Murali Krishna Divi
Chairman and managing director, Divis Laboratories
Rank in the Rich List: 45
Net Worth: $2.03 billion
The Big Challenge Faced in the Last Year: Managing growth in an uncertain political climate, especially the bifurcation of Andhra Pradesh
The Way Forward: Strengthen ties with big pharma firms to continue getting high-margin custom synthesis contracts and play a non-conflict role to generics companies for API contracts
Murali Krishna Divi has a humorous disposition, the mildly amused air of a man who doesn’t have too much to worry about. The 63-year-old sits at the helm of a Rs 2,597 crore pharmaceutical contract manufacturing company, an investor favourite because of its industry-beating margins. In the last one year, the stock price of his company, Divis Laboratories, has risen by 75 percent. It ended its June quarter this year with a 38 percent operating margin in an industry that averages over 20 percent. And Murali Divi seems confident that he can sustain this pace. “There is a lot more opportunity in the field we are in,” he says, “in terms of manufacturing new products and also existing products.”
As a company that supplies the active ingredients of drugs to big pharmaceutical manufacturers, Divis Laboratories will only benefit from the expanding demand for medicines in developed and developing countries. “People are living longer. As they live longer, they need to use more lifestyle management medicines. If you have arthritis and, instead of 80, you are living till 90 or 100, you need to use anti-arthritis or anti-inflammatory drugs for another 10-20 years,” says Murali Divi. (Divis Labs is the world’s largest manufacturer of Naproxen, an anti-inflammatory that is a part of medicines used to treat osteoarthritis.)
One of the reasons why the company is on such solid ground today is because it deliberately chose a different business model at a time when most of the Indian pharmaceutical industry was seeking its fortune in challenging patents and selling generics in regulated markets. Murali Divi decided very early on in the game that his firm would stick to contract manufacturing of raw material for drugs. This involves making active pharmaceutical ingredients, or APIs (the compound in a drug that has the therapeutic effect), on a large scale for generics already being sold in the market, or doing the same on a smaller scale for the testing and development of experimental drugs.
To date, Divis Laboratories does not manufacture the final formulation (the tablets and tonics sold in the market) because this would change its role from a service provider to big pharma companies to their competitor. This canny decision was made soon after Murali Divi parted ways with Kallam Anji Reddy, founder of Dr Reddy’s Laboratories, a firm that deals in both generics and contract manufacturing.
Murali Divi’s life as an entrepreneur began in 1984 when he returned to India after working in senior research and development roles in American firms such as Fike Chemical. He had spent several years in the US after receiving his doctorate in pharmaceutical sciences from erstwhile Andhra’s (now Telangana’s) Kakatiya University. When the opportunity to partner with Reddy—a chemical engineer who was also striking out on his own after working at government-owned Indian Drugs and Pharmaceuticals Ltd (IDPL)—presented itself, Murali Divi decided to return to India.
He joined as a director on the board of the newly formed Dr Reddy’s Laboratories in 1984. Together, Reddy and Murali Divi took over Cheminor, an ailing contract manufacturing company, with the intention of turning it around. The idea was for Cheminor, a subsidiary of Dr Reddy’s Laboratories, to be the contract manufacturing arm of the company, while Dr Reddy’s would concentrate on generics and drug discovery.
But reviving Cheminor was a tall order. At the time, the company had only a few chemical reactors, the equipment used to produce APIs, which were churning out outdated products.
Murali Divi stepped in and changed all that. He took on the role of managing director, hired a crew of fresh graduates and trained them in the chemistry skills needed to revive the firm. His team included organic chemists Ramesh Babu Potluri, TVVSN Murthy, NV Ramana and G Hemanth Kumar. They worked on developing a cost-effective manufacturing process for the API, ibuprofen. A year down the line, the team had set up a production line for ibuprofen, which was soon scaled up to 1,200 metric tonnes a year, catering to about 25 percent of the global market demand for the compound.
During the 25th anniversary of the incorporation of Dr Reddy’s, Murali Divi spoke about the early days of Cheminor. He remembered how sceptical observers were of their plans to revive the sick firm, which had only eight reactors and six employees then. “When we took [it] over… people laughed,” he wrote in a compilation of memories on Dr Reddy’s Laboratories’ official website. “They said, ‘This guy comes from the US. Dr Anji Reddy and Murali think they can make it like IDPL.’ We kept quiet. Of course, we turned it around.”
Murali Divi is credited with managing the entire research and development effort at Cheminor while Reddy handled business development. But more relevant was Murali Divi’s skill with people. Potluri, who is now founder chairman of SMS Pharma (a Rs 550 crore company), recalls how well his former boss and mentor treated his employees, even visiting the homes of junior staff when they faced problems. A Workaholic Boss
According to Potluri, on a typical day, Murali Divi would turn up at 7.30 in the morning at his office in Hyderabad, work continuously till lunch and then spend the rest of the day at the manufacturing plant to monitor the production line. He would remain at the plant till midnight, ironing out kinks in the production process and handholding his employees through any “chemistry problems”, says Potluri. “The impact of this [style of functioning] was great. When he left Cheminor in 1990, almost 125 people resigned the same day. That tells you how he handled people.”
It isn’t clear why Murali Divi left Cheminor after partnering with Reddy for six years, but Potluri puts it down to personal differences between the two. Egos clashed as the next generation of the Reddy family was inducted into the company and it questioned his decisions, says Potluri. When Forbes India asked Murali Divi why he quit, he says, “Perhaps because I was destined to become chairman of my own company rather than remaining managing director elsewhere.”
Murali Divi then went on to start his new venture, Divis Laboratories, in 1990. While several of the employees who quit Cheminor simultaneously with Divi eventually set up their own firms—TVVSN Murthy is managing director of Potluri’s SMS Pharma—others such as NV Ramana and Hemanth Kumar joined Divis Labs a few years after its establishment. Ramana is now executive director, and Kumar is general manager at Divis Labs.
In its early days, Divis was a consulting firm and did not engage in any manufacturing. Murali Divi and his team would engineer new and more efficient processes for active pharmaceutical ingredients and sell them to the highest bidder. By 1995 though, the company had a 71-acre manufacturing facility in Hyderabad. This facility was staffed with some of the same chemists whom Murali Divi had personally trained and worked with in Cheminor. It was time for the next big step: Convincing international pharma giants to outsource their work to Divis Labs.
From the very beginning, Murali Divi was adamant that he would not enter the formulations play even though most of the Indian pharmaceutical industry had taken that route through reverse engineering. Murali Divi’s former place of work, Dr Reddy’s, was leading the way with Paragraph IV filings for drug product applications in the US market. This filing allowed an Indian pharma company to launch a generic version of a patented drug by challenging the validity of the patent. If it won the challenge, the pharma company would receive six months of exclusive marketing rights and the large profits that went with it. But in doing so, Indian companies were also competing with pharma giants such as Pfizer and Merck, who were potential clients for their bread-and-butter contract manufacturing services.
In this uncertain climate, there was no outsourcing to India, says Murali Divi. “When we zeroed in on this problem, we realised that intellectual property (IP) was the hurdle.”
Around the same time, in 1994, India became a signatory to the TRIPS agreement, and committed to greater respect for IP rights and the introduction of product patents. Murali Divi saw this as an opportunity to build a business around non-patent-infringing processes. “We said that if we build a business model that is one hundred percent IP compliant, we should be able to convince big pharma firms to outsource their chemistry to us.” But even after the TRIPS agreement, it was easier said than done.
The initial business plan was to focus on custom synthesis—manufacturing small, custom quantities of a drug for use in clinical trials and laboratory experiments by big pharma companies. But international pharma giants were wary of outsourcing to India; finding customers proved hard for Divis. “We repeatedly knocked on their doors, asked them to visit and invest in outsourcing from India,” Murali Divi says.
As he worked towards building relationships with potential clients, he decided that Divis would generate revenue by manufacturing APIs, a lower margin business, but one it could easily enter given his previous experience at Cheminor.
The research team began with Naproxen, the ingredient in a popular anti-inflammatory drug. It was a crowded market and Divis was the 22nd firm to enter it behind giants such as Swiss health care company Roche and chemical and biotech firm Lonza Group. But Murali Divi had made some headway in developing an efficient process to manufacture the compound and saw opportunity there.
This was a time, he says, when the industry still depended on traditional chemistry methods to make drugs. These methods were simpler, but inefficient because they used chemicals as catalysts, which increased costs and led to more pollution. He turned to newer, greener technologies that used enzymes instead of chemicals as catalysts and devised an efficient production process for Naproxen. Today, Divis Laboratories is one of the world’s largest manufacturers of Naproxen. Over time, it also snatched away market share for the manufacture of APIs such as Dextromethorphan (cough suppressant) from Lonza and erstwhile pharmaceutical arm of Dutch material and life science company DSM.
In the meantime, Divis also began establishing relationships with big pharmas and winning sought-after high-margin, custom synthesis contracts. The generics API segment eventually shrunk to about 50 percent of the business, where it remains today, from around 90 percent in the early years. The remaining 50 percent now comes from custom synthesis of APIs, which drives Divis’ exceptional margins.
Through the years, Murali Divi has remained averse to inorganic expansion. Any new capacity for contracts has always been built internally. He says this is because there are no companies in India that fit his business model of complying with intellectual property and not competing with clients. And while businesses in the US or Japan may offer similar services, he claims they are inefficient because they are not flexible. They tend to own large manufacturing capacities dedicated to a small number of products unlike Divis Laboratories, which can switch products or scale production up and down according to the needs of its clients.
“We get offers on a gold plate with new clothes and even some cash on it,” he says, referring to American and Japanese firms looking to sell off their contract manufacturing arms. But buying such companies would amount to “buying inefficiency”. Instead, Murali Divi prefers to expand his own facility and bring it up to speed—an expeditious and cost-effective exercise.
His son, 38-year-old Kiran Divi, who is director (business development) at Divis Labs, and is next in line to take over the reins when his father retires, agrees with this philosophy. “We have been successful with inorganic growth so far. I believe in what Dr Divi says. If there is an [inorganic growth] opportunity which shows mutual benefit in the long term, we will consider it, but at this point, it is not even a thought,” says the soft-spoken heir.
Murali Divi’s daughter, Nilima Motaparti, too is on the company’s rolls. With a Masters in international finance from Glasgow University in Scotland, she handles procurement and finance for Divis Labs. In 2012, Murali Divi handed over 20.3 percent of his shareholding in the company to his daughter while his son received 17.34 percent. As of today, the chairman owns only 5.8 percent.
On weekends, the businessman-chemist undergoes an unexpected transformation. He eschews his close involvement with chemicals and retires to his family’s organic farms. It is an odd vocation for a man who once formulated a process to manufacture rodenticides. When Forbes India asks Murali Divi what led to this interest, he says, “My main business is running farms and growing orchards; running pharmaceutical companies is my hobby.”
Murali Divi is the youngest of nine sons and four daughters of the late Divi Satyanarayana, who was secretary of a zilla parishad in the Krishna district of Andhra. Although Satyanarayana worked as a government employee, his family grew produce on its farms. Most of it was grown without the use of pesticides “because they were not available to begin with”, says Murali Divi.
He rues the excess use of chemicals by farmers today, and the heavy pollution that is seeping into agro-ecological systems. This seems to have influenced the way he runs his company, which adheres to green manufacturing technology and waste-treatment practices.
The accidental businessman also does yoga and meditation every evening, something his employees are encouraged to engage in. It explains his outlook to life. He exudes contentment rather than paranoid competitiveness. When Forbes India asks him if Divis is looking for clients in the biotech industry—the next big area of growth for the pharmaceutical sector—he says he is exploring the idea, but isn’t in a hurry because pure organic chemistry still has much growth to offer.
“There are still enough opportunities here; we don’t have to walk away and go somewhere else. The grass on our side is also very green. We don’t want to forget that. If somebody is enjoying the other side, let them enjoy it,” Murali Divi says with a chuckle. “Live and let live. Don’t destroy and get destroyed by being over-greedy.”
(This story appears in the 16 October, 2014 issue of Forbes India. To visit our Archives, click here.)