK, US, Belgium and the Netherlands following suit. Legislation was enacted to test and approve drugs and to require appropriate labeling. Prescription and non-prescription drugs became legally distinguished from one another as the pharmaceutical industry matured. Numerous new drugs were developed during the 1950s and mass-produced and marketed through the 1960s. These included the first oral contraceptive, "The Pill", Cortisone, blood-pressure drugs and other heart medications. Cancer drugs were a feature of the 1970s. From 1978, India took over as the primary center of pharmaceutical production without patent protection. The industry remained relatively small scale until the 1970s when it began to expand at a greater rate. Legislation allowing for strong patents, to cover both the process of manufacture and the specific products, came in to force in most countries. The pharmaceutical industry entered the 1980s pressured by economics and a host of new regulations, both safety and environmental, but also transformed by new DNA chemistries and new technologies for analysis and computation. Drugs for heart disease and for AIDS were a feature of the 1980s, involving challenges to regulatory bodies and a faster approval process. Managed care and Health maintenance organizations (HMOs) spread during the 1980s as part of an effort to contain rising medical costs, and the development of

preventative and maintenance medications became more important. A new business atmosphere became institutionalized in the 1990s, characterized by mergers and takeovers, and by a dramatic increase in the use of contract research organizations for clinical development and even for basic R&D. Marketing changed dramatically in the 1990s. The Internet made possible the direct purchase of medicines by drug consumers and of raw materials by drug producers, transforming the nature of business. Drug development progressed from a hit-and-miss approach to rational drug discovery in both laboratory design and natural-product surveys. Demand for nutritional supplements and so-called alternative medicines created new opportunities and increased competition in the industry.


The main aim of a particular Pharmaceutical Industry is to develop, research and distribute drugs in order to provide health care for the people in the society. The Pharmaceutical Industry like other industries is subjected to follow certain rules and regulations. The Pharmaceutical Industry needs to follow rules about about patent, marketing as well as testing of drugs that are scheduled to come to the market as medicines. Since the inauguration of the Pharmaceutical Industry in the 19th century , it has covered a long way and now it has become one of the most influential and successful industry in the world with both controversy and praise on its part. Pharmaceutical Industry is very much dependent upon the developments and discoveries that are made to search new types of drugs and also to search for new kind of medicines. One can also see differences within the industry regarding the same drug or report and different companies within the Pharmaceutical Industry look to follow different paths for the same thing. Drug Discovery and Drug Innovation are two very aspects in the Pharmaceutical Industry: Drug Discovery: Drug Discovery is a process through which potential drugs are designed or discovered. It has been observed in the past that most of the drugs were invented by means of isolating the active component from remedies which are traditional in nature or through another kind of discovery known as serendipitous discovery. Drug Development: This process is taken forward after the discovery is done and a thing is identified as a potential drug. The development takes place immediately after that as the component is turned into a medicine. So this is also considered as a very important process and has great importance in the Pharmaceutical Industry.

The Indian pharmaceutical industry is a success story providing employment for millions and ensuring that essential drugs at affordable prices are available to the vast population of this sub-continent. Richard Gerster

The Indian pharmaceutical industry consists of around 20,000 businesses. The pharmaceutical business in India is booming because of several reasons. Firstly, the affordability of the products plays an important role in improving the conditions of the Indian pharmaceutical industry. Secondly, India boasts of a workforce that matches those of the top pharmaceutical businesses in the world. Finally, the development and competency level of technology in India is on a considerable rise. Due to all of this, the Indian pharmaceutical industry is growing at the rate of CAGR 13.7%. As India offers a perfect combination of skills, technology and economy, many foreign companies have started outsourcing their manufacturing departments to India. Also, some Indian companies have joined hands with MNCs for research and development (R & D) in projects like cancer, AIDS, etc. India's IT sector plays a pivotal role in enticing MNCs to outsource research and drug discovery contracts. This road to success was led by the system of product patents introduced on 1st January, 2005. Due to this, India has become a worldwide exporter of high quality generic

drugs. India exports to 65 countries with US as its biggest market. According to the National Pharmaceuticals Policy for 2006, the industry's export was worth US 3.75 billion dollars and growing at a compound annual rate of 22.7%. In spite of this success story, the Indian pharmaceutical business has room for improvement. To utilise their capacity to the fullest, the India pharmaceutical industry is seeking untapped global as well as local markets. In India, one of the goals of the Indian pharmaceutical industry is to make drugs easily accessible in the local markets. Also, the demand for sophisticated and innovative medicines has increased as the common man lives the western lifestyle. The Indian pharmaceutical industry needs to make more investments in R & D and distribution. Quality wise India is still not up to the international standards. For India to become a top player in the global pharmaceutical business, the government of India needs to support foreign investments in pharmaceuticals and biotechnology. Also, biotechnology in India is yet to reach its true potential but it's definitely on its way with the growing importance of vaccines ad bio-services. However, with talented human resource, advanced technology, low-cost products and mergers & acquisitions with MNCs, the pharmaceutical business in India holds the promise of being one of the top pharmaceutical industries in the world.

Leading Pharmaceutical Companies

In the domestic market, Cipla retained its leadership position with 5.27 per cent share. Ranbaxy followed next. The highest growth was for Mankind Pharma (37.2%). Other leading companies in the Indian pharma market in 2010 are:

Sun Pharma (25.7%) Abbott (25%) Zydus Cadila (24.1%) Alkem Laboratories (23.3%) Pfizer (23.6 %) GSK India (19%)

Piramal Healthcare (18.6 %) Lupin (18.8 %)

The Pharmaceutical Statistics

India currently represents just U.S. $6 billion of the $550 billion global pharmaceutical industry but its share is increasing at 10 percent a year, compared to 7 percent annual growth for the world market overall.1 Also, while the Indian sector represents just 8 percent of the global industry total by volume, putting it in fourth place worldwide, it accounts for 13 percent by value, and its drug exports have been growing 30 percent annually. The organizedsector of India's pharmaceutical industry consists of 250 to 300 companies, which account for 70 percent of products on the market, with the top 10 firms representing . However, the total sector is estimated at nearly 20,000 businesses, some of which are extremely small. Approximately 75 percent of India's demand for medicines is met by local manufacturing. According to the German Chemicals Association, in 2005, India's top 10 pharmaceutical companies were Ranbaxy, Cipla, Dr. Reddy's Laboratories, Lupin, Nicolas Piramal, Aurobindo Pharma, Cadila Pharmaceuticals, Sun Pharma, Wockhardt Ltd. and Aventis Pharma.5 Indian-owned firms currently account for 70 percent of the domestic market, up from less than 20 percent in 1970. In 2005, nine of the top 10 companies in India were domestically owned, compared with just four in 1994. The pharmaceutical industry in India meets around 70% of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectibles. There are about 250 large units and about 8000 Small Scale Units, which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units). These units produce the complete range of pharmaceutical formulations, i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e., chemicals having therapeutic value and used for production of pharmaceutical formulations.

Competent workforce: India has a pool of personnel with high managerial and technical competence as also skilled workforce. It has an educated work force and English is commonly used. Professional services are easily available. Cost-effective chemical synthesis: Its track record of development, particularly in the area of improved cost-beneficial chemical synthesis for various drug molecules is excellent. It provides a wide variety of bulk drugs and exports sophisticated bulk drugs. Legal & Financial Framework: India has a 53 year old democracy and hence has a solid legal framework and strong financial markets. There is already an established international industry and business community. Information & Technology: It has a good network of world-class educational institutions and established strengths in Information Technology. Globalization: The country is committed to a free market economy and globalization. Above all, it has a 70 million middle class market, which is continuously growing. Consolidation: For the first time in many years, the international pharmaceutical industry is finding great opportunities in India. The process of consolidation, which has become a generalized phenomenon in the world pharmaceutical industry, has started taking place in India.

Every industry has its own sets of advantages and disadvantages under which they have to work; the pharmaceutical industry is no exception to this. Some of the challenges the industry faces are:

Regulatory obstacles Lack of proper infrastructure

Lack of qualified professionals Expensive research equipments Lack of academic collaboration Underdeveloped molecular discovery program Divide between the industry and study curriculum

FutureScenario With several companies slated to make investments in India, the future scenario of the pharmaceutical industry in looks pretty promising. The country's pharmaceutical industry has tremendous potential of growth considering all the projects that are in the pipeline. Some of the future initiatives are:

According to a study by FICCI-Ernst & Young India will open a probable US$ 8 billion market for MNCs selling expensive drugs by 2015 The study also says that the domestic pharma market is likely to reach US$ 20 billion by 2015

The Minister of Commerce estimates that US$ 6.31 billion will be invested in the domestic pharmaceutical sector

Public spending on healthcare is likely to raise from 7 per cent of GDP in 2007 to 13 per cent of GDP by 2015

Dr Reddy's Laboratories has tied up with GlaxoSmithKline to develop and market generics and formulations in upcoming markets overseas

Lupin, a Mumbai based pharmaceutical company is looking to tap opportunities of about US$ 200 million in the US oral contraceptives market

Due to the low cost of R&D, the Indian pharmaceutical off-shoring industry is designated to turn out to be a US$ 2.5 billion opportunity by 2012


Liberalisation, globalisation and privatization are the important issues to the entrepreneur and corporate hreatening the existence of a firm. In such a complex corporate environment, it is the challenge to the finance manager to survive the firm in long- run perspective with the objective of maximizing the owner's wealth. With a view to achieve this objective, finance manager is required to pay his due attention on investment decision, financing decision and dividend decision. Assuming that sound investment policy and portunity are there, it is my intention in this paper to optimize the financing decision and dividend decision in the context of achieving the stated objective. Financing decision refers to the selection of appropriate financing-mix and so it relates to the capital structure or leverage. Capital structure refers to the proportion of long- term debt capital and equity capital required to finance investment proposal. There should be an optimum capital structure, which can be attained by the judicious exercise of financial leverage. This paper mainly concentrates on the exercise of financial leverage in the context of understanding its impact on earnings and dividend per share FINANCIAL LEVERAGE Financial leverage is primarily concerned with the financial activities which involve raising of funds from the sources for which a firm has to bear a fixed charge. These sources include long-term debt (e.g. bonds, debentures etc.) and preference share capital. Long-term debts capital carries a contractual fixed rate of interest and its payment is obligatory. As the debt providers have prior claim on income and assets of a firm over equity shareholders, their rate of interest is generally lower than the expected return on equity shareholders. Further interest on debt capital is a tax deductible expense. These two phenomena lead to the magnification of rate of return on equity capital and hence EPS. It goes without saying that the effect of changes in EBIT on the earnings per share is shown by the financial leverage. Financial leverage can best be described as "the ability of a firm to use fixed financial charges to magnify the effect of changes in EBIT on the firm's earning per share."

EARNINGS PER SHARE IN THE CONTEXT OF OPTIMUM CAPITAL STRUCTURE Earnings per share are the reward of an investor for making his investment and it is the best measure of performance of a firm. "The bottom line of Income Statement is an indicator of performance of 'think tank' or 'top level' of the company". Ordinary investors lacking in-depth knowledge and inside information mainly based on EPS to make their investment decision. So it should be the objective of financial management to maximize the EPS from the view point of both the investor and owners. Again the objective of financial management is maximization of value measure in terms of market price of equity share of a corporate entity. Given the objective of the firm to maximize the value of equity share, a firm should select a desired combination of financing mix or capital structure to achieve the goal. Theoretically, optimum capital structure implies that combination of debt and equity at which overall cost of capital is minimum and value of the firm is maximum. The prevailing view is that the value maximization criterion as a criterion of optimal capital structure is measured in terms of market price of equity share i.e. the value of the firm is maximized when the market price of equity share is maximized. So, according to this view, maximization of market price of equity share leading to the maximization of value of the firm is a criterion of optimum capital structure. But I beg to differ. Market price of equity share though basically depends on firm's earnings per share, it also depends to a great extent on many external factors such as government monetary and economic policies, political stability, state of economy, speculative trends etc. and it may be contended that market price of share has no direct bearing on the optimum capital structure. In this context an example of a firm may be drawn which is running with optimum debt-equity combination. Now due to the influence of some external factors i.e. sudden political change or something like this, the market price of its equity shares started decreasing and as a result value of the firm went on decreasing. Due to the downward movement of the value of the firm, its capital structure will not become optimum further and will need restructuring to become optimum again. In practice, change in market price of equity share may occur very rapidly and hence it is very difficult to change the composition of capital structure accordingly. Capital structure decision is an internal decision of the firm. So what I really think is that increase in market price of equity share due to the influence of external factors leading to the maximization of the value of the firm should not be a criterion of optimum capital structure. Rather 'EPS may be a better substitute as a criterion of value maximization in respect of optimum capital

structure, and as such maximizing EPS should be the main slogan or mul-mantra of a firm in order to realize the objective of maintaining an appropriate capital structure. DIVIDEND POLICY DECISION Dividend decision is the major decision area of financial management. A firm is to decide what portion of earnings would be distributed to the shareholders by way of dividend and what portion of the same would be retained in the firm for its future growth. Both dividend and retention are desirable but they are conflicting to each other. A finance manager should be able to formulate a suitable dividend policy, which will satisfy the shareholders without hampering future progress of the firm. It is common that higher the earnings, higher will be the amount of dividend and vice-versa. FINANCIAL LEVERAGE, EARNINGS AND DIVIDEND Use of fixed cost bearing capital in the capital structure is termed as financial leverage. Such capital especially debt is cheaper than the equity as the cost of debt is generally lower than that of equity and a tax advantage is attached with its use. In this circumstances, if total capital employed remains constant, increase in the financial leverage or use of debt implies that a relatively cheaper source of fund replaces a source of fund having relatively higher cost. Now if a company follows this practice its net return will be attributable to the low base of equity shareholders (lower base being due to the increase in financial leverage).As a result it will lead to the magnification of return to the equity and thus EPS. But one should keep in mind that the same holds good in favourable business environment where the company is able to earn a rate of return on investment being higher than its cost of financing. So long this situation continues the return on equity or EPS will increase with the increase in financial leverage. The excess of the rate of return on investment over the fixed rate of interest and pref. dividend will go to the equity shareholders. However, during the period of adversity when the company is not in a position to earn greater (at least equal) rate of return than the cost of debt and pref. share, its return on equity and EPS, instead of increase, will actually decrease, with the increase in the financial leverage. As higher earnings would result in higher dividend, the above discussion follows that increase in the use of financial leverage increases the earnings per share and thus dividend per share. Conversely decrease in the use of financial leverage decreases the earnings and dividend per share. Keeping these theoretical backgrounds in view, it is my

humble effort to draw the attention of readers regarding subjectivity of this paper and its applicability into real corporate practice. For this purpose a case study has been introduced in the next section considering the case of Maruti Udyog Limited, a leading automobile company in India. Now it is proposed to present brief profile of the company in the subsequent paragraph. Financial leverage refers to the use of debt to acquire additional assets. Financial leverage may decrease or increase return on equity in different conditions. Financial overleveraging means incurring a huge debt by borrowing funds at a lower rate of interest and using the excess funds in high risk investments in order to maximize returns.[18]


RESEARCH METHODOLOGY What is Research? According to Clifford Woody, Research comprises defining & redefining problems, formulating hypothesis or suggested solutions; collecting, organizing & evaluating data, making deductions & reaching conclusions; & at last carefully testing the conclusions to determine whether they fit the formulating hypothesis. The Advance Learners Dictionary of Current English lays down the meaning of research as A careful investigation or inquiry especially through search for new facts in any branch of knowledge. In simple terms research refers to a search of knowledge. One can also define the research as a scientific & systematic search for pertinent information on a specific topic. In fact, research is an art of scientific investigation. What is Research Methodology? Research Methodology is a way to solve systematically the research problem. It may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a researcher in studying his problem along with the logic behind them. It is necessary for the researcher to know not only the research methods/ techniques but also the methodology. Thus, there is a difference in Research Methods & Research Methodology. Research Methods refer to the methods the researchers use in performing research operations, where as, in Research Methodology researchers should not only know the different techniques used in research, but they also need to know which of these methods or techniques are relevant & which are not, what do they mean & indicate & why.

OBJECTIVES OF RESEARCH The purpose of research is to discover answers to questions through application of scientific procedures. The main aim of research is to find out the truth which is hidden & which has not been discovered yet. The objectives of this research are as follows: The objectives for which study has been undertaken are: 1. To study the methods of raising finance and financial leverage practice of the company 2. To examine the impact of financial leverage on EPS 3. To know about the dividend policy of the company 4. To assess the inter-relationship between degree of financial leverage(DFL), earnings per share( EPS) and dividend per share(DPS) 5. To summarise main findings of the study and offer some suggestions, if any, for improving EPS by the use of financial leverage.

HYPOTHESIS : In order to realize the above objectives, the following hypothesis have been formulated: 1. The company uses debt as a cheaper source of finance than equity 2. The company is able to earn higher rate of return on investment than the cost of financing investment. 3. DFL & EPS are positively correlated in such a manner that increase in financial leverage leads to increase in EPS. 4. DFL is positively correlated with DPS. 5. EPS is positively correlated with DPS. RESEARCH DESIGN AND METHODOLOGY Collection of data The data has been collected from a Pharmaceutical company i.e. Dr. Reddys laboratories Ltd. Data is collected from annual reports of 10 years. The data collected from these sources have been used and compiled with due care as per requirement of study. The present study cover a period of 10 years from 2001-02 to 2010-11.

Techniques of analysis The study has been made by converting the collected data into rerlative measure as percentage rather than absolute one. For analyzing the degree of association between DFL & EPS, DFL & DPS, statistical technique of Pearsons correlation analysis has been applied. The t test has been used to judge whether the calculated correlation co-efficient are significant of not.

LIMITATIONS OF THE STUDY 1. The study is limited to ten years only. Generally twenty years data is ideal to form a trend analysis. But I was able to collect ten years Annual Reports of Dr. Reddys laboratories Ltd. Thats why the analysis has been made for ten years only. 2. The study is based on secondary data collected from the Annual Reports of the company. It was not possible to collect primary data from the companys office. 3. The study is limited to Dr. Reddys laboratories Ltd not to be generalized for all public undertakings.

Chapter 5 Data analysis & INTERPRETATIO N

NOTES AND EXPLANATIONS 1. DFL = Degree of Financial Leverage = EBIT I EBT 2. EPS = EAT / No. of Equity Shares. 3. DPS = Dividend / No. of Equity Shares. 4. DIP Ratio = DPS / EPS x 100

5. Rate of Interest = (Interest / Long-term debt) X 100 6. Interest on debt capital is an allowable expenditure for income tax purpose and it qualifies for deduction in computing taxable income. So it reduces effective cost of debt in the following way: Cost of debt (%) = Rate of Interest (1 - tax rate).Tax rate varied over the years with the changes in Tax Legislations. Tax rate being not available has been computed by approximating it to be equivalent of tax provisions. So an average tax rate has been approximated as (Total of 10 years' provision for tax + Total of 10 years' profit before tax) X 100, which comes 30% approximately. 7. Cost of equity (%) = (Dividend / Equity or Net worth) x 100 8. Rate of return on investment = (EAT / Total Capital Employed) x 100


DFL & EPS are positively correlated in such a manner that increase in financial leverage leads to increase in EPS.

DFL is positively correlated with DPS. EPS is positively correlated with DPS

Table 4: Relationship between DFL, EPS & DPS Relationship DFL & EPS DFL & DPS EPS & DPS Correlation Coefficient (r) -0.35225 -0.43875 0.45727 Calculated t value of r 0.934 1.244 1.465

Note: Table value of (n-2) i.e 8, degree of freedom at 5% level of significance is 1.860 Source: computed with the data obtained from table-2


Financial leverage practice and EPS of Dr. ReddysLtd. From the table -2 as presented above , it is seen that Dr. Reddys Ltd. did not find debt capital cheaper than equity capital over the period of ten years from 2001-02 to 2010-11. Dr. ReddysLtd. had to pay higher rate of interest leading to a greater cost of debt than that of equity despite an average tax advantage attached with debt financing @ 30% over the period covered our study.

If one looks at the financial data of Dr. ReddysLtd., given in table-2 a mix trend to EPS with constant in DFL become evident.

Successive EPS of last three years showed a fluctuating trend with the increase in DFL like all the preceding years.











LABORATORIES is to increase its net worth by ploughing back of profit in this way to reduce cost of equity as a cheaper cost if its networth is strengthen by ploughing back of profits, which is not dividend bearing. Now if we have a mark on Table-1 , an increase amount of reserve and surplus included in net worth is seen all over the period of 10 years.

The company increased its capitalization from Rs. 1471.8 Cr. To7465 Cr.

Table-3 has been prepared to reflect the relative method of finance adopted by the company. It is seen from the table 3 that the net-worth of the company constituted equity capital and reserve & surplus and it was 28% of equity capital and 72% of reserve & surplus in the year 2001-02. In the following years the company stated increasing the proportion of reserve & surplus from 72% to 99% with decrease in the proportion of equity capital from 28% to 1% during the period from 2002-03 to 2010-1109.


Table-2 shows that DPS of first 5 years of consideration is decreasing and thereafter the company has been increasing DPS at a slow rate.

CORRELATION ANALYSIS The co-efficient of correlation in between DFL, EPS and DPS are presented in Table-4 to assess to closeness of association between each other. It is evident from the table that the co-relation, co-efficient between DFL and EPS is (-)0.35. It indicates that there is a positive association between DFL and EPS. The value of correlation co-efficient is also found to be highly insignificant at 5% level of significance, as the calculated T value of 0.93 is lesser than the table value of 1.86. So the hypothesis that DFL and EPS are positively correlated is outright accepted.

Contrary to the common supposition debt being cheaper than equity.

Dr. ReddysLtd. enjoyed equity as a cheaper source of finance by maintaining a lower pay-out ratio. So the basic assumption of the proposition which makes leverage advantageous was not fulfilled. As a result leverage benefits did not true in case of Dr. ReddysLtd.

So there is a clear conflict between the accepted leverage theorems and actual practiced in Dr. ReddysLtd. In theory there is a positive relationship between DFL and EPS in such a way corresponding increase or decrease in DFL.

The excess capitalization and slightly increase in the use of debt in each year were commensurated by the reserve and surplus i.e., by successful ploughing back of profit instead of making additional issue of equity shares. If the same was made by fresh issue of equity shares the company would not be able to reward its shareholders more in terms of return. Since reserve & surplus was not divided bearing, its utilization brought down the cost of equity and at the same time it maintained the lower base of equity share- holders resulting higher amount of EPS (lower base means lower number of equity shares).

The study on the inter relationship between the degree of financial leverage, earning per share and dividend per share of DR. REDDYS LABORATORIES showed both positive and negative association. For the

purposes of study, the correlation co-efficient of three sets of selected variables have been analyzed. The sign of correlation coefficient between (i) DFL and DPS and (II) EPS and DPS are not conformed to hypotheses that DFL is positively correlated with DPS and EPS. The data could not provide any evidence of the hypothesis. So this hypothesis is not accepted to be true case DR. REDDYS LABORATORIES. The result of correlation co-efficient between EPS and DPS is what we have not expected. So the hypothesis that EPS is positively correlated with DPS might be rejected to be false in case of DR. REDDYS LABORATORIES


DR. REDDYS LABORATORIES could not enjoy the benefit of accepted leverage theorem. Rather it accrued operation of financial leverage. So leverage theorem is not a general rule. The dividend policy of the company is conservative because D/P ratio is low. The company has been maintaining a decreasing trend in its dividend pay-out. The company was enabling to maximize the EPS by the reverse operation of financial leverage. The company successfully pulled down the degree of financial leverage to reap the EPS advantage. Thus the objective of this paper to maximize the EPS through judicious operation of financial leverage has been fulfilled.


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