LETTER FROM THE CHAIRMAN AND CO-CHAIRMAN
Though one needs to be circumspect in making definitive statements in an annual report, it is fair to say that there are clear indicatof of your company’s operational and financial turnaround.
On the revenue side, your company witnessed impressive growth in branded generics markets, especially in India, Russia, China, Brazil and CIS countries. Other than improving the base business across these markets, we launched several new products and scaled up in new geographies like Brazil and Colombia.
However, strong pricing pressures continued unabated in the US — your company’s key generics market. This was true for all generic companies, and Dr. Reddy’s was no exception. Thankfully, strong revenue growth in branded generics outweighed the negative pull in the US. Consequently, your company’s global generics revenue increased by 8% over the previous year.
In response to the changing conditions in this key market, we are building a differentiated pipeline for the US.
In FY2019 alone, we filed 20 new Abbreviated New Drug Applications (ANDAs) with the USFDA. As on 31 March 2019, your company had 110 generic filings pending approval from the USFDA — comprising 107 ANDAs and three New Drug Applications (NDAs). Of the 107 ANDAs, 60 are Para IV applications, of which we believe 34 have ‘First-to-File’ status.
The company’s pharmaceutical services and active ingredient (PSAI) business has seen a turnaround. In FY2019, revenues from PSAI grew by 10% over FY2018. In the course of the year, your company filed 82 Drug Master Files (DMFs) across the globe, including nine in the US. The strategy of building sustainable and growing PSAI revenues involves deeper customer relationships, new product portfolio and ramping up of base businesses in key geographies.
You will recall that in our letter to you last year, we had written: “From the beginning of FY2018 there has been a totally focused drive on eliminating needless layers and unnecessary costs.” With changing dynamics of the generics markets, we believe that cost competitiveness will continue to be a key driver. Hence, we aim to continue creating a leaner and more efficient organization.
In FY2019, our cost optimization initiatives enabled us to improve profitability. Multi-year initiatives are now in place to drive cost and procurement efficiencies; to optimize R&D spends and productivity; and to improve manpower throughput by delayering and eliminating needless overlaps.
Your company has also focused on constructing a leaner business model so as to create profitable growth for each of its businesses. As a part of the strategy, FY2019 saw the company selling its antibiotic formulations manufacturing facility in Bristol, US; its API manufacturing business unit at Jeedimetla, Hyderabad; and the rights to distribute and market the specialty derma brands portfolio.
We can also share some good news regarding the USFDA warning letters that had affected three of your company’s manufacturing facilities: API manufacturing at Miryalaguda (Telangana) and Srikakulam (Andhra Pradesh), and the oncology formulations facility at Duvvada, near Visakhapatnam (Andhra Pradesh).
Regarding the API plant at Miryalaguda, the USFDA issued an Establishment Inspection Report (EIR) in June 2017, indicating successful closure of its audit of this facility. This facility was reinspected in January 2019, for which the USFDA issued an EIR in May, 2019. Similarly, in February 2019, the USFDA issued an EIR for the oncology formulations facility at Duvvada and has determined the inspection classification of this facility as Voluntary Action Initiated (VAI). In March 2019, we responded to the follow-up questions from USFDA regarding the API facility in Srikakulam. Based on the subsequent discussion with USFDA, we expect a reinspection will be conducted for the site.
WHAT IS OUR VIEW OF THE NEAR FUTURE?
We believe that pricing pressures will continue to affect all players in generics in the US.
Overcoming this necessitates a robust pipeline of complex formulations with limited competition — a pipeline that allows your company to introduce several value-added products each year, and thus make up for price erosions on the earlier launched products.
As touched upon earlier in this letter, we have such a pipeline — of.110 generic filings awaiting approval from the USFDA. We have to leverage this and ensure that we succeed in delivering these products, molecule by molecule, to the US on the due dates. As we wrote last year, “We have to do this without fail, and with best-in-class cost. That is the way out.”
Given the challenges in the US market, we will continue our efforts to diversify our market presence. We will leverage our global portfolio of products in markets outside the US to drive growth. We will also refocus some of our R&D resources to service the high potential branded generics markets such as China, Russia and other Emerging Markets. This is an important element of our geographical diversification and new market entry strategy — to lead with high value products and go-to-market partnerships.
India will continue to be important. We have seen a 12% growth in revenues in FY2019 and improved our market ranking by three places.
We shall propel further growth in our PSAI business. These moves should reduce our dependence on the US and also help us generate sustained growth and profitability to counter-balance volatility of the unbranded generics markets.
We remain focused on improving quality across all aspects of our operations, with initiatives for continuous improvement, reducing manual interventions through digitization and shop floor training programs to constantly upgrade the culture of quality. We intend to continue this journey and meet the highest regulatory standards across markets.
Given your company’s significantly improved performance in FY2019, the success in improving operational efficiencies and our determination to drive growth, we are reasonably optimistic of the prospects for FY2020.
Our thanks to the management team, all employees and partners for coming together to deliver better results. And our thanks to you for your support.
With best regards,
K SATISH REDDY G V PRASAD
Managing Director and CEO