We don’t know if Ramprasad Reddy’s proudest moment was the invitation by then Secretary General Kofi Annan to speak at the United Nations in November 2006 – he is one of the few generic manufacturers to do so — or if it was last Thursday, when Aurobindo Pharma NSE -3.87 % announced the biggest cross-border acquisition by any Indian pharmaceuticals company.
What we do know is that till early August, Reddy’s heart was battling his mind. His heart was in the high-risk, higher-upside Mallinckrodt opioids portfolio, a year-long pursuit intermittently punctuated by the Donald Trump administration’s shrill political rhetoric. His mind, though, wanted the dermatology and oral solids business of Sandoz, generics arm of Swiss big pharma Novartis NSE -0.58 % , also in the US. A better business fit, it would complement existing operations. Even a fortnight ago, Reddy and his lawyers were deeply engaged with Mallinckrodt, boxing in all potential legal and regulatory risks with indemnities and other protection.
Eventually, negotiations collapsed at the last lap, making it easier for Reddy to shrug off all dilemma and jump right into a far more competitive process. “Unlike those bilateral discussions, Sandoz was a timebound process led by Novartis, so timelines were not in Aurobindo’s control,” recalls an official involved in negotiations, on condition of anonymity.
“Reddy wanted a leg in, knowing (full) well that Mallinckrodt had a lot of associated risks. But it (Aurobindo) also did not expect the Sandoz acquisition to end at a $900 million price tag, after starting at $1.5 billion.” Looking back, the preparation and loud rehearsals with family members before his UN speech to overcome stage fright and his heavy Telugu accent must have been as exhilarating as the midnight jitters just ahead of last week’s signing off.
What matters now is that Aurobindo has leapfrogged to become the secondlargest generics player in the US — easily the toughest market — in terms of share of prescriptions, ahead of homegrown rival Lupin and even global giant Mylan. It is closing in on Israel’s Teva, the largest generic drug manufacturer worldwide.
“We save on huge costs and at least five years of time getting into such business organically,” says P Sarath Chandra Reddy, Ramprasad’s son and a wholetime director at Aurobindo. “Apart from offering certain key synergies in solid orals business, it will also help us achieve the size required to reap advantages in the US market.”
Dare To Dream Aurobindo may not be Infosys and Penaka Venkata Ramprasad Reddy no Narayana Murthy, but just like the technology bellwether, the pharma company too has been a rollercoaster entrepreneurial journey.
Two postgraduate friends started it in 1986 after pooling resources by pledging the family silver and raising seed capital from kith and kin. At a personal level, Reddy’s life story is no less a chronicle of human triumph — from a humble background and vernacular education in Andhra Pradesh to political controversies in the not-so-distant past and now, global recognition. How often do you meet an entry-level purchase department clerk-turned-smalltime chemicals trader who went on to become a pharma billionaire?
“Reddy may lack the aristocracy and panache of Cipla’s Yusuf Hamied or the scientific vision of DRL’s K Anji Reddy, but he makes it up with his strategic intent to grow,” says a fellow Hyderabadbased founder. “He’s a billionaire without the air of one. He makes up for his language deficiencies with his negotiating prowess and consistent price discipline.” This, in turn, has helped in its constant evolution.
First, as an active pharmaceutical ingredient (API), or raw material, maker; then pivoting to a preferred antiretrovirals vendor to supply HIV/AIDS medicines for global agencies such as World Health Organization and Clinton Foundation; making a mark in Europe through a string of bolt-on buyouts and now, breaking out in the US, Aurobindo has always been as unobtrusive as its obsessively media-shy cofounder – always shunning the limelight, overstretched bids and even the relentless glare of the regulators. After resolving an imports alert and warning letter for two of its facilities, the company has staged a significant comeback bulking up especially in US – its largest market – with a series of drug approvals and a large pipeline that awaits clearance
“Aurobindo stands out for its lowrisk strategy,” feels Surjit Pal, analyst, Prabhudas Liladhar, a brokerage firm. A combination of a well-integrated and nimble manufacturing strategy has additionally helped corner market share and sequential growth in difficult developed markets. “Lesser litigation, integration of active pharmaceuticals business, formulation operations and low level of research & development spend is what the market finds attractive in the current scenario. It has also been faster in turning around its FDA inspections and warning letters than its peers.”
“Aurobindo stands out for its lowrisk strategy,” feels Surjit Pal, analyst, Prabhudas Liladhar, a brokerage firm. A combination of a well-integrated and nimble manufacturing strategy has additionally helped corner market share and sequential growth in difficult developed markets. “Lesser litigation, integration of active pharmaceuticals business, formulation operations and low level of research & development spend is what the market finds attractive in the current scenario. It has also been faster in turning around its FDA inspections and warning letters than its peers.”
By playing to its strengths, the latest Sandoz acquisition makes it a consolidator in the US with a diverse portfolio and strong relationships with large buyers. “We see an upside from better utilisation of manufacturing capacity (especially the orals plant), addition of 300 products, rationalisation of manpower as well as integrating the business with Aurobindo’s backward integrated supply chain,” feels Vivek Agarwal of Citi.
It’s actually a win-win for both the buyer and the seller. For Aurobindo, it gives deep access to lesser competitive generics segments such as dermatology and controlled substances in the US. Sandoz and Novartis, on the other hand, get to rationalise assets to launch more complex products in injectables, respiratory and ophthalmic, value-added speciality medicines and biosimilars.
“We will be focused on leveraging our group’s market leading, vertically integrated and highly efficient manufacturing base to enhance the market position and medium-term profitability of the businesses,” said N Govindarajan, managing director, Aurobindo Pharma, an engineer-turned-consigliere of Reddy.
Low cost has also always been a competitive advantage but over the years, Aurobindo has consciously steered away from relying solely on APIs. Today, 80% of its business comes from formulations. But the three world-class manufacturing facilities that Aurobindo will now inherit will further aid its attempts to derisk its high dependence on the Indian formulation plant. Again, that’s a key differentiator from local mid-cap peers such as Torrent, Mankind and Eris Lifesciences, for whom India is the place to grow. “Aurobindo and Intas want to become
Low cost has also always been a competitive advantage but over the years, Aurobindo has consciously steered away from relying solely on APIs. Today, 80% of its business comes from formulations. But the three world-class manufacturing facilities that Aurobindo will now inherit will further aid its attempts to derisk its high dependence on the Indian formulation plant. Again, that’s a key differentiator from local mid-cap peers such as Torrent, Mankind and Eris Lifesciences, for whom India is the place to grow
“Aurobindo and Intas want to become big in the US and Europe at a time when global generics players such as Mylan and Teva are in a turmoil, the Chinese companies are grappling with regulations and trade issues and local peers like Cipla and Lupin have had challenging acquisitions,” says Manisha Girotra, India chief executive, Moelis, a global investment bank.
“So there are select global bidders left in the fray. If you want to hand over your business to a strategic, then the Indians are very credible and real buyers, paying good values.” The recent history of M&As is, therefore a great indication of how both the Indian companies — Aurobindo and Intas — aim to gain scale in the key markets. In 2016, Aurobindo unsuccessfully bid for Teva’s Actavis UK and Ireland units but were pipped by Intas, which paid close to £600 million (around Rs 5,000 crore) to win the deal. But in November of the same year, it took over a few products from Teva in France. In Mallinckrodt as well as Zentiva, Sanofi’s European generics arm, both again locked horns but were outbid by private equity
“These players will not stop here. Aurobindo could look to do a big buy in Europe next where it needs further scale in certain markets. Liquidity is also available to them …They are getting financing competitive to PE aiding them to get competitive,” adds Girotra. The Sandoz transaction is the third overseas acquisition by Aurobindo in less than two years. In January 2017, it agreed to buy Portugal’s Generis Farmaceutica SA from Magnum Capital Partners for €135 million. It also acquired the European business of Canadian generic maker Apotex for €74 million earlier this year. However, achieving scale may also require continued capex and increase supply chain complexity which Aurobindo will need to manage, warn Alok Dalal and Alok Srivastava of CLSA
Mixed Dosage The Reddys are unlikely to baulk at such challenges, having dealt with a fair share of failures and regrets. Reddy saw setback in the Chinese market in an experiment of own manufacturing facilities that had to be eventually shut down. “Ramprasad regrets the move and saw it as loss of a golden opportunity,” recalls cofounder Nityananda Reddy, whose daughter is now married to Ramprasad’s son, Sarath Chandra Reddy. His other big failing was when Aurobindo was a little late to seize opportunities in the formulations business. Reddy was also not ready with globally compliant manufacturing facilities and product portfolio by the time of the new patent regime in January 2005.
“It took 6-7 years of rigorous preparation and investments for the company to get into the global generics business, without any revenue generation from global generics for nearly seven years,” says AJ Kamath, who was finance director of Aurobindo for nearly two decades. “The entry into global generics formulations was a major milestone for the company, which transformed its fortunes.”
Today, around 90% of the company’s business comes from the exports, mostly from global generics sold in regulated markets. “Over the last three decades, the company has seen a drastic shift from being a predominantly bulk drugs firm to becoming a formulations company; and to global regulated markets from the domestic market,” says Kamath.
Bitter Coating on Sweet Pills Taking timely punts has always been Ramprasad Reddy’s trademark. When Aurobindo Pharma got a 180-day market exclusivity for its generic drug Duloxetine — copycat of Eli Lilly’s Cymbalta — Reddy wanted to ship the product on time into the US market, without being too early or late for the launch. For this, he ruled out the regular exports route and preferred to hire a dedicated chartered air cargo that reached the US on time, despite certain highly anxious movements when the flight was almost caught in a storm after a transit halt at Heathrow Airport. It was his idea to get into manufacturing APIs first at then Pondicherry, bored as he was with his trading business and lured by the attractive tax incentives the Union Territory offered in the mid-1980s.
Reddy, a Commerce postgraduate from the Venkateshwara University in Andhra Pradesh, roped in friends like Nityananda, a postgraduate in Chemistry who already had a cushy job in the pharma industry in Tirupati at Tini Pharma, an outfit of Reddy’s maternal uncle. “One of the major turning points in the entrepreneurial journey of Ramprasad Reddy was when the Videocon group approached him for a deal around 1994 and bought equity at Rs 110 a share,” says an old family friend who did not wish to be identified.
“What amazed him more and amplified his business confidence was the enterprise valuation when Videocon sold the same Aurobindo shares at a premium of Rs 180 a share to the public in early 1995, during the firm’s local listing.” By then, Aurobindo had four manufacturing facilities – one at erstwhile Pondicherry and three in Hyderabad — with leadership in semi-synthetic penicillins (SSPs) and antibiotics, an expanded bulk drug product portfolio and production capacities.
“I think this delegation of responsibilities among a healthy mix of promoters and professionals has helped us to where we are today. Being the large shareholders in the company, the promoters are also benefited in the process, with growth in wealth.” When long-term associate and group chief financial officer Sudhir Singhi wanted to quit Hyderabad and stay close to his family in Mumbai, Reddy refused to accept his resignation and instead built an office for him in the financial capital of the country.
Such unflinching loyalty equally helped when Reddy relinquished his position as chairman of Aurobindo Pharma and moved to the US in early 2012, to focus fully on the business there, handing over the reins in India to professional managers after some of the promoters were accused by the Enforcement Directorate in relation to their alleged proximity to Jaganmohan Reddy, founder of YSR Congress. Since then, the company’s global sales have tripled to $2.6 billion in FY18. Even then, Reddy kept his cards close to his chest as he homed in on his boldest career moves. Only three or four within the company had an inkling about the Sandoz deal. For now though, everyone is smiling as it helps achieve the internal target of $4 billion of top line by 2019. The intrepid risk-taker clearly knows the right dosage.
