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DRL at the crossroads

Sanjiv Shankaran

DR Reddy's Laboratories (DRL) is at the crossroads. The company has begun to bring together the various arms of its group under one company as it prepares for a radically different environment. As part of its plan to prepare itself for a mo re competitive era, DRL also plans to tap the equity market in the US soon.

In that context, it is interesting to note that media reports suggest that DRL has been discarded from the portfolio of a leading institutional investor. Recent trading patterns suggest that when an institutional trend-setter discards a stock, the counte r is gripped by negative sentiment, thereby leading to a lower price. This may also present investors with an opportunity to take an exposure if the company's fundamentals are sound.

DRL's share price has slipped about 15 per cent over the last 10 days to trade around Rs 1,233. A few key areas that investors ought to track are given below.

Dr Reddy's started operation as a bulk drug (ingredient for drugs in consumable form) producer in the mid-1980s. The striking feature of the company's operations since then has been its steady move up from the high-risk bulk drugs business into the more profitable formulations (drugs in consumable form) business.

DRL has consistently tried to expand its presence in the formulations business through acquisitions. In November 1999, Dr Reddy's bought out the stake of the promoters of American Remedies and then initiated steps to bring the company into its fold.

Exporting to the US market is an important part of the strategy of quite a few Indian pharmaceutical companies. DRL's associate company, Cheminor, has worked towards tapping the US market. Recently, DRL initiated steps to merge Cheminor with itself.

The brand and proposed company acquisitions have set the stage where the entire group will soon log a turnover of about Rs 900 crore in a year, thereby making it one of the biggest pharmaceutical firms in the country. This would be a considerable growth over Dr Reddy's turnover of Rs 250 crore in 1996-97.

In this scenario, companies with a huge mass and a presence across many therapeutic segment are more likely to withstand pressure. Dr Reddy's acquisitions supplement organic growth by allowing the company to straddle quite a few therapeutic segments fast er and place it strongly on this front.

The ability to quickly replicate a molecule under patent elsewhere and produce it at a much lower cost is a characteristic that makes the Indian pharmaceutical industry globally competitive. But when the freedom to replicate molecules under patent elsewh ere is denied and thereby companies are constrained from introducing new products, most Indian companies may be left holding a relatively static basket of products.

DRL has taken the lead in tackling this situation by working on synthesising new chemical entities. So far, DRL has achieved a degree of success in its endeavour. The amount of funds it can set aside for Research & Development (R&D) and its pipeline of p roducts will play a significant role in its future valuation.