Job Cuts Seen At Dr Reddy’s Amid Cost Recalibration
Executive Summary
Dr Reddy’s Laboratories has set in motion significant cost control initiatives as part of broader efforts to emerge leaner and more nimble. Headcount rationalization in R&D is rumored to be already underway, while more operational areas could potentially see significant manpower reductions.
Dr. Reddy's Laboratories Ltd. has initiated efforts to set right its skewed cost structure as it seeks to restore growth momentum in the backdrop of a challenging year gone by and the tough overall business environment.
Significant headcount reduction plans are believed to be in the cards as part of these efforts, with an estimated 100 personnel in R&D and related sections expected to move on soon, industry sources told Scrip. The sources claimed that overall cuts could run into several hundred (speculated by some to be more than 500 ) across various operational and business segments.
The personnel cuts come as the Hyderabad-based company undertakes a major re-calibration as it seeks to transition to a “leaner and flexible” cost structure, focusing on areas such as network and portfolio rationalization, improving plant operating efficiencies, R&D site optimization and productivity. The efforts are expected to bring about cost savings of “multiple hundreds of crores” [INR100cr =$14.6m], the firm’s top brass had indicated earlier. (Also see "Dr Reddy’s Charts Sharp Cost Overhaul Amid Weak Q1" - Scrip, 28 Jul, 2017.)
Dr Reddy’s currently has more than 23,500 employees, according to the firm’s latest annual report.
Systematic Exercise
Dr Reddy’s didn’t comment on specifics around headcount reductions but told Scrip that it continues to focus on “optimizing costs” as an organizational priority.
“We have embarked on a systematic exercise to transition to a leaner and flexible cost structure in multiple areas of our operations. We would not like to comment further on the specifics of these initiatives at this point in time,” the company maintained.
However, Dr Reddy’s top management, in the latest annual report, noted that the “revenue crunch” in FY2017 and FY2018 had drawn the company’s attention to costs; from the start of FY18, there has been a “totally focused” drive on eliminating “needless layers and unnecessary costs.”
“This will continue throughout FY2019 and thereafter, with the aim to create a leaner, internationally cost-competitive and more nimble organization,” Chair Satish Reddy and Co-Chair and CEO GV Prasad said in their letter to shareholders as part of the annual report.
All eyes are also expected to be on new COO and ex-Teva executive Erez Israeli, as he steers the firm through this turbulent phase. Israeli took over from Dr Reddy’s old-timer Abhijit Mukherjee earlier this year.
Some analysts believe more “impactful” measures may be in store, referring to previous management commentary.
CEO Prasad, at the time of the firm's Q4 earnings call in May, referred to cost saving opportunity in many areas, “from rationalizing the manufacturing network, optimizing our portfolios, removing wastefulness in many areas – including manning levels and multiple places.”
“And we so far have not touched the core, it's only looking at areas where we can save without any impact on operations. Moving forward, we will actually see divestments of some sites and also other non-contributing expenditures that we have,” Prasad said.
Interestingly, in its presentation at the Jefferies Healthcare Conference in June, Dr Reddy’s specified that while more than 70% of its North America revenues are reliant currently on internal manufacturing sites, by 2021 it hopes to have a “diversified manufacturing network” with almost 50% of revenues coming from "partner manufacturing sites."
Ongoing Challenges
But tough cost-control measures are neither unusual in the pharmaceutical industry nor specific to Indian firms like Dr Reddy’s, given the generally challenging environment. (Also see "Cipla Trimming Jobs Amid Europe Business Rejig" - Scrip, 14 Jul, 2016.) (Also see "Novo Nordisk Seen Readying Steps To Offset US Pressures, Including Job Cuts" - Scrip, 8 Jun, 2018.)
Teva Pharmaceutical Industries Ltd. is among the firms that also have initiated a major overhaul in the recent past. The Israeli multinational is slicing its workforce as part of restructuring plans - these are expected to achieve $1.5bn of savings in 2018 and $3bn by the end of 2019. (Also see "Schultz Swings The Cleaver At Teva, Cutting 25% Of The Workforce" - Scrip, 14 Dec, 2017.)
Headwinds in key markets like the US have dented earnings of several leading Indian firms, which depend on it for a large chunk of their revenues. Dr Reddy’s, with more than 40% of its sales from the US, reported a 6% decline in US revenues to INR59.82bn in FY18. This was largely on account of higher price erosion due to channel consolidation and increased competition in certain key molecules such as valganciclovir, azacitidine, decitabine, the firm indicated at the time of its Q4 FY18 results.
Exacerbating the situation for Dr Reddy’s has been GMP deviations at its manufacturing plants that supply the US, though some of the sites have since made the compliance cut or are in the process of doing so. In late June, Dr Reddy’s said its active pharmaceutical ingredient (API) plant 3 at Bollaram and API plant 1 in Jinnaram, both in Medak district, Telangana, had received an Establishment Inspection Report (EIR) from the US FDA.
EIRs generally are provided when no enforcement action is contemplated, or after enforcement action is concluded. An EIR typically includes, among others, the investigator’s narrative report and any refusals, voluntary corrections, or promises made by the firm’s management.