Business from Russia, US markets add to Dr Reddy's coffers

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Pharmaceutical major Dr Reddy's Labs has reported a better than expected consolidated net profit number at Rs 308 crore, an increase of 7.4% for the second quarter of FY12 as against Rs 286.8 crore in the corresponding quarter last fiscal.

G V Prasad, VC & CEO, Dr Reddy's Laboratories tells CNBC-TV18 that North America, Russia and the Pharmaceuticals Services and Active Ingredients (PSAI) segment led to the stupendous growth in the business.

Below is an edited transcript of his interview. Watch the accompanying video for more.

Q: Could you just take us through the contribution from the old products that already exist for Dr. Reddy's and also the contribution from Fonda as well as Allegra OTC?

A: The major growth came from the launch of new products. Fonda was a big contributor but was not that big as the market share is still building up. Fexo-Pseudo higher strength was the major contributor. The OTC business performed reasonably well and we also picked up market share on some of our older molecules such as Omeprazole and other such products.

Overall the US market grew by about 42% and that was the main driver of the growth for the quarter. In addition the Russia CIS markets also performed exceedingly well. These two were the main highlights for the quarter's performance.

Q: India has been a bit of a concern in the past couple of quarters and this time around you have shown a tad bit of a recovery of around 9%. What do you think is a sustainable amount in terms of domestic business growth? What could we see in terms of FY12 as a total?

A: For us, 9% for this quarter was still a disappointment. We would like our growth rate to be a few percentage points at least higher than the market growth. If you peg the market growth at around 13-15%, we should have grown faster than that. We have taken a number of steps in correcting the territory sales force's product portfolio alignment. We hope to see those results in the balance portion of the year. We are already seeing early signals of a recovery and I hope Q3 will be better than Q2.

Q: What led to the sluggishness in the domestic business?

A: There were a number of factors. We had some old brands which were impacted; products like Nimesulide had an overhang. We had some issues in scaling up our sales force as it did not become as productive as we wanted it to be. We took a number of measures to correct the situation and we are seeing good results.

Q: The other segment which has actually done extremely well is the PSAI which has grown 28%. What led to such a strong recovery and give us an extrapolation of what we could expect in terms of a growth rate for it?

A: The PSAI business is strongly tied to the global generics business, patent expirations in US and Europe. Along with the growth of the generics business in the US, we also have the same molecules going to our other customers in the US market and the European market. The patent expiries have really driven the growth of the PSAI business. This growth will continue for the rest half of the year and will also continue into next year as we see a rash of patent expiries in the next one-and-half year or so.

Q: Germany was pretty much flat on a sequential basis and it's down 27% on a year-on-year basis. Even last quarter it was down 9% on a year-on-year basis. What exactly is happening with Betapharm in particular and what is the outlook on that?

A: The Betapharm underperformance has been due to pricing pressures. We had bid aggressively for market share for the tenders and that has been reflected in lower realisations. Actual volumes are going up for all the molecules that we have won. As we establish our market share and add more products and bring in products with limited competition, the business will turnaround.

I don't think that's going to happen this year. Maybe it will take us another year or two to see our organic pipeline play out and add significantly to the growth of the German market. Our outlook is that it will be flattish for the next few quarters.

Q: Would you consider a hiving off of the German business at all or monetising it in any manner going forward?

A: No, it is not on the cards. We are willing to invest more into this market through new products and grow that business. We are also looking at other avenues such as the prescription market where products are not covered by tenders. Hence, we are looking at turning around the business and not selling it.

Q: You called off the JB Chemicals deal for that part of their Russian business. What went wrong there?

A: We liked the business and the brands. There was a good fit with our business and hence we went ahead and opened up negotiations with JB. Unfortunately on the final terms we could not agree on operational issues such as supplies and other things and we felt it best not to go forward. It was mutually decided to terminate the discussions.

Q: Would you possibly look at a renegotiation at that level? In what form or manner would you look to expand the Russian business considering that it's been on such a strong growth rate?

A: We are open to small to mid-sized acquisitions of brands. We are also looking aggressively at in-licensing products from multinationals and other companies. Of course, our organic pipeline is also playing out. There is good opportunity in the Russian market and we are doing our best to address the opportunity.

Q: You had Zyprexa's generic version which you got USFD approval for. What can we expect in terms of a contribution going forward for Q3? Can you give us guidance?

A: Olanzapine will be a very strong performer for the next half of the year. It will certainly help us meet our growth objectives for this year. It will be a very significant product for Dr Reddy's.