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Dr. Reddy`s Laboratories (RDY)

Filed: 5 Nov 21, 2:27pm

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16 OR 15D-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarter Ended September 30, 2021

 

Commission File Number 1-15182

 

DR. REDDY’S LABORATORIES LIMITED

(Translation of registrant’s name into English)

 

8-2-337, Road No. 3, Banjara Hills

Hyderabad, Telangana 500 034, India

+91-40-49002900

 

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F x                     Form 40-F ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ______

 

Yes ¨                     No x

 

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

 

Yes ¨                     No x

 

Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

 

 

 

   

 

 

QUARTERLY REPORT

Quarter Ended September 30, 2021

 

Currency of Presentation and Certain Defined Terms

 

In this Quarterly Report, references to “$” or “dollars” or “U.S.$” or “U.S. dollars” are to the legal currency of the United States, references to “Rs.” or “rupees” or “Indian rupees” or “INR” are to the legal currency of India, references to “MXN” are to the legal currency of Mexico, references to “ZAR” are to the legal currency of South Africa, references to “UAH” are to the legal currency of Ukraine, references to “GBP” are to the legal currency of United Kingdom and references to “EUR” or “euros” are to the legal currency of the European Union. Our unaudited condensed consolidated interim financial statements are presented in Indian rupees and are prepared in accordance with International Accounting Standard 34, “Interim Financial Reporting” (“IAS 34”). Convenience translation into U.S. dollars with respect to our unaudited condensed consolidated interim financial statements is also presented. References to a particular “fiscal” year are to our fiscal year ended March 31 of such year. References to “ADSs” are to our American Depositary Shares. All references to “IAS” are to the International Accounting Standards, to “IASB” are to the International Accounting Standards Board, to “IFRS” are to International Financial Reporting Standards as issued by the IASB, to “SIC” are to the Standing Interpretations Committee and to "IFRIC" are to the International Financial Reporting Interpretations Committee. References to “FVTOCI” are to fair value through other comprehensive income and to “FVTPL” are to fair value through profit and loss.

 

References to “U.S. FDA” are to the United States Food and Drug Administration, to “ANDS” are to Abbreviated New Drug Submissions, to “NDAs” are to New Drug Applications, and to “ANDAs” are to Abbreviated New Drug Applications.

 

References to “U.S.” or “United States” are to the United States of America, its territories and its possessions. References to “India” are to the Republic of India. References to “EU” are to the European Union. References to “CIS” are to the Commonwealth of Independent States, which is comprised of certain countries of the former Soviet Union. All references to “we”, “us”, “our”, “DRL”, “Dr. Reddy’s” or the “Company” shall mean Dr. Reddy’s Laboratories Limited and its subsidiaries. “Dr. Reddy’s” is a registered trademark of Dr. Reddy’s Laboratories Limited in India. Other trademarks or trade names used in this Quarterly Report are trademarks registered in the name of Dr. Reddy’s Laboratories Limited or are pending before the respective trademark registries, unless otherwise specified. Market share data is based on information provided by IQVIA Holdings Inc. (formerly Quintiles IMS Holding Inc.) (“IQVIA”), a provider of market research to the pharmaceutical industry, unless otherwise stated.

 

Except as otherwise stated in this report, all convenience translations from Indian rupees to U.S. dollars are at the certified foreign exchange rate of U.S.$1.00 = Rs.74.16, as published by Federal Reserve Board of Governors on September 30, 2021. No representation is made that the Indian rupee amounts have been, could have been or could be converted into U.S. dollars at such a rate or any other rate. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.

 

Our main corporate website address is https://www.drreddys.com. Information contained in our website, www.drreddys.com, is not part of this Quarterly Report and no portion of such information is incorporated herein.

 

Forward-Looking Statements and Risk Factor Summary

 

In addition to historical information, this quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition to statements which are forward-looking by reason of context, the words “may”, “will”, “should”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, or “continue” and similar expressions identify forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, risks relating to:

 

in our generics medicines business: consolidation of our customer base and commercial alliances among our customers; the increase in the number of competitors targeting generic opportunities and seeking U.S. market exclusivity for generic versions of significant products; price erosion relating to our generic products, both from competing products and increased regulation; delays in launches of new generic products; efforts of pharmaceutical companies to limit the use of generics including through legislation and regulations; the difficulty and expense of obtaining licenses to proprietary technologies; returns, allowances and chargebacks; and investigations of the calculation of wholesale prices;

 

in our specialty medicines business: competition for our specialty products; our ability to achieve expected results from investments in our product pipeline; competition from companies with greater resources and capabilities; and the effectiveness of our patents and other measures to protect our intellectual property rights;

 

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our business and operations in general, including: our ability to develop and commercialize additional pharmaceutical products; manufacturing or quality control problems, which may damage our reputation for quality production and require costly remediation; interruptions in our supply chain; disruptions of our or third party information technology systems or breaches of our data security or other cyber-attacks; the failure to recruit or retain key personnel; challenges associated with conducting business globally, including adverse effects of political or economic instability, major hostilities or terrorism; significant sales to a limited number of customers in our U.S. market; our ability to successfully bid for suitable acquisition targets or licensing opportunities, or to consummate and integrate acquisitions;

 

compliance, regulatory and litigation matters, including: costs and delays resulting from the extensive governmental regulation to which we are subject; the effects of reforms in healthcare regulation and reductions in pharmaceutical pricing, reimbursement and coverage; governmental investigations into selling and marketing practices; potential liability for patent infringement; product liability claims; increased government scrutiny of our patent settlement agreements; failure to comply with complex Medicare and Medicaid reporting and payment obligations; and environmental risks;

 

other financial and economic risks, including: our exposure to currency fluctuations and restrictions as well as credit risks; potential impairments of our intangible assets; potential significant increases in tax liabilities; and the effect on our overall effective tax rate of the termination or expiration of governmental programs or tax benefits, or of a change in our business;

 

our business and operations in general, including uncertainty regarding the magnitude, duration, and geographic reach of the COVID-19 pandemic and its impact on our business, financial condition, operations, cash flows, and liquidity and on the economy in general; manufacturing or quality control protocols; interruptions in our supply chain, including due to potential effects of the COVID-19 pandemic on our operations and business in geographic locations impacted by the pandemic and on the business operations of our customers and suppliers; our ability to successfully execute and maintain the activities and efforts related to the measures we have taken or may take in response to the COVID-19 pandemic and associated costs therewith; challenges associated with conducting business globally, including adverse effects of the COVID-19 pandemic; costs resulting from the extensive governmental regulation to which we are subject or delays in governmental processing time due to modified government operations due to the COVID-19 pandemic, including effects on product and patent approvals due to the COVID-19 pandemic; disruptions of information technology systems; and our ability to successfully compete in the marketplace;

 

compliance matters including U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws, which impose restrictions and may carry substantial penalties, which risks include without limitation the following: We work with third-party distributors and other agents for the marketing and distribution of our products and, although our policies prohibit these third parties from making improper payments or otherwise violating these anti-bribery laws, any lapses in complying with such anti-bribery laws by these third parties may adversely impact us. We may be subject to injunctions or limitations on future conduct, be required to modify our business practices and compliance programs and/or have a compliance monitor imposed on us, or suffer other criminal or civil penalties or adverse impacts, including lawsuits by private litigants or investigations and fines imposed by local authorities. Actions by our employees, or third-party intermediaries acting on our behalf, in violation of such laws, whether carried out in the United States or elsewhere, may expose us to liability for violations of such anti-bribery laws and accordingly may have a material adverse effect on our reputation and our business, financial positions, results of operations, or/and cash flows; and

 

those discussed in the sections entitled “risk factors” in our most recent Annual Report on Form 20-F for the year ended March 31, 2021 and “operating and financial review and prospects” and elsewhere in this quarterly report.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis and assumptions only as of the date hereof. In addition, readers should carefully review the other information in this quarterly report, in our most recent Annual Report on Form 20-F for the year ended March 31, 2021 and in our periodic reports and other documents filed with and/or furnished to the SEC from time to time.

 

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TABLE OF CONTENTS

 

ITEM 1. FINANCIAL STATEMENTS5
ITEM 2. OPERATING AND FINANCIAL REVIEW, TREND INFORMATION34
ITEM 3. LIQUIDITY AND CAPITAL RESOURCES43
ITEM 4. OTHER MATTERS45
ITEM 5. EXHIBITS45
SIGNATURES46
EXHIBIT 99.1: REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM47

 

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ITEM 1. FINANCIAL STATEMENTS

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION

(in millions, except share and per share data)

 

    As of 
Particulars Note September 30, 2021  September 30, 2021  March 31, 2021 
    Convenience translation
(See Note 2(d))
       
ASSETS              
Current assets              
Cash and cash equivalents 4 U.S.$135  Rs.9,980  Rs.14,829 
Other investments 5  197   14,601   19,744 
Trade and other receivables 6  925   68,611   49,641 
Inventories 7  670   49,700   45,412 
Derivative financial instruments    16   1,158   1,218 
Tax assets    43   3,174   2,745 
Other current assets    214   15,898   14,509 
Total current assets before assets held for sale   U.S.$2,200  Rs.163,122  Rs.148,098 
Assets held for sale    2   150   151 
Total current assets   U.S.$2,202  Rs.163,272  Rs.148,249 
Non-current assets              
Property, plant and equipment 8  U.S.$812  Rs.60,229  Rs.57,111 
Goodwill 9  62   4,576   4,568 
Other intangible assets 10  440   32,630   35,648 
Trade and other receivables 6  1   55   118 
Investment in equity accounted investees    52   3,882   3,375 
Other investments 5  49   3,607   4,958 
Deferred tax assets    127   9,422   10,630 
Other non-current assets    11   827   834 
Total non-current assets   U.S.$1,554  Rs.115,228  Rs.117,242 
Total assets   U.S.$3,755  Rs.278,500  Rs.265,491 
LIABILITIES AND EQUITY              
Current liabilities              
Trade and other payables   U.S.$345  Rs.25,552  Rs.23,744 
Short-term borrowings 11  315   23,380   23,136 
Long-term borrowings, current portion 11  12   916   864 
Provisions    50   3,744   3,435 
Tax liabilities    18   1,311   1,389 
Derivative financial instruments    6   449   326 
Bank overdraft    -   -   9 
Other current liabilities    412   30,550   30,488 
Total current liabilities   U.S.$1,158  Rs.85,902  Rs.83,391 
Non-current liabilities              
Long-term borrowings 11  U.S.$81  Rs.5,977  Rs.6,299 
Deferred tax liabilities    1   99   338 
Provisions    1   58   58 
Other non-current liabilities    34   2,536   2,343 
Total non-current liabilities   U.S.$117  Rs.8,670  Rs.9,038 
Total liabilities   U.S.$1,275  Rs.94,572  Rs.92,429 
Equity              
Share capital 12 U.S.$11  Rs.832  Rs.832 
Treasury shares 12  (22)  (1,660)  (1,967)
Share premium    124   9,205   8,887 
Share-based payment reserve    19   1,407   1,461 
Capital redemption reserve    2   173   173 
Special economic zone re-investment reserve    14   1,012   1,326 
Retained earnings    2,263   167,819   156,023 
Other components of equity    69   5,140   6,327 
Total equity   U.S.$2,480  Rs.183,928  Rs.173,062 
Total liabilities and equity   U.S.$3,755  Rs.278,500  Rs.265,491 

 

The accompanying notes form an integral part of these unaudited condensed consolidated interim financial statements. 

 

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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM INCOME STATEMENTS

(in millions, except share and per share data)

 

    

For the six months

ended September 30,

  For the three months
ended September 30,
 
Particulars Note 2021  2021  2020  2021  2020 
    

Convenience
translation

(See Note 2(d))

             
Revenues 13 U.S.$1,440  Rs.106,826  Rs.93,142  Rs.57,632  Rs.48,967 
Cost of revenues    679   50,341   41,978   26,846   22,558 
Gross profit    762   56,485   51,164   30,786   26,409 
Selling, general and administrative expenses    418   30,996   25,893   15,951   13,107 
Research and development expenses    121   8,997   8,339   4,463   4,359 
Impairment of non-current assets    -   -   781   -   781 
Other income, net 14  (30)  (2,230)  (267)  (1,743)  (149)
Total operating expenses    509   37,763   34,746   18,671   18,098 
Results from operating activities (A)    252   18,722   16,418   12,115   8,311 
Finance income    19   1,398   1,327   553   489 
Finance expense    (6)  (427)  (485)  (234)  (252)
Finance income, net (B) 15  13   971   842   319   237 
Share of profit of equity accounted investees, net of tax (C)    6   413   150   247   73 
Profit before tax [(A)+(B)+(C)]    271   20,106   17,410   12,681   8,621 
Tax expense 16  60   4,478   3,994   2,761   998 
Profit for the period   U.S.$211  Rs.15,628  Rs.13,416  Rs.9,920  Rs.7,623 
Earnings per share:                      
Basic earnings per share of Rs.5/- each   U.S.$1.27  Rs.94.24  Rs.80.91  Rs.59.80  Rs.45.96 
Diluted earnings per share of Rs.5/- each   U.S.$1.27  Rs.94.00  Rs.80.69  Rs.59.65  Rs.45.83 

  

The accompanying notes form an integral part of these unaudited condensed consolidated interim financial statements. 

 

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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME

(in millions, except share and per share data)

 

  

For the six months

ended September 30,

  For the three months
ended September 30,
 
Particulars 2021  2021  2020  2021  2020 
  

Convenience
translation

(See Note 2(d))

             
Profit for the period U.S.$211  Rs.15,628  Rs.13,416  Rs.9,920  Rs.7,623 
Other comprehensive (loss)/income                    
Items that will not be reclassified subsequently to the consolidated income statement:                    
Changes in the fair value of financial instruments U.S.$(18) Rs.(1,344) Rs.181  Rs.(101) Rs.(34)
Tax impact on above items  4   293   -   -   - 
Total of items that will not be reclassified subsequently to the consolidated income statement U.S.$(14) Rs.(1,051) Rs.181  Rs.(101) Rs.(34)
Items that will be reclassified subsequently to the consolidated income statement:                    
Changes in the fair value of financial instruments U.S.$-  Rs.-  Rs.(37)  Rs.-  Rs.(24) 
Foreign currency translation adjustments  1   54   22   (307)  (193)
Effective portion of changes in fair value of cash flow hedges, net  (4)  (286)  917   248   446 
Tax impact on above items  1   96   (294)  (77)  (138)
Total of items that will be reclassified subsequently to the consolidated income statement U.S.$(2) Rs.(136) Rs.608  Rs.(136) Rs.91 
Other comprehensive (loss)/income for the period, net of tax U.S.$(16) Rs.(1,187) Rs.789  Rs.(237) Rs.57 
Total comprehensive income for the period U.S.$195  Rs.14,441  Rs.14,205  Rs.9,683  Rs.7,680 

  

The accompanying notes form an integral part of these unaudited condensed consolidated interim financial statements. 

 

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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY

(in millions, except share and per share data) 

 

  Share
capital
  Share
premium
  Treasury
shares
  Share-
based
payment
reserve
  Fair value
reserve(1) 
  Foreign
currency
translation
reserve
  Hedging
reserve
  Capital
redemption
reserve
  Special
economic
zone
 re-investment
reserve(2)
  Actuarial
gains
/(losses)
  Retained
earnings
  Total 
Balance as of April 1, 2021 (A) Rs.832  Rs.8,887  Rs.(1,967) Rs.1,461  Rs.1,540  Rs.5,049  Rs.241  Rs.173  Rs.1,326  Rs.(503) Rs.156,023  Rs.173,062 
Profit for the period  -   -   -   -   -   -   -   -   -   -   15,628   15,628 
Net change in fair value of equity instruments, net of tax benefit of Rs.293  -   -   -   -   (1,051)  -   -   -   -   -   -   (1,051)
Foreign currency translation adjustments  -   -   -   -   -   54   -   -   -   -   -   54 
Effective portion of changes in fair value of cash flow hedges, net of tax benefit of Rs.96  -   -   -   -   -   -   (190)  -   -   -   -   (190)
Total comprehensive income (B) Rs.-  Rs.-  Rs.-  Rs.-  Rs.(1,051) Rs.54  Rs.(190) Rs.-  Rs.-  Rs.-  Rs.15,628  Rs. 14,441 
Issue of equity shares on exercise of options  -*  318   307   (344)  -   -   -   -   -   -   -   281 
Share-based payment expense  -   -   -   290   -   -   -   -   -   -   -   290 
Dividend paid  -   -   -   -   -   -   -   -   -   -   (4,146)  (4,146)
Total transactions (C) Rs.-  Rs.318  Rs.307  Rs.(54) Rs.-  Rs.-  Rs.-  Rs.-  Rs.-  Rs.-  Rs.(4,146) Rs.(3,575)
Transfer from special economic zone re-investment reserve on utilization  -   -   -   -   -   -   -   -   (314)  -   314   - 
Total (D) Rs.-  Rs.-  Rs.-  Rs.-  Rs.-  Rs.-  Rs.-  Rs.-  Rs.(314) Rs.-  Rs.314  Rs.- 
Balance as of September 30, 2021 [(A)+(B)+(C)+(D)] Rs.832  Rs.9,205  Rs.(1,660) Rs.1,407  Rs.489  Rs.5,103  Rs.51  Rs.173  Rs.1,012  Rs.(503) Rs.167,819  Rs.183,928 
Convenience translation  (See note 2(d)) U.S.$11  U.S.$124  U.S.$ (22) U.S.$19  U.S.$7  U.S.$69  U.S.$1  U.S.$2  U.S.$14  U.S.$ (7) U.S.$2,263  U.S.$2,480 
                                                 
Balance as of April 1, 2020 (A) Rs.831  Rs.8,495  Rs.(1,006) Rs.1,223  Rs.(2,405) Rs.4,343  Rs.(563) Rs.173  Rs.-  Rs.(360) Rs.144,247  Rs.154,988 
Profit for the period  -   -   -   -   -   -   -   -   -   -   13,416   13,416 
Net change in fair value of equity and debt instruments  -   -   -   -   144   -   -   -   -   -   -   144 
Foreign currency translation adjustments  -   -   -   -   -   22   -   -   -   -   -   22 
Effective portion of changes in fair value of cash flow hedges, net of tax expense of Rs.294  -   -   -   -   -   -   623   -   -   -   -   623 
Total comprehensive income (B) Rs.-  Rs.-  Rs.-  Rs.-  Rs.144  Rs.22  Rs.623  Rs.-  Rs.-  Rs.-  Rs.13,416  Rs.14,205 
Issue of equity shares on exercise of options  -*  297   148   (268)  -   -   -   -   -   -   -   177 
Share-based payment expense  -   -   -   304   -   -   -   -   -   -   -   304 
Purchase of treasury shares  -   -   (190)  -   -   -   -   -   -   -   -   (190)
Dividend paid  -   -   -   -   -   -   -   -   -   -   (4,147)  (4,147)
Total transactions (C) Rs.-  Rs.297  Rs.(42) Rs.36  Rs.-  Rs.-  Rs.-  Rs.-  Rs.-  Rs.-  Rs.(4,147) Rs.(3,856)
Transfer to special economic zone re-investment reserve  -   -   -   -   -   -   -   -   1,059   -   (1,059)  - 
Total (D) Rs.-  Rs.-  Rs.-  Rs.-  Rs.-  Rs.-  Rs.-  Rs.-  Rs.1,059  Rs.-  Rs.(1,059) Rs.- 
Balance as of September 30, 2020 [(A)+(B)+(C)+(D)] Rs.831  Rs.8,792  Rs.(1,048) Rs.1,269  Rs.(2,261) Rs.4,365  Rs.60  Rs.173  Rs.1,059  Rs.(360) Rs.152,458  Rs.165,337 

 

*Rounded to the nearest million.

 

(1)Represents mark to market gain or loss on financial assets classified as fair value through other comprehensive income (“FVTOCI”). Depending on the category and type of the financial asset, the mark to market gain or loss is either reclassified to the income statement or to retained earnings upon disposal of the investment.

 

(2)The Company has created a Special Economic Zone (“SEZ”) Reinvestment Reserve out of profits of its eligible SEZ Units in accordance with the terms of Section 10AA(1) of the Indian Income Tax Act, 1961. This reserve is to be utilized by the Company for acquiring Plant and Machinery in accordance with Section 10AA(2) of such Act.

 

The accompanying notes form an integral part of these unaudited condensed consolidated interim financial statements 

 

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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(in millions, except share and per share data)

 

  For the six months ended September 30, 
Particulars 2021  2021  2020 
  Convenience
translation
(See Note 2(d))
       
Cash flows from operating activities:            
Profit for the period U.S.$211  Rs.15,628  Rs.13,416 
Adjustments for:            
Tax expense  60   4,478   3,994 
Fair value changes and profit on sale of financial instruments measured at FVTPL, net  (3)  (217)  (389)
Depreciation and amortization  79   5,890   6,411 
Impairment of non-current assets  -   -   781 
Allowance for credit losses (on trade receivables and other advances)  2   138   61 
(Gain)/loss on sale or de-recognition of non-current assets, net  (16)  (1,161)  15 
Share of profit of equity accounted investees  (6)  (413)  (150)
Foreign exchange (gain)/loss, net  (5)  (398)  919 
Interest (income)/expense, net  (-)*  (19)  82 
Equity settled share-based payment expense  4   290   304 
Changes in operating assets and liabilities:            
Trade and other receivables  (257)  (19,031)  1,620 
Inventories (Refer to Note 7 for inventory write downs)  (58)  (4,288)  (5,602)
Trade and other payables  67   4,934   4,773 
Other assets and other liabilities, net  (9)  (634)  (3,991)
Cash generated from operations  70   5,197   22,244 
Income tax paid, net  (48)  (3,539)  (2,077)
Net cash from operating activities U.S.$22  Rs.1,658  Rs.20,167 
Cash flows used in investing activities:            
Expenditures on property, plant and equipment  (91)  (6,781)  (3,999)
Proceeds from sale of property, plant and equipment  2   154   33 
Expenditures on other intangible assets  (51)  (3,767)  (567)
Proceeds from sale of other intangible assets  40   2,946   - 
Payment for acquisition of business (Refer to Note 24 for details)  -   -   (15,514)
Purchase of other investments  (406)  (30,095)  (50,933)
Proceeds from sale of other investments  479   35,494   53,296 
Interest received  6   411   714 
Net cash used in investing activities U.S.$(22) Rs.(1,638) Rs.(16,970)
Cash flows used in financing activities:            
Proceeds from issuance of equity shares (including treasury shares)  4   281   177 
Purchase of treasury shares  -   -   (190)
(Repayment of)/proceeds from short-term borrowings  (1)  (62)  3,644 
Proceeds from long-term borrowings  -   -   3,800 
Repayment of long-term borrowings  -   -   (3,743)
Payment of principal portion of lease liabilities  (6)  (408)  (366)
Dividend paid  (56)  (4,146)  (4,147)
Interest paid  (8)  (616)  (559)
Net cash used in financing activities U.S.$(67) Rs.(4,951) Rs.(1,384)
Net (decrease)/increase in cash and cash equivalents  (66)  (4,931)  1,813 
Effect of exchange rate changes on cash and cash equivalents  1   91   13 
Cash and cash equivalents at the beginning of the period  200   14,820   1,962 
Cash and cash equivalents at the end of the period (Refer to Note 4 for details) U.S.$135  Rs.9,980  Rs.3,788 

 

*Rounded to the nearest million.

 

The accompanying notes form an integral part of these unaudited condensed consolidated interim financial statements.

 

 9 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

1.Reporting entity

 

Dr. Reddy’s Laboratories Limited (the “parent company”), together with its subsidiaries and joint ventures (collectively, the “Company”), is a leading India-based pharmaceutical company headquartered and having its registered office in Hyderabad, Telangana, India. Through its three businesses - Pharmaceutical Services and Active Ingredients, Global Generics and Proprietary Products – the Company offers a portfolio of products and services, including Active Pharmaceutical Ingredients (“APIs”), Custom Pharmaceutical Services (“CPS”), generics, biosimilars and differentiated formulations.

 

The Company’s principal research and development facilities are located in the states of Telangana and Andhra Pradesh in India, Cambridge in the United Kingdom and Leiden in the Netherlands; its principal manufacturing facilities are located in the states of Telangana, Andhra Pradesh and Himachal Pradesh in India, Cuernavaca-Cuautla in Mexico, Mirfield in the United Kingdom, and Louisiana in the United States; and its principal markets are in India, Russia, the United States, the United Kingdom, and Germany. The Company’s shares trade on the Bombay Stock Exchange, the National Stock Exchange, the NSE IFSC Limited in India and on the New York Stock Exchange in the United States.

 

2.Basis of preparation of financial statements

 

a)Statement of compliance

 

These unaudited condensed consolidated interim financial statements (hereinafter referred to as “interim financial statements”) are prepared in accordance with IAS 34, “Interim Financial Reporting” as issued by the International Accounting Standards Board (“IASB”). They do not include all of the information required for a complete set of annual financial statements and should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 20-F for the fiscal year ended March 31, 2021. These interim financial statements were authorized for issuance by the Company’s Board of Directors on November 5, 2021.

 

b)Significant accounting policies

 

The accounting policies applied by the Company in these interim financial statements are the same as those applied by the Company in its audited consolidated financial statements as of and for the year ended March 31, 2021 contained in the Company’s Annual Report on Form 20-F.

 

Several amendments and interpretations apply for the first time in the fiscal year ending March 31, 2022, but do not have an impact on these interim financial statements.

 

c)Basis of measurement

 

These interim financial statements have been prepared on the historical cost convention and on an accrual basis, except for the following material items in the statements of financial position:

 

·derivative financial instruments are measured at fair value;
·financial assets are measured either at fair value or at amortized cost, depending on the classification;
·employee defined benefit assets/(liabilities) are recognized as the net total of the fair value of plan assets, adjusted for actuarial gains/(losses) and the present value of the defined benefit obligation;
·long-term borrowings are measured at amortized cost using the effective interest rate method;
·share-based payments are measured at fair value;
·investments in joint ventures are accounted for using the equity method;
·assets held for sale are measured at fair value;
·assets acquired and liabilities assumed as part of business combinations are measured at fair value; and
·right-of-use assets and lease liabilities are recognized at the present value of lease payments that are not paid at that date. This amount is adjusted for any lease payments made at or before the commencement date, lease incentives received and initial direct costs, incurred, if any.

 

 10 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

2.Basis of preparation of financial statements (continued)

 

d)Convenience translation

 

These interim financial statements have been prepared in Indian rupees. Solely for the convenience of the reader, these interim financial statements as of and for the three months and six months ended September 30, 2021 have been translated into U.S. dollars at the certified foreign exchange rate of U.S.$1.00 = Rs.74.16, as published by the Federal Reserve Board of Governors on September 30, 2021. No representation is made that the Indian rupee amounts have been, could have been or could be converted into U.S. dollars at such a rate or any other rate. Such convenience translation is not subject to review by the Company’s independent registered public accounting firm.

 

e)Functional and presentation currency

 

These interim financial statements are presented in Indian rupees, which is the functional currency of the parent company. All financial information presented in Indian rupees has been rounded to the nearest million.

 

In respect of certain non-Indian subsidiaries that operate as marketing arms of the parent company in their respective countries/regions, the functional currency has been determined to be the functional currency of the parent company (i.e., the Indian rupee). The operations of these entities are largely restricted to importing of finished goods from the parent company in India, sales of these products in the foreign country and making of import payments to the parent company. The cash flows realized from sales of goods are available for making import payments to the parent company and cash is paid to the parent company on a regular basis. The costs incurred by these entities are primarily the cost of goods imported from the parent company. The financing of these subsidiaries is done directly or indirectly by the parent company.

 

In respect of subsidiaries whose operations are self-contained and integrated within their respective countries/regions, the functional currency has been generally determined to be the local currency of those countries/regions, unless use of a different currency is considered appropriate.

 

f)Use of estimates and judgments

 

The preparation of interim financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. In preparing these interim financial statements, the significant judgments made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the audited consolidated financial statements as of and for the year ended March 31, 2021.

 

 11 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

3.Segment reporting

 

The Chief Operating Decision Maker (“CODM”) evaluates the Company’s performance and allocates resources based on an analysis of various performance indicators by operating segments. The CODM reviews revenue and gross profit as the performance indicator for all of the operating segments, and does not review the total assets and liabilities of an operating segment. The Co-Chairman and Managing Director was previously the CODM of the Company. Pursuant to certain organizational changes, effective December 1, 2020, the office of Chief Executive Officer (“CEO”) assumed the authority and responsibility for making decisions about resources to be allocated to various segments and assessing their performance. Consequently, the CEO is currently the CODM of the Company.

 

The Company’s reportable operating segments are as follows:

 

·Global Generics;
·Pharmaceutical Services and Active Ingredients (“PSAI”);
·Proprietary Products; and
·Others.

 

Global Generics. This segment consists of the Company’s business of manufacturing and marketing prescription and over-the-counter finished pharmaceutical products ready for consumption by the patient, marketed under a brand name (branded formulations) or as generic finished dosages with therapeutic equivalence to branded formulations (generics). This segment includes the operations of the Company’s biologics business.

 

Pharmaceutical Services and Active Ingredients. This segment primarily consists of the Company’s business of manufacturing and marketing active pharmaceutical ingredients and intermediates, also known as “API”, which are the principal ingredients for finished pharmaceutical products. Active pharmaceutical ingredients and intermediates become finished pharmaceutical products when the dosages are fixed in a form ready for human consumption such as a tablet, capsule or liquid using additional inactive ingredients. This segment also includes the Company’s contract research services business and the manufacture and sale of active pharmaceutical ingredients and steroids in accordance with the specific customer requirements.

 

Proprietary Products. This segment consists of the Company’s business that focuses on the research and development of differentiated formulations. The segment is expected to earn revenues arising out of monetization of such assets and subsequent royalties, if any.

 

Others. This segment consists of the operations of the Company’s wholly-owned subsidiary, Aurigene Discovery Technologies Limited (“ADTL”), a discovery stage biotechnology company developing novel and best-in-class therapies in the fields of oncology and inflammation. ADTL works with established pharmaceutical and biotechnology companies through customized models of drug-discovery collaborations.

 

The measurement of each segment’s revenues, expenses and assets is consistent with the accounting policies that are used in preparation of the Company’s consolidated financial statements.

 

 12 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

3.Segment reporting (continued)

 

Information about segments: For the six months ended September 30, 2021  For the six months ended September 30, 2020 
Segments Global
Generics
  PSAI  Proprietary
Products
  Others  Total  Global
Generics
  PSAI  Proprietary
Products
  Others  Total 
Revenues(1) Rs.88,544  Rs.15,912  Rs.1,291  Rs.1,079  Rs.106,826  Rs.74,916  Rs.17,058  Rs.156  Rs.1,012  Rs.93,142 
Gross profit Rs.50,709  Rs.3,796  Rs.1,277  Rs.703  Rs.56,485  Rs.45,211  Rs.5,140  Rs.144  Rs.669  Rs.51,164 
Selling, general and administrative expenses                  30,996                   25,893 
Research and development expenses                  8,997                   8,339 
Impairment of non-current assets                  -                   781 
Other income, net                  (2,230)                  (267)
Results from operating activities                 Rs.18,722                  Rs.16,418 
Finance income, net                  971                   842 
Share of profit of equity accounted investees, net of tax                  413                   150 
Profit before tax                 Rs.20,106                  Rs.17,410 
Tax expense                  4,478                   3,994 
Profit for the period                 Rs.15,628                  Rs.13,416 

 

Information about segments: For the three months ended September 30, 2021  For the three months ended September 30, 2020 
Segments Global
Generics
  PSAI  Proprietary
Products
  Others  Total  Global
Generics
  PSAI  Proprietary
Products
  Others  Total 
Revenues(1) Rs.47,431  Rs.8,372  Rs.1,232  Rs.597  Rs.57,632  Rs.39,841  Rs.8,505  Rs.100  Rs.521  Rs.48,967 
Gross profit Rs.26,990  Rs.2,166  Rs.1,232  Rs.398  Rs.30,786  Rs.23,685  Rs.2,284  Rs.88  Rs.352  Rs.26,409 
Selling, general and administrative expenses                  15,951                   13,107 
Research and development expenses                  4,463                   4,359 
Impairment of non-current assets                  -                   781 
Other income, net                  (1,743)                  (149)
Results from operating activities                 Rs.12,115                  Rs.8,311 
Finance income, net                  319                   237 
Share of profit of equity accounted investees, net of tax                  247                   73 
Profit before tax                 Rs.12,681                  Rs.8,621 
Tax expense                  2,761                   998 
Profit for the period                 Rs.9,920                  Rs.7,623 

  

(1)Revenues for the six months ended September 30, 2021 and 2020 do not include inter-segment revenues from the PSAI segment to the Global Generics segment, which amount to Rs.2,940 and Rs.3,288, respectively. Revenues for the three months ended September 30, 2021 and 2020 do not include inter-segment revenues from the PSAI segment to the Global Generics segment, which amount to Rs.1,618 and Rs.1,751, respectively.

 

 13 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

3.Segment reporting (continued)

 

Analysis of revenues by geography:

 

The following table shows the distribution of the Company’s revenues by country, based on the location of the customers:

 

  For the six months ended
September 30,
  For the three months
ended September 30,
 
Country 2021  2020  2021  2020 
India Rs.22,984  Rs.16,932  Rs.11,846  Rs.9,887 
United States  39,557   38,441   20,918   20,147 
Russia  9,269   7,250   5,742   3,978 
Others(1)  35,016   30,519   19,126   14,955 
  Rs.106,826  Rs.93,142  Rs.57,632  Rs.48,967 

 

(1)Others include Germany, the United Kingdom, Ukraine, Canada and other countries across the world.

 

4.Cash and cash equivalents

 

Cash and cash equivalents consist of the following:

 

  As of 
  September 30, 2021  March 31, 2021 
Cash on hand Rs.1  Rs.1 
Balances with banks  9,408   14,324 
Term deposits with banks (original maturities less than 3 months)  571   504 
Cash and cash equivalents in the statements of financial position Rs.9,980  Rs.14,829 
Restricted cash balances included above        
Balance in unclaimed dividends and debenture interest account Rs.75  Rs.106 
Balances in Escrow account pursuant to the Business Transfer Agreement with Wockhardt Limited (Refer to Note 24 for details)  40   40 
Other restricted cash balances  72   82 
         
  As of 
  September 30, 2021  September 30, 2020 
Cash and cash equivalents in the statements of cash flow Rs.9,980  Rs.3,788 

 

5.Other investments

 

Other investments consist of investments in units of mutual funds, equity securities, bonds, limited liability partnership firm interests and term deposits with banks (i.e., certificates of deposit having an original maturity period exceeding 3 months). The details of such investments as of September 30, 2021 and March 31, 2021 are as follows:

 

  As of September 30, 2021  As of March 31, 2021 
  Cost  Unrealized
gain/(loss)
  Fair value/
amortized
cost(2)
  Cost  Unrealized
gain/(loss)
  Fair value/
amortized
cost(2)
 
Current portion                        
In units of mutual funds Rs.5,207  Rs.   39  Rs.5,246  Rs.13,197  Rs.66  Rs.13,263 
In bonds  522   -   522   522   -   522 
Term deposits with banks  8,833   -   8,833   5,959   -   5,959 
  Rs.14,562  Rs.39  Rs.14,601  Rs.19,678  Rs.66  Rs.19,744 
Non-current portion                        
In equity securities(1) Rs.2,701  Rs.488  Rs.3,189  Rs.2,701  Rs.1,832  Rs.4,533 
In limited liability partnership firm  400   (7)  393   400   -   400 
Others  25   -   25   25   -   25 
  Rs.3,126  Rs.481  Rs.3,607  Rs.3,126  Rs.1,832  Rs.4,958 

 

 14 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

5.Other investments (continued)

 

(1)Primarily represents the shares of Curis, Inc. issued to the Company under a 2015 Collaboration Agreement with Curis, Inc., as amended. For further details, refer to Note 34 of the consolidated financial statements in the Company’s Annual Report on Form 20-F for the fiscal year ended March 31, 2021.

 

(2)Interest accrued but not due on bonds and term deposits with banks is included in other current assets.

 

For the purpose of measurement, the aforesaid investments are classified as follows:

 

Investments in units of mutual fundsFair value through profit and loss
Investments in bonds, term deposits with banks and othersAmortized cost
Investments in equity securitiesFair value through other comprehensive income (on account of irrevocable option elected at time of transition) and fair value through profit and loss
Investment in limited liability partnership firm interestsFair value through profit and loss

 

6.Trade and other receivables

 

  As of 
  September 30, 2021           March 31, 2021 
Current        
Trade and other receivables, gross Rs.69,948  Rs.50,937 
Less: Allowance for credit losses  (1,337)  (1,296)
Trade and other receivables, net Rs.68,611  Rs.49,641 
Non-current        
Trade and other receivables, gross(1) Rs.55  Rs.118 
Less: Allowance for credit losses  -   - 
Trade and other receivables, net Rs.55  Rs.118 

 

(1)Represents amounts receivable pursuant to an out-licensing arrangement with a customer. As these amounts are not expected to be realized within twelve months from the end of the reporting date, they are disclosed as non-current.

 

During the previous period, pursuant to an arrangement with a bank, the Company sold to the bank certain trade receivables of its Global Generics segment, on a non-recourse basis. The receivables sold were mutually agreed upon with the bank after considering the creditworthiness and contractual terms with the customer, including any gross to net adjustments (due to rebates, discounts etc.) from the contracted amounts. As a result, the receivables sold were not more than the total net amount of trade receivables. The Company had transferred substantially all the risks and rewards of ownership of such receivables sold to the bank, and accordingly, the same are derecognized in the statements of financial position. As on September 30, 2021 and March 31, 2021, the amount of trade receivables de-recognized pursuant to the aforesaid arrangement was Rs.Nil and Rs.9,254, respectively.

 

7.Inventories

 

Inventories consist of the following:

 

  As of 
  September 30, 2021        March 31, 2021 
Raw materials Rs.14,251  Rs.12,287 
Work-in-progress  11,604   10,009 
Finished goods (includes stock-in-trade)  20,358   19,829 
Packing materials, stores and spares  3,487   3,287 
  Rs.49,700  Rs.45,412 

 

Details of inventories recognized in these interim financial statements are as follows:

 

  For the six months ended
September 30,
  For the three months
ended September 30,
 
  2021  2020  2021  2020 
Raw materials, consumables and changes in finished goods and work in progress Rs.35,266  Rs.27,469  Rs.19,272  Rs.15,426 
Inventory write-downs  2,031   1,528   1,004   375 

 

 15 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

8.Property, plant and equipment

 

  

For the six months ended

September 30,

  For the year ended
March 31,
 
  2021  2020  2021 
Opening balance Rs.57,111  Rs.52,332  Rs.52,332 
Cost of assets acquired during the period(1)  7,179   6,724   13,159 
Assets acquired through business combinations(2)  -   373   373 
Net book value of assets disposed of during the period  (113)  (72)  (140)
Net book value of assets held for sale  -   -   (151)
Depreciation expense  (4,048)  (4,307)  (8,527)
Impairment loss  -   -   (46)
Effect of changes in foreign exchange rates  100   (24)  111 
Closing balance Rs.60,229  Rs.55,026  Rs.57,111 

 

(1)Additions for the six months ended September 30, 2020 and the year ended March 31, 2021 include recognition of a right-of-use asset of Rs.1,852 relating to a warehousing services agreement in the United States.

 

(2)Refer to Note 24 of these interim financial statements for further details.

 

Capital commitments

 

As of September 30, 2021 and March 31, 2021, the Company was committed to spend Rs.9,208 and Rs.9,841, respectively, under agreements to purchase property, plant and equipment. This amount is net of capital advances paid in respect of such purchase commitments.

 

9.Goodwill

 

Goodwill arising on business combinations is not amortized but is tested for impairment at least annually, or more frequently if there is any indication that the cash generating unit to which goodwill is allocated is impaired.

 

The following table presents goodwill as of September 30, 2021 and March 31, 2021:

 

  As of 
  September 30, 2021        March 31, 2021 
Opening balance, gross Rs.20,852  Rs.20,278 
Goodwill arising on business combinations(1)  -   530 
Effect of translation adjustments  8   44 
Impairment loss(2)  (16,284)  (16,284)
Closing balance Rs.4,576  Rs.4,568 

 

(1)Refer to Note 24 of these interim financial statements for further details.

 

(2)The impairment loss of Rs.16,284 includes Rs.16,003 pertaining to the Company’s German subsidiary, betapharm Arzneimittel GmbH, which is part of the Company’s Global Generics segment. This impairment loss was recorded for the years ended March 31, 2009 and 2010.

 

 16 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

10.Other intangible assets

 

  

For the six months ended

September 30,

  For the year ended
March 31,
 
  2021  2020  2021 
Opening balance Rs.35,648  Rs.27,659  Rs.27,659 
Cost of assets acquired during the period(1)(2)  542   1,696   6,411 
Assets acquired through business combinations(3)  -   14,888   14,888 
Net book value of assets disposed of during the period(4)  (1,883)  -   - 
Amortization expense  (1,842)  (2,104)  (4,269)
Impairment loss(5)  -   (781)  (8,542)
Effect of changes in foreign exchange rates  165   (326)  (499)
Closing balance Rs.32,630  Rs.40,972  Rs.35,648   

 

(1)During the year ended March 31, 2021, the Company entered into a definitive agreement with Glenmark Pharmaceuticals Limited to acquire marketing authorizations and other rights of select brands in four “Emerging Markets” countries. The acquired brands represent two products, (a) a mometasone mono product and (b) a combination of mometasone with azelastine, and are indicated for the treatment of seasonal and perennial allergic rhinitis. The total consideration paid was Rs.1,516. Following the principles of IAS 38, “Intangible Assets”, the Company recognized the acquired brands at their acquisition cost. The acquisition pertains to the Company’s Global Generics segment.

 

(2)During the six months ended September 30, 2020 and the year ended March 31, 2021, the additions include Rs.728 and Rs.3,291, respectively, representing the expenditure for the purchase of intellectual property rights relating to Xeglyze®, forming part of the Company’s Proprietary Products segment.

 

(3)Refer to Note 24 of these interim financial statements for further details.

 

(4)During the three and six months ended September 30, 2021, the Company entered into a definitive agreement with Citius Pharmaceuticals, Inc. (“Citius”) pursuant to which it sold all of its rights relating to its anti-cancer agent E7777 (denileukin diftitox) to Citius. Under the terms of agreement, the Company will receive U.S.$40 up front upon the closing of the transaction, followed by a milestone payment of up to U.S.$40 related to the CTCL (cutaneous Tcell lymphoma) indication regulatory approval and up to U.S.$70 in milestone payments upon additional indication regulatory approvals. Further, the Company will receive certain sales-based milestones and tiered earn-out payments. Consequently, an amount of Rs.1,064, representing the excess of sale consideration over the carrying cost, has been recognized as gain on sale of intangible assets and was included under “Other income, net”. The transaction pertains to the Company’s Proprietary Products segment.

 

(5)Total impairment loss for the year ended March 31, 2021 was Rs.8,542 (six months ended September 30, 2020 Rs.781), of which Rs.3,291 (six months ended September 30, 2020 Rs.728) was attributable to impairment of Xeglyze®, forming part of Company’s Proprietary Products segment, Rs.3,180 was attributable to impairment of ethinyl estradiol/ethenogestral vaginal ring (a generic equivalent to Nuvaring®), forming part of the Company’s Global Generics segment, Rs.1,587 was attributable to impairment of saxagliptin/ metformin (generic version of Kombiglyze®-XR) and phentermine and topiramate (generic version of Qsymia®), forming part of the Company’s Global Generics segment and the balance of Rs.484 (six months ended September 30, 2020 Rs.53) was attributable to other product related intangibles forming part of the Company’s Global Generics segment.

 

Details of significant separately acquired intangible assets as of September 30, 2021 are as follows:

 

Particulars of the asset Acquired from Carrying cost 
Select portfolio of branded generics business Wockhardt Limited Rs.13,839 
Select portfolio of dermatology, respiratory and pediatric assets UCB India Private Limited and affiliates  4,316 
Intellectual property rights relating to PPC-06 (tepilamide fumarate) Xenoport, Inc.  4,179 
Various ANDAs Teva and an affiliate of Allergan  3,659 
Select Anti-Allergy brands Glenmark Pharmaceuticals Limited  1,437 
Habitrol® brand Novartis Consumer Health Inc.  1,113 

 

 17 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

11.Loans and borrowings

 

Short-term borrowings

 

Short-term borrowings consist of “pre-shipment credit” drawn by the parent company and other unsecured loans drawn by the parent company and certain of its subsidiaries in Russia, Brazil, Mexico, Ukraine, Switzerland and the United States which are repayable within 6 to 12 months from the date of drawdown.

 

Short-term borrowings consist of the following:

 

  As of 
  September 30, 2021           March 31, 2021 
Pre-shipment credit Rs.14,150  Rs.10,300 
Other working capital borrowings  9,230   12,836 
  Rs.23,380  Rs.23,136 

 

The interest rate profile of short-term borrowings from banks is given below:

 

 As of 
 September 30, 2021 March 31, 2021 
 Currency(1) Interest Rate(2) Currency(1) Interest Rate(2) 
Pre-shipment creditINR 3 Months T-bill +10 bps to 30 bps INR 3 Months T-bill + 30 bps 
 - - INR 5.75% 
Other working capital borrowingsU.S.$ (1.90)% to (1.80)%(3) U.S.$ (2.20)% to (1.80)% (3) 
 RUB 6 Months MosPrime + 65 bps RUB 3.00% to 3.40% and 5.55% 
 MXN TIIE + 1.15% MXN TIIE + 1.20% 
 INR 4.00%   INR 4.00% 
 BRL CDI + 1.79% BRL 4.00% 
 UAH 7.00% UAH 4.75% 

 

(1)“INR” means Indian rupees, “U.S.$” means United States Dollars, “RUB” means Russian roubles, “MXN” means Mexican pesos, “BRL” means Brazilian reals and “UAH” means Ukrainian hryvnia.

 

(2)“TIIE” means the Equilibrium Inter-banking Interest Rate (Tasa de Interés Interbancaria de Equilibrio), “T-bill” means the India Treasury Bill interest rate, “MosPrime” means Moscow Prime Offered rate and “CDI” means the Certificado de Depósito Interbancário (a daily average of overnight interbank loans, which is used as an investment benchmark in the Brazilian financial system).

 

(3)Against some of its intra-group receivables denominated in U.S.$, the parent company obtained post-shipment credits from banks at an interest rate equal to the INR interest rate discounted by the U.S.$/INR forward premium, resulting in a negative U.S.$ interest rate.

 

Long-term borrowings

 

Long-term borrowings consist of the following:

 

  As of 
  September 30, 2021  March 31, 2021 
  Non – Current  Current  Non – Current  Current 
Non-convertible debentures by the APSL subsidiary(1) Rs.3,800  Rs.-  Rs.3,800  Rs.- 
Obligations under leases(2)  2,177   916   2,499   864 
  Rs.5,977  Rs.916  Rs.6,299  Rs.864 

 

(1)“APSL subsidiary” refers to Aurigene Pharmaceutical Services Limited.

 

(2)Additions for the year ended March 31, 2021 include lease liability of Rs.1,878 relating to a warehousing services agreement in the United States.

 

 18 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

11.Loans and borrowings (continued)

 

The interest rate profiles of long-term borrowings (other than obligations under leases) as of September 30, 2021 and March 31, 2021 were as follows:

 

  As of 
  September 30, 2021  March 31, 2021 
  Currency(1)  Interest Rate  Currency(1)  Interest Rate 
Non-convertible debentures  INR   6.77%  INR   6.77%

 

(1)“INR” means Indian rupees.

 

Uncommitted lines of credit from banks

 

The Company had uncommitted lines of credit of Rs.28,270 and Rs.38,766 as of September 30, 2021 and March 31, 2021, respectively, from its banks for working capital requirements. The Company draw upon these lines of credit based on its working capital requirements.

 

12.Share capital

 

The following table presents the changes in number of equity shares and amount of equity share capital for the six months ended September 30, 2021 and September 30, 2020:

 

  As of 
  September 30, 2021  September 30, 2020 
  Number  Amount  Number  Amount 
Opening number of equity shares/share capital  166,301,231  Rs.832   166,172,082  Rs.831 
Add: Equity shares issued pursuant to employee stock option plans(1)  97,580   -*  97,197   -*
Closing number of equity shares/share capital  166,398,811  Rs.832   166,269,279  Rs.831 
Treasury shares(2)  485,771  Rs.1,660   383,054  Rs.1,048 

 

*Rounded off to nearest million.

 

(1)During the six months ended September 30, 2021 and 2020, equity shares were issued as a result of the exercise of vested options granted to employees pursuant to the Dr. Reddy’s Employees Stock Option Scheme, 2002 and the Dr. Reddy’s Employees Stock Option Scheme, 2007. The options exercised had an exercise price of Rs.5, Rs.2,607, Rs.2,814 or Rs.3,679 per share. Upon the exercise of such options, the amount of compensation cost (computed using the grant date fair value) previously recognized in the "share based payment reserve” was transferred to “share premium” in the unaudited condensed consolidated interim statements of changes in equity.

 

(2)Pursuant to the special resolution approved by the shareholders in the Annual General Meeting held on July 27, 2018, the Dr. Reddy’s Employees ESOS Trust (the “ESOS Trust”) was formed to support the Dr. Reddy’s Employees Stock Option Scheme, 2018 by acquiring, from the Company or through secondary market acquisitions, equity shares which are used for issuance to eligible employees (as defined therein) upon exercise of stock options thereunder. During the six months ended September 30, 2021 and 2020, an aggregate of 89,430 and 56,175 equity shares, respectively, were issued as a result of the exercise of vested options granted to employees pursuant to the Dr. Reddy’s Employees Stock Option Scheme, 2018. The options exercised had an exercise price of Rs.2,607, Rs.2,814 or Rs.3,679 per share. Upon the exercise of such options, the amount of compensation cost (computed using the grant date fair value) previously recognized in the “share based payment reserve” was transferred to “share premium” in the unaudited condensed consolidated interim statements of changes in equity. In addition, any difference between the carrying amount of treasury shares and the consideration received was recognized in the “share premium”. As of September 30, 2021 and March 31, 2021, the ESOS Trust had outstanding 4,85,771 and 575,201 shares, respectively, which it purchased from the secondary market for an aggregate consideration of Rs.1,660 and Rs.1,967, respectively.

 

 19 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

13.Revenue from contracts with customers

 

  For the six months
ended September 30,
  For the three months
ended September 30,
 
  2021  2020  2021  2020 
Sales Rs.103,429  Rs.91,010  Rs.55,167  Rs.47,766 
Service income  1,657   1,565   953   914 
License fees(1)  1,740   567   1,512   287 
  Rs.106,826  Rs.93,142  Rs.57,632  Rs.48,967 

 

(1)In August 2021, the Company entered into a definitive agreement with BioDelivery Sciences International, Inc. (“BDSI”), pursuant to which the Company sold its U.S. and Canada territory rights for ELYXYB (celecoxib oral solution) 25 mg/mL, to BDSI. Under the terms of agreement, the Company will receive U.S.$6 up front upon closing followed by U.S.$9 one year from closing. Further, the Company is entitled to event based milestone payments upon achievement of certain regulatory approvals; sales-based milestone payments upon achievement of certain net sales thresholds in a calendar year; and quarterly earn-out payments based on a percentage (which varies based on sales volumes) of net sales of the product in the territory. The closing of the transaction was subject to satisfactory completion of customary closing conditions including the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act), as amended. Upon successful completion of the closing conditions, in September 2021, the Company recognized an amount of Rs.1,084 as licensee fee from this transaction.

 

Analysis of revenues by geography:

The following table shows the distribution of the Company’s revenues by country, based on the location of the customers:

 

  For the six months
ended September 30,
  For the three months
ended September 30,
 
Country 2021  2020  2021  2020 
India Rs.22,984  Rs.16,932  Rs.11,846  Rs.9,887 
United States  39,557   38,441   20,918   20,147 
Russia  9,269   7,250   5,742   3,978 
Others(1)  35,016   30,519   19,126   14,955 
  Rs.106,826  Rs.93,142  Rs.57,632  Rs.48,967 

 

(1)Others include Germany, the United Kingdom, Ukraine, Canada and other countries across the world.

 

Refund liabilities on account of sales returns amounting to Rs.3,101 and Rs.2,824 as of September 30, 2021 and March 31, 2021, respectively, have been included in provisions forming part of current liabilities.

 

14.Other income, net

 

Other income, net consists of the following:

 

  For the six months
ended September 30,
  For the three months
ended September 30,
 
  2021  2020  2021  2020 
(Gain)/loss on sale/disposal of non-current assets, net(1) Rs.(1,161) Rs.15  Rs.(1,131) Rs.14 
Sale of spent chemicals  (151)  (113)  (75)  (60)
Scrap sales  (106)  (55)  (58)  (34)
Miscellaneous income, net  (812)  (114)  (479)  (69)
  Rs.(2,230) Rs.(267) Rs.(1,743) Rs.(149)

 

(1)Refer to Note 10 of these interim financial statements for further details.

 

 20 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

15.Finance income, net

 

Finance income, net consists of the following:

 

  For the six months
ended September 30,
  For the three months
ended September 30,
 
  2021  2020  2021  2020 
Interest income Rs.446  Rs.403  Rs.237  Rs.122 
Fair value changes and profit on sale of financial instruments measured at FVTPL, net  217   389   91   131 
Foreign exchange gain, net  735   535   225   236 
Finance income (A) Rs.1,398  Rs.1,327  Rs.553  Rs.489 
Interest expense  (427)  (485)  (234)  (252)
Finance expense (B) Rs.(427) Rs.(485) Rs.(234) Rs.(252)
Finance income, net [(A)+(B)] Rs.971  Rs.842  Rs.319  Rs.237 

 

16.Income taxes

 

Income tax expense is recognized based on the Company’s best estimate of the average annual income tax rate for the fiscal year applied to the pre-tax income of the interim period. The average annual income tax rate is determined for each taxing jurisdiction and applied individually to the interim period pre-tax income of each jurisdiction. The difference between the estimated average annual income tax rate and the enacted tax rate is accounted for by a number of factors, including the effect of differences between Indian and foreign tax rates, expenses that are not deductible for tax purposes, income exempted from income taxes, and effects of changes in tax laws and rates.

 

  For the six months
ended September 30,
  For the three months
ended September 30,
 
  2021  2020  2021  2020 
Weighted average tax rate  22.3%  22.9%  21.8%  11.6%
Tax expense Rs.4,478  Rs.3,994  Rs.2,761  Rs.998 
Tax (benefit)/expense recognised directly in the equity Rs.(389)  Rs.294  Rs.77  Rs.138 

 

The effective rate of tax for the three months ended September 30, 2020 was lower primarily on account of recognition of deferred tax asset amounting to Rs.1,012 pursuant to a planned restructuring activity between certain subsidiaries of the Company.

 

Tax (benefits)/expenses recognized directly in the equity primarily relates to tax effects on the changes in fair value of financial instruments and the changes in fair value of cash flow hedges.

 

17.Nature of expense

 

The following table shows supplemental information related to certain “nature of expense” items for the three months and six months ended September 30, 2021 and 2020:

 

  For the six months
ended September 30,
  For the three months
ended September 30,
 
Depreciation 2021  2020  2021  2020 
Cost of revenues Rs.2,782  Rs.3,085  Rs.1,431  Rs.1,551 
Selling, general and administrative expenses  753   740   384   394 
Research and development expenses  513   482   260   242 
  Rs.4,048  Rs.4,307  Rs.2,075  Rs.2,187 

 

  For the six months
ended September 30,
  For the three months
ended September 30,
 
Amortization 2021  2020  2021  2020 
Cost of revenues Rs.-  Rs.-  Rs.-  Rs.- 
Selling, general and administrative expenses  1,831   2,051   906   1,056 
Research and development expenses  11   53   4   28 
  Rs.1,842  Rs.2,104  Rs.910  Rs.1,084 

 

 21 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

17.Nature of expense (continued)

 

  For the six months
ended September 30,
  For the three months
ended September 30,
 
Employee benefits 2021  2020  2021  2020 
Cost of revenues Rs.5,888  Rs.5,948  Rs.2,986  Rs.3,156 
Selling, general and administrative expenses  11,248   9,886   5,815   5,127 
Research and development expenses  2,433   2,378   1,304   1,205 
  Rs.19,569  Rs.18,212  Rs.10,105  Rs.9,488 

 

18.Employee benefit plans

 

Gratuity benefits provided by the parent company

 

In accordance with applicable Indian laws, the Company has a defined benefit plan which provides for gratuity payments (the “Gratuity Plan”) and covers certain categories of employees in India. The Gratuity Plan provides a lump sum gratuity payment to eligible employees at retirement or termination of their employment. The amount of the payment is based on the respective employee’s last drawn salary and the years of employment with the Company. Effective September 1, 1999, the Company established the Dr. Reddy’s Laboratories Gratuity Fund (the “Gratuity Fund”) to fund the Gratuity Plan. Liabilities in respect of the Gratuity Plan are determined by an actuarial valuation, based upon which the Company makes contributions to the Gratuity Fund. Trustees administer the contributions made to the Gratuity Fund. Amounts contributed to the Gratuity Fund are invested in bonds issued by the Government of India and in debt securities and equity securities of Indian companies. The liability recorded by the Company towards this obligation was Rs.640 and Rs.631 as of September 30, 2021 and March 31, 2021, respectively.

 

Compensated absences

 

The Company provides for accumulation of compensated absences by certain categories of its employees. These employees can carry forward a portion of the unutilized compensated absences and utilize them in future periods or receive cash in lieu thereof as per the Company’s policy. The Company records a liability for compensated absences in the period in which the employee renders the services that increases this entitlement. The total liability recorded by the Company towards this obligation was Rs.1,074 and Rs.1,130 as of September 30, 2021 and March 31, 2021, respectively.

 

19.Employee stock incentive plans

 

Pursuant to the special resolutions approved by the shareholders in the Annual General Meetings held on September 24, 2001, on July 27, 2005, and on July 27, 2019 respectively, the Company instituted the Dr. Reddy’s Employees Stock Option Scheme, 2002 (the “DRL 2002 Plan”), the Dr. Reddy’s Employees ADR Stock Option Scheme, 2007 (the “DRL 2007 Plan”), and Dr. Reddy’s Employees Stock Option Scheme, 2019 (the “DRL 2019 Plan”) each of which allows for grants of stock options to eligible employees.

 

Grants under Stock Incentive Plans

 

The terms and conditions of the grants made during the six months ended September 30, 2021 under the above plans were as follows:

 

Particulars Number of
instruments
  Exercise price  Vesting period Contractual life
DRL 2002 Plan  68,808  Rs.5.00  1 to 4 years 5 years
DRL 2007 Plan  55,884  Rs.5.00  1 to 4 years 5 years
DRL 2007 Plan  5,144  Rs.5,301.00  1 to 4 years 5 years
DRL 2018 Plan  8,700  Rs.5,301.00  1 to 4 years 5 years

 

The above grants were made on May 13, 2021.

 

 22 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

19.Employee stock incentive plans (continued)

 

The terms and conditions of the grants made during the six months ended September 30, 2020 under the above plans were as follows:

 

Particulars Number of
instruments
  Exercise price  Vesting period Contractual life
DRL 2002 Plan  88,848  Rs.5.00  1 to 4 years 5 years
DRL 2007 Plan  52,316  Rs.5.00  1 to 4 years 5 years
DRL 2007 Plan  96,080  Rs.3,679.00  1 to 4 years 5 years
DRL 2018 Plan  150,740  Rs.3,679.00  1 to 4 years 5 years

 

The above grants were made on May 19, 2020.

 

The fair value of services received in return for stock options granted to employees is measured by reference to the fair value of stock options granted. The fair value of stock options has been measured using the Black-Scholes-Merton valuation model at the date of the grant.

 

The weighted average inputs used in computing the fair value of such grants were as follows:

 

  May 13, 2021  May 13, 2021  May 19, 2020  May 19, 2020 
Expected volatility  29.38%  30.02%  29.12%  30.47%
Exercise price Rs.5,301.00  Rs.5.00  Rs.3,679.00  Rs.5.00 
Option life  5.0 Years   2.5 Years   5.0 Years   2.5 Years 
Risk-free interest rate  5.70%  4.64%  5.67%  4.62%
Expected dividends  0.47%  0.47%  0.68%  0.68%
Grant date share price Rs.5,301.00  Rs.5,301.00  Rs.3,700.00  Rs.3,700.00 

 

Share-based payment expense

 

  For the six months
ended September 30,
  For the three months
ended September 30,
 
  2021  2020  2021  2020 
Equity settled share-based payment expense(1) Rs.290  Rs.304  Rs.143  Rs.161 
Cash settled share-based payment expense(2)  102   123   25   72 
  Rs.392  Rs.427  Rs.168  Rs.233 

 

(1)As of September 30, 2021 and 2020, there was Rs.883 and Rs.979, respectively, of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of 2.01 years and 2.16 years, respectively.

 

(2)Certain of the Company’s employees are eligible to receive share based payment awards that are settled in cash. These awards would vest only upon satisfaction of certain service conditions which range from 1 to 4 years. These awards entitle the employees to a cash payment on the vesting date. The amount of the cash payment is determined based on the price of the Company’s ADSs at the time of vesting. As of September 30, 2021 and 2020, there was Rs.179 and Rs.219, respectively, of total unrecognized compensation cost related to unvested awards. This cost is expected to be recognized over a weighted-average period of 2.03 years and 2.18 years, respectively. This scheme does not involve dealing in or subscribing to or purchasing securities of the Company, directly or indirectly.

 

20.Related parties

 

The Company has entered into transactions with the following related parties:

 

·Green Park Hotel and Resorts Limited for hotel services;
·Green Park Hospitality Services Private Limited for catering and other services;
·Dr. Reddy’s Foundation towards contributions for social development;
·Kunshan Rotam Reddy Pharmaceuticals Company Limited for sales of goods and for research and development services;
·Pudami Educational Society towards contributions for social development;
·Indus Projects Private Limited for engineering services relating to civil works;
·CERG Advisory Private Limited for professional consulting services;
·Dr. Reddy’s Institute of Life Sciences for research and development services;
·AverQ Inc. for professional consulting services;
·Shravya Publications Private Limited for professional consulting services;
·Samarjita Management Consultancy Private Limited for professional consulting services;

 

 23 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

20.Related parties (continued)

 

·Cancelled Plans LLP for the sale of scrap materials;
·Araku Originals Private Limited for the purchase of coffee powder;
·DRES Energy Private Limited for the purchase of solar power; and
·Stamlo Industries Limited for hotel services.

 

These are enterprises over which key management personnel have control or significant influence. “Key management personnel” consists of the Company’s Directors and members of the Company’s Management Council. The Company has also entered into cancellable operating lease transactions with key management personnel and close members of their families.

 

Further, the Company contributes to the Dr. Reddy’s Laboratories Gratuity Fund, which maintains the plan assets of the Company’s Gratuity Plan for the benefit of its employees. See Note 18 of these interim financial statements for information on the Gratuity Fund.

 

The following is a summary of significant related party transactions:

 

  For the six months
ended September 30,
  For the three months
ended September 30,
 
  2021  2020  2021  2020 
Research and development services received Rs.51  Rs.52  Rs.25  Rs.25 
Sale of goods  13   21   5   21 
Lease rentals received  1   1   1   -*
Lease rentals paid  18   19   8   10 
Catering expenses paid  160   139   93   67 
Hotel expenses paid  7   4   3   -*
Facility management services paid  18   18   9   9 
Purchase of Solar power  61   68   27   34 
Civil works  45   15   28   13 
Professional consultancy services paid  43   1   21   1 
Contributions towards social development  194   116   66   58 
Salaries to relatives of key management personnel  7   5   3   2 

 

*Rounded to the nearest million.

 

The Company had the following amounts due from related parties as of the following dates:

 

  As of 
  September 30, 2021      March 31, 2021 
Key management personnel and close members of  their families Rs.8  Rs.8 
Other related parties  30   72 

 

The Company had the following amounts due to related parties as of the following dates:

 

  As of 
  September 30, 2021      March 31, 2021 
Due to related parties Rs.31  Rs.93 

 

The following table describes the components of compensation paid or payable to key management personnel for the services rendered during the applicable period:

 

  For the six months
ended September 30,
  For the three months
ended September 30,
 
  2021  2020  2021  2020 
Salaries and other benefits Rs.321  Rs.375  Rs.156  Rs.179 
Contributions to defined contribution plans  16   17   8   9 
Commission to directors  188   170   94   85 
Share-based payments expense  107   121   54   67 
  Rs.632  Rs.683  Rs.312  Rs.340 

 

 24 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

  

20.Related parties (continued)

 

Some of the key management personnel of the Company are also covered under the Company’s Gratuity Plan along with the other employees of the Company. Proportionate amounts of gratuity accrued under the Company’s Gratuity Plan have not been separately computed or included in the above disclosure.

 

21.Financial instruments

 

Financial instruments by category

 

The carrying value and fair value of financial instruments as of September 30, 2021 and March 31, 2021 were as follows:

 

  As of September 30, 2021  As of March 31, 2021 
  Total carrying
value
  

Total fair value

  Total carrying
value
  Total fair value 
Assets:                
Cash and cash equivalents Rs.9,980  Rs.9,980  Rs.14,829  Rs.14,829 
Other investments(1)  18,208   18,208   24,702   24,702 
Trade and other receivables  68,666   68,666   49,759   49,759 
Derivative financial assets  1,158   1,158   1,218   1,218 
Other assets(2)  2,886   2,886   2,626   2,626 
Total Rs.100,898  Rs.100,898  Rs.93,134  Rs.93,134 
Liabilities:                
Trade and other payables Rs.25,552  Rs.25,552  Rs.23,744  Rs.23,744 
Derivative financial liabilities  449   449   326   326 
Long-term borrowings  6,893   6,893   7,163   7,163 
Short-term borrowings  23,380   23,380   23,136   23,136 
Bank overdraft  -   -   9   9 
Other liabilities and provisions(3)  23,915   23,915   23,233   23,233 
Total Rs.80,189  Rs.80,189  Rs.77,611  Rs.77,611 

 

(1)Interest accrued but not due on investments is included in other assets.

 

(2)Other assets that are not financial assets (such as receivables from statutory authorities, export benefit receivables, prepaid expenses, advances paid and certain other receivables) of Rs.13,839 and Rs.12,717 as of September 30, 2021 and March 31, 2021, respectively, are not included.

 

(3)Other liabilities and provisions that are not financial liabilities (such as statutory dues payable, deferred revenue, advances from customers and certain other accruals) of Rs.12,973 and Rs.13,091 as of September 30, 2021 and March 31, 2021, respectively, are not included.

 

Fair value hierarchy

 

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices).

Level 3 - Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).

 

The following table presents the fair value hierarchy of assets and liabilities measured at fair value on a recurring basis as of September 30, 2021:

 

Particulars Level 1  Level 2  Level 3  Total 
FVTPL - Financial asset - Investments in units of mutual funds Rs.5,246  Rs.-  Rs.-  Rs.5,246 
FVTPL - Financial asset - Investment in limited liability partnership firm interests  -   -   393   393 
FVTPL - Financial asset - Investments in equity securities  -   -   1   1 
FVTOCI - Financial asset - Investments in equity securities  3,188   -   -   3,188 
Derivative financial instruments – net gain/(loss) on outstanding foreign exchange forward, option and swap contracts and interest rate swap contracts, net(1)  -   709   -   709 

 

 25 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

21.Financial instruments (continued)

 

The following table presents the fair value hierarchy of assets and liabilities measured at fair value on a recurring basis as of March 31, 2021:

 

Particulars Level 1  Level 2  Level 3  Total 
FVTPL - Financial asset - Investments in units of mutual funds Rs.13,263  Rs.-  Rs.-  Rs.13,263 
FVTPL - Financial asset - Investment in limited liability partnership firm interests  -   -   400   400 
FVTPL - Financial asset - Investments in equity securities  -   -   1   1 
FVTOCI - Financial asset - Investments in equity securities  4,532   -   -   4,532 
Derivative financial instruments – net gain/(loss) on outstanding foreign exchange forward, option and swap contracts and interest rate swap contracts, net(1)  -   892   -   892 
FVTPL- Contingent consideration pursuant to the Business Transfer Agreement with Wockhardt Limited (Refer to Note 24  for details)  -   -   420   420 

 

(1)The Company enters into derivative financial instruments with various counterparties, principally financial institutions and banks. Derivatives valued using valuation techniques with market observable inputs are mainly interest rate swaps, foreign exchange forward option and swap contracts. The most frequently applied valuation techniques include forward pricing, swap models and Black-Scholes-Merton models (for option valuation), using present value calculations. The models incorporate various inputs including foreign exchange forward rates, interest rate curves and forward rate curves.

 

As of September 30, 2021 and March 31, 2021, the changes in counterparty credit risk had no material effect on the hedge effectiveness assessment for derivatives designated in hedge relationships and other financial instruments recognized at fair value.

 

Hedges of foreign currency exchange rate risks

 

The Company is exposed to exchange rate risk which arises from its foreign exchange revenues and expenses, primarily in U.S. dollars, U.K. pounds sterling, Russian roubles, Brazilian reals, Swiss francs, South African rands, Kazakhstan tenges, Romanian new leus, Australian dollars and Euros, and foreign currency debt in U.S. dollars, Russian roubles, South African rands, Mexican pesos, Ukrainian hryvnias and Brazilian reals.

 

The Company uses foreign exchange forward contracts, option contracts and swap contracts (derivative financial instruments) to mitigate its risk of changes in foreign currency exchange rates. The Company also uses non-derivative financial instruments as part of its foreign currency exposure risk mitigation strategy. Non-derivative financial instruments consist of investments in mutual funds, bonds and market linked debentures, commercial papers, equity and debt securities, trade receivables, cash and cash equivalents, loans and borrowings, and trade payables.

 

Details of gain/(loss) recognized in respect of derivative contracts

 

The following table presents details in respect of the gain/(loss) recognized in respect of derivative contracts during the applicable period ended:

 

  For the six months
ended September 30,
  For the three months
ended September 30,
 
  2021  2020  2021  2020 
Net gain recognized in finance costs in respect of foreign exchange derivative contracts and cross currency interest rate swaps contracts Rs.12  Rs.1,386  Rs.551  Rs.1,882 
Net gain/(loss) recognized in equity in respect of hedges of highly probable forecast transactions, net of amounts reclassified from equity and recognized as component of revenue  (286)  917   248   446 
Net gain/(loss) reclassified from equity and recognized as component of revenue occurrence of forecasted transaction  86   (93)  16   51 

 

The net carrying amount of the Company’s “hedging reserve” as a component of equity before adjusting for tax impact was a gain of Rs.115 as of September 30, 2021, as compared to a gain of Rs.401 as of March 31, 2021.

 

 26 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

22.Contingencies

 

The Company is involved in disputes, lawsuits, claims, governmental and/or regulatory inspections, inquiries, investigations and proceedings (collectively, “Legal Proceedings”), including patent and commercial matters that arise from time to time in the ordinary course of business. Most of the claims involve complex issues. Often, these issues are subject to uncertainties and therefore the probability of a loss, if any, being sustained and an estimate of the amount of any loss is difficult to ascertain. Consequently, for a majority of these claims, it is not possible to make a reasonable estimate of the expected financial effect, if any, that will result from ultimate resolution of the proceedings. This is due to a number of factors, including: the stage of the proceedings (in many cases trial dates have not been set) and the overall length and extent of pre-trial discovery; the entitlement of the parties to an action to appeal a decision; clarity as to theories of liability; damages and governing law; uncertainties in timing of litigation; and the possible need for further legal proceedings to establish the appropriate amount of damages, if any. In these cases, the Company discloses information with respect to the nature and facts of the case. The Company also believes that disclosure of the amount sought by plaintiffs, if that is known, would not be meaningful with respect to those legal proceedings.

 

Although there can be no assurance regarding the outcome of any of the Legal Proceedings referred to in this Note, the Company does not expect them to have a materially adverse effect on its financial position, as it believes that the likelihood of loss in excess of amounts accrued (if any) is not probable. However, if one or more of such Legal Proceedings were to result in judgments against the Company, such judgments could be material to its results of operations in a given period.

 

Note 33 to the Consolidated Financial Statements in the Company’s Annual Report on Form 20-F for the year ended March 31, 2021 contains a summary of significant Legal Proceedings. The following is a summary, as of the date of this quarterly report, of significant developments in those proceedings as well as any new significant proceedings commenced since the date such Annual Report on Form 20-F was filed.

 

Product and patent related matters

 

Launch of product

 

On June 14, 2018, the U.S. FDA granted the Company final approval for buprenorphine and naloxone sublingual film, 2 mg/0.5 mg, 4 mg/1 mg, 8 mg/2 mg, and 12 mg/3 mg dosages, a therapeutic equivalent generic version of Suboxone® sublingual film. The U.S. FDA approval came after the conclusion of litigation in the U.S. District Court for the District of Delaware (the “Delaware District Court”), where the Delaware District Court held that patents covering Suboxone® sublingual film would not be infringed by the Company’s commercial launch of its generic sublingual film product. In light of the favorable decision from the Delaware District Court, the Company launched its generic sublingual film product in the United States immediately following the U.S. FDA approval on June 14, 2018. On July 12, 2019, the U.S. Court of Appeals for the Federal Circuit (“the Court of Appeals”) affirmed the Delaware District Court’s ruling that the Company’s generic version of Suboxone® sublingual films did not infringe the two remaining patents at issue in the Delaware District Court’s case (U.S. patent numbers 8,603,514 and 8,015,150).

 

After the Delaware District Court’s decision, Indivior filed a second lawsuit against the Company alleging infringement of three additional U.S. patents (numbers 9,687,454, 9,855,221 and 9,931,305) in the U.S. District Court for the District of New Jersey (the “New Jersey District Court”), styled Indivior Inc. et al. v. Dr. Reddy’s Laboratories S.A., Civil Action No. 2:17-cv-07111 (D.N.J.). Following the launch, on June 15, 2018, Indivior filed an emergency application for a temporary restraining order and preliminary injunction against the Company in the New Jersey District Court. Indivior’s motion alleged that the Company’s generic sublingual film product infringed one of three U.S. patents (number 9,931,305) at issue in the New Jersey District Court. Pending a hearing and decision on the injunction application, the New Jersey District Court initially issued a temporary restraining order against the Company with respect to further sales, offer for sales, and imports of its generic sublingual film product in the United States. Subsequently, on July 14, 2018, the New Jersey District Court granted a preliminary injunction in favor of Indivior. Under the order, Indivior was required to and did post a bond of U.S. $72 to pay the costs and damages sustained by the Company if it was found to be wrongfully enjoined. The Company immediately appealed the decision, and the Court of Appeals agreed to expedite the appeal.

 

On November 20, 2018, the Court of Appeals issued a decision vacating the preliminary injunction. The Court of Appeals denied Indivior’s petition for rehearing on February 4, 2019.

 

Indivior subsequently filed two emergency motions in the Court of Appeals to stay issuance of the mandate and to keep the preliminary injunction in place, which the Court of Appeals denied. Indivior then petitioned the U.S. Supreme Court to stay issuance of the mandate.

 

Indivior’s petition was denied by the Chief Justice of the U.S. Supreme Court on February 19, 2019, and the mandate was issued on the same day. The Company resumed sales of its generic sublingual film product after the mandate was issued.

 

 27 

 

  

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

22.Contingencies (continued)

 

On February 19, 2019, the New Jersey District Court entered a stipulated order of dismissal of Indivior’s claims under U.S. patent number 9,855,221. On November 5, 2019, the New Jersey District Court issued its claim construction decision construing certain terms in U.S. patent numbers 9,931,305 and 9,687,454. After such claim construction decision, on January 8, 2020, the New Jersey District Court entered a stipulated order that the Company’s generic sublingual film product does not infringe the asserted claims in U.S. patent number 9,931,305. In the stipulated order, Indivior reserved the ability to appeal the New Jersey District Court’s claim construction order. The Company filed a motion requesting that the New Jersey District Court enter partial final judgment in the Company’s favor relating to the allegations of infringement of U.S. patent number 9,931,305, which the District Court denied without prejudice on August 24, 2020, pending resolution of Indivior’s allegations relating to U.S. patent number 9,687,454.

 

On November 11, 2019, a Magistrate Judge in the District of New Jersey granted the Company leave to file a counterclaim against Indivior that alleges that Indivior engaged in anticompetitive conduct by making false or misleading statements to the New Jersey District Court during the preliminary injunction proceedings in violation of federal antitrust laws. Indivior appealed the Magistrate Judge’s ruling to the District Court Judge and, on August 24, 2020, the District Court Judge denied Indivior’s appeal. The District Court did grant Indivior’s motion to bifurcate the patent claims and the antitrust claims into two separate trials. Fact discovery closed on January 29, 2021. No trial date has been set and expert discovery on both the patent and antitrust claims is ongoing. Opening expert reports were submitted on March 24, 2021. Expert discovery closed on September 24, 2021. Both parties have submitted letters requesting leave to file dispositive motions in the case. Indivior has indicated that it intends to seek summary judgment that it is immune from antitrust liability under the Noerr-Pennington doctrine and that the Company is not entitled to seek damages in excess of the injunction bond. The Company intends to seek summary judgment that Indivior’s remaining claims for patent infringement are barred by the doctrines of issue preclusion, claim preclusion, and prosecution laches.

 

In addition to the District Court proceeding, on November 13, 2018, the Company filed two petitions for inter-partes review challenging the validity of certain claims of U.S. patent number 9,687,454 before the Patent Trial and Appeal Board (“PTAB”). On June 13, 2019, the PTAB agreed to institute inter-partes review on one of the two petitions filed by the Company. The PTAB heard oral argument in the pending inter-partes review challenge on March 3, 2020.

 

On June 2, 2020, the PTAB issued a final written decision in the Company’s favor finding that the Company had demonstrated that claims 1–5, 7, and 9–14 of U.S. patent number 9,687,454 were unpatentable. The PTAB upheld the validity of only one of the challenged claims, claim 8. Additionally, claim 6 was not at issue in the inter-partes review and therefore not subject to the final written decision. Claims 6 and 8 remain asserted against the Company in the New Jersey District Court litigation. Indivior filed a timely notice of appeal of the PTAB’s Final Written Decision (“ FWD”) for claims 1-5, 7, and 9-14, and the Company cross appealed the PTAB’s FWD on claim 8. In the PTAB appeal, Indivior submitted its principal appeal brief on December 9, 2020. Indivior did not challenge the Board’s decision on claims 5 and 12 in its appeal brief. The Company submitted its opening and response brief on February 18, 2021 and Indivior submitted its response and reply brief on March 30, 2021. The Company’s reply brief was submitted on April 20, 2021. Oral argument before the court of appeals occurred on September 1, 2021.

 

The Company intends to vigorously defend its positions and pursue a claim for damages caused by the preliminary injunction. Any liability that may arise on account of this litigation is unascertainable. Accordingly, no provision was made in these interim financial statements of the Company.

 

Matters relating to National Pharmaceutical Pricing Authority

 

Litigation relating to Cardiovascular and Anti-diabetic formulations Norfloxacin, India litigation

 

As previously disclosed, the Company is involved in legal proceedings with India’s National Pharmaceutical Pricing Authority regarding allegations on the maximum prices permissible for “specified product” Norfloxacin under applicable price control regulations. A writ petition on this matter filed by the Company is pending with the Delhi High Court, and the matter has been adjourned to November 12, 2021 for hearing.

 

Litigation relating to Cardiovascular and Anti-diabetic formulations

 

As previously disclosed, the Company is involved in legal proceedings with India’s National Pharmaceutical Pricing Authority regarding allegations that the Company violated the maximum prices permissible for various formulations in the cardiovascular and anti-diabetic therapeutic areas under applicable price control regulations. A writ petition on this matter filed by the Company is pending with the Delhi High Court, and the matter has been adjourned to November 17, 2021 for hearing.

 

 28 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

22.Contingencies (continued)

 

Other product and patent related matters

 

Ranitidine Recall and Litigation

 

On October 1, 2019, the Company initiated a voluntary nationwide recall (at the retail level for over-the-counter products and at the consumer level for prescription products) of its ranitidine medications sold in the United States due to the presence of N-Nitrosodimethylamine (“NDMA”) above levels established by the U.S. FDA. On November 1, 2019, the U.S. FDA issued a statement indicating that it had found levels of NDMA in ranitidine from its testing generally that were “similar to the levels you would expect to be exposed to if you ate common foods like grilled or smoked meats.” See https://www.fda.gov/news-events/press-announcements/statement-new-testing-results-including-low-levels-impurities-ranitidine-drugs. On April 1, 2020, the U.S. FDA issued a press release announcing that it was requesting manufacturers to withdraw all prescription and over-the-counter ranitidine drugs from the market immediately.

 

Individual federal court personal injury lawsuits, as well as various class actions, have been transferred to the In re Zantac (Ranitidine) Products Liability Litigation Multidistrict Litigation in the Southern District of Florida, MDL-2924 (“MDL-2924”). The Company and/or one or more of its U.S. subsidiaries have been named as a defendant in over 250 lawsuits pending in the MDL-2924. A census registry established in the MDL-2924 includes tens of thousands of claimants who have not filed complaints but are presenting claims for consideration in the MDL-2924 against the many pharmaceutical manufacturers, distributors and retailers which are defendants in the MDL-2924. The MDL-2924 also involves a proposed nationwide consumer class action and a proposed nationwide class action for medical monitoring. A third-party payor class action was dismissed without prejudice and has been appealed by plaintiffs to the U.S. Court of Appeals for the Eleventh Circuit.

 

On December 31, 2020, the MDL-2924 Court ruled on multiple motions to dismiss in the MDL-2924 and granted the generic manufacturers’ (the Company is a generic manufacturer) motion to dismiss based on federal preemption. The plaintiffs’ failure-to-warn and design defect claims against the Company were dismissed with prejudice, but the Court permitted plaintiffs to attempt to replead several claims/theories. Plaintiffs have filed their amended complaints and the defendants, including the Company, filed motions to dismiss seeking dismissal of all claims against them on March 24, 2021. The briefings and arguments as to the latest round of motions to dismiss were completed and on July 8, 2021, the MDL court granted the Company’s and the other generic manufacturers’ motions to dismiss with prejudice. Plaintiffs have the right to appeal these dismissals.

 

There are three ranitidine-related actions currently pending against the Company in state courts. The New Mexico State Attorney General filed suit against the Company’s U.S. subsidiary, and multiple other manufacturers and retailers. The State of New Mexico asserted claims of statutory and common law public nuisance and negligence claims against the Company. The Company joined in an effort to transfer the case from the Santa Fe County Court to the MDL-2924, but the case was remanded by the MDL-2924 Court to the Santa Fe County Court. Plaintiff filed an amended complaint on April 16, 2021, and a briefing schedule has been entered pursuant to which the defendants will move to dismiss the case.

 

In November 2020, the City of Baltimore filed a similar action against the Company’s U.S. subsidiary, and multiple other manufacturers and retailers. The City of Baltimore asserts public nuisance and negligence claims against the Company. The City of Baltimore action also was transferred to the MDL-2924 and subsequently was remanded to the Circuit Court of Maryland by the MDL-2924 Court. The City of Baltimore intends to file an amended complaint and the defendants will then move to dismiss the case.

 

In January 2021, the Company was served in a Proposition 65 case filed by the Center for Environmental Health in the Superior Court of Alameda County, California. The plaintiff purports to bring the case on behalf of the people of California and alleges that the Company violated Proposition 65, a California law requiring manufacturers to disclose the presence of carcinogens in consumer products. The Company and other defendants have filed demurrers (motions to dismiss) in the case, and on May 7, 2021 the Court granted all such demurrers without leave to amend the pleadings. The People of California have the right to appeal this decision.

 

Commencing in or around September 2021, the Company was served in two state court actions venued in Madison County, Illinois. Similarly, commencing in or around October 2021, the Company was served in two state court actions venued in Philadelphia, Pennsylvania. All of these civil actions assert claims that generally mirror those raised in MDL-2924, and on behalf of individual plaintiffs. When timely, the Company and other defendants intend to move to dismiss these actions.

 

The Company believes that all of the aforesaid complaints and asserted claims are without merit and it denies any wrongdoing and intends to vigorously defend itself against the allegations. Any liability that may arise on account of these claims is unascertainable at this time. Accordingly, no provision was made in these interim financial statements of the Company.

 

 29 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

  

22.Contingencies (continued)

 

United States Antitrust Multi-District Litigation

 

As previously disclosed, the Attorneys General for forty-nine U.S. States, plus the District of Columbia and the Commonwealth of Puerto Rico, filed a lawsuit asserting claims against a number of pharmaceutical companies, including the Company’s subsidiary, Dr. Reddy’s Laboratories, Inc., alleging conspiracies to fix prices and to allocate bids and customers, and such case was subsequently consolidated with certain private plaintiff class actions in a multi-district litigation (“MDL”) in the United States District Court for the Eastern District of Pennsylvania, MDL 2724, In re Generic Pharmaceuticals Antitrust Pricing Litigation (the “MDL-2724”). Some updates on the MDL-2724 litigation are set forth below.

 

Antitrust Complaint Filed by Westchester County, New York

 

On September 21, 2021, a Complaint was filed in the Supreme Court of the State of New York, Westchester County, by Westchester County against the Company and 57 other defendants. The case has been removed to the United States District Court for the Southern District of New York and is in the process of being transferred to, and consolidated with, the MDL-2724 litigation. The complaint alleges an overarching conspiracy to fix prices and allocate markets for approximately 294 generic drugs. Of the 294 drugs, the Company is specifically named with respect to 3 drugs: Divalproex, Meprobamate, and Zoledronic Acid. The complaint alleges violations of Sections 1 and 3 of the Sherman Act, Sections 4 and 16 of the Clayton Act, and the Antitrust Statutes of New York, as well as Unjust Enrichment claims under the laws of New York. The complaint seeks injunctive relief, recovery of treble damages, and attorney’s fees and costs against all defendants on a joint and several basis. The Company denies any wrongdoing and intends to vigorously defend against these claims.

 

Pennsylvania Court of Common Pleas Praecipe For a Writ of Summons Filed by 21 End Payor Entities consisting of Blue Cross Blue Shield entities and other health insurance companies

 

On October 21, 2021, a Praecipe For a Writ of Summons for a tort action was filed in the Pennsylvania Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania, Civil Trial Division, by 21 Blue Cross Blue Shield entities and other health insurance companies, against the Company’s U.S. subsidiary and 74 other defendants (consisting of 50 other pharmaceutical companies and 24 individuals). Only a Praecipe of Writ of Summons has been filed. No complaint has been filed and, therefore, the potential claims have not been asserted or delineated in any manner, including what drugs any such claims may relate to. A complaint may, at some point, be filed encompassing the claims asserted by the End Payor Plaintiff class actions in the MDL-2724 actions. It is anticipated that this action will be placed in Deferred Status Pending Further Developments in the related MDL-2724 case. Because no Complaint has been filed setting forth any claims, and because it is expected that the action will be placed into Deferred Status, no response is required by the Company’s subsidiary at this time.

 

Note on Above Complaints and Claims

 

The Company believes that all of the aforesaid complaints and asserted claims are without merit and intends to vigorously defend itself against the allegations. Also, any liability that may arise on account of these claims is unascertainable. Accordingly, no provision was made in these interim financial statements of the Company.

 

Other matters

 

Internal Investigation

 

The Company has commenced a detailed investigation into an anonymous complaint. The complaint alleges that healthcare professionals in Ukraine and potentially in other countries were provided with improper payments by or on behalf of the Company in violation of U.S. anti-corruption laws, specifically the U.S. Foreign Corrupt Practices Act. A U.S. law firm is conducting the investigation at the instruction of a committee of the Company’s Board of Directors. The Company has disclosed the matter to the U.S. Department of Justice, Securities and Exchange Commission (“SEC”) and Securities Exchange Board of India. On July 6, 2021 the Company received a subpoena from the SEC for the production of documents pertaining to certain CIS geographies, and the Company is in the process of responding to the same. During the three months ended September 30, 2021, the Company shared the report with respect to one jurisdiction with the SEC. The investigation is ongoing, and the Company is complying with its listing obligations as it relates to updating the regulatory agencies. While the findings from the aforesaid investigations may result in government enforcement actions against the Company in the United States and/or foreign jurisdictions, which could lead to civil and criminal sanctions under relevant laws, the outcome are not reasonably ascertainable at this time. The Company is also in the process of reviewing its Compliance Program including controls in relation to compliance and implement appropriate enhancements, if any.

 

 30 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

 

22.Contingencies (continued)

 

Civil Investigative Demand from the Office of the Attorney General, State of Texas

 

On or about November 10, 2014, Dr. Reddy’s Laboratories, Inc., one of the Company’s subsidiaries in the United States, received a Civil Investigative Demand (“CID”) from the Office of the Attorney General, State of Texas (the “Texas AG”) requesting certain information, documents and data regarding sales and price reporting in the U.S. marketplace of certain products for the period of time between January 1, 1995 and the date of the CID. On or about June 23, 2021, the Texas AG contacted the Company’s counsel to request additional information related to the Texas AG’s investigation for the time-period of October 1, 2003 through February 29, 2012. The Company continues to cooperate with this investigation.

 

23.Merger of Dr. Reddy’s Holdings Limited into Dr. Reddy’s Laboratories Limited

 

The Board of Directors, at its meeting held on July 29, 2019, has approved the amalgamation (the “Scheme”) of Dr. Reddy’s Holdings Limited (“DRHL”), an entity held by the Promoter Group, which holds 24.88% of Dr. Reddy’s Laboratories Limited (the “Company”) into the Company. This is subject to the approval of shareholders, stock exchanges, the National Company Law Tribunal (“NCLT”) and other relevant regulators.

 

The Scheme will lead to simplification of the shareholding structure and reduction of shareholding tiers.

 

The Promoter Group cumulatively would continue to hold the same number of shares in the Company, pre- and post the amalgamation. All costs, charges and expenses relating to the Scheme will be borne out of the surplus assets of DRHL. Further, any expense, if exceeding the surplus assets of DRHL, will be borne directly by the Promoters.

 

The Scheme also provides that the Promoters of the Company will jointly and severally indemnify, defend and hold harmless the Company, its directors, employees, officers, representatives, or any other person authorized by the Company (excluding the Promoters) for any liability, claim, or demand, which may devolve upon the Company on account of this amalgamation.

 

During year ended March 31, 2020, the Scheme was approved by the board of directors, members and unsecured creditors of the Company. The no-observation letters from the BSE Limited and National Stock Exchange of India Limited were received on the basis of no comments received from Securities and Exchange Board of India (“SEBI”). The petition for approval of the said Scheme was filed with the Hon’ble NCLT, Hyderabad Bench.

 

The hearings on the petition took place on April 20, 2021, and the Hon’ble NCLT reserved the issuance of an order pending its review and further analysis of the matter.

 

24.Business Transfer Agreement with Wockhardt Limited

 

In February 2020, the Company entered into a Business Transfer Agreement (“BTA”) with Wockhardt Limited (“Wockhardt”) to acquire select divisions of its branded generics business in India and the territories of Nepal, Sri Lanka, Bhutan and Maldives for a consideration of Rs.18,500.

 

The business consists of a portfolio of 62 brands in multiple therapy areas, such as respiratory, neurology, venous malformations, dermatology, gastroenterology, pain and vaccines. This entire portfolio was to be transferred to the Company, along with related sales and marketing teams, the manufacturing plant located in Baddi, Himachal Pradesh and all plant employees (together the “Business Undertaking”). The transaction involved 2,051 employees engaged in operations of the acquired Business Undertaking.

 

As of March 31, 2020, the acquisition of this Business Undertaking was subject to certain closing conditions, such as approval from shareholders and lenders of Wockhardt and other requisite approvals under applicable statutes. Hence, the transaction was not accounted for in the year ended March 31, 2020.

 

Due to the COVID-19 pandemic and the consequent government restrictions, there was a reduction in the revenue from the sales of the products forming part of the Business Undertaking during March and April 2020. Accordingly, through an amendment to the BTA, the Company and Wockhardt agreed that the consideration would be up to Rs.18,500, to be paid as per the following terms:

 

a)an amount of Rs.14,830 to be paid on the date of closing;

b)an amount of Rs.670 to be deposited in an escrow account which shall be released subject to adjustments for, inter alia, net working capital, employee liabilities and certain other contractual and statutory liabilities;

c)an amount of Rs.3,000 (the “Holdback Amount”) which shall be released as follows:

·If the revenue from sales of the products forming part of the Business Undertaking during the twelve (12) months post-closing exceeds Rs.4,800, the Company will be required to pay to Wockhardt an amount equal to two (2) times the amount by which the revenue exceeds Rs.4,800, subject to the maximum of the Holdback Amount.

 

 31 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

  

24.Business Transfer Agreement with Wockhardt Limited (continued)

 

The acquisition is in line with the Company's strategic focus on India and has paved a path for accelerated growth and leadership in the domestic Indian market. The Company believes that the acquired Business Undertaking offers to strengthen the Company’s pharmaceutical portfolio and products in the Indian market.

 

The transaction was completed on June 10, 2020.

 

The Company has accounted for the transaction under IFRS 3, “Business Combinations”.

 

As of June 30, 2020, the purchase price allocation was preliminary.

 

During the three months ended September 30, 2020, the Company completed the purchase price allocation. Tabulated below are the fair values of the assets acquired, including goodwill, and liabilities assumed on the acquisition date:

 

Particulars Amount 
Cash Rs.14,990 
Payment through Escrow account  564 
Contingent consideration (Holdback Amount)  561 
Total consideration Rs.16,115 
Assets acquired    
Goodwill Rs.530 
Property, plant and equipment  373 
Product related intangibles  14,888 
Inventories  466 
Other assets  245 
Liabilities assumed    
Employee benefits (Gratuity-Rs.70 and Compensated absences- Rs.75)  (145)
Refund liability  (242)
Total net assets Rs.16,115 

 

The total goodwill of Rs.530 consists largely of the synergies and economies of scale expected from the acquired business, together with the value of the workforce acquired and has been assigned to the Company’s Global Generics segment. The entire amount of goodwill is not deductible for tax purposes.

 

Acquisition related costs amounted to Rs.60 and were excluded from the consideration transferred and were recognized as expense under “Selling, general and administrative expenses” in the consolidated income statements for the year ended March 31, 2021. The amount of revenues included in the consolidated income statements for the six months ended September 30, 2020 and for the year ended March 31, 2021 pertaining to the acquired business since June 10, 2020 was Rs.1,518 and Rs.3,887, respectively.

 

The fair value of the contingent consideration of Rs.561 was estimated by applying the income approach. The fair value measurement is based on significant inputs that are not observable in the market, which IFRS 13 refers to as Level 3 inputs. The significant unobservable inputs in the valuation is the estimated sales forecast. During the three months ended March 31, 2021, the Company, after taking into account the revenue of the products until twelve months post-closing, re-measured the contingent consideration to Rs.420. Further, after considering the actual revenues for the twelve months period post-closing and corresponding changes, during the three months ended June 30, 2021, the Company re-measured the contingent consideration to Rs.330.

 

During the three months ended June 30, 2021, the parties entered into an amendment agreement for the transfer of Goods and Services Tax credit (“GST credit”) from Wockhardt to the Company, so that the Company can avail and utilize the GST credit immediately upon the transfer.

 

25.Impact of COVID-19

��

The Company considered the uncertainty relating to the COVID-19 pandemic in assessing the recoverability of receivables, goodwill, intangible assets, investments and other assets. For this purpose, the Company considered internal and external sources of information up to the date of approval of these interim financial statements. Based on its judgments, estimates and assumptions, including sensitivity analysis, the Company expects to fully recover the carrying amount of receivables, goodwill, intangible assets, investments and other assets.

 

The Company will continue to closely monitor any material changes to future economic conditions.

 

 32 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(in millions, except share and per share data and where otherwise stated)

  

26.The Code on Social Security, 2020

 

India’s Code on Social Security, 2020, which aims to consolidate, codify and revise certain existing social security laws, received Presidential assent in September 2020 and has been published in the Gazette of India. However, the related final rules have not yet been issued and the date on which this Code will come into effect has not been announced. The Company will assess the impact of this Code and the rules thereunder when they come into effect.

 

27.Update on the Inspection of facilities from the U.S. FDA

 

Tabulated below are the details of the recently open U.S. FDA inspections carried out at facilities of the Company:

 

Month and year Unit Details of observations
March 2021 API Middleburgh Plant, New York, United States Three observations were noted. The Company responded to the observations and awaiting for the Establishment Inspection Report (“EIR”).
April 2021 Integrated Product Development Organization (IPDO), Bachupally, Hyderabad, India 

No observations noted.

EIR/Remote Record Review Summary was received on August 10, 2021 and the U.S. FDA concluded that this remote record review is closed.

October 2021 Formulations manufacturing facilities {Vizag SEZ plant 1 (FTO VII) and Vizag SEZ plant 2 (FTO IX)} at Duvvada, Visakhapatnam, India Eight observations were noted. The Company will address the observations within the stipulated timeline.

 

28.Subsequent events

 

Please refer to Note 22 and 27 of these interim financial statements for the details of subsequent events relating to contingencies and update on the inspection of facilities from the U.S. FDA, respectively.

 

On October 28, 2021, the Company allotted 1,114 equity shares to various employees with an exercise price of Rs.5 each (1,004 equity shares for Rs.5 each pursuant to the DRL 2002 Plan and 100 equity shares for Rs.5 each underlying 100 ADRs pursuant to the DRL 2007 plan).

 

 33 

 

 

ITEM 2. OPERATING AND FINANCIAL REVIEW, TREND INFORMATION

 

The following discussion and analysis should be read in conjunction with the audited consolidated financial statements, the related notes and the “Operating and Financial Review and Prospects” section included in our Annual Report on Form 20-F for the fiscal year ended March 31, 2021, and the interim financial statements included in our report on Form 6-K for the three months ended June 30, 2021, all of which are on file with the SEC, as well as the unaudited condensed consolidated interim financial statements and related notes contained in this report on Form 6-K.

 

This discussion contains forward-looking statements that involve risks and uncertainties. When used in this discussion, the words “anticipate”, “believe”, “estimate”, “intend”, “will” and “expect” and other similar expressions as they relate to us or our business are intended to identify such forward-looking statements. Actual results, performances or achievements could differ materially from those expressed or implied in such forward-looking statements. Factors that could cause or contribute to such differences include those described under the heading “Risk Factors” in our Form 20-F. Readers are cautioned not to place reliance on these forward-looking statements which reflect management’s analysis and assumptions only as of the date hereof. We undertake no obligation to publicly update or revise the forward-looking statements, whether as a result of new information, future events, or otherwise.

 

Section A:

 

Three months ended September 30, 2021 compared to the three months ended September 30, 2020

 

The following table sets forth, for the periods indicated, financial data along with respective percentages to total revenues and the increase (or decrease) by item as a percentage of the amount over the comparable period in the previous year.

 

  For the three months ended September 30, 
  2021  2020    
  Rs. in
millions
  % of
Revenues
  Rs. in
millions
  % of
Revenues
  Increase/
(Decrease)
 
Revenues Rs.57,632   100.0% Rs.48,967   100.0%  18%
Gross profit  30,786   53.4%  26,409   53.9%  17%
Selling, general and administrative expenses  15,951   27.7%  13,107   26.8%  22%
Research and development expenses  4,463   7.7%  4,359   8.9%  2%
Impairment of non-current assets  -   0.0%  781   1.6%  (100)%
Other income, net  (1,743)  (3.0)%  (149)  (0.3)%  1070%
Results from operating activities  12,115   21.0%  8,311   17.0%  46%
Finance income, net  319   0.6%  237   0.5%  35%
Share of profit of equity accounted investees, net of  tax  247   0.4%  73   0.1%  238%
Profit before tax  12,681   22.0%  8,621   17.6%  47%
Tax expense / (benefit), net  2,761   4.8%  998   2.0%  177%
Profit for the period Rs.9,920   17.2% Rs.7,623   15.6%  30%

 

Revenues

 

Our overall consolidated revenues were Rs.57,632 million for the three months ended September 30, 2021, an increase of 18% as compared to Rs.48,967 million for the three months ended September 30, 2020.

 

The following table sets forth, for the periods indicated, our consolidated revenues by segment:

  

  For the three months ended September 30, 
  2021  2020     
  Rs. in
millions
  Revenues % of Total  Rs. in
millions
  Revenues % of Total  Increase/ (Decrease) 
Global Generics Rs.47,431   82% Rs.39,841   81%  19%
Pharmaceutical Services and Active Ingredients (PSAI)  8,372   15%  8,505   17%  (2)%
Proprietary Products  1,232   2%  100   0.2%  1132%
Others  596   1%  521   1%  15%
Total Rs.57,632   100% Rs.48,967   100%  18%

 

 34 

 

  

Segment Analysis

 

Global Generics

 

Revenues from our Global Generics segment were Rs.47,431 million for the three months ended September 30, 2021, an increase of 19% as compared to Rs.39,841 million for the three months ended September 30, 2020. The revenue increase was in all of the four business geographies of this segment: North America (the United States and Canada), Europe, India, and “Emerging Markets” (which is comprised of Russia, other countries of the former Soviet Union, Romania and certain other countries from our “Rest of the World” markets, including South Africa, China, Brazil and Australia).

 

After taking into account the impact of exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, the foregoing increase in revenues of this segment was attributable to the following factors:

 

·an increase of approximately 19% resulting from new products launched during the period;

 

·an increase of approximately 11% resulting from a net increase in the sales volumes of existing products in this segment; and

 

·the foregoing was partially offset by a decrease of approximately 11% resulting from the net impact of changes in sales prices of the products in this segment.

 

North America (the United States and Canada): Our Global Generics segment’s revenues from North America (the United States and Canada) were Rs.18,909 million for the three months ended September 30, 2021, an increase of 3% as compared to Rs.18,328 million for the three months ended September 30, 2020. In U.S. dollar absolute currency terms (i.e., U.S. dollars without taking into account the effect of currency exchange rates), such revenues increased by 3% in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

 

This increase in revenues was largely attributable to new product launches between October 1, 2020 and September 30, 2021 (such as icosapent ethyl capsules, sapropterin dihydrochloride tablets and powder, ertapenem injection) and an increase in volumes of certain of our existing products, which was partly offset by price erosion in certain of our existing products.

 

During the three months ended September 30, 2021, we launched four new products in North America (the United States and Canada). We launched one new product in the United States, which is chlordiazepoxide hydrochloride & clidinium bromide capsules. We also launched three new products in Canada, which are lenalidomide capsules, ertapenem injection and dasatinib tablets.

 

During the three months ended September 30, 2021, we made two new ANDA filings with the U.S. FDA. As of September 30, 2021, we had 93 filings pending approval with the U.S. FDA, which includes 90 ANDAs and three NDAs filed under section 505(b)(2). Out of these 93 ANDA filings, 46 are Paragraph IV filings and we believe we are the first to file with respect to 23 of these filings.

 

Europe: Our Global Generics segment’s revenues from Europe are primarily derived from Germany, the United Kingdom, Italy, France and Spain. Such revenues were Rs.4,135 million for the three months ended September 30, 2021, an increase of 10% as compared to Rs.3,754 million for the three months ended September 30, 2020. This increase was primarily on account of new products launched between October 1, 2020 and September 30, 2021 and an increase in the sales volumes of our existing products, partly offset by a decrease in prices of our existing products.

 

India: Our Global Generics segment’s revenues from India for the three months ended September 30, 2021 were Rs.11,402 million, an increase of 25% as compared to Rs.9,123 million for the three months ended September 30, 2020. This increase was attributable to an increase in sales volumes and sales prices of our existing products and revenues from new products launched between October 1, 2020 and September 30, 2021. During the three months ended September 30, 2021, we launched two new brands in India.

 

According to IQVIA in its report for the three months ended September 30, 2021, our secondary sales in India grew by 21.3% during such period, as compared to the India pharmaceutical market’s growth of 15.4%.

 

Emerging Markets: Our Global Generics segment’s revenues from “Emerging Markets” (which is comprised of Russia, other countries of the former Soviet Union, Romania and certain other countries from our “Rest of the World” markets, including South Africa, China, Brazil and Australia) for the three months ended September 30, 2021 were Rs.12,985 million, an increase of 50% as compared to Rs.8,636 million for the three months ended September 30, 2020.

 

Russia: Our Global Generics segment’s revenues from Russia for the three months ended September 30, 2021 were Rs.5,742 million, an increase of 44% as compared to Rs.3,978 million for the three months ended September 30, 2020. In Russian rouble absolute currency terms (i.e., Russian roubles without taking into account the effect of currency exchange rates), such revenues increased by 46%. The increase in revenues was primarily on account of an increase in sales prices and sales volumes of our existing products and contribution from new products launched between October 1, 2020 and September 30, 2021. Our over-the-counter (“OTC”) division’s revenues from Russia for the three months ended September 30, 2021 were 46% of our total revenues from Russia.

 

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According to IQVIA, as per its report for the two months ended August 31, 2021, our sales value (in Russian roubles) growth and volume growth from Russia, as compared to the Russian pharmaceutical market sales value (in Russian roubles) growth and volume growth was as follows:

 

  For the two months ended August 31, 2021 
  Dr. Reddy's
Laboratories
Ltd.
  Russian
pharmaceutical
market
 
  Sales value  Volume  Sales value  Volume 
Prescription (Rx)  13.6%  7.7%  16.9%  5.3%
Over-the-counter (OTC)  19.7%  18.1%  13.1%  (0.2)%
Total (Rx + OTC)  16.4%  11.1%  15.0%  1.7%

  

Other countries of the former Soviet Union and Romania: Our Global Generics segment’s revenues from other countries of the former Soviet Union and Romania were Rs.2,174 million for the three months ended September 30, 2021, an increase of 9% as compared to Rs.1,990 million for the three months ended September 30, 2020. This increase was largely attributable to additional revenues from new products launched between October 1, 2020 and September 30, 2021, partially offset by a reduction in the prices and decrease in sales volumes of certain of our existing products.

 

“Rest of the World” Markets: We refer to all markets of this segment other than North America (the United States and Canada), Europe, Russia and other countries of the former Soviet Union, Romania and India as our “Rest of the World” markets. Our Global Generics segment’s revenues from our “Rest of the World” markets were Rs.5,069 million for the three months ended September 30, 2021, an increase of 90% as compared to Rs.2,668 million for the three months ended September 30, 2020. This increase was largely attributable to additional revenues from new products launched between October 1, 2020 and September 30, 2021 and an increase in the sales volumes of our existing products, partly offset by a decrease in prices of our existing products.

 

Pharmaceutical Services and Active Ingredients (“PSAI”)

 

Our PSAI segment’s revenues for the three months ended September 30, 2021 were Rs.8,372 million, a decrease of 2% as compared to Rs.8,505 million for the three months ended September 30, 2020. After taking into account the impact of exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, this decrease was attributable to a decrease in sales volumes and prices of our existing products, partially offset by new products launched between October 1, 2020 and September 30, 2021.

 

Proprietary Products

 

Revenues from our Proprietary Products segment were Rs.1,232 million for the three months ended September 30, 2021, an increase of 1,132% as compared to Rs.100 million for the three months ended September 30, 2020. This increase was primarily on account of recognition of Rs.1,084 million from a licence fee associated with the sale of our U.S. and Canada territory rights for ELYXYB® (celecoxib oral solution) 25 mg/ml, to BioDelivery Sciences International, Inc., in the three months period ended September 30, 2021

 

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Gross Profit

 

Our total gross profit was Rs.30,786 million for the three months ended September 30, 2021, representing 53.4% of our revenues for that period, as compared to Rs.26,409 million for the three months ended September 30, 2020, representing 53.9% of our revenues for that period.

 

The following table sets forth, for the period indicated, our gross profits by segment:

 

  For the three months ended September 30, 
  2021  2020 
  (Rs. in millions) 
  Gross Profit  % of Segment
Revenue
  Gross Profit  % of Segment
Revenue
 
Global Generics Rs.26,990   56.9% Rs.23,685   59.4%
PSAI  2,166   25.9%  2,284   26.9%
Proprietary Products  1,232   100.0%  88   88.0%
Others  398   66.7%  352   67.6%
Total Rs.30,786   53.4% Rs.26,409   53.9%

 

The gross profit margin from our Global Generics segment decreased to 56.9% of this segment’s revenues for the three months ended September 30, 2021 from 59.4% for the three months ended September 30, 2020. This decrease was on account of price erosion in certain of our products, primarily in the United States, Europe, Brazil and Romania, and also due to lower export benefits (i.e., tax benefits applicable to exports). This decrease was partially offset by a lower rate of increase in manufacturing overhead costs as compared to sales.

 

The gross profit margin from our PSAI segment decreased to 25.9% of this segment’s revenues for the three months ended September 30, 2021, from 26.9% for the three months ended September 30, 2020. This decrease was primarily on account of price erosion in certain of our products and lower export benefits (i.e., tax benefits applicable to exports).

 

Selling, general and administrative expenses

 

Our selling, general and administrative expenses were Rs.15,951 million for the three months ended September 30, 2021, an increase of 22% as compared to Rs.13,107 million for the three months ended September 30, 2020. After taking into account the impact of exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, this increase was largely attributable to the following:

 

·a 6% increase due to higher royalty fees;

 

·a 5% increase due to higher legal and professional expenses;

 

·a 5% increase due to higher selling and advertisement expenses;

 

·a 5% increase due to higher personnel costs, primarily on account of annual raises; and

 

·a 1% increase due to higher spending on other costs, including freight outward expenses.

 

As a proportion of our total revenues, our selling, general and administrative expenses increased to 27.7% for the three months ended September 30, 2021 from 26.8% for the three months ended September 30, 2020.

 

Impairment of non-current assets

 

Our impairment of non-current assets charge were Rs.Nil for the three months ended September 30, 2021 as compared to a charge of Rs.781 million for the three months September 30, 2020. (Refer to Note 10 of the interim financial statements for further details).

 

Research and development expenses

 

Our research and development expenses were Rs.4,463 million for the three months ended September 30, 2021, an increase of 2% as compared to Rs.4,359 million for the three months ended September 30, 2020. This increase was primarily on account of higher developmental expenditures on certain projects in our biosimilars and generics business.

 

As a proportion of our total revenues, our research and development expenses was at 7.7% for the three months ended September 30, 2021, as compared to 8.9% for the three months ended September 30, 2020.

 

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Other income, net

 

Our net other income was Rs.1,743 million for the three months ended September 30, 2021, as compared to net other income of Rs.149 million for the three months ended September 30, 2020. The other income was higher for the three months ended September 30, 2021 primarily on account of recognition of an income of Rs. 1,064 million towards sale of all of our rights relating to our anti-cancer agent E7777 (denileukin diftitox) to Citius Pharmaceuticals, Inc.

 

Finance income, net

 

Our net finance income was Rs.319 million for the three months ended September 30, 2021, as compared to Rs.237 million for the three months ended September 30, 2020. This increase in net finance income was due to the following:

 

·profit on sale of investments, and unrealized gains on investments recorded at fair value through profit and loss, of Rs.91 million for the three months ended September 30, 2021, as compared to Rs.131 million for the three months ended September 30, 2020;

 

·net interest income of Rs.3 million for the three months ended September 30, 2021, as compared to net interest expense of Rs.130 million for the three months ended September 30, 2020; and

 

·net foreign exchange gain of Rs.225 million for the three months ended September 30, 2021, as compared to net foreign exchange gain of Rs. 236 million for the three months ended September 30, 2020.

 

Profit before tax

 

As a result of the above, our profit before tax was Rs.12,681 million for the three months ended September 30, 2021, as compared to Rs.8,621 million for the three months ended September 30, 2020.

 

Tax expense

 

Our consolidated weighted average tax rate was 21.8% for the three months ended September 30, 2021, as compared to 11.6% for the three months ended September 30, 2020.

 

Our effective tax rate for the three months ended September 30, 2021 was higher as compared to the three months ended September 30, 2020, primarily on account of the recognition of a deferred tax asset amounting to Rs.1,012 million pursuant to a planned restructuring activity between certain Company subsidiaries in the three months ended September, 2020.

 

Our tax expense was Rs.2,761 million for the three months ended September 30, 2021 as compared to Rs.998 million for the three months ended September 30, 2020.

 

Profit for the period

 

As a result of the above, our net profit was Rs.9,920 million for the three months ended September 30, 2021, representing 17.2% of our total revenues for such period, as compared to Rs.7,623 million for the three months ended September 30, 2020, representing 15.6% of our total revenues for such period.

 

 38 

 

 

Section B:

 

Six months ended September 30, 2021 compared to the six months ended September 30, 2020

 

The following table sets forth, for the periods indicated, financial data along with respective percentages to total revenues and the increase (or decrease) by item as a percentage of the amount over the comparable period in the previous year.

 

  For the six months ended September 30, 
  2021  2020    
  Rs. in
millions
  % of
Revenues
  Rs. in
millions
  % of
Revenues
  Increase/
(Decrease)
 
Revenues Rs.106,826   100.0% Rs.93,142   100.0%  15%
Gross profit  56,485   52.9%  51,164   54.9%  10%
Selling, general and administrative expenses  30,996   29.0%  25,893   27.8%  20%
Research and development expenses  8,997   8.4%  8,339   9.0%  8%
Impairment of non-current assets  -   0.0%  781   0.8%  (100)%
Other income, net  (2,230)  (2.1)%  (267)  (0.3)%  735%
Results from operating activities  18,722   17.5%  16,418   17.6%  14%
Finance income, net  971   0.9%  842   0.9%  15%
Share of profit of equity accounted investees, net of  tax  413   0.4%  150   0.2%  175%
Profit before tax  20,106   18.8%  17,410   18.7%  15%
Tax expense / (benefit), net  4,478   4.2%  3,994   4.3%  12%
Profit for the period Rs.15,628   14.6% Rs.13,416   14.4%  16%

 

Revenues

 

Our overall consolidated revenues were Rs.106,826 million for the six months ended September 30, 2021, an increase of 15% as compared to Rs.93,142 million for the six months ended September 30, 2020.

 

The following table sets forth, for the periods indicated, our consolidated revenues by segment:

 

  For the six months ended September 30, 
  2021  2020    
  Rs. in
millions
  Revenues
% of Total
  Rs. in
millions
  Revenues
%  of Total
  Increase/
(Decrease)
 
Global Generics Rs.88,544   83% Rs.74,916   80%  18%
PSAI  15,912   15%  17,058   18%  (7)%
Proprietary Products  1,291   1%  156   0.2%  728%
Others  1,079   1%  1,012   1%  7%
Total Rs.106,826   100% Rs.93,142   100%  15%

 

Segment Analysis

 

Global Generics

 

Revenues from our Global Generics segment were Rs.88,544 million for the six months ended September 30, 2021, an increase of 18% as compared to Rs.74,916 million for the six months ended September 30, 2020. The revenue increase was in all of the four business geographies of this segment: North America (the United States and Canada), Europe, India, and “Emerging Markets” (which is comprised of Russia, other countries of the former Soviet Union, Romania and certain other countries from our “Rest of the World” markets, including South Africa, China, Brazil and Australia).

 

After taking into account the impact of exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, the foregoing increase in revenues of this segment was attributable to the following factors:

 

·an increase of approximately 18% resulting from new products launched during the period;
·an increase of approximately 10% resulting from a net increase in the sales volumes of existing products in this segment; and
·the foregoing was partially offset by a decrease of approximately 10% resulting from the net impact of changes in sales prices of the products in this segment.

 

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North America (the United States and Canada): Our Global Generics segment’s revenues from North America (the United States and Canada) were Rs.36,299 million for the six months ended September 30, 2021, an increase of 2% as compared to Rs.35,609 million for the six months ended September 30, 2020. In U.S. dollar absolute currency terms (i.e., U.S. dollars without taking into account the effect of currency exchange rates), such revenues increased by 3% in the six months ended September 30, 2021 as compared to the six months ended September 30, 2020.

 

During the six months ended September 30, 2021, we launched 10 new products in North America (the United States and Canada). We launched five new products in the United States, which are sapropterin dihydrochloride powder for oral solution, albendazole tablets, ertapenem injection, icosapent ethyl capsules and chlordiazepoxide hydrochloride & clidinium bromide capsules. We also launched five new products in Canada, which are alitretinoin capsules, sodium nitroprusside injection, lenalidomide capsules, ertapenem injection and dasatinib tablets.

 

Europe: Our Global Generics segment’s revenues from Europe were Rs.8,129 million for the six months ended September 30, 2021, an increase of 11% as compared to Rs.7,304 million for the six months ended September 30, 2020. After taking into account the impact of exchange rate fluctuations of the Indian rupee against the European Euro and Great Britain’s Pound sterling, this increase was largely attributable to the new products launched and an increase in the sales volumes of our existing products, partly offset by a decrease in prices of our existing products.

 

India: Our Global Generics segment’s revenues from India were Rs.22,002 million for the six months ended September 30, 2021, an increase of 43% as compared to Rs.15,383 million for the six months ended September 30, 2020. During the six months ended September 30, 2021, we launched eight new brands in India.

 

According to IQVIA in its Moving Annual Total report for the twelve months ended September 30, 2021, our secondary sales in India grew by 24.7% during such period, as compared to the India pharmaceutical market’s growth of 17.6%.

 

Emerging Markets: Our Global Generics segment’s revenues from “Emerging Markets” (which is comprised of Russia, other countries of the former Soviet Union, Romania and certain other countries which we refer to as our “Rest of the World” markets, primarily South Africa, China, Brazil and Australia) for the six months ended September 30, 2021 were Rs.22,113 million, an increase of 33% as compared to Rs.16,620 million for the six months ended September 30, 2020.

 

Russia: Our Global Generics segment’s revenues from Russia for the six months ended September 30, 2021 were Rs.9,269 million, an increase of 28% as compared to Rs.7,250 million for the six months ended September 30, 2020. In Russian rouble absolute currency terms (i.e., Russian roubles without taking into account the effect of currency exchange rates), such revenues increased by 32%. Our OTC division’s revenues from Russia for the six months ended September 30, 2021 were 48% of our total revenues from Russia.

 

According to IQVIA, as per its report for the five months ended August 31, 2021, our sales value growth (in Russian roubles) and volume growth from Russia, as compared to the Russian pharmaceutical market, was as follows:

 

  For the five months ended August 31, 2021 
  Dr. Reddy's Laboratories
Ltd.
  Russian pharmaceutical
market
 
  Sales value  Volume  Sales value  Volume 
Prescription (Rx)  13.2%  8.9%  15.3%  4.3%
Over-the-counter (OTC)  16.0%  14.4%  9.2%  (4.0)%
Total (Rx + OTC)  14.5%  10.7%  12.3%  (1.2)%

 

Other Countries of former Soviet Union and Romania: Our Global Generics segment’s revenues from other countries of the former Soviet Union and Romania were Rs.3,612 million for the six months ended September 30, 2021, an increase of 7% as compared to Rs.3,377 million for the six months ended September 30, 2020.

 

“Rest of the World” Markets: We refer to all markets of this segment other than North America (the United States and Canada), Europe, Russia and other countries of the former Soviet Union, Romania and India as our “Rest of the World” markets. Our Global Generics segment’s revenues from our “Rest of the World” markets were Rs.9,232 million for the six months ended September 30, 2021, an increase of 54% as compared to Rs.5,993 million for the six months ended September 30, 2020.

 

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Pharmaceutical Services and Active Ingredients (“PSAI”)

 

Our PSAI segment’s revenues for the six months ended September 30, 2021 were Rs.15,912 million, a decrease of 7% as compared to Rs.17,058 million for the six months ended September 30, 2020. After taking into account the impact of exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, this decrease was largely attributable to a decrease in sales volumes of our existing products, partially offset by the contribution from new products launched.

 

Proprietary Products

 

Revenues from our Proprietary Products segment were Rs.1,291 million for the six months ended September 30, 2021, an increase of 728% as compared to Rs.156 million for the six months ended September 30, 2020. This increase was primarily on account of recognition of Rs.1,084 million from a licence fee associated with the sale of our U.S. and Canada territory rights for ELYXYB® (celecoxib oral solution) 25 mg/ml, to BioDelivery Sciences International, Inc., in the six months period ended September 30, 2021

 

Gross Profit

 

Our total gross profit was Rs.56,485 million for the six months ended September 30, 2021, representing 52.9% of our revenues for that period, as compared to Rs.51,164 million for the six months ended September 30, 2020, representing 54.9% of our revenues for that period.

 

  For the six months ended September 30, 
  2021  2020 
  (Rs. in millions) 
  Gross Profit  % of Segment
Revenue
  Gross Profit  % of Segment
Revenue
 
Global Generics Rs.50,709   57.3% Rs.45,211   60.3%
Pharmaceutical Services and Active Ingredients (PSAI)  3,796   23.9%  5,140   30.1%
Proprietary Products  1,277   98.9%  144   92.3%
Others  703   65.2%  669   66.1%
Total Rs.56,485   52.9% Rs.51,164   54.9%

 

After taking into account the impact of the exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, the gross profit margin from our Global Generics segment decreased to 57.3% of this segment’s revenues for the six months ended September 30, 2021, from 60.3% for the six months ended September 30, 2020. This decrease was on account of price erosion in certain of our products, primarily in the United States, Europe, Brazil and Romania, and also due to lower export benefits (i.e., tax benefits applicable to exports). This decrease was partially offset by a lower rate of increase in manufacturing overhead costs as compared to sales.

 

The gross profit margin from our PSAI segment decreased to 23.9% of this segment’s revenues for the six months ended September 30, 2021, from 30.1% for the six months ended September 30, 2020. This decrease was primarily on account of price erosion in certain of our products and lower export benefits (i.e., tax benefits applicable to exports).

 

Selling, general and administrative expenses

 

Our selling, general and administrative expenses were Rs.30,996 million for the six months ended September 30, 2021, an increase of 20% as compared to Rs.25,893 million for the six months ended September 30, 2020. After taking into account the impact of exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, this increase was largely attributable to the following:

 

·a 6% increase due to higher selling and advertisement expenses;

 

·a 5% increase due to higher personnel costs, primarily on account of annual raises;

 

·a 5% increase due to higher legal and professional expenses;

 

·a 5% increase due to higher royalty fees; and

 

·the foregoing was partially offset by a 1% decrease in other costs.

 

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As a proportion of our total revenues, our selling, general and administrative expenses were 29.0% for the six months ended September 30, 2021, as compared to 27.8% for the six months ended September 30, 2020.

 

Impairment of non-current assets

 

Our impairment of non-current assets expense charge were Rs.Nil for the six months ended September 30, 2021 as compared to a charge of Rs.781 million for the six months September 30, 2020. (Refer to Note 10 of the interim financial statements for further details).

 

Research and development expenses

 

Our research and development costs were Rs.8,997 million for the six months ended September 30, 2021, an increase of 8% as compared to Rs.8,339 million for the six months ended September 30, 2020. This increase was primarily on account of higher developmental expenditure on certain projects in our biosimilars and generics business.

 

Other income, net

 

Our net other income was Rs.2,230 million for the six months ended September 30, 2021, as compared to net other income of Rs.267 million for the six months ended September 30, 2020. The other income was higher for the six months ended September 30, 2021 primarily on account of recognition of an income of Rs.1,064 million towards sale of all of our rights relating to our anti-cancer agent E7777 (denileukin diftitox) to Citius Pharmaceuticals, Inc.

 

Finance income, net

 

Our net finance income was Rs.971 million for the six months ended September 30, 2021, as compared to Rs.842 million for the six months ended September 30, 2020. This increase in net finance income was due to the following:

 

·profit on sale of investments, and unrealized gains on investments recorded at fair value through profit and loss, of Rs.217 million for the six months ended September 30, 2021, as compared to Rs.389 million for the six months ended September 30, 2020;

 

·net interest income of Rs.19 million for the six months ended September 30, 2021, as compared to net interest expense of Rs.82 million for the six months ended September 30, 2020; and

 

·net foreign exchange gain of Rs.735 million for the six months ended September 30, 2021, as compared to net foreign exchange gain of Rs.535 million for the six months ended September 30, 2020.

 

Profit before tax

 

As a result of the above, our profit before tax was Rs.20,106 million for the six months ended September 30, 2021, an increase of 15% as compared to Rs.17,410 million for the six months ended September 30, 2020.

 

Tax expense

 

Our consolidated weighted average tax rate was 22.3% for the six months ended September 30, 2021, as compared to 22.9% for the six months ended September 30, 2020. Our tax expense was Rs.4,478 million for the six months ended September 30, 2021 as compared to Rs.3,994 million for the six months ended September 30, 2020.

 

Our effective tax rate for the six months ended September 30, 2021 was lower as compared to the six months ended September 30, 2020 primarily on account of changes in our jurisdictional mix of earnings (i.e., an increase in the proportion of our profits from lower tax jurisdictions and decrease in the proportion of our profits from higher tax jurisdictions) for the six months ended September 30, 2021, as compared to the six months ended September 30, 2020.

 

Profit for the period

 

As a result of the above, our net profit was Rs.15,628 million for the six months ended September 30, 2021, representing 14.6% of our total revenues for such period, as compared to Rs.13,416 million for the six months ended September 30, 2020, representing 14.4% of our total revenues for such period.

 

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ITEM 3. LIQUIDITY AND CAPITAL RESOURCES

 

We have primarily financed our operations through cash flows generated from operations and a mix of long-term and short-term borrowings. Our principal liquidity and capital needs are for the purchase of property, plant and equipment, regular business operations and research and development.

 

Our principal sources of short-term liquidity are internally generated funds and short-term borrowings, which we believe are sufficient to meet our working capital requirements.

 

Principal Debt Obligations

 

The following table provides a list of our principal debt obligations (excluding lease obligations) outstanding as of September 30, 2021:

 

  

Amount

(Rs. in millions)

  Currency(1)  Interest Rate(2) 
Pre-shipment credit Rs.14,150   INR   3 Months T-bill +10 bps to 30 bps 
Other working capital borrowings  9,230   U.S.$   (1.90)% to (1.80)%(3)
       RUB   6 Months MosPrime + 65 bps 
       MXN   TIIE + 1.15%
       INR   4.00%
       BRL   CDI + 1.79%
       UAH   7.00%
Long-term Non-convertible debentures  3,800   INR   6.77%

 

(1)“INR” means Indian rupees, “U.S.$” means United States Dollars, “RUB” means Russian roubles, “MXN” means Mexican pesos, “BRL” means Brazilian reals and “UAH” means Ukrainian hryvnia.

 

(2)“TIIE” means the Equilibrium Inter-banking Interest Rate (Tasa de Interés Interbancaria de Equilibrio), “T-bill” means the India Treasury Bill interest rate, “MosPrime” means Moscow Prime Offered rate and “CDI” means the Certificado de Depósito Interbancário (a daily average of overnight interbank loans, which is used as an investment benchmark in the Brazilian financial system).

 

(3)Against some of its intra-group receivables denominated in U.S.$, the parent company obtained post-shipment credits from banks at an interest rate equal to the INR interest rate discounted by the U.S.$/INR forward premium, resulting in a negative U.S.$ interest rate.

 

Summary of statements of cash flows

 

The following table summarizes our statements of cash flows for the periods presented:

 

  For the six months ended
September 30,
 
  2021  2020 
  (Rs. in millions) 
Net (used in)/cash from:        
Operating activities Rs.1,658  Rs.20,167 
Investing activities  (1,638)  (16,970)
Financing activities  (4,951)  (1,384)
Net (decrease)/increase in cash and cash equivalents Rs.(4,931)  Rs.1,813 

 

In addition to cash, inventory and accounts receivable, our unused sources of liquidity included Rs.28,270 million available in credit under revolving credit facilities with banks as of September 30, 2021.

 

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Cash Flows from Operating Activities

 

The result of operating activities was a net cash inflow of Rs.1,658 million for the six months ended September 30, 2021, as compared to a cash inflow of Rs.20,167 million for the six months ended September 30, 2020.

 

The decrease in net cash inflow of Rs.18,509 million was primarily due to an increase in our working capital requirements.

 

Our average days’ sales outstanding (“DSO”) as of September 30, 2021, March 31, 2021 and September 30, 2020 were 108 days, 93 days and 91 days, respectively. The increase in our DSO as compared to March 31, 2021 was primarily on account of a reduction in the sale to a bank of our trade receivables in North America (Refer to Note 6 for details).

 

Cash Flows used in Investing Activities

 

Our investing activities resulted in net cash outflows of Rs.1,638 million and Rs.16,970 million for the six months ended September 30, 2021 and 2020, respectively. The decrease in net cash outflow was primarily on account of the following:

 

·the acquisition of property, plant and equipment, and other intangible assets, net of dispositions, of Rs.7,448 million for the six months ended September 30, 2021, as compared to Rs.4,533 million for the six months ended September 30, 2020;
·net proceeds from sale of other investments of Rs.5,399 million for the six months ended September 30, 2021, as compared to net proceeds from sales of other investments of Rs.2,363 million for the six months ended September 30, 2020; and
·the payment, in connection with our acquisition of certain business assets from Wockhardt Limited, of Rs.15,514 million for the six months ended September 30, 2020.

 

Cash Flows from Financing Activities

 

Our financing activities resulted in net cash outflows of Rs.4,951 million and Rs.1,384 million for the six months ended September 30, 2021 and 2020, respectively. The increase in net cash outflow was primarily on account of the following:

 

·net repayment of short-term borrowings of Rs.62 million for the six months ended September 30, 2021, as compared to net proceeds from short-term and long-term borrowings of Rs.3,701 million for the six months ended September 30, 2020;
·payments of dividends of Rs.4,146 million for the six months ended September 30, 2021, as compared to payments of dividends of Rs.4,147 million for the six months ended September 30,2020;
·interest payments of Rs.616 million for the six months ended September 30, 2021, as compared to interest payments of Rs.559 million for the six months ended September 30, 2020; and
·payments of the principal portion of lease liabilities of Rs.408 million for the six months ended September 30, 2021, as compared to payments of the principal portion of lease liabilities of Rs.366 million for the six months ended September 30, 2020.

 

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ITEM 4. OTHER MATTERS

 

None

 

ITEM 5. EXHIBITS

 

Exhibit Number Description of Exhibits
   
99.1 Review report of Independent Registered Public Accounting Firm

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

DR. REDDY’S LABORATORIES LIMITED

(Registrant)  

  
Date:  November 5, 2021By:  /s/ Sandeep Poddar  
  Name: Sandeep Poddar 
  Title: Company Secretary 

 

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