The last occasion this writer visited Gunapati Venkateshwara Prasad's office late last year, he was shown a bottle of champagne that had been uncorked at 3.00 am on December 18. Prasad, a young-looking 41-year-old is the Executive Vice Chairman and CEO of Hyderabad-based Dr. Reddy's Laboratories, a company that has, in the words of Chairman Kallam Anji Reddy, set itself the target of becoming "a drug-discovery and innovation-led" global pharmaceutical major "in five-to-seven years."

Dr. Reddy's had a seemingly fool-proof strategy to achieve this: one, it would continue to focus on research and create molecules that could be licensed out to large multinational pharmaceutical companies that could, if nothing went wrong in any of the stages in between, take them to their logical denouement, prescription drugs (a pragmatic approach, given the cost involved in drug development, upwards of $500 million, Rs 2,400 crore); and two, it would tap into the lucrative market for generics (best-sellers coming off patent) in the US, valued at a whopping $10-15 billion (Rs 48,000-72,000 crore).

The champagne ritual early in the morning on December 18 had been in order: a New Jersey court had just ruled in favour of Dr. Reddy's in a patent dispute with Pfizer. The process had begun in December 2001 when the company filed a New Drug Application under Para IV (See Filings Fever) for Amlodipine Maleate, a variant of Amlodipine Besylate, the essence of Pfizer's best-selling angina and hypertension drug Norvasc. In June 2002, Pfizer challenged the application and six months later, the court decided in favour of Dr. Reddy's.

FILINGS FEVER As Dr. Reddy's filing activity shows, Indian generics wannabes have to keep filing away.

The last three months of 2002 saw increased filings by Dr. Reddy's Laboratories with the US Food and Drug Administration. These included five DMF (Drug Master File) filings, essentially permission to enter the US bulk actives market with the objective of either supplying to a large US generics player or captive consumption, and three ANDAs (Abbreviated New Drug Applications). Interestingly, like the other four ANDAs filed in 2002-03, these three also took the Para IV route-an application filed under Para IV challenges the patents on a product. If successful, a Para IV filing will make it possible for a company to launch its product even before the expiry of the patent. The company also gets a 180-day exclusive marketing window for its generic offering. All told, Dr. Reddy's has 19 approvals pending with the FDA. This includes 14 patent challenge cases.

On this visit, circa February 2003, there's no talk of champagne. Instead, there's talk of numbers-total revenues for the three months ended December 2002 were almost 12 per cent lower than that for the previous three months, and 7 per cent lower than that for the corresponding period in 2001; and EBITDA margins were down to 22 per cent from 26 per cent the previous quarter and 37 per cent for the same period in 2001.

There's talk of the legal aspect: Pfizer has appealed the New Jersey court's decision and filed a counter patent for Amlodipine Maleate itself; and a senior manager in Dr. Reddy's legal department, an ardent Grisham fan, talks of "investing heavily in acquiring legal expertise and building on relationships with law firms abroad"; and Dr. Reddy's has filed a suit seeking a declaratory judgement that Pfizer's patents are not infringed by its new drug application for Sertraline HCL (a generic version of Pfizer's Zoloft). And there's talk of the pain associated with being a research-driven company: in January this year, Novartis stopped clinical trials of a Dr. Reddy's molecule, DRF 4158 after the pre-clinical stage. Dr. Reddy's had licensed this molecule to the multinational for $55 million in May 2001, the bulk of the amount milestone payments contingent upon 4158 clearing specific stages in the drug development cycle. In July 2002, Novo Nordisk had suspended trials on another Dr. Reddy's molecule, Ragaglitazar.

After its 2001 windfall-Eli Lilly's patent covering fluoxetine (the active ingredient) in anti-depressant Prozac expired in August 2001, following which Dr. Reddy's and two other companies launched different dosage forms of fluoxetine under the 180-day marketing exclusivity available to ANDA (Abbreviated New Drugs Applications) applicants-things haven't gone the way the company would have liked them to.

Swimming With The Sharks

V.S. Vasudevan, the graying-at-the-edges Chief Financial Officer of Dr. Reddy's, doesn't seem overly perturbed by the numbers. One would expect him to react to the company's net profit for the three months ended December 2002-some 47 per cent lower than that for the corresponding period the previous year. "The financials don't surprise us and are in line with our expectations. We are investing in the future-(we have to) increase our R&D spend and incur higher legal and consulting costs." Somewhere down the line, he reasons, this should start paying back.

If the company's Selling, General, and Administrative (SG&A) expenses for the last three months of 2002 have increased 43 per cent year-on-year, then, it is only to be expected. For instance, all seven Abbreviated New Drug applications filed by the company thus far in 2002-03 have been under Para IV. That's an approach laden with risk, and one that Dr. Reddy's believes makes it unique when compared to other Indian pharmaceutical companies. If the strategy clicks, even if only from time to time, the company stands to gain a windfall. As it did with Prozac, and it will stand to gain from Norvasc. Amlodipine, analysts reckon, could generate annual profits of Rs 470.4 crore ($98 million) for Dr. Reddy's, no small number for a company with total annual profits of Rs 492 crore ($102.5 million) in 2001-02. That's what the company is betting on. That, and its research pipeline.

Risky Business

Dr. Reddy's hasn't been disheartened by the decisions of Novo Nordisk and, more recently, Novartis, to stop development of molecules licensed from it. Speaking to Business Today soon after Novartis' announcement to the effect in January 2003, Chairman Anji Reddy refused to label the event a setback. "The drug discovery process is painful. It is just that the molecule couldn't meet certain benchmarks." Then, on a more positive note, "We will now study the data and determine the appropriate development path for the molecule. And we will give Novartis a backup compound that meets their requirement." Indeed, the company's research pipeline is replete with molecules-four, at the least-that are ripe for licensing.

That could explain the sanguineness of analysts like Sameer Narayan, who tracks the pharmaceutical sector for Mumbai-based brokerage Enam Securities. Don't dismiss Dr. Reddy's, he warns. "It has almost (Rs) 700 crore in cash, 10 Para IV (applications) lined up, out of which any marketing exclusivity outcome could prove a windfall." Dr. Reddy's revenue from generics may have dipped 22 per cent in the October-December quarter (compared to the same period in 2001), but that could well be, as another analyst puts it, "because 2001-02 was a particularly good year for the company."

Dr. Reddy's generics business in the US-25 per cent of its revenue-compares unfavourably with Delhi-based pharma multinational-wannabe Ranbaxy's sales of $296 million (Rs 1,420.8 crore) in the US in 2001-02, 37.5 per cent of its revenue. But unlike the latter, its US strategy revolves around Para IV filings. Although Ranbaxy has articulated its desire to now focus on niche, difficult to make VAGs (Value Added Generics), and Para IV filings, only 7 of its 37 approvals pending with the FDA are under Para IV. In contrast, 14 of Dr. Reddy's 19 are. Maybe, just maybe, there is something to Dr. Reddy's beliefs that recent events and numbers are just a bad stretch on the road to pharma greatness.