Other Indian drug companies such as Sun Pharma and Lupin, who ventured into specialty business, are also facing challenges in scaling their products.
Earlier this month, Dr Reddy's announced the sale of its two specialty migraine drug assets Zembrace and Tosymra to Upsher-Smith Laboratories in US and other territories.
Dr Reddy's said it will receive $70 million upfront and another $40.5 million if those drugs meet certain milestones. The company also said it will receive sales based royalties on a quarterly basis.
Zembrace and Tosymra are both reformulated versions of migraine drug Sumatriptan. One is an auto-injector and other is a nasal spray. Tosymra was approved in January this year by USFDA.
Just two months ago, the company sold three specialty skin products - Sernivo Spray, Promiseb Topical cream and Trianex in the US to Encore Dermatology. The company got Rs 181 crore from the sale.
The management has indicated that it is taking a pause and having a relook on how to move forward with other specialty assets under various stages of development.
Dr Reddy's over the years had built specialty assets focusing on dermatology and neurology. But now it says if any of these assets are not aligned with the core-strategy, they may be sold or out-licensed.
The company has even hinted at prioritising speeding-up of clinical trials of its biosimilar assets meant for US filings over specialty assets.
Dr Reddy's spends between $250 and $300 million on R&D of which it allocates about 60 percent to development of formulations and active pharmaceutical ingredients, the remaining was largely spent on development of proprietary products, a small portion of it goes towards biosimilars and Aurigene, a subsidiary working in new chemical entities.
The monetisation of specialty assets and the management commentary by the company hints at a possible de-emphasis of the specialty business.
The shift of focus away from specialty business, was also due to the lacklustre performance of the division. Specialty business contributed about 4.4 percent or Rs 680.8 crore of Dr Reddy's revenues of Rs 15,385 crore in FY19, growing at 13 percent. But the revenue growth of specialty business, which the company refers as proprietary products pales to modest 5 percent, if we take out one-off out-licensing income.
At this rate of growth, the company is far away from the aspirational target to build a $400 million business by FY22.
"We are going to focus on generic in general. We will have some specialty, but our main bread and butter is about affordable medicine, and giving accelerated access to affordable medicines. This is where we are going to be," said Erez Israeli, Chief Operating Officer at Dr Reddy's, speaking at 37th Annual J.P. Morgan Healthcare Conference earlier this year.
"Maybe there was a perception in the past that we are becoming from a generic company to a specialty company. This is not the case. We are generic company and will stay generic company in that respect. May be here and there we will have a nice asset in specialty that can serve us well. In that respect, the main effort will be, if at all, complementary moves in the generic area," Israeli clarified.
Analysts saw this coming.
"For the past year, the company had indicated its desire to divest or cease the proprietary products business, though, the quantum received through the divestitures (~$170 mn) is significantly shy of the US$650-700 mn spent on developing the products from FY2013-19. Given our long-standing concerns over the scalability of DRRD's proprietary products strategy and questionable product selection track record, we believe the divestitures are a correct step," said Kotak Securities in its latest report.
Others not immune
Dr Reddy's change of strategy comes even as other large Indian drug makers continue to bet on specialty drug business in US through acquisitions, R&D scale-up and expansion of sales and marketing budgets.
They see specialty drugs to mitigate the rapid price erosion and commoditisation of plain vanilla generic drugs in US.
Specialty drugs are prescription drugs that are repurposed or reformulated, requiring special handling. They are approved using a different pathway called as the 505(b)(2) new drug application, with limited period of exclusivity. The advantages end there. The companies have to build marketing and sales machinery to build brands, get the drug formularies to add the drug and payers to back it. All this is very new for Indian drug companies, who are known for selling low cost copycat drugs.
Analysts say it isn't Dr Reddy's alone that's struggling. Other Indian drug companies such as Sun Pharma and Lupin, who ventured into specialty business, are also facing challenges in scaling their products."Either one needs to have one big brand with good earnings visibility or it needs to have a basket of specialty products. With a standalone product, it will not be cost-effective to build brands," said Surya Patra of Phillips Securities.