Plan to revamp systems as per FDA expectations: Dr Reddy's

With one of its plants under the US FDA scanner, Dr Reddy’s laboratories have plans to revamp systems to bring it in like with FDA expectations.  “The quality management system, we are revamping to bring it in line with the new expectations of FDA both in terms of compliance, data protection, reliability as well as the new set of metrics,” said the GV Prasad, Co-Chairman & CEO of the company in an interview to CNBC-TV18.The leading drug maker has also changed its brand identity and with that has renewed its focus on geographical expansion & quality compliance. Speaking on acquisitions, Satish Reddy, Chairman of the company said they are always on the lookout for strategic fits to boost growth.Below is the transcript of GV Prasad’s and Satish Reddy's interview with CNBC-TV18's Archana ShuklaQ: 30 years and a brand change, what really led to this change and what are your key and new aspirations now attached to this change?Prasad: Firstly I wouldn’t see this as a dramatic shift from the past; I would say it is evolutionary. Dr Reddy started as a chemical company, as an Active Pharmaceutical Ingredient (API) company. That point technology was the driving force for the company. From there we evolved into medicines, drugs and drug discovery and all that, so there that was one shift that we made and we had this life research hope and the new logo come in at that time.  Over the years the businesses have grown, they have grown in different ways and we as a company wanted to bring them all together with one rallying cry with something that resonates with every individual that works in Dr Reddy'saround the world and that was one driving force for starting on the journey. There are of course other things- the company’s strategy has become a little more evolved and that needed to mesh with our new branding and then we also were looking at the healthcare scenario in the world and how it is evolving, we felt the need to adjust our brand and make a statement which resonates with everybody in the company and also with our stakeholders and that is how we started on this journey of rebranding Dr Reddy's and we now have our new brand which is Good Health Can’t Wait and with this logo of a heart and just bubbles coming out the heart. Q: With a new brand, new logo and a new focus, where are you positioning Dr Reddy'sif we talk of the global pharmaceutical space? What are your aspirations now of a scale to reach and the things that you want to do? Prasad: Firstly we want to signal that we are moving beyond medicines to health and making the patient at the centre of everything we do, so this is one shift.  The other thing that we are doing is-as we evolve this business from generics into more value-added products such as proprietary products as well as biosimilars, we want to signal to the world that we are moving into health as a complete whole and that makes us look at different dimensions of health, the patient journey, the services that he needs along with the medicines, so as a result of this our focus will expand beyond just medicines to the entire health of the patient. Q: The company had a target to be a USD 3 billion company by 2012. Are you reassessing your aspirations as far as the scale of the company’s concerned in the near-term with the new push that you have now? Reddy: No, there is no reassessment of the goals or what we are trying to do because the target that you talked about was set at a certain point of time when the company was trying to raise a certain aspiration and then we had a certain goal at that point of time but then if you see the evolution of the company like Prasad was saying over a period of time how the company has started building capabilities and then if you look at the opportunity ahead of us in terms of what is presented, it is a huge scale up that the company can go ahead, so I won’t put that in numbers and a particular date to say what can be done but we are in a good position right now.  Q: Proprietary products is one space that you spoke about, how are we looking at the monetization of those proprietary products, what is the timeline that we are speaking, how far are we in that journey of launching those proprietary products?Prasad: For the company filing these new drug applications (NDAs) last year was a great achievement. This is the first time we moved from doing research into actually filing for innovative products. So, we now have target dates for approval, from the FDA for these three products and we should see the first launch of this product within the next 12-18 months and we should continue that with a raft of launches, maybe one product or two products every year in the US market. This business is really focused on the US on two franchises –dermatology and neurology.  I expect this business to be in the hundreds of millions of dollars in the next 5-7 years and not only that, it will also have an impact on our branded businesses worldwide by bringing in the thinking of understanding unmet needs, converting that into a product, developing them and registering them worldwide. So, in that sense this is not only about money but is also about our evolution from being a generics company to a company which looks at unmet medical needs and innovates to meet them.  Q: In two years’ time you would start launching those products in the US market. US is the largest market for the company but we have seen some amount of headwinds as far as regulatory issues are concerned or regulatory approval timelines are concerned for that market? How are you dealing with them and you have pushed a lot as far as complex generics are concerned, for US market, where do you see yourself?Reddy: There are two three issues that you are talking about in terms of challenges. One is obviously the regulatory part of it where because of the increased scrutiny of the US Food and Drug Administration (FDA) on companies coming out of India, it has presented one level of challenge. So, that is one thing we are looking at. The other part of it when you look at the market itself because of the consolidation that you are seeing in the channels -- the distributors, the retail chains, that is another part of it  which has also put some amount of pressure. Then there is also other consolidation which is happening amongst generic players. The most recently that we seen Teva with the activist part of Allergan. So, these are changes that you have seen in the market but when it comes to products like the complex generics that we have developed as part of Dr Reddy's it offers immense potential. It is a question of the approval cycle and once we get the approval once we get it and the market share that we gain after that which is the most crucial thing. So we have shown a proven track record on this space whether it was injectibles or a few other products that we have launched over the last few years and we continue to maintain that because of this rich pipeline that we have. Q: The complex generics is a big push for Dr Reddy’s, what sort of launches and the pipeline looking like in the next one year’s timeline?Prasad: We are doing significant work in injectibles, complex injectibles largely in oncology and the hospitals healthcare systems area. We are doing some incremental innovation even in generics, so the pipeline looks very good. I can’t share specifics with you and I can’t share timing because predictability of approval is not very clear. Q: But is there a scope for more inorganic growth in that market? We have seen Sun expand through Ranbaxy, Lupin has also made a recent acquisition of Gavis Pharmaceuticals, so companies are pushing their generics pipeline in that market making it more competitive through M&A route. Is that a scope for Dr Reddy's and are you exploring some opportunities in the US? Reddy: This is part of a growth strategy but it is not purely going to be in terms of adding some revenues, it is also about capabilities. So if you see the last four to five years we have expanded globally on a range of acquisitions which helped us access the technology and also help us build a pipeline. So that was one part of it in terms of capability building. Hence, if there is other opportunity available to us which adds on to our growth strategy we will always be looking at it. Q: The Teva Allergen deal will throw open some opportunities for some brand acquisitions from the FTCs, conditions that would come in. Would you be interested in, have you already assessed that portfolio, do you see something? Prasad: Certainly it is of interest to us and we will participate in that process whenever it starts. We have been in touch with the bankers. Q: So you have already assessed some, how many products do you think…Prasad: Not at that stage yet but it is something of interest to us.  Q: Which therapy areas would really suit your portfolio? Prasad: Not therapy area driven, we have to look at the products.  Q: Individual products perspective? Prasad: Yes. Q: Would we look at some acquisitions in the proprietary side in the US market?  Prasad: It is possible. We are looking at opportunities there too. Q: From the US marker perspective again, are the approval timelines now improving for products, how do you see it for Dr Reddy's?Prasad: Post Generic Drug User Fee Amendments of 2012 (GDUFA) there has been an improvement. Various other factors come into play and it is a bit too early to judge but the government is meeting their GDUFA commitments._PAGEBREAK_Q: As far as the regulatory compliance is concerned Srikakulam is under the scanner. We understand you have already written to the US FDA and you also said you will be making a lot of investments to upgrade and upscale your quality compliance. What sort of investments are you making?  Prasad: The quality management system itself we are revamping it bringing it in line with the new expectations of FDA both in terms of compliance, data protection, reliability as well as the new set of metrics they are asking the industry to look at. So that process will take a year or two years to deeply entrench itself. It is not just a question of money; it is question of looking at the hardware, the software, the training, the culture and all of those. So it is a significant investment in transforming.Q: So how much have you already invested in transforming? Prasad: It is not about money here, it is more about time, effort and the attention of the management.Q: Do you think you are close to a resolution on that side? What sort of a conversation have you had? Prasad: We don't have an update on that. Q: You also had a follow up visit at your Hyderabad facility recently and ou have received some observations on that facility as well? Prasad: We have had several inspections after that, we have some inspections where there were no observations, some which had some minor observations and so on but this resolution still we don’t have any information to share with you.  Q: What sort of an impact in the US business do you think is coming because of this scanner put on Nexium because it is a one big product which you have openly said that you have filed from there and you have applied for a side transfer as well? Prasad: We still don't have approval on that product. We already have been impacted quite significantly due to the delayed approval of Nexium and other assets. Q: Any quantification that you would want to.. Prasad: I don’t have a quantification but it is quite large. Q: Let us shift focus to some of your emerging markets, Russia being the other key market where you operate and like you were saying in the press conference that you continue to stay in that market despite challenges in the past as well. How do you see the current challenge and are you making any strategic shifts in that market, any changes in your strategy that would help you survive in the current volatile environment? Reddy: If you see the current problems a lot of it is because of the currency volatility, that is something that we had seen and also the economic conditions because of sanctions imposed on Russia and that has a direct effect on pharmaceutical market itself. So, you are seeing volumes go down. So if you actually see the Russian market over the last one or one and half years the volumes have actually gone down. We kept growing in spite of that because of our very strong presence in the market with various our products in different segments again. So, within OTC, within prescription products, within institutional sales. So, there is not going to be a shift in the strategy. In terms of some of the tactics to continue to grow in the market there will be a subtle shift in that in terms of pricing and a few other issues but we don't see an overall strategic shift in the market because we are committed to the market.Q: Would you look at some of the inorganic modes. Lupin has already made an entry through M&A route and has grabbed quite a bit of the market share with that. What sort of changes in the competitive landscape do you see with this sort of a entry and would M&A be a driver for you in the Russian market? Reddy: Not particularly because again I am saying that it is a really large market for us. In terms of the sales if you see us and the nearest competitor from India it is a huge margin, so let us not even talk about that. So, that is not the issue. The issue is if you want to grow in the market there are several other things to be done besides an M&A and at the scale at which we are operating at this point of time. So, that won't be the key driver. At the same time I would also say we are looking at opportunities there but that is not the key driver.Q: The third important market of course is India and you spoke of a lot of challenges which the company and the overall industry is facing whether it is price control or regulatory compliances are concerned. Do you think in the changing competitive landscape in this market when there is a competition as far as price control is concerned or with companies like Sun gaining a lot of market share with acquisitions you need to change your strategy here? Prasad: We have certainly in the last couple of years did a lot of interesting stuff in the Indian market. Indian market is very important to us, it is our home market and we are not very happy with our ranking here. So we put in a lot of effort in streamlining our processes, our portfolios our focus and that is starting to pay dividends. Today our growth is closer to 20 percent compared to 13-12 percent which used to be case historically. So our position in the Indian market is improving, we are open to other options, inorganic options included which we just did with UCB's brands and we are committed to grow this market. Every market has its challenges, the Indian market has its challenges but it is exciting place to be. It certainly is growing at a much faster rate than most markets in the world. So overall India continues to be a focus for us. Q: Would you be open to looking at an acquisition like what Sun did with Ranbaxy, do you think there are opportunities available that you could explore?  Prasad: Sun and Ranbaxy is a very unique combination. Ranbaxy the buyer was not comfortable with what he bought and then there was an opportunity and it happened. So, I can't predict whether any such opportunities are lurking in the market place but we remain open to acquisitions.  Q: You are open and would you be assessing, are you still assessing some options? Prasad: Not in that scale. Q: Do you think valuations are just too high in the Indian market. What do you think when you look at an M&A option in the Indian market, do you think valuations are at the level that they should be? Prasad: Valuation again is like beauty is in the eyes of the beholder. If there is some value that you can buy and add to it then you are willing to pay a premium and buy it at a higher price. So, in that sense we look at each asset, each opportunity uniquely. I can't generally say the market is overvalued or undervalued.Q: A lot of times we have heard speculation in the market that possibly Cipla is looking for a sell out or may be even Wockhardt is looking for a sell out. Have you heard anything of that sort and if that would come on the table would you look at assessing something of that nature? Reddy: As you said it is speculation. Q: I am asking. If something like that came on the table would you be accepting it? Prasad: We can't comment on speculations.Q: The other big segment that you have been speaking about and working on has been the biosimilars push. Where are we on that front? Your deal with Merck, where is it, we have not heard an update on that?  Prasad: The cycle times for clinical trials, all these are quite long in this business, so we are making good progress with Merck, the clinical development is going quite well. There will be some restructuring as we think as we go forward. As of now the relationship stands as it is and it is marching forward.  Q: Any timeline that you could help us with in terms of launches? Prasad: 2019. Q: 2019 is when but you are very well on that…Prasad: We are on that path, things are going as well as they can. Q: You had a deal with GSK as well, a partnership, where is that? There were reports that you are calling that JV off on generics, is that still on and if yes, then what is the progress? Reddy: First of all it is not a joint venture, it was providing access to certain markets where we are not present or we had pulled out as part of our strategy. So, that didn’t work very well, so at this point of time our focus is on also to start looking at other emerging markets where we were probably present in the past, didn’t work out or look at newer markets at this point of time because we have a different strategy now compared to what we had before. Prasad: And that relationship is being unwound.  Q: R&D has been a focus from Dr. Anji Reddy’s time and you have always said that you would keep investing in your R&D capabilities; you said that was one of your key priority areas as well. If you could help us understand what is the pipeline looking like and how close could we be or how far have we reached on that pipeline and would you be reassessing your investments in R&D and where would it be settling now?  Prasad: R&D is flipped between various businesses. The bulk of our R&D spend goes in to generics and API, it is about 60 percent or so and that is fuelling our complex generics pipeline, our API growth. The rest of it a large portion of it goes to proprietary products which are really working on existing molecules and improving them in the areas of dermatology and neurology. So, that pipeline we have already filed three NDAs, we are going to continue filing as we go forward and the products will be launched in a year or two. We are 12-18 months we should see our first launch. So, that is a significant achievement for us and biosimilars we just spoke about it, that is also award winning. Apart from this we are not doing drug discovery in the main company today but we are doing it at Aurigene and that also is progressing as well as it can.  Q: So as far as percentage of investments in R&D is concerned, where do you think it would be settling in the next two to three year’s timeline? Would it remain at 10-11 percent? Reddy: In the current range.Q: Just to wind up the conversation new company's vision, new brand, new logo, you have outlined certain vision. Where do you see yourself in the global map as far as rankings are concerned also in the India space as far as ranking is concerned. You said you were not very happy with that, where do you want to be let us say in the next two to three year's timeline and if the company is working with any target as far as the scale of company in terms of revenue is concerned? Prasad: More than numbers and ranks we want to make a difference to patients around the world in the areas that we focus on and we certainly see great opportunity in our core markets, in India, in US, in Russia and some of the key other emerging markets where we will be one of the more significant players in the areas that we focus on. So, we are happy with where we are going. We see lot of possibilities and this drive with our new brand statement, 'Good Health Can't Wait' is inspiring all my colleagues to do their best for the company. Reddy: It is not the number, it is the value that we are going to create for all the stakeholders that is more crucial. Q: But you would definitely be wanting to inch up on the charts as far as ranks are concerned in India? Prasad: That will be a consequence.