UPDATE 1-INTERVIEW-Falling prices hurting German unit-Dr Reddy's

Fri Aug 29, 2008 6:28pm IST

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By Sumeet Chatterjee

BANGALORE Aug 29 (Reuters) - Indian drug maker Dr Reddy's Laboratories Ltd (REDY.BO) is facing significant pressure on its business in Germany as regulations and growing competition drive down prices, its chief executive said on Friday.

Betapharm, which Dr Reddy's bought in 2006 for $572 million, has been a drag on earnings due to supply constraints and falling prices. It has moved Betapharm's main manufacturing to India and to other facilities in Europe to lower costs.

"While we can say that cost of goods is lower from India, prices going down is not a good thing for anybody," CEO G.V. Prasad told Reuters in a phone interview from the company's headquarters in the south Indian city of Hyderabad.

"Volumes are going up, but the prices are under pressure," he said. "I think it will take us a year or two when we will see significant growth and value there."

HSBC said on Tuesday the declining prices and eroding margins of drug makers in Germany were a result of government intervention through public healthcare insurance firms that are increasing the number of drugs covered by discount contracts.

Top German state health insurer, Allgemeine Ortskrankenkasse (AOK), last year started to secure drug supplies for its clients via tenders, and Prasad said this would lead to commoditisation of products and more pressure on prices.

Betapharm's top selling drugs are Simvabeta for cholesterol lowering, Omebeta for gastro-intestinal disorders, and Alendronbeta for Osteoporosis.

Prasad said Dr Reddy's (RDY.N), the only Indian drug maker listed in New York, was on track to meet its guidance of 25 percent revenue growth for the year to March, but margins were under pressure due to price falls and rising raw material costs.

Global demand for generic drugs produced by firms such as Dr Reddy's and local rival Ranbaxy Laboratories (RANB.BO) is booming as nations around the world battle rising healthcare costs.

But export-driven Indian companies are facing stiff pricing pressure as more drug makers enter into the generics space.

NOT FOR SALE

Prasad said Dr Reddy's would continue to launch 10 to 12 products a year in the United States, one of its key markets, and the company had about 80 products pending regulatory approval.

The launch of its acute migraine drug sumatriptan, a generic of GlaxoSmithKline's (GSK.L) Imitrex, in the December quarter should help boost growth, he said.

Promius Pharma, a wholly owned speciality dermatology drug unit, would start operations in the United States with two products in October, and more will be launched in a phased manner, the chief executive said.

After a deal announced in June where Japan's Daiichi Sankyo (4568.T) will pay up to $4.6 billion for control of Ranbaxy, India's top drug maker by sales, analysts have said other family-controlled firms may be buyout targets.

But Prasad said Dr Reddy's was not for sale.

"I think we view ourselves we are neither going to participate as a consolidator today because we want to build up our organisation a little more organically on the generics side, nor do we think we are available for sale for somebody else."

Shares in Dr Reddy's, which has a market value of $2 billion, rose 1.8 percent to 579.25 rupees in a Mumbai market that rose 3.7 percent. (Editing by John Mair)

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