Dr Reddy's may leverage on patent filings to boost margins

Pharma major hopes to cut costs through marketing alliances as short-term strategy

To shore up its falling margins, Dr Reddy's Laboratories Ltd may, as a short-term strategy, leverage the status of its 12 first-to-file Para IV challenges through marketing alliances with other pharma companies.

This apart, the Hyderabad-based pharmaceutical major has decided to set up a formulations unit in Baddi in Himachal Pradesh to take advantage of the tax-holiday incentive that the state government is offering.

A Para IV generic challenge is a high-risk, high-return game. Generally, the greater the proportion of Para IV filings, the more volatility one can expect in earnings. A Para IV filing means that a company is fighting a patent and is taking on the patent-holders legally in a court of law.

Speaking to Business Standard, G V Prasad, vice-chairman and chief executive officer, Dr Reddy's said: "Some assets could be leveraged through alliances in the short-term to ensure that margins are not under pressure. We are looking at cutting costs through alliances as a strategy to mitigate margin pressure."

Dr Reddy's believes that it has the first-to-file status on 12 of the 24 Para IV filings. Some of its patent challenges are now maturing and could bring it major opportunities over the next few years (subject to court decisions).

Patent challenges include the generic equivalents of Eli Lilly's Zyprexa, Pfizer's Zofran, Novartis' Lamisil, Sanofi's Clopidogrel and Pfizer's Zoloft.

Prasad indicated that the company's acquisition in May this year of Trigenesis Therapeutics Inc, which has a pipeline of products could be one of the many assets that can be leveraged over the short-term for marketing alliances with other pharmaceutical companies.

"Trigenesis has a clutch of products in the pipeline that we could leverage on for sewing up marketing alliances," he said.

Dr Reddy's had acquired Trigenesis, a US-based privately-owned dermatology company, in an $11 million all-cash deal. The deal is significant because it jumpstarts Dr Reddy's foray into the specialty drugs segment.

The acquisition had provided Dr Reddy's with access to certain products and propriety drug delivery platforms for deploying a pipeline of differentiated drugs in the dermatology segment.

The privately-owned US company was focused on the dermatology area and has worldwide rights and limited territorial licences to certain products and worldwide licences to certain proprietary drug delivery technologies for application in the treatment of dermatological diseases and disorders.

Prasad also said that the company had acquired land in Baddi in Himachal Pradesh for setting up a formulations unit. "The state government is offering us tax incentives and excise benefits," he said.

Dr Reddy's expects the move to set up a formulations unit in the hill state will bring down costs over a period of time.

Dr Reddy's is understood to be also evaluating the setting up of a formulations unit in Visakhapatnam in the special economic zone. The investment in the Himachal unit could well be upwards of $10 million, though Prasad did not divulge any specific numbers.

Dr Reddy's Laboratories Ltd had reported disappointing results for the fourth quarter ended March 31, 2003, with net profit for the quarter dipping 74 per cent to touch Rs 16.2 crore as compared to Rs 62.3 crore for the same period last year, while revenues had recorded a 12 per cent growth to touch Rs 475.5 crore (Rs 426 crore).

The March quarter results were also hampered by higher operating costs, one-time charges and the absence of any new drug launch.

Net profit for the full year fell 27 per cent to touch Rs 247.4 crore as compared to Rs 340.4 crore for the previous fiscal. Revenues for the year recorded a 11 per cent growth to touch Rs 2,008.10 crore as compared to Rs 1,807 crore for the previous year.