Global Business Strategy of Dr Reddy Labs - Essay Example

Section/# Dr Reddy Labs: A Case Overview and Analysis Dr Reddy Labs, an Indian pharmaceutical manufacturer that is heavily involved in supplying pharmaceutical retailers around the globe with original and generic medication stood at a delicate impasse during and leading up to the year 2003. Begun by Dr. Anji Reddy in 1986, Dr Reddy Labs saw its earliest success come from the explosion in growth of the Indian pharmaceutical sector during the last 1980’s and early to mid 1990’s. Following this rapid level of success, the firm was able to attract and employ a large segment of talented research and development scientists at a fraction of the cost that more advanced Western economies could do. As such, this provided Dr Reddy Labs with an obvious cost advantage with the development and innovation of new drugs as well as setting up the infrastructure that would be able to compete on a global scale and provide pharmaceutical markets around the world with high qualities and high quantities of generic drugs. As a means of analyzing the overall strength, strategic position, fundamental tools at the disposal of the firm, strategy, outlook, history, and outlook for the firm in question, this analysis will seek to provide a commentary on each of these points. By means of beginning its industrial start as a primary supplier of Indian and Russian pharmaceutical industry, Dr Reddy Labs was able to save a massive amount of money that would otherwise be required to make the labs qualify under FDA regulations. In this way, the firm was able to begin generating a steady stream of revenue while seeking to focus supplying existing markets and consumers while minimizing the needs to jump directly into the more nuanced US and/or European markets. For this reason, few firms readily enter the pharmaceutical market due to the obscenely high cost of entry associated with all of the standards that such firms seek to meet within the beginning phases of company operation (Hopper 2003). Once a solid footing was established within Indian and international markets for both generic drugs, Dr. Reddy Labs shifted to seeking to penetrate the market for over the counter drugs in both Europe and the United States. This would serve as the first foray into the US market; a market which according to the study that has been utilized to inform this piece accounts for over 50% of the entire world pharmaceutical market. This gradual approach to entry into the US market meant that the firm was able to continue to generate a high number of sales from the key markets that contributed mainly to their initial success as well as leverage more advanced markets without entering the fray of brand name drugs and expensive FDA regulations concerning their development. Further, as the firm sought entry into the US and European markets, points which will be discussed in a great deal more depth further along in this analysis, it saw the need to expend a large amount of capital in order to achieve such a goal. As the initial success and the means by which Dr. Reddy Labs has built its customer base and defined itself within the industry has been briefly explained, the reader can see a firm that has taken a series of well timed and successfully implemented steps to become one of the dominant players in the world pharmaceutical market. However, as the case study which has been provided illustrates, the recent history of Dr Reddy Labs has not been nearly as profitable as the early history of the company that has thus far been related. Beginning in the early 2000’s, Dr. Reddy Labs made the fateful decision to enter the US and European drug markets. As a means to achieve this step, key requirements were necessary to ensure that the level of production and licensing of the facilities were up to par with the means that regulating agencies required. In brief, the means by which Dr Reddy Labs intended on penetrating new markets was a clear deviation from the prior success which has thus far been enumerated upon. Moreover, it was the initial success that afforded Dr Reddy labs with the fluid cash that it required in order to make entry into these new markets with new and challenging requirements. As such, leveraged with a degree of debt and dependent upon a measure of success, it was with a heavy heart that CEO of Dr Reddy Labs learned that several more of their pre-clinical trials had failed to pass muster (Lekha 2008). Although the failure of new drug compounds to treat a litany of different ailments was and is a large part of the game of pharmacology, this was a particularly painful setback for Dr Reddy Labs as it had only recently poured a vast amount of resources into new segments of the firm which were to be responsible for generating income and helping to bring the firm to a host of new markets and new consumers. Though Dr Reddy Labs already had a strong focus on research and development within its laboratories, the new focus and entry into the US and European markets meant that the research and development arms of the firm had a more and more complex and costly task to accomplish in seeking to engineer, patent, and see drugs through to eventual acceptance into the world pharmaceutical markets. This process and refocus meant that a larger and larger portion of the profits that would otherwise have gone into differentiating key regions of the company’s profitable branches that were already in existence in a plethora of markets and bringing in a high level of funding to the firm were diverted into seeking to compete within a type of pharmaceutical game in which the firm nor its leadership were intimately familiar with. This should not be misconstrued to mean that the leadership and/or scientists that were employed by Dr Reddy Labs were somehow incompetent or unable to grasp the complexity and difficulties associated with attempting to patent drugs; rather, what can be understood by a thorough analysis of the proceeding difficulties that took place was that the firm fell on a period of bad luck with regards to approval of the drug varieties that they had in process at the time. Such a period of difficult times required that Dr Reddy Labs re-examine the market penetration approach that it had currently held and review the business plan and operational model which had thus far guided the firm to such a high degree of success. This naturally weakened the strategic position that Dr Reddy Labs found itself in as it most certainly had fewer resources to draw upon and a need to experience a level of success within the markets in question, both as a way to build revenues as well as credibility and reputation for having drugs approved for usage (Floyd et al 2008). Although this credibility may seem as somewhat inconsequential to the average observer, as a function of having several drugs turned down after preliminary laboratory trials, the credibility of the firm was severely damaged at a time that it sought to gain notoriety as an up and coming supplier of primary pharmaceutical compounds to pharmaceutical players around the globe. In this sense, the loss of profitability from the drugs that had been researched, developed, and promoted for trial was but a small part of the financial damage that had been wrought upon the firm near the end of 2003. As a means to further the acumen and ethos of the research and development branches of the pharmaceutical supplier, Dr Reddy Labs made what has become known as the largest single acquisition by an Indian firm of a foreign firm in history. In 2006 Dr Reddy Labs acquired Betapharm, Germany’s fourth largest generic pharmaceutical manufacturer, for approximately 480 million Euros. Betapharm denoted a 3.5% market share and 150 active pharmaceutical ingredients; thereby representing a valuable acquisition with relationship to promoting the creditability and recognition that Dr Reddy Labs would be able to bring to bear on the new markets that it sought to compete within. However, many outsiders viewed this acquisition with a great deal of criticism. For purposes that can only be understood by a thorough examination of the causal factors leading to Dr. Reddy Labs acquisition of Betapharm, the deal was finalized and Dr Reddy Labs hoped to use this as a means to leverage a new level of market penetration and recognition within the markets that it sought to expand within. To Dr Reddy Labs, the acquisition of Betapharm was something of a force multiplier and exponential growth mechanism. In truth, Dr Reddy Labs was not the only Indian pharmaceutical player that was deeply interested in Betapharm’s acquisition. Due to the unique nature of the German pharmaceutical industry and the business constraints that currently existed within the European system, allowed for Dr Reddy Labs model of growth which had raised the firm to such a high level of success in the developing world would not work on a systemic level within Germany or Europe for that matter. In this way, the acquisition of Betapharm was something of a necessity in helping to provide what Dr Reddy Labs believed would be a type of much needed kick start to providing penetration into the European, and more specifically, worldwide markets for pharmaceutical sales. Moreover, as briefly mentioned previously, one of the stronger motivating factors for the acquisition was of course the fact that Betapharm had a primary strength within the area of research and development; something with which the prior analysis has indicated that Dr Reddy Labs had struggled. In this particular way, it is readily noted that the high price of acquisition of Betapharm could not necessarily be understood by the casual observer due to the fact that Dr Reddy Labs saw this acquisition as more of a type of expertise acquisition than merely providing nuance and market access to the firms existing product lines. Similarly, the timing of the acquisition is also of primary importance in seeking to understand some of the true motivations for seeking Germany as the next reasonable step in further developing the firm and its holdings/capabilities. As the US market for generic drugs become less and less lucrative due to new legislation that was enacted in the end of 2005/beginning of 2006, the legislation effectively reduced the profit margins that generic drugs could enjoy from 25% to around 5%. Furthermore, it became necessary for firms such as Dr Reddy Lab to actively make a choice to engage with a key European nation whose pharmaceutical sales segment had a high probability for growth and potential for advanced research and development. As a result of the merger, Dr Reddy Labs was immediately able to gain full and unmitigated access to the world’s second largest generic market. This was of course especially important due to the fact that the overall lucrative nature of the acquisition. As one might expect, beyond the physical acquisition that the purchase facilitated, the research and development expertise, or even the market potential that was gained, Dr Reddy Labs also sought to experience a major boost in the means which the acquisition would help to add to the supply mechanisms that Dr Reddy Labs could hope to enjoy within the continent of Europe. In this way, many of the critics of the deal sought to ridicule the fact that the cost was far too high for the benefit garnered (nearly three times the annual revenue of Betapharm); however, with respect to the compound benefits that have thus far been enumerated upon, the reader becomes readily aware that Dr Reddy Lab was approaching the acquisition from a long-term standpoint of market penetration, purchase of expertise, market supply mechanism, and access to a new and growing market to which Dr Reddy Labs would otherwise not be able to acquire an interest. Similarly, those that criticized the deal thought that the residual debt that Dr Reddy Lab had taken upon itself as a means to finalize the deal and successfully buy Betapharm would have an overall net negative effect on the ability of Betapharm to ultimately capitalize on the deal and seek to leverage a type of advantage from the deal. As is oftentimes the case with firms that are overly ambitious to attempt to purchase competitors in the hopes that a type of unbelievable synergy will promote unprecedented growth and revenue generation, the end result is oftentimes something far different. This somewhat overly optimistic view was much the same case with Betapharm and Dr Reddy Labs. Merely a few brief months after the acquisition, German law changed to mirror the changes that US law had exhibited the year before. In this way, the level of revenue that the firm had hoped to acquire from the German market plummeted and instead of realizing a level of synergy as the overly optimistic view had anticipated, the firm was ladened with debt and unable to turn the levels of quick profits they had initially depended upon as way to make the acquisition a type of springboard business acquisition that would facilitate their integration into the European market as well as better access to the world pharmaceutical market on a broader level. However, one cannot weight the Betapharm acquisition and cast in a purely negative light (Argawal et al 2001). The fact of the matter remains that due to the tangential benefits that the Betapharm acquisition gave to Dr Reddy Labs, it placed it in a better position for competition both within the continent of Europe as well as against other world pharmaceutical manufactures and domestic Indian pharmaceutical firms that were also keenly interested to gain a leverage into the same market. If one solitary negative would be known to exist with reference to the acquisition it would demonstrably remain the fact that because of the acquisition Dr Reddy Lab was not able to rapidly generate revenue based upon the supposed synergy that was assumed to have existed. Rather, it was saddled with a hefty portion of debt that retarded its ability to expand into other markets and or gain a more favorable position within the markets it currently competed within. As the final portion of this analysis, the researcher will raise the question of the overall sustainability of Dr Reddy Lab’s success with regards to the globalization that the industry currently faces. Of course one cannot attempt to answer such a question without attempting to paint a verifiable and demonstrable baseline for the manner in which the firm currently operates. Moreover, the sustainability of a firm such as Dr Reddy Lab is as dependent upon its prior acquisitions, market share, expansion policies, industry leadership, as the level to which the globalization of the industry exists. In other words, the standpoint from which Dr Reddy Labs approached the issue of sustainability and viability within an increasingly globalised world was that they needed to maintain a high level of competition and strike into new markets as the opportunity arose; even if the costs of doing so would prove to be heavy in the short term. When one considers the globalization of the pharmaceutical industry it is one that has but a handful of competitors. Whereas other consumer goods have relatively low entry costs with regards to barriers keeping would be competition out, the pharmaceutical industry has high entry costs that effectively negate the power that globalization would otherwise play in self-regulating the market. In this way, the means by which globalization effects Dr Reddy Labs is somewhat diminished due to the peculiar level of market diversity and ease of entry and exit from the market for pharmaceutical products. Similarly, with respect to labor costs and the dynamics of globalization that has seen so many firms move away from the developed economies of the West and seek out lower cost alternatives in Asia and elsewhere, Dr Reddy Labs has been able to enjoy the cost advantage of being physically headquartered in India and therefore enjoying the low cost of labor that such a location affords. Moreover, as the cost of labor allows the firm to hire a greater number of scientists and workers as compared to their counterparts in the West, it allows for Dr Reddy Labs to exhibit a higher degree of competition due to the fact that a smaller level of resources can afford the firm the opportunity to maximize its human capital without experiencing a high degree of cost overruns. From the information that has been presented, the means by which Dr Reddy Lab has sought to grow and transform itself into a worldwide pharmaceutical powerhouse has been aptly exhibited. Naturally, some of the steps that have been taken have meant that the firm has endangered itself and made some missteps with regards to the means by which key acquisitions have been made; however, it is not possible to judge the overall success of the firm based upon these missteps. Rather, one should look at the broader picture. For instance, even in a situation where one may be quick to note that the levels of debt that Dr Reddy Lab took upon itself with relation to seeking and effectively purchasing Betapharm exhibits an array of difficulties when one examines it. Rather than pointing to the slower than expected growth that was experienced as a result of the acquisition, one would do just as well to consider the fact of what would have happened to Dr Reddy Lab’s level of profitability had the competition sought after and made the acquisition instead. In such an externality, it becomes clear that the framework of expansion and development upon which the firm is operating seeks to place a renewed emphasis on the cash cows that the firm is famous for as well as seeking to leverage new markets and gain valuable partners as well as minimize those shortcomings and weaknesses that they have been known for in the past. In this way, the growth mechanism and the means by which Dr Reddy Labs has sought to differentiate itself, although unsteady and difficult at times, has proven to be a valuable stance with regards to continuing to remain competitive within the world pharmaceutical environment. References Agarwal, S. et al (2001) Unlocking the value in Big Pharma , The McKinsey Quarterly accessible from the www.mckinseyquarterly.com Floyd ,D. (2008) The Changing Dynamics of the Global Pharmaceutical Industry, Management services accessed from http://www.ims-productivity.com/user/custom/journal/2008/Spring/IMSspr08pg14_18.pdf Hopper, J. (2003). Dr. Reddy’s Laboratories (DRL) Ltd. London Business School. Lekha, R. (2008). Global strides –Will the Success Story Continue? Accessible from http://ebookbrowse.com/dr-reddys-global-strides-will-the-success-story-continue-pdf-d76834019 Read More