Dr Reddy's prescription for risk

Is the company's discovery-led globalisation strategy worth it?

Why is it that several Indian companies have a presence abroad, but only a few show signs of being globally competitive "" and none of them is a global leader yet? When I ask Vijay Govindarajan, the director of the William F Achtmeyer Center for Global Leadership at the Tuck School at Dartmouth, he startles me by countering with a question of his own: "Tell me, what is a global company?"

As I stumble through the loose-tight definition I had chosen for the series "" an Indian company of the likes of a Coca-Cola, a Nokia or a Sony "" Govindarajan quickly puts me at ease, saying that he usually gets 15 different answers when he asks 10 people that question. "That tells us two things about a global company. First, it's multi-dimensional. Second, what matters is the degree to which the company is global along each dimension," explains Govindarajan, the co-author of the best-selling, The Quest for Global Dominance: Transforming Global Presence into Global Competitive Advantage.

In that classic tome, Govindarajan elegantly lays down every global company's five dimensions:

Globalisation of market presence: To what extent is your company present in the important markets in the world for its products?

Globalisation of supply chain: To what extent is your company accessing the most optimal locations for the performance of activities in the supply chain?

Globalisation of capital base: To what extent is your company tapping into the most optimal sources of capital on a worldwide basis?

Globalisation of talent: To what extent is your company able to attract, retain, develop and leverage the best talent in every country?

Globalisation of corporate mindset: To what extent does your company reflect an understanding of diversity across cultures and markets coupled with an ability to integrate across that diversity?

One look at the G-model, and it becomes obvious that only when executives are clear on what a global company is, can they decide how to build a global company.

Let's take the case of Dr Reddy's Laboratories (Dr Reddy's), that operates in an industry where Indian companies appear to enjoy a global advantage "" and faces this very dilemma. The Hyderabad-based company sells bulk actives (active ingredients in drugs) and formulations (ready-to-consume dosages) at competitive prices in over 100 countries but committed itself to a very different globalisation strategy some years ago: discovering new chemical entities (NCEs).

Says Govindarajan: "Where is the strategic clarity?"

Those two businesses are as alike as, say, Vitamin C and Viagra. Until now, Dr Reddy's had an advantage over rivals because it could reverse-engineer alternatives to patented drugs and manufacture them cost-effectively. However, the discovery-led business is a different Petri-dish altogether since it is capital-intensive and risky.

"The two games are very different in terms of culture, mindset and capabilities," points out Govindarajan, who adds that Dr Reddy's discovery-led globalisation strategy forces him to pose the question: "Is it an ambition worth pursuing "" or a pipe-dream?"

When I turn to G.V. Prasad, CEO of Dr Reddy's, I'm pleasantly surprised to see that he harbours few illusions. "The challenge is our own DNA. Our company thinks in terms of chemicals and molecules. It has to move to innovation, where we define the problem from the patient's or doctor's point of view. We have to change the company's DNA," he readily admits.

However, he believes that's happening. In the early 1990s, Dr Reddy's moved up the value chain when it felt the pinch of falling margins in the bulk actives business. By 1995, the company had launched generic formulations for regulated markets like the US and branded generics for less-regulated markets like Russia.

Then, it started developing specialty formulations in 2001 to ramp up revenues. Where Govindarajan points to a lack of strategic clarity, Prasad sees a steady movement up the value chain. The figures bear him out; Dr Reddy's has grown at a compounded annual growth rate of 28 per cent in the last five years.

Prasad plans to use the specialty formulations business as a halfway house between the past's reverse-engineering tactics and the future's discovery skills. He is trying to add low-cost innovation "" a novel dosage, a unique delivery mechanism "" to generics and branded generics.

Not only will that give the company exposure to developing innovations through basic R&D, but it will also teach Dr Reddy's to market drugs since US doctors prescribe specialty-formulations by name. Moreover, it will provide the revenue spikes the company needs to keep the innovation pump primed: the specialties game-plan is to develop a portfolio of products that add at least $ 50 million in revenues each.

In terms of NCEs, the company has eight products in the pipeline, the first of which may enter the market by 2008.

Govindarajan isn't convinced that this path to globalisation won't be rocky. He has visited Dr Reddy's manufacturing facilities, which impressed him. At the same time, he has consulted with pharma firms like Johnson & Johnson and Abbott Laboratories, and feels it is difficult to break into the innovation-led club.

As he says, "Dr Reddy's gaps on the five dimensions are significant. It will need to master several challenges to become a global company."

Consider the issues Dr Reddy's faces as it makes the transition from a global presence to a global company:

Globalisation of mindset: The biggest challenge, according to Govindarajan, lies in shifting Dr Reddy's mindset of a company that produces at a low cost in India and exports to the rest of the world.

That will require sweeping changes: less family control, decentralised decision-making, setting up R&D centres outside India, setting up marketing and distribution infrastructure in overseas markets and, importantly, finding new competencies.

Says Govindarajan: "Moving up the food chain requires big cultural transformations. If the family owns 30 to 40 per cent of the stock, and family members run the firm, that's an Indian mindset."

Prasad, who is founder Dr Anji Reddy's son-in-law, says he is systematically cutting the family strings that bind strategy. The family's stake is down to 26 per cent, and an eight-member management council, which consists of people who head global functions and units, runs the company. Half the council is based in the US. Moreover, only manufacturing and product development are in India.

Prasad has started de-linking himself from businesses that are established, and instead is "obsessed" with building an organisation for the future. He claims he is rigorously "reinventing" himself by learning about new businesses and new markets.

What really worries him, though, is changing the mindset at the grassroots. "The factory worker sitting in a small village in Andhra Pradesh has to service a market that is highly regulated by the US FDA. It's very important for our workforce to understand that market and adapt to meeting those requirements," he says.

Globalisation of human talent: It's no secret that Dr Reddy's has enjoyed a low-cost advantage due to the large number of highly-skilled scientists and researchers available in India. But while those skills can be deployed cost-effectively in developing equivalent products, they are of little use in the discovery-led approach, points out Govindarajan.

Recognising that mixing the two research philosophies could be as dangerous as adding nitric acid to glycerol, Prasad has ensured that there are already two separate R&D establishments within Dr Reddy's India operations "" one for business-as-usual, the other for innovation.

In fact, in the future, Prasad sees the need to set up two independent companies under the Dr Reddy's umbrella "" one for discovery products, one for equivalents.

The other issue: a low-cost, India-based talent strategy. Counters Prasad: "We are giving up our low-cost strategy because we're building our US operations. We have increased our operating costs in order for us to look for a higher value-creation opportunity."

In 2000, the company set up its first global research facility in Atlanta. Prasad plans to hire more people with a "discovery-led mindset" there. Last year, the manpower strength in the US rose from five to 50. Moreover, Prasad insists that in the innovations side of the business there may not be any low-cost advantages based on head-count, but the company still benefits from the low cost of infrastructure and the ability to scale up quickly.

Explains Prasad: "We combine thought-leadership in the US with scale and the low cost of innovation in India to create a competitive advantage."

Govindarajan points out that there is nothing to stop transnational pharma firms from weaning away the best talent in India. "I am not denying that there are world-class scientists in India. But does that automatically mean that only Dr Reddy's can use that base?" he asks.

Globalising market presence: Govindarajan gives credit to Dr Reddy's for managing its global presence "" so far. Dr Reddy's sells branded generics in 38 countries and bulk actives in 53 countries. It started by selling generic drugs in less regulated markets and graduated to focusing on more regulated markets. But, asks Govindarajan: "In what way will Dr Reddy's exploit those markets?"

Interestingly, the keyword at Dr Reddy's is not exploit, but exit. The company has started to limit the markets it operates in based on two criteria: the ability to compete as well as the attractiveness of the market.

The idea is to bring down global presence to increase global competitiveness. The company will pump resources saved by a shrinking global footprint into developing key markets like the US, Brazil, Europe, Russia, and China.

Says Prasad: "We've given up the bulk business in many parts of the world. We want to focus on the developed world."

In the specialties business, one route to establishing a global presence will be licensing agreements with other companies, and perhaps acquiring companies. In fact, Dr Reddy's was all set to introduce amlodipine maleate, a drug for hypertension, in the US market in 2004.

But the "innovation" was a legal loophole, and Dr Reddy's suffered a setback when it lost a case in the US courts last month. Six months ago, Dr Reddy's submitted yet another specialty product for approval in the US market "" and Prasad indicates that within 24 months a marketing infrastructure could be in place in the US.

The only glitch is that Dr Reddy's strategy until now has been based on finding legal loopholes in patents. By challenging Eli Lilly's patent for Prozac, for example, the company earned $ 60 million in six months through an equivalent product. Such litigious strategy hardly endears Dr Reddy's to potential global partners.

"Dr Reddy's will need to convert big companies into customers where they have been competitors in the past. By eroding their margins, Dr Reddy's has made them quite mad," warns Govindrajan.

Prasad is betting that business relationships will be based on fact, not emotion. "We compete with them, litigate against them "" and work with them."

That's true; Dr Reddy's was in litigation with Novartis over a generic product even as it licenced its diabetes molecule to it. Similarly, the testing and marketing of the first molecule to come out of Dr Reddy's discovery pipeline "" insulin sensitiser Balaglitazone "" has been out-licensed to Novo Nordisk.

Globalisation of supply chain and capital base: Govindarajan finds little to fault in these two areas. Dr Reddy's has made very little progress in the globalisation of its supply chain "" that's good news, says Govindarajan. Until now, it made sense to base the supply chain as far as possible in India, and avail of the low-cost advantage.

In terms of finances, the company has systematically availed of opportunities to globalise its capital base. After going public in India in 1986, the company went in for a $ 48 million GDR in 1994 and on April 11, 2001, became the first pharmaceutical company from the Asia-Pacific region, excluding Japan, to list on the New York Stock Exchange. Says Prasad: "More than 40 per cent of our shareholding is held by global institutional investors."

That still leaves one issue Dr Reddy's must deal with: size. Pointing to the turnover of around $ 380 million (March 2003), Govindarajan says: "Glaxo, Pfizer or Merck round off $400 million in their annual reports. In this industry, there are giants whose economies of scale are phenomenal."

Undaunted, Prasad says he's working on it. His stretch targets: more than double the turnover to $ 1 billion by 2006, and increase the share of global sales in total revenues from 65 to 80 per cent by 2007.

The bottomline: I find myself caught between a management thinker who sees the problems of a beaker half-empty "" and the practising manager who sees the opportunities of a beaker half-full.

Still, I can't resist quizzing Prasad about why he is committing Dr Reddy's to a more risky strategy rather than playing safe. "Why bother with the discovery-led business when you could just as well go global with the bulk actives?" I ask.

"Yes, but that will not lead to greatness," says Prasad. "The world's largest generic firm has sales of $1.5 billion at most. The world's 50th largest innovation firm is bigger than that. So, success in innovation is necessary for Dr Reddy's to become a great firm."

It makes me wonder: perhaps, that's all the strategic clarity a company needs when it wants to go global.