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 June 30, 2020
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): ______
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): ______
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.
Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes ¨ No x
If “Yes” is marked, indicate below the file number assigned to registrant in connection with Rule 12g3-2(b): 82-________.
QUARTERLY REPORT
Quarter Ended June 30, 2020
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. 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.75.53, as published by Federal Reserve Board of Governors on June 30, 2020. 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
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:
• | 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; |
2 |
• | 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; 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; 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, 2020 and “Operating and Financial Review, Trend Information” 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, 2020 and in our other periodic reports and documents filed with and/or furnished to the SEC from time to time.
3 |
TABLE OF CONTENTS
ITEM 1. FINANCIAL STATEMENTS | 5 |
ITEM 2. OPERATING AND FINANCIAL REVIEW, TREND INFORMATION | 34 |
ITEM 3. LIQUIDITY AND CAPITAL RESOURCES | 39 |
ITEM 4. OTHER MATTERS | 41 |
ITEM 5. EXHIBITS | 41 |
SIGNATURES | 42 |
EXHIBIT 99.1: REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
4 |
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 | June 30, 2020 | June 30, 2020 | March 31, 2020 | ||||||||||||
Convenience translation (See Note 2(d)) | ||||||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | 4 | U.S.$ | 58 | Rs. | 4,400 | Rs. | 2,053 | |||||||||
Other investments | 5 | 308 | 23,291 | 23,687 | ||||||||||||
Trade and other receivables | 6 | 617 | 46,568 | 50,278 | ||||||||||||
Inventories | 7 | 518 | 39,148 | 35,066 | ||||||||||||
Derivative financial instruments | 5 | 413 | 1,105 | |||||||||||||
Tax assets | 33 | 2,501 | 4,379 | |||||||||||||
Other current assets | 419 | 16,616 | 13,802 | |||||||||||||
Total current assets | U.S.$ | 1,760 | Rs. | 132,937 | Rs. | 130,370 | ||||||||||
Non-current assets | ||||||||||||||||
Property, plant and equipment | 8 | U.S.$ | 712 | Rs. | 54,183 | Rs. | 52,332 | |||||||||
Goodwill | 9 | 64 | 4,817 | 3,994 | ||||||||||||
Other intangible assets | 10 | 545 | 41,174 | 27,659 | ||||||||||||
Trade and other receivables | 6 | 23 | 1,748 | 1,737 | ||||||||||||
Investment in equity accounted investees | 38 | 2,851 | 2,763 | |||||||||||||
Other investments | 5 | 7 | 536 | 328 | ||||||||||||
Deferred tax assets | 161 | 12,193 | 12,214 | |||||||||||||
Other non-current assets | 11 | 804 | 844 | |||||||||||||
Total non-current assets | U.S.$ | 1,566 | Rs. | 118,306 | Rs. | 101,871 | ||||||||||
Total assets | U.S.$ | 3,326 | Rs. | 251,243 | Rs. | 232,241 | ||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Trade and other payables | U.S.$ | 252 | Rs. | 19,038 | Rs. | 16,659 | ||||||||||
Short-term borrowings | 11 | 293 | 22,161 | 16,441 | ||||||||||||
Long-term borrowings, current portion | 11 | 35 | 2,632 | 4,266 | ||||||||||||
Provisions | 52 | 3,892 | 3,800 | |||||||||||||
Tax liabilities | 12 | 869 | 573 | |||||||||||||
Derivative financial instruments | 10 | 793 | 1,602 | |||||||||||||
Bank overdraft | 4 | - | - | 91 | ||||||||||||
Other current liabilities | 404 | 30,499 | 29,382 | |||||||||||||
Total current liabilities | U.S.$ | 1,058 | Rs. | 79,884 | Rs. | 72,814 | ||||||||||
Non-current liabilities | ||||||||||||||||
Long-term borrowings | 11 | U.S.$ | 90 | Rs. | 6,789 | Rs. | 1,304 | |||||||||
Deferred tax liabilities | 3 | 216 | 275 | |||||||||||||
Provisions | 1 | 54 | 54 | |||||||||||||
Other non-current liabilities | 34 | 2,552 | 2,806 | |||||||||||||
Total non-current liabilities | U.S.$ | 127 | Rs. | 9,611 | Rs. | 4,439 | ||||||||||
Total liabilities | U.S.$ | 1,185 | Rs. | 89,495 | Rs. | 77,253 | ||||||||||
Equity | ||||||||||||||||
Share capital | 12 | U.S.$ | 11 | Rs. | 831 | Rs. | 831 | |||||||||
Treasury shares | 12 | (12 | ) | (940 | ) | (1,006 | ) | |||||||||
Share premium | 115 | 8,678 | 8,495 | |||||||||||||
Share based payment reserve | 16 | 1,219 | 1,233 | |||||||||||||
Capital redemption reserve | 2 | 173 | 173 | |||||||||||||
Retained earnings | 1,986 | 150,040 | 144,247 | |||||||||||||
Other components of equity | 23 | 1,747 | 1,015 | |||||||||||||
Total equity | U.S.$ | 2,142 | Rs. | 161,748 | Rs. | 154,988 | ||||||||||
Total liabilities and equity | U.S.$ | 3,326 | Rs. | 251,243 | Rs. | 232,241 |
The accompanying notes form an integral part of these unaudited condensed consolidated interim financial statements.
5 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED INTERIM INCOME STATEMENTS
(in millions, except share and per share data)
For the three months ended June 30, | ||||||||||||||||
Particulars | Note | 2020 | 2020 | 2019 | ||||||||||||
Convenience translation (See Note 2(d)) | ||||||||||||||||
Revenues | 13 | U.S.$ | 585 | Rs. | 44,175 | Rs. | 38,435 | |||||||||
Cost of revenues | 257 | 19,420 | 18,576 | |||||||||||||
Gross profit | 328 | 24,755 | 19,859 | |||||||||||||
Selling, general and administrative expenses | 169 | 12,786 | 12,065 | |||||||||||||
Research and development expenses | 53 | 3,980 | 3,609 | |||||||||||||
Impairment of non-current assets | - | - | - | |||||||||||||
Other income, net | 14 | (2 | ) | (118 | ) | (3,759 | ) | |||||||||
Total operating expenses | 220 | 16,648 | 11,915 | |||||||||||||
Results from operating activities (A) | 107 | 8,107 | 7,944 | |||||||||||||
Finance income | 11 | 838 | 690 | |||||||||||||
Finance expense | (3 | ) | (233 | ) | (297 | ) | ||||||||||
Finance income, net (B) | 15 | 8 | 605 | 393 | ||||||||||||
Share of profit of equity accounted investees, net of tax (C) | 1 | 77 | 163 | |||||||||||||
Profit before tax [(A)+(B)+(C)] | 116 | 8,789 | 8,500 | |||||||||||||
Tax expense | 16 | 40 | 2,996 | 1,872 | ||||||||||||
Profit for the period | U.S.$ | 77 | Rs. | 5,793 | Rs. | 6,628 | ||||||||||
Earnings per share: | ||||||||||||||||
Basic earnings per share of Rs.5/- each | U.S.$ | 0.46 | Rs. | 34.94 | Rs. | 39.98 | ||||||||||
Diluted earnings per share of Rs.5/- each | U.S.$ | 0.46 | Rs. | 34.86 | Rs. | 39.91 |
The accompanying notes form an integral part of these unaudited condensed consolidated interim financial statements.
6 |
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 three months ended June 30, | ||||||||||||
Particulars | 2020 | 2020 | 2019 | |||||||||
Convenience translation (See Note 2(d)) | ||||||||||||
Profit for the period | U.S.$ | 77 | Rs. | 5,793 | Rs. | 6,628 | ||||||
Other comprehensive income/(loss) | ||||||||||||
Items that will not be reclassified subsequently to the consolidated income statement: | ||||||||||||
Changes in the fair value of financial instruments | U.S.$ | 3 | Rs. | 215 | Rs. | (47) | ||||||
Tax impact on above items | - | - | - | |||||||||
Total of items that will not be reclassified subsequently to the consolidated income statement | U.S.$ | 3 | Rs. | 215 | Rs. | (47) | ||||||
Items that will be reclassified subsequently to the consolidated income statement: | ||||||||||||
Changes in the fair value of financial instruments | U.S.$ | (0) | (13 | ) | (7 | ) | ||||||
Foreign currency translation adjustments | 3 | Rs. | 215 | Rs. | (172) | |||||||
Effective portion of changes in fair value of cash flow hedges, net | 6 | 471 | (84 | ) | ||||||||
Tax impact on above items | (2 | ) | (156 | ) | 23 | |||||||
Total of items that will be reclassified subsequently to the consolidated income statement | U.S.$ | 7 | Rs. | 517 | Rs. | (240) | ||||||
Other comprehensive income/(loss) for the period, net of tax | U.S.$ | 10 | Rs. | 732 | Rs. | (287) | ||||||
Total comprehensive income for the period | U.S.$ | 86 | Rs. | 6,525 | Rs. | 6,341 |
The accompanying notes form an integral part of these unaudited condensed consolidated interim financial statements.
7 |
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 | Actuarial gains /(losses) | Retained earnings | Total | ||||||||||||||||||||||||||||||||||
Balance as of April 1, 2020 | Rs. | 831 | Rs. | 8,495 | Rs. | (1,006 | ) | Rs. | 1,223 | Rs. | (2,405 | ) | Rs. | 4,343 | Rs. | (563 | ) | Rs. | 173 | Rs. | (360 | ) | Rs. | 144,247 | Rs. | 154,988 | ||||||||||||||||||
Profit for the period | - | - | - | - | - | - | - | - | - | 5,793 | 5,793 | |||||||||||||||||||||||||||||||||
Net change in fair value of equity and debt instruments | - | - | - | - | 202 | - | - | - | - | - | 202 | |||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | - | 215 | - | - | - | - | 215 | |||||||||||||||||||||||||||||||||
Effective portion of changes in fair value of cash flow hedges, net of tax expense of Rs.156 | - | - | - | - | - | - | 315 | - | - | - | 315 | |||||||||||||||||||||||||||||||||
Total comprehensive income (B) | Rs. | - | Rs. | - | Rs. | - | Rs. | - | Rs. | 202 | Rs. | 215 | Rs. | 315 | Rs. | - | Rs. | - | Rs. | 5,793 | Rs. | 6,525 | ||||||||||||||||||||||
Issue of equity shares on exercise of options | - | * | 183 | 66 | (157 | ) | - | - | - | - | - | - | 92 | |||||||||||||||||||||||||||||||
Share-based payment expense | - | - | - | 143 | - | - | - | - | - | - | 143 | |||||||||||||||||||||||||||||||||
Purchase of treasury shares | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
Total transactions with owners of the Company (C) | Rs. | - | Rs. | 183 | Rs. | 66 | Rs. | (14 | ) | Rs. | - | Rs. | - | Rs. | - | Rs. | - | Rs. | - | Rs. | - | Rs. | 235 | |||||||||||||||||||||
Balance as of June 30, 2020 [(A)+(B)+(C)] | Rs. | 831 | Rs. | 8,678 | Rs. | (940 | ) | Rs. | 1,219 | Rs. | (2,203 | ) | Rs. | 4,558 | Rs. | (248 | ) | Rs. | 173 | Rs. | (360 | ) | Rs. | 150,040 | Rs. | 161,748 | ||||||||||||||||||
Convenience translation (See note 2(d)) | U.S.$ | 11 | U.S.$ | 115 | U.S.$ | (12 | ) | U.S.$ | 16 | U.S.$ | (29 | ) | U.S.$ | 60 | U.S.$ | (3 | ) | U.S.$ | 2 | U.S.$ | (5 | ) | U.S.$ | 1,987 | U.S.$ | 2,142 | ||||||||||||||||||
Balance as of April 1, 2019 | Rs. | 830 | Rs. | 8,211 | Rs. | (535 | ) | Rs. | 990 | Rs. | (1,910 | ) | Rs. | 4,031 | Rs. | 156 | Rs. | 173 | Rs. | (395 | ) | Rs. | 128,646 | Rs. | 140,197 | |||||||||||||||||||
Profit for the period | - | - | - | - | - | - | - | - | - | 6,628 | 6,628 | |||||||||||||||||||||||||||||||||
Net change in fair value of equity and debt instruments | - | - | - | - | (68 | ) | - | - | - | - | 14 | (2) | (54 | ) | ||||||||||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | - | (172 | ) | - | - | - | - | (172 | ) | |||||||||||||||||||||||||||||||
Effective portion of changes in fair value of cash flow hedges, net of tax benefit of Rs.23 | - | - | - | - | - | - | (61 | ) | - | - | - | (61 | ) | |||||||||||||||||||||||||||||||
Total comprehensive income (B) | Rs. | - | Rs. | - | Rs. | - | Rs. | - | Rs. | (68 | ) | Rs. | (172 | ) | Rs. | (61 | ) | Rs. | - | Rs. | - | Rs. | 6,642 | Rs. | 6,341 | |||||||||||||||||||
Issue of equity shares on exercise of options | 1 | 131 | - | (124 | ) | - | - | - | - | - | - | 8 | ||||||||||||||||||||||||||||||||
Share-based payment expense | - | - | - | 136 | - | - | - | - | - | - | 136 | |||||||||||||||||||||||||||||||||
Purchase of treasury shares | - | - | (474 | ) | - | - | - | - | - | - | - | (474 | ) | |||||||||||||||||||||||||||||||
Total transactions with owners of the Company (C) | Rs. | 1 | Rs. | 131 | Rs. | (474 | ) | Rs. | 12 | Rs. | - | Rs. | - | Rs. | - | Rs. | - | Rs. | - | Rs. | - | Rs. | (330 | ) | ||||||||||||||||||||
Balance as of June 30, 2019 [(A)+(B)+(C)] | Rs. | 831 | Rs. | 8,342 | Rs. | (1,009 | ) | Rs. | 1,002 | Rs. | (1,978 | ) | Rs. | 3,859 | Rs. | 95 | Rs. | 173 | Rs. | (395 | ) | Rs. | 135,288 | Rs. | 146,208 |
* Rounded to the nearest million.
The accompanying notes form an integral part of these unaudited condensed consolidated interim financial statements.
(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) | Represents gain on disposal of financial instruments classified as FVTOCI instruments re-classified to retained earnings. |
8 |
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 three months ended June 30, | ||||||||||||
Particulars | 2020 | 2020 | 2019 | |||||||||
Convenience translation (See Note 2(d)) | ||||||||||||
Cash flows from/(used in) operating activities: | ||||||||||||
Profit for the period | U.S.$ | 77 | Rs. | 5,793 | Rs. | 6,628 | ||||||
Adjustments for: | ||||||||||||
Income tax expense | 40 | 2,996 | 1,872 | |||||||||
Fair value changes and profit on sale of units of mutual funds, net | (3 | ) | (258 | ) | (311 | ) | ||||||
Depreciation and amortization | 42 | 3,140 | 3,083 | |||||||||
Allowance for credit losses (on trade receivables and other advances) | 1 | 54 | 91 | |||||||||
(Gain)/loss on sale or de-recognition of non-current assets, net | 0 | 1 | (5 | ) | ||||||||
Share of profit of equity accounted investees | (1 | ) | (77 | ) | (163 | ) | ||||||
Foreign exchange (gain)/loss, net | 8 | 620 | (438 | ) | ||||||||
Interest (income)/expense, net | (1 | ) | (48 | ) | 72 | |||||||
Equity settled share-based payment expense | 2 | 143 | 136 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Trade and other receivables | 48 | 3,659 | 1,954 | |||||||||
Inventories (Refer to Note 7 for inventory write downs) | (48 | ) | (3,649 | ) | (1,550 | ) | ||||||
Trade and other payables | 32 | 2,403 | 326 | |||||||||
Other assets and other liabilities, net | (39 | ) | (2,980 | ) | (825 | ) | ||||||
Cash generated from operations | 156 | 11,797 | 10,870 | |||||||||
Income tax paid, net | (12 | ) | (884 | ) | (1,037 | ) | ||||||
Net cash from operating activities | U.S.$ | 144 | Rs. | 10,913 | Rs. | 9,833 | ||||||
Cash flows from/(used in) investing activities: | ||||||||||||
Expenditure on property, plant and equipment | (20 | ) | (1,499 | ) | (1,058 | ) | ||||||
Proceeds from sale of property, plant and equipment | 0 | 3 | 45 | |||||||||
Expenditure on other intangible assets | (5 | ) | (392 | ) | (381 | ) | ||||||
Proceeds from sale of other intangible assets | - | - | 259 | |||||||||
Payment for acquisition of business (Refer to Note 24 for details) | (198 | ) | (14,990 | ) | - | |||||||
Purchase of other investments | (450 | ) | (34,024 | ) | (49,385 | ) | ||||||
Proceeds from sale of other investments | 459 | 34,672 | 46,609 | |||||||||
Interest received | 7 | 506 | 220 | |||||||||
Net cash used in investing activities | U.S.$ | (208) | Rs. | (15,724) | Rs. | (3,691) | ||||||
Cash flows from/(used in) financing activities: | ||||||||||||
Proceeds from issuance of equity shares (including treasury shares) | 1 | 92 | 0 | |||||||||
Purchase of treasury shares | - | - | (474 | ) | ||||||||
Proceeds from short-term borrowings, net | 74 | 5,617 | 1,496 | |||||||||
Proceeds from long-term borrowings | 25 | 3,800 | - | |||||||||
Repayment of long-term borrowings | (25 | ) | (1,897 | ) | (6,765 | ) | ||||||
Payment of principal portion of lease liabilities | (2 | ) | (148 | ) | (148 | ) | ||||||
Interest paid | (4 | ) | (283 | ) | (422 | ) | ||||||
Net cash from/(used in) financing activities | U.S.$ | 95 | Rs. | 7,181 | Rs. | (6,313) | ||||||
Net increase/(decrease) in cash and cash equivalents | (31 | ) | 2,370 | (171 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | 1 | 68 | 8 | |||||||||
Cash and cash equivalents at the beginning of the period | 26 | 1,962 | 2,228 | |||||||||
Cash and cash equivalents at the end of the period (Refer to Note 4 for details) | U.S.$ | 58 | Rs. | 4,400 | Rs. | 2,065 |
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 and the National Stock Exchange 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, 2020. These interim financial statements were authorized for issuance by the Company’s Board of Directors on July 29, 2020.
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 at and for the year ended March 31, 2020 contained in the Company’s Annual Report on Form 20-F.
Several amendments and interpretations apply for the first time in the fiscal year ended March 31, 2021, but do not have an impact on the interim financial statements of the Company.
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; and |
· | right-of-use the assets 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. |
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 ended June 30, 2020 have been translated into U.S. dollars at the certified foreign exchange rate of U.S.$1.00 = Rs.75.53, as published by the Federal Reserve Board of Governors on June 30, 2020. 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.
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) |
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 at and for the year ended March 31, 2020.
g) New accounting standards effective as on April 1, 2020
Amendments to IFRS 3: Definition of a Business
The amendment to IFRS 3 clarifies that to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Furthermore, it clarified that a business can exist without including all of the inputs and processes needed to create outputs. These amendments had no impact on the interim financial statements of the Company, but may impact future periods should the Company enter into any business combinations.
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 is 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 three months ended June 30, 2020 | For the three months ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||||
Segments | Global Generics |
PSAI | Proprietary Products |
Others | Total | Global Generics |
PSAI | Proprietary Products |
Others | Total | ||||||||||||||||||||||||||||||
Revenues(1) | Rs. | 35,075 | Rs. | 8,553 | Rs. | 56 | Rs. | 491 | Rs. | 44,175 | Rs. | 32,982 | Rs. | 4,539 | Rs. | 281 | Rs. | 633 | Rs. | 38,435 | ||||||||||||||||||||
Gross profit | Rs. | 21,526 | Rs. | 2,856 | Rs. | 56 | Rs. | 317 | Rs. | 24,755 | Rs. | 19,007 | Rs. | 325 | Rs. | 207 | Rs. | 320 | Rs. | 19,859 | ||||||||||||||||||||
Selling, general and administrative expenses | 12,786 | 12,065 | ||||||||||||||||||||||||||||||||||||||
Research and development expenses | 3,980 | 3,609 | ||||||||||||||||||||||||||||||||||||||
Impairment of non-current assets | - | - | ||||||||||||||||||||||||||||||||||||||
Other income, net | (118 | ) | (3,759 | ) | ||||||||||||||||||||||||||||||||||||
Results from operating activities | Rs. | 8,107 | Rs. | 7,944 | ||||||||||||||||||||||||||||||||||||
Finance income, net | 605 | 393 | ||||||||||||||||||||||||||||||||||||||
Share of profit of equity accounted investees, net of tax | 77 | 163 | ||||||||||||||||||||||||||||||||||||||
Profit before tax | Rs. | 8,789 | Rs. | 8,500 | ||||||||||||||||||||||||||||||||||||
Tax expense | 2,996 | 1,872 | ||||||||||||||||||||||||||||||||||||||
Profit for the period | Rs. | 5,793 | Rs. | 6,628 |
(1) | Revenues for the three months ended June 30, 2020 and 2019 do not include inter-segment revenues from the PSAI segment to the Global Generics segment, which amount to Rs.1,537 and Rs.1,394, respectively. |
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 three months ended June 30, | ||||||||
Country | 2020 | 2019 | ||||||
India | Rs. | 7,045 | Rs. | 7,628 | ||||
United States | 18,294 | 17,089 | ||||||
Russia | 3,272 | 3,964 | ||||||
Others | 15,564 | 9,754 | ||||||
Rs. | 44,175 | Rs. | 38,435 |
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)
4. | Cash and cash equivalents |
Cash and cash equivalents consist of the following:
As of | ||||||||
June 30, 2020 | March 31, 2020 | |||||||
Cash on hand | Rs. | 2 | Rs. | 2 | ||||
Balances with banks | 3,262 | 1,807 | ||||||
Term deposits with banks (original maturities less than 3 months) | 1,136 | 244 | ||||||
Cash and cash equivalents in the statements of financial position | Rs. | 4,400 | Rs. | 2,053 | ||||
Bank overdrafts used for cash management purposes | - | 91 | ||||||
Cash and cash equivalents in the statement of cash flow | Rs. | 4,400 | Rs. | 1,962 | ||||
Restricted cash balances included above | ||||||||
Balance in unclaimed dividends and debenture interest account | Rs. | 105 | Rs. | 111 | ||||
Balances in Escrow account pursuant to the Business Transfer Agreement with Wockhardt Limited (Refer to Note 24 for details) | 670 | - | ||||||
Other restricted cash balances | 82 | 15 |
5. | Other investments |
Other investments consist of investments in units of mutual funds, equity securities, bonds, market linked debentures, commercial paper 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 June 30, 2020 and March 31, 2020 were as follows:
As of June 30, 2020 | As of March 31, 2020 | |||||||||||||||||||||||
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. | 17,902 | Rs. | 213 | Rs. | 18,115 | Rs. | 13,686 | Rs. | 146 | Rs. | 13,832 | ||||||||||||
In bonds | - | - | - | 1,851 | - | 1,851 | ||||||||||||||||||
In commercial paper | - | - | - | 967 | - | 967 | ||||||||||||||||||
In market linked debentures | 1,000 | (13 | ) | 987 | 2,000 | (7 | ) | 1,993 | ||||||||||||||||
Term deposits with banks | 4,189 | - | 4,189 | 5,044 | - | 5,044 | ||||||||||||||||||
Rs. | 23,091 | Rs. | 200 | Rs. | 23,291 | Rs. | 23,548 | Rs. | 139 | Rs. | 23,687 | |||||||||||||
Non-current portion | ||||||||||||||||||||||||
In equity securities(1) | Rs. | 2,701 | Rs. | (2,190 | ) | Rs. | 511 | Rs. | 2,701 | Rs. | (2,397 | ) | Rs. | 304 | ||||||||||
Others | 25 | - | 25 | 24 | - | 24 | ||||||||||||||||||
Rs. | 2,726 | Rs. | (2,190 | ) | Rs. | 536 | Rs. | 2,725 | Rs. | (2,397 | ) | Rs. | 328 |
(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 33 of the consolidated financial statements in the Company’s Annual Report on Form 20-F for the fiscal year ended March 31, 2020. |
(2) | Interest accrued but not due on bonds and debentures, commercial paper 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 funds | Fair value through profit and loss |
Investments in bonds, commercial paper, term deposits and others | Amortized cost |
Investments in market linked debentures | Fair value through other comprehensive income |
Investments in equity securities | Fair value through other comprehensive income (on account of irrevocable option elected at time of transition) |
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)
6. | Trade and other receivables |
As of | ||||||||
June 30, 2020 | March 31, 2020 | |||||||
Current | ||||||||
Trade and other receivables, gross | Rs. | 47,832 | Rs.51,480 | |||||
Less: Allowance for credit losses | (1,264 | ) | (1,202 | ) | ||||
Trade and other receivables, net | Rs. | 46,568 | Rs.50,278 | |||||
Non-current | ||||||||
Trade and other receivables, gross(1) | Rs. | 1,748 | Rs.1,737 | |||||
Less: Allowance for credit losses | - | - | ||||||
Trade and other receivables, net | Rs. | 1,748 | Rs.1,737 |
(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. |
Pursuant to an arrangement with a bank, the Company sells to the bank certain of its trade receivables forming part 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 are generally lower than the total net amount of trade receivables. The Company has 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 June 30, 2020 and March 31, 2020, the amount of trade receivables de-recognized pursuant to the aforesaid arrangement was Rs.9,624 (U.S.$127) and Rs.9,049 (U.S.$120), respectively.
7. | Inventories |
Inventories consist of the following:
As of | ||||||||
June 30, 2020 | March 31, 2020 | |||||||
Raw materials | Rs. | 10,678 | Rs.10,594 | |||||
Work-in-progress | 7,615 | 6,806 | ||||||
Finished goods (includes stock-in-trade) | 17,833 | 15,126 | ||||||
Packing materials, stores and spares | 3,022 | 2,540 | ||||||
Rs. | 39,148 | Rs.35,066 |
Details of inventories recognized in consolidated income statement are as follows:
For the three months ended June 30, | ||||||||
2020 | 2019 | |||||||
Raw materials, consumables and changes in finished goods and work in progress | Rs. | 12,043 | Rs. | 11,283 | ||||
Inventory write-downs | 1,153 | 786 |
8. | Property, plant and equipment |
Acquisitions and disposals
For the three months ended June 30, | For the year ended March 31, | |||||||||||
2020 | 2019 | 2020 | ||||||||||
Cost of assets acquired during the period(1) | Rs. | 3,537 | Rs. | 1,008 | Rs. | 5,667 | ||||||
Assets acquired through business combinations(2) | 373 | - | - | |||||||||
Recognition of right-of-use asset on initial application of IFRS 16 | - | 1,153 | 1,153 | |||||||||
Net book value of assets disposed of during the period | 10 | 40 | 81 | |||||||||
Depreciation expense | 2,120 | 2,124 | 8,640 |
(1) | Additions for the three months ended June 30, 2020 include right-of-use asset of Rs.1,852 for availing a warehousing service in the United States. |
(2) | Refer to Note 24 of these interim financial statements for further details. |
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 (continued) |
Capital commitments
As of June 30, 2020 and March 31, 2020, the Company was committed to spend Rs.6,336 and Rs.4,888, 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 June 30, 2020 and March 31, 2020:
As of | ||||||||
June 30, 2020 | March 31, 2020 | |||||||
Opening balance, gross | Rs. | 20,278 | Rs.20,176 | |||||
Goodwill arising on business combinations(1) | 791 | - | ||||||
Effect of translation adjustments | 32 | 102 | ||||||
Impairment loss(2) | (16,284 | ) | (16,284 | ) | ||||
Closing balance | Rs. | 4,817 | Rs.3,994 |
(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. |
10. | Other intangible assets |
For the three months ended June 30, | For the year ended March 31, | |||||||||||
2020 | 2019 | 2020 | ||||||||||
Cost of assets acquired during the period(1) | Rs. | 398 | Rs. | 533 | Rs. | 1,806 | ||||||
Assets acquired through business combinations(2) | 14,141 | - | - | |||||||||
Net book value of assets disposed of during the period | - | - | 65 | |||||||||
Amortization expense | 1,020 | 959 | 3,832 | |||||||||
Impairment loss recognized during the period(3) | - | - | 16,757 |
(1) | During the three months ended June 30, 2019, the Company acquired a portfolio of approved, non-marketed Abbreviated New Drug Applications (“ANDAs”) in the United States from Teva for a total consideration of Rs.277 (U.S.$4). The Company recognized these ANDAs acquired as product related intangibles. |
(2) | Refer to Note 24 of these interim financial statements for further details. |
(3) | Total impairment loss for the year ended March 31, 2020 is Rs.16,757, of which Rs.11,137 was towards impairment of gNuvaring, Rs.4,385 was towards ramelteon, tobramycin and imiquimod, and the balance is towards other product related intangibles forming part of Company’s Global generics and Proprietary Products segments. |
Details of significant separately acquired intangible assets as of June 30, 2020 are as follows:
Particulars of the asset | Acquired from | Carrying cost | ||||
Select portfolio of branded generics business | Wockhardt Limited | Rs. | 14,098 | |||
ANDAs | Teva and an affiliate of Allergan | 9,602 | ||||
Select portfolio of dermatology, respiratory and pediatric assets | UCB India Private Limited and affiliates | 4,947 | ||||
Intellectual property rights relating to PPC-06 (tepilamide fumarate) | Xenoport, Inc | 4,047 | ||||
Commercialization rights for an anti-cancer biologic agent | Eisai Company Limited | 1,849 | ||||
Habitrol® brand | Novartis Consumer Health Inc. | 1,754 | ||||
Over the counter product brands | Ducere Pharma LLC | 713 | ||||
Beta brand | 3i Group plc | 444 | ||||
Various ANDAs | Gland Pharma Limited | 276 |
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)
11. | Loans and borrowings |
Short-term borrowings
Short-term borrowings primarily consist of “pre-shipment credit” drawn by the parent company and other unsecured loans drawn by certain of its subsidiaries in Russia, Mexico, South Africa and Brazil which are repayable within 6 to 12 months from the date of drawdown.
Short-term borrowings consist of the following:
As of | ||||||||
June 30, 2020 | March 31, 2020 | |||||||
Pre-shipment credit | Rs. | 11,918 | Rs. | 10,432 | ||||
Other working capital borrowings | 10,243 | 6,009 | ||||||
Rs. | 22,161 | Rs. | 16,441 |
The interest rate profile of short-term borrowings from banks is given below:
As of | |||||||
June 30, 2020 | March 31, 2020 | ||||||
Currency(1) | Interest Rate(2) | Currency(1) | Interest Rate(2) | ||||
Pre-shipment credit | U.S.$ | 1 Month LIBOR + 12.5 to 16 bps | U.S.$ | 1 Month LIBOR + 12.5 to 16 bps | |||
INR | 1 Month T-bill + 60 bps with a collar of 4.2% | INR | 1 Month T-bill + 60 bps | ||||
INR | 5.75% | - | - | ||||
Other working capital borrowings | ZAR | 1 Month JIBAR+120 bps | ZAR | 1 Month JIBAR+120 bps | |||
RUB | 7.15% | RUB | 7.05% | ||||
BRL | 7.25% | BRL | 7.25% | ||||
MXN | TIIE + 1.25% | MXN | TIIE + 1.25% | ||||
INR | 5.15% - 6.35% | INR | 7.75% | ||||
INR | Repo rate + 1.5% | - | - | ||||
- | - | U.S.$ | 1 Month/3 Months LIBOR + 55 to 78 bps |
(1) | “INR” means Indian rupees, “U.S.$” means United States Dollars, “RUB” means Russian roubles, “MXN” means Mexican pesos, “BRL” means Brazilian reals and “ZAR” means South African rand. |
(2) | “LIBOR” means the London Inter-bank Offered Rate, “TIIE” means the Equilibrium Inter-banking Interest Rate (Tasa de Interés Interbancaria de Equilibrio), “JIBAR” means the Johannesburg Interbank Average Rate, “T-bill” means the India Treasury Bill interest rate and “Repo rate” means the rate at which the Reserve Bank of India lends to commercial banks (as decided by Reserve Bank of India in its monetary policy). |
Long-term borrowings
Long-term borrowings consist of the following:
As of | ||||||||||||||||
June 30, 2020 | March 31, 2020 | |||||||||||||||
Non – Current | Current | Non – Current | Current | |||||||||||||
Foreign currency borrowing by the parent company | Rs. | - | Rs. | 1,888 | Rs. | - | Rs. | 3,783 | ||||||||
Non-convertible debentures by the APSL subsidiary(1) | 3,800 | - | - | - | ||||||||||||
Obligations under leases(2) | 2,989 | 744 | 1,304 | 483 | ||||||||||||
Rs. | 6,789 | Rs. | 2,632 | Rs. | 1,304 | Rs. | 4,266 |
(1) | “APSL subsidiary” refers to Aurigene Pharmaceutical Services Limited. |
(2) | Additions for the three months ended June 30, 2020 include right-of-use liability of Rs.1,878 for availing a warehousing service in the United States. |
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 (continued) |
During the three months ended June 30, 2020, APSL subsidiary issued non-convertible debentures for Rs.3,800. The aforesaid non-convertible debentures are repayable at par after 3 years following the date of issue.
All the foregoing loan agreements impose various financial covenants on the Company. As of June 30, 2020, the Company was in compliance with all such financial covenants.
The interest rate profiles of long-term borrowings (other than obligations under leases) as at June 30, 2020 and March 31, 2020 were as follows:
As of | |||||||
June 30, 2020 | March 31, 2020 | ||||||
Currency(1) | Interest Rate(2) | Currency(1) | Interest Rate(2) | ||||
Foreign currency borrowings | U.S.$ | 1 Month LIBOR + 82.7 bps | U.S.$ | 1 Month LIBOR + 82.7 bps | |||
Non-convertible debentures | INR | 6.77% | - | - |
(1) | “U.S.$” means United States dollars and “INR” means Indian rupees. |
(2) | “LIBOR” means the London Inter-bank Offered Rate. |
Uncommitted lines of credit from banks
The Company had uncommitted lines of credit of Rs.39,419 and Rs.39,374 as of June 30, 2020 and March 31, 2020, respectively, from its banks for working capital requirements. The Company has the right to 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 three months ended June 30, 2020 and June 30, 2019:
As of | ||||||||||||||||
June 30, 2020 | June 30, 2019 | |||||||||||||||
Number | Amount | Number | Amount | |||||||||||||
Opening number of equity shares/share capital | 166,172,082 | Rs. | 831 | 166,065,948 | Rs. | 830 | ||||||||||
Add: Equity shares issued pursuant to employee stock option plans(1) | 60,434 | - | * | 47,892 | 1 | |||||||||||
Closing number of equity shares/share capital | 166,232,516 | Rs. | 831 | 166,113,840 | Rs. | 831 | ||||||||||
Treasury shares(2) | 370,200 | Rs. | 940 | 397,100 | Rs. | 1,009 |
* Rounded off to nearest million.
(1) | During the three months ended June 30, 2020 and 2019, 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 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 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 three months ended June 30, 2020, an aggregate of 25,750 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, 2018. The options exercised had an exercise price of Rs.2,607/Rs.2,814 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 consolidated 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 at June 30, 2020 and March 31, 2020, the ESOS Trust had outstanding 370,200 and 395,950 shares, respectively, which it purchased from the secondary market for an aggregate consideration of Rs.940 and Rs.1,006, respectively. |
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)
13. | Revenue from contracts with customers |
For the three months ended June 30, | ||||||||
2020 | 2019 | |||||||
Sales | Rs. | 43,244 | Rs. | 37,624 | ||||
Service income | 651 | 577 | ||||||
License fees | 280 | 234 | ||||||
Rs. | 44,175 | Rs. | 38,435 |
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 three months ended June 30, | ||||||||
Country | 2020 | 2019 | ||||||
India | Rs. | 7,045 | Rs. | 7,628 | ||||
United States | 18,294 | 17,089 | ||||||
Russia | 3,272 | 3,964 | ||||||
Others | 15,564 | 9,754 | ||||||
Rs. | 44,175 | Rs. | 38,435 |
Refund liabilities on account of sales returns amounting to Rs.3,086 and Rs.3,252 as of June 30, 2020 and March 31, 2020, respectively, have been included in provisions forming part of current liabilities.
14. | Other income, net |
Other income, net consists of the following:
For the three months ended June 30, | ||||||||
2020 | 2019 | |||||||
Loss/(gain) on sale/disposal of non-current assets, net | Rs. | 1 | Rs. | (5 | ) | |||
Sale of spent chemicals | (53 | ) | (73 | ) | ||||
Scrap sales | (21 | ) | (47 | ) | ||||
Miscellaneous income, net(1) | (45 | ) | (3,634 | ) | ||||
Rs. | (118 | ) | Rs. | (3,759 | ) |
(1) | Miscellaneous income, net for the three months ended June 30, 2019 includes Rs.3,457 (U.S.$50) received from Celgene pursuant to a settlement agreement entered into in April 2019. The agreement effectively settles any claim the Company or its affiliates may have had for damages under section 8 of the Canadian Patented Medicines (Notice of Compliance) Regulations in regard to the Company’s ANDS for a generic version of REVLIMID® brand capsules (Lenalidomide) pending before Health Canada. |
15. | Finance income, net |
Finance income, net consists of the following:
For the three months ended June 30, | ||||||||
2020 | 2019 | |||||||
Interest income | Rs. | 281 | Rs.225 | |||||
Fair value changes and profit on sale of units of mutual funds, net | 258 | 311 | ||||||
Foreign exchange gain | 299 | 154 | ||||||
Finance income (A) | Rs. | 838 | Rs.690 | |||||
Interest expense | (233 | ) | (297 | ) | ||||
Finance expense (B) | Rs. | (233 | ) | Rs.(297) | ||||
Finance income, net [(A)+(B)] | Rs. | 605 | Rs.393 |
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)
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.
The Company’s consolidated weighted average tax rate for the three months ended June 30, 2020 and 2019 was 34.09% and 22.02%, respectively. Income tax expense was Rs.2,996 for the three months ended June 30, 2020, as compared to income tax expense of Rs.1,872 for the three months ended June 30, 2019.
The effective rate of tax for the three months ended June 30, 2020 was higher as compared to three months ended June 30, 2019, primarily on account of the reduction in tax deduction on eligible research and development expenditure from 150% to 100%, with effect from April 1, 2020, as per the provisions of Income Tax Act of India.
Total tax expenses of Rs.156 and benefits of Rs.23 for the three months ended June 30, 2020 and 2019, respectively, were recognized directly in the equity.
17. | Nature of expense |
The following table shows supplemental information related to certain “nature of expense” items for the three months ended June 30, 2020 and 2019:
Depreciation | For the three months ended June 30, | |||||||
2020 | 2019 | |||||||
Cost of revenues | Rs. | 1,534 | Rs. | 1,599 | ||||
Selling, general and administrative expenses | 346 | 288 | ||||||
Research and development expenses | 240 | 237 | ||||||
Rs. | 2,120 | Rs. | 2,124 |
Amortization | For the three months ended June 30, | |||||||
2020 | 2019 | |||||||
Cost of revenues | Rs. | - | Rs. | 70 | ||||
Selling, general and administrative expenses | 995 | 859 | ||||||
Research and development expenses | 25 | 30 | ||||||
Rs. | 1,020 | Rs. | 959 |
Employee benefits | For the three months ended June 30, | |||||||
2020 | 2019 | |||||||
Cost of revenues | Rs. | 2,792 | Rs.2,804 | |||||
Selling, general and administrative expenses | 4,759 | 4,665 | ||||||
Research and development expenses | 1,173 | 1,146 | ||||||
Rs. | 8,724 | Rs.8,615 |
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)
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, in debt securities and in equity securities of Indian companies. The liability recorded by the Company towards this obligation was Rs.286 and Rs.189 as at June 30, 2020 and March 31, 2020, 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.904 and Rs.1,161 as at June 30, 2020 and March 31, 2020, 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 three months ended June 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 terms and conditions of the grants made during the three months ended June 30, 2019 under the above plans were as follows:
Particulars | Number of instruments | Exercise price | Vesting period | Contractual life | ||||||
DRL 2002 Plan | 46,680 | Rs. | 5.00 | 1 to 4 years | 5 years | |||||
DRL 2007 Plan | 84,142 | Rs. | 5.00 | 1 to 4 years | 5 years | |||||
DRL 2007 Plan | 61,700 | Rs. | 2,814.00 | 1 to 4 years | 5 years | |||||
DRL 2018 Plan | 167,500 | Rs. | 2,814.00 | 1 to 4 years | 5 years |
The above grants were made on May 16, 2019.
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.
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)
19. | Employee stock incentive plans (continued) |
The weighted average inputs used in computing the fair value of such grants were as follows:
May 19, 2020 | May 19, 2020 | May 16, 2019 | May 16, 2019 | |||||||||||||
Expected volatility | 29.12 | % | 30.47 | % | 28.25 | % | 29.29 | % | ||||||||
Exercise price | Rs. | 3,679.00 | Rs. | 5.00 | Rs. | 2,814.00 | Rs. | 5.00 | ||||||||
Option life | 5.0 Years | 2.5 Years | 5.0 Years | 2.5 Years | ||||||||||||
Risk-free interest rate | 5.67 | % | 4.62 | % | 7.14 | % | 6.76 | % | ||||||||
Expected dividends | 0.68 | % | 0.68 | % | 0.71 | % | 0.71 | % | ||||||||
Grant date share price | Rs. | 3,700.00 | Rs. | 3,700.00 | Rs. | 2,801.00 | Rs. | 2,801.00 |
Share-based payment expense
For the three months ended June 30, | ||||||||
2020 | 2019 | |||||||
Equity settled share-based payment expense(1) | Rs. | 143 | Rs. | 136 | ||||
Cash settled share-based payment expense(2) | 51 | 7 | ||||||
Rs. | 194 | Rs. | 143 |
(1) | As of June 30, 2020 and 2019, there was Rs.1,154 and Rs.920, respectively, of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of 2.30 years and 2.27 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 June 30, 2020 and 2019, there was Rs.94 and Rs.68, respectively, of total unrecognized compensation cost related to unvested awards. This cost is expected to be recognized over a weighted-average period of 1.90 years and 1.92 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 Pvt. Ltd. for professional consulting services; |
· | 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.
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)
20. | Related parties (continued) |
The following is a summary of significant related party transactions:
For the three months ended June 30, | ||||||||
2020 | 2019 | |||||||
Research and development services received | Rs. | 27 | Rs. | 26 | ||||
Sale of goods | - | 1 | ||||||
Lease rentals received | - | * | - | |||||
Research and development services provided | - | 25 | ||||||
Lease rentals paid | 9 | 9 | ||||||
Catering expenses paid | 72 | 92 | ||||||
Hotel expenses paid | 4 | 6 | ||||||
Facility management services paid | 9 | - | ||||||
Purchase of Solar power | 34 | - | ||||||
Civil works | 2 | 2 | ||||||
Contributions towards social development | 58 | 37 | ||||||
Salaries to relatives of key management personnel | 3 | 3 | ||||||
Others | - | * | 2 |
* Rounded to the nearest million.
The Company had the following amounts due from related parties as at the following dates:
As of | ||||||||
June 30, 2020 | March 31, 2020 | |||||||
Key management personnel and close members of their families | Rs. | 8 | Rs. | 8 | ||||
Other related parties | 48 | 68 |
The Company had the following amounts due to related parties as at the following dates:
As of | ||||||||
June 30, 2020 | March 31, 2020 | |||||||
Due to related parties | Rs. | 32 | Rs. | 91 |
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 three months ended June 30, | ||||||||
2020 | 2019 | |||||||
Salaries and other benefits | Rs. | 196 | Rs. | 161 | ||||
Contributions to defined contribution plans | 8 | 9 | ||||||
Commission to directors | 85 | 75 | ||||||
Share-based payments expense | 54 | 36 | ||||||
Rs. | 343 | Rs. | 281 |
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.
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)
21. | Financial instruments |
Financial instruments by category
The carrying value and fair value of financial instruments as at June 30, 2020 and March 31, 2020 were as follows:
As of June 30, 2020 | As of March 31, 2020 | |||||||||||||||
Total carrying value |
Total fair value |
Total carrying value |
Total fair value | |||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents | Rs. | 4,400 | Rs. | 4,400 | Rs. | 2,053 | Rs. | 2,053 | ||||||||
Other investments(1) | 23,827 | 23,827 | 24,015 | 24,015 | ||||||||||||
Trade and other receivables | 48,316 | 48,316 | 52,015 | 52,015 | ||||||||||||
Derivative financial assets | 413 | 413 | 1,105 | 1,105 | ||||||||||||
Other assets(2) | 3,639 | 3,639 | 4,170 | 4,170 | ||||||||||||
Total | Rs. | 80,595 | Rs. | 80,595 | Rs. | 83,358 | Rs. | 83,358 | ||||||||
Liabilities: | ||||||||||||||||
Trade and other payables | Rs. | 19,038 | Rs. | 19,038 | Rs. | 16,659 | Rs. | 16,659 | ||||||||
Derivative financial liabilities | 793 | 793 | 1,602 | 1,602 | ||||||||||||
Long-term borrowings | 9,421 | 9,421 | 5,570 | 5,570 | ||||||||||||
Short-term borrowings | 22,161 | 22,161 | 16,441 | 16,441 | ||||||||||||
Bank overdraft | - | - | 91 | 91 | ||||||||||||
Other liabilities and provisions(3) | 26,559 | 26,559 | 25,317 | 25,317 | ||||||||||||
Total | Rs. | 77,972 | Rs. | 77,972 | Rs. | 65,680 | Rs. | 65,680 |
(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.13,781 and Rs.10,476 as of June 30, 2020 and March 31, 2020, 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.10,438 and Rs.10,725 as of June 30, 2020 and March 31, 2020, 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 June 30, 2020:
Particulars | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
FVTPL - Financial asset - Investments in units of mutual funds | Rs. | 18,115 | Rs. | - | Rs. | - | Rs. | 18,115 | ||||||||
FVTOCI - Financial asset - Investment in equity securities | 510 | - | - | 510 | ||||||||||||
FVTOCI - Financial asset - Investment in market linked debentures | 987 | - | - | 987 | ||||||||||||
Derivative financial instruments – net loss on outstanding foreign exchange forward, option, swap contracts and interest rate swap contracts(1) | - | (380 | ) | - | (380 | ) |
The following table presents the fair value hierarchy of assets and liabilities measured at fair value on a recurring basis as of March 31, 2020:
Particulars | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
FVTPL - Financial asset - Investments in units of mutual funds | Rs. | 13,832 | Rs. | - | Rs. | - | Rs. | 13,832 | ||||||||
FVTOCI - Financial asset - Investment in equity securities | 303 | - | - | 303 | ||||||||||||
FVTOCI - Financial asset - Investment in market linked debentures | 1,993 | - | - | 1,993 | ||||||||||||
Derivative financial instruments – net loss on outstanding foreign exchange forward, option, swap contracts and interest rate swap contracts(1) | - | (497 | ) | - | (497 | ) |
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)
21. Financial Instruments (continued)
(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 at June 30, 2020 and March 31, 2020, 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 and Euros, and foreign currency debt in U.S. dollars, South African rands, Russian roubles, Brazilian reals and Mexican pesos.
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 three months ended June 30, | ||||||||
2020 | 2019 | |||||||
Net loss recognized in finance costs in respect of foreign exchange derivative contracts and cross currency interest rate swaps contracts | Rs. | (496) | Rs. | (28) | ||||
Net gain/(loss) recognized in equity in respect of hedges of highly probable forecast transactions | 471 | (84 | ) | |||||
Net gain/(loss) reclassified from equity and recognized as component of revenue occurrence of forecasted transaction | (144 | ) | 41 |
The net carrying amount of the Company’s “hedging reserve” as a component of equity before adjusting for tax impact was a loss of Rs.250 as at June 30, 2020, as compared to a loss of Rs.721 as at March 31, 2020.
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.
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)
22. | Contingencies (continued) |
Note 32 to the Consolidated Financial Statements in the Company’s Annual Report on Form 20-F for the year ended March 31, 2020 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.
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 has filed a motion requesting 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.
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 has appealed the Magistrate Judge’s decision to the New Jersey District Court. The Court has ordered that discovery on the Company’s counterclaim will proceed uninterrupted, and that there will be separate trials to address the antitrust claim and Indivior’s only remaining infringement claims, regarding U.S. patent number 9,687,454.
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 (continued) |
The parties continue to litigate Indivior’s allegation that the Company’s generic sublingual film products infringe any valid claim of U.S. patent number 9,687,454, with such litigation ongoing before the New Jersey District Court and the Patent Trial and Appeal Board (“PTAB”).
In the PTAB, 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 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 the ’454 patent 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. The PTAB’s decision becomes effective after the time for Indivior to appeal has expired or after any appeal taken by Indivior has concluded.
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 the interim financial statements of the Company.
Matters relating to National Pharmaceutical Pricing Authority
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. Following the adjournment of a hearing before the Delhi High Court which had been scheduled in June 2020, the Company is awaiting notification of a new hearing date.
Other product and patent related matters
Namenda Litigation
In August 2015, Sergeants Benevolent Assoc. Health & Welfare Fund (“Sergeants”) filed suit against the Company in the United States District Court for the Southern District of New York. Sergeants alleged that certain parties, including the Company, violated federal antitrust laws as a consequence of having settled patent litigation related to the Alzheimer’s drug Namenda® (memantine) tablets during a period from about 2009 until 2010. Sergeants seeks to represent a class of “end payor” purchasers of Namenda® tablets (i.e., insurers, other third-party payors and consumers).
Sergeants seeks damages based upon an allegation made in the complaint that the defendants entered into patent settlements regarding Namenda® tablets for the purpose of delaying generic competition and facilitating the brand innovator’s attempt to shift sales from the original immediate release product to the more recently introduced extended release product. The Company believes that the complaint lacks merit and that the Company’s conduct complied with all applicable laws and regulations.
Defendants' motions to dismiss were denied. Fact discovery has closed, and expert discovery is ongoing. Plaintiff filed a motion for class certification on July 6, 2020, and this motion is pending.
On November 5, 2019 plaintiffs MSP Recovery Claims, Series LLC and MSPA Claims 1, LLC filed suit against the Company and other drug manufacturers in the United States District Court for the Southern District of New York. The claims in this complaint were similar in nature to the claims in the Sergeants lawsuit, and those cases were coordinated for discovery purposes. On April 14, 2020, with the consent of the Company and the other defendants, plaintiffs MSP Recovery Claims, Series LLC and MSPA Claims 1, LLC voluntarily dismissed their claims without prejudice.
Other class action complaints containing similar allegations to the Sergeants complaint have also been filed in the U.S. District Court for the Southern District of New York. However, apart from the Sergeants case described above, there are no such class actions that are pending and that name the Company as a defendant.
In addition, the State of New York filed an antitrust case in the U.S. District Court for the Southern District of New York. The case brought by the State of New York contained some (but not all) of the allegations set forth in the class action complaints, but the Company was not named as a party. The case brought by the State of New York was dismissed by stipulation on November 30, 2015.
The Company believes that the likelihood of any liability that may arise on account of alleged violation of federal antitrust laws is not probable. Accordingly, no provision was made in the interim financial statements of the Company.
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)
Ranitidine Recall and Litigation
On October 1, 2019, the Company initiated a voluntary nationwide retail (at the retail level for over-the-counter products and at the consumer level for prescription products) of all 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. NDMA is classified as a probable human carcinogen (a substance that could cause cancer) based on results from laboratory tests. 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. The U.S. FDA has indicated that its investigation and testing continue. 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. The U.S. FDA stated that it “has determined that the impurity in some ranitidine products increases over time and when stored at higher than room temperatures may result in consumer exposure to unacceptable levels of this impurity.” See https://www.fda.gov/safety/medical-product-safety-information/all-ranitidine-products-zantac-press-release-fda-requests-removal?utm_campaign=FDA%20MedWatch.
As referenced in Note 32 of the Company’s Form 20-F for the year ended March 31, 2020, various ranitidine related complaints were filed against the parent company, one of the Company’s U.S. subsidiaries and the Company’s Swiss subsidiary, along with numerous other pharmaceutical manufacturers and retailers. These complaints were subsumed by the June 22, 2020 filing of three new master complaints – a Master Personal Injury Complaint, a Consolidated Consumer Class Action Complaint and a Consolidated Third-Party Payor Class Action Complaint.
During the quarter ending June 30, 2020, the New Mexico State Attorney General filed suit against the Company’s U.S. subsidiary, and multiple other manufacturers and retailers.
The Company believes that all of the aforesaid complaints and asserted claims are without merit, denies any wrongdoing 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.
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”).
Antitrust Case Filed by Rite Aid Corporation and Rite Aid Hdqtrs. Corp.
On July 9, 2020, Rite Aid Corporation and Rite Aid Hdqtrs Corp. filed a complaint on their own behalf, and as assignee of McKesson Corporation with regard to drugs sold by McKesson to Rite Aid, against the Company’s U.S. subsidiary and forty-six other defendants, involving a total of one hundred thirty-five generic drugs, alleging an “overarching conspiracy” to fix prices and to rig bids and allocate customers with respect to these drugs. The Company’s U.S. subsidiary is specifically named with respect to nine drugs: ciprofloxacin ER, divalproex ER, fluconazole, glimepiride, meprobamate, oxaprozine, paricalcitol, tizanidine and zoledronic acid.
Plaintiffs also allege that the Company’s U.S. subsidiary was part of a larger “overarching conspiracy” with all other manufacturers named as to all of the drugs named in the complaint; and, alternatively, was part of an overarching conspiracy with eighteen of the defendants named with regard to forty-five of the drugs named. The complaint also alleges violations of Section 1 of the Sherman Act, 15 U.S.C. §1. 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.
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 the interim financial statements of the Company.
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)
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 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.
The Scheme of Amalgamation of DRHL with the Company was filed with BSE and NSE (Stock Exchanges) for their consideration and approval. No observation letters were received from the stock exchanges on the basis of no comments received from SEBI on October 11, 2019. The Company has filed an application with the Hon’ble National Company Law Tribunal (“NCLT”) Hyderabad, seeking direction for conducting court convened meetings of the shareholders and unsecured creditors. The NCLT vide its order dated November 22, 2019 directed the Company to conduct meetings of the shareholders’ and creditors. The NCLT also appointed the Chairpersons and Scrutinizers for the respective meetings. The notice convening the shareholders and unsecured creditors meetings on January 2, 2020, were circulated within statutory timelines for approval of Scheme of Amalgamation of DRHL with the Company.
The resolutions were passed with requisite majority of shareholders (99.98%) and unsecured creditors (100%) at the respective shareholders and unsecured creditors meetings on January 2, 2020. The petition for approval of the Scheme has been filed with Hon’ble NCLT on January 9, 2020. The NCLT hearing on June 3, 2020 has been adjourned and a new date is yet to be scheduled.
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 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 / products in the Indian market.
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.
The transaction was completed on June 10, 2020.
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)
24. | Business Transfer Agreement with Wockhardt Limited (continued) |
Due to the COVID-19 pandemic and the consequent government restrictions, there has been 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 shall now be upto Rs.18,500, to be paid as per the following terms:
a) | an amount of Rs.14,830 was paid on the date of closing; |
b) | an amount of Rs.670 was 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. |
The transaction involved 2,051 employees engaged in operations of the acquired Business Undertaking.
The Company has accounted for the transaction under IFRS 3, “Business Combinations”. The following amounts represent the preliminary determination of the fair value of consideration, identifiable assets acquired and liabilities assumed from the acquisition.
As of June 30, 2020, the valuation studies necessary to determine the fair market value of the consideration involved, assets acquired and liabilities assumed are preliminary, including the validation of the underlying cash flows used to determine the fair value of the identified intangible assets. The size and breadth of the acquisition necessitates need for additional period to adequately analyze all the factors used in establishing the fair values of asset and liability as of the acquisition date, including, but not limited to, intangible assets, property, plant and equipment, and contingent consideration involved.
Tabulated below is the preliminary allocation of the purchase price as of June 30, 2020:
Particulars | Amount | |||
Cash | 14,990 | |||
Balances in Escrow account | 536 | |||
Contingent consideration (Holdback Amount) | 70 | |||
Total consideration | 15,596 | |||
Assets acquired | ||||
Goodwill | 791 | |||
Property, plant and equipment | 373 | |||
Product related intangibles | 14,141 | |||
Inventories | 435 | |||
Other assets | 243 | |||
Liabilities assumed | ||||
Employee benefits | (145 | ) | ||
Refund liability | (242 | ) | ||
Total net assets | 15,596 |
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 unaudited condensed consolidated interim income statements for the three months ended June 30, 2020.
The amount of revenue included in the unaudited condensed consolidated interim income statements since June 10, 2020 pertaining to the business acquired from Wockhardt was Rs.171 for the three months ended June 30, 2020.
The business has been integrated into the Company’s existing activities and it is not practicable to identify the impact on the Company profit in the period.
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. The Company based on its judgments, estimates and assumptions including sensitivity analysis, 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.
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)
26. | Update on the warning letter from the U.S. FDA |
Practices (“cGMPs”) deviations at its active pharmaceutical ingredient (“API”) manufacturing facilities at Srikakulam, Andhra Pradesh and Miryalaguda, Telangana, as well as violations at its oncology formulation manufacturing facility at Duvvada, Visakhapatnam, Andhra Pradesh. The contents of the warning letter emanated from Form 483 observations that followed inspections of these sites by the U.S. FDA in November 2014, January 2015 and February-March 2015.
Tabulated below are the further updates with respect to the aforementioned sites:
Month and year | Update | |
February, March and April 2017 | The U.S. FDA completed the re-inspection of the aforementioned manufacturing facilities. During the re-inspections, the U.S. FDA issued three observations with respect to the API manufacturing facility at Miryalaguda, two observations with respect to the API manufacturing facility at Srikakulam and thirteen observations with respect to the Company’s oncology formulation manufacturing facility at Duvvada. | |
June 2017 | The U.S. FDA issued an Establishment Inspection Report (“EIR”) which indicated that the inspection of the Company’s API manufacturing facility at Miryalaguda was successfully closed. | |
November 2017 | The Company received EIRs from the U.S. FDA for the oncology manufacturing facility at Duvvada which indicated that the inspection status of this facility remained unchanged. | |
February 2018 | The Company received EIRs from the U.S. FDA for API manufacturing facility at Srikakulam which indicated that the inspection status of this facility remained unchanged. | |
June 2018 | The Company requested the U.S. FDA to schedule a re-inspection of the oncology formulation manufacturing facility at Duvvada. | |
October 2018 | The re-inspection was completed for the oncology formulation manufacturing facility at Duvvada and the U.S. FDA issued a Form 483 with eight observations. | |
November 2018 | The Company responded to the observations identified by the U.S. FDA for the oncology formulation manufacturing facility at Duvvada in October 2018. | |
February 2019 | The U.S. FDA issued an EIR indicating successful closure of the audit of the oncology formulation manufacturing facility at Duvvada. |
With respect to the API manufacturing facility at Srikakulam, subsequent to the receipt of EIR in February 2018, the Company was asked, in October 2018, to carry out certain detailed investigations and analyses and the Company submitted the results of the investigations and analyses. As part of the review of the response by the U.S. FDA, certain additional follow on queries were received by the Company, and the Company responded to all such queries in January 2019.
In February 2019, the Company received certain other follow on questions from the U.S. FDA and the Company responded to these questions in March 2019. The U.S. FDA completed the audit on January 28, 2020. The Company was issued a Form 483 with 5 observations and responded to the observations in February 2020. In May 2020, the Company received an EIR from the U.S. FDA, for the above-referred facility, indicating closure of the audit and classifying the inspection of this facility as Voluntary Action Indicated (“VAI”). With this, all facilities under warning letter are now determined as VAI.
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)
26. | Update on the warning letter from the U.S. FDA (continued) |
Inspection of other facilities:
Tabulated below are the details of the U.S. FDA inspections carried out at other facilities of the Company:
Located in India
Month and year | Unit | Details of observations | ||
June 2018 | API Srikakulam Plant (SEZ) | No observations were noted. An EIR indicating the closure of audit for this facility was issued by the U.S. FDA in August 2018. | ||
November 2018 | Formulations Srikakulam Plant (SEZ) Unit II | No observations were noted. An EIR indicating the closure of audit for this facility was issued by the U.S. FDA in February 2019. | ||
January 2019 | Formulations Srikakulam Plant (SEZ) Unit I | Four observations were noted. The Company responded to the observations and an EIR indicating the closure of audit for this facility was issued by the U.S. FDA in April 2019. | ||
January 2019 | API manufacturing Plant at Miryalaguda, Nalgonda |
One observation was noted. The Company responded to the observation.
In May 2019, an EIR was issued by the U.S. FDA indicating the closure of audit and the inspection classification of the facility was determined as VAI. | ||
January 2019 | Formulations manufacturing facility at Bachupally, Hyderabad |
Eleven observations were noted. The Company responded to the observations in January 2019.
In April 2019, an EIR was issued by the U.S. FDA indicating the closure of audit and the inspection classification of the facility was determined as VAI. | ||
March 2019 | Aurigene Discovery Technologies Limited, Hyderabad |
No observations noted.
In June 2019, the Company received an EIR from the U.S. FDA indicating the closure of audit for this facility. | ||
June 2019 | Formulations manufacturing plants, Duvvada {Vizag SEZ plant 1 (FTO VII) and Vizag SEZ plant 2(FTO IX)} |
Two observations were noted. The Company responded to the observations.
In September 2019, an EIR was issued by the U.S. FDA indicating the closure of audit of these facilities. | ||
July 2019 | API Hyderabad plant 2, Bollaram, Hyderabad |
Five observations were noted during U.S. FDA inspection. The Company responded to the observations in August 2019.
In October 2019, an EIR was issued by the U.S. FDA indicating the closure of audit and the inspection classification of the facility was determined as VAI. | ||
August 2019 |
Formulations manufacturing plants, (Vizag SEZ plant 1), Duvvada, Visakhapatnam (FTO VII) |
Eight observations were noted. The Company responded to the observations in September 2019.
In February 2020, an EIR was issued by the U.S. FDA indicating the closure of audit and the inspection classification of the facility was determined as VAI. |
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. Update on the warning letter from the U.S. FDA (continued)
Month and year | Unit | Details of observations | ||
August 2019 | Formulations manufacturing facility at Shreveport, Louisiana, U.S.A |
No observations were noted.
In October 2019, an EIR was issued by the U.S. FDA indicating the closure of the audit and the inspection classification of the facility was determined as No Action Initiated (“NAI”). | ||
October 2019 | API Srikakulam plant (SEZ), Andhra Pradesh |
Four observations were noted. The Company responded to the observations in November 2019.
In May 2020, an EIR was issued by the U.S. FDA indicating the closure of the audit. | ||
February 2020 | Formulations Srikakulam Plant (SEZ) Unit I |
No observations were noted.
In May 2020, an EIR was issued by the U.S. FDA indicating the closure of the audit and the inspection classification of the facility was determined as NAI. | ||
February 2020 | Formulations manufacturing facility at Bachupally, Hyderabad (FTO Unit III) | One observation was noted. The Company responded to the observation in March 2020. In May 2020, an EIR was issued by the U.S. FDA indicating the closure of the audit and the inspection classification of the facility was determined as VAI. | ||
February 2020 | Integrated Product Development Organization (IPDO) at Bachupally, Hyderabad |
No observation was noted.
In May 2020, an EIR was issued by the U.S. FDA indicating the closure of the audit and the inspection classification of the facility was determined as NAI. | ||
March 2020 | API manufacturing Plant at Miryalaguda, Nalgonda |
Three observations were noted. The Company responded to the observations in March 2020.
In April 2020, an EIR was issued by the U.S. FDA indicating the closure of audit and the inspection classification of the facility was determined as VAI. |
No U.S. FDA audits were conducted during the three months ended June 30, 2020.
27. | Subsequent events |
None
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, notes and the Operating and Financial Review and Prospects included in our Annual Report on Form 20-F for the fiscal year ended March 31, 2020 which is on file with the SEC, and the unaudited condensed consolidated interim financial statements 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. We undertake no obligation to publicly update or revise the forward-looking statements, whether as a result of new information, future events, or otherwise. 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 that speak only as of their dates.
Three months ended June 30, 2020 compared to the three months ended June 30, 2019
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 June 30, | ||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||
Rs. in millions |
% of Revenues |
Rs. in millions |
% of Revenues |
Increase/ (Decrease) |
||||||||||||||||
Revenues | Rs. | 44,175 | 100.0 | % | Rs. | 38,435 | 100.00 | % | 15 | % | ||||||||||
Gross profit | 24,755 | 56.0 | % | 19,859 | 51.7 | % | 25 | % | ||||||||||||
Selling, general and administrative expenses | 12,786 | 28.9 | % | 12,065 | 31.4 | % | 6 | % | ||||||||||||
Research and development expenses | 3,980 | 9.0 | % | 3,609 | 9.4 | % | 10 | % | ||||||||||||
Impairment of non-current assets | - | 0.0 | % | - | 0.0 | % | 0 | % | ||||||||||||
Other income, net | (118 | ) | (0.3 | %) | (3,759 | ) | (9.8 | %) | (97 | %) | ||||||||||
Results from operating activities | 8,107 | 18.4 | % | 7,944 | 20.7 | % | 2 | % | ||||||||||||
Finance income, net | 605 | 1.4 | % | 393 | 1.0 | % | 54 | % | ||||||||||||
Share of profit of equity accounted investees, net of tax | 77 | 0.2 | % | 163 | 0.4 | % | (53 | %) | ||||||||||||
Profit before tax | 8,789 | 19.9 | % | 8,500 | 22.1 | % | 3 | % | ||||||||||||
Tax expense | 2,996 | 6.8 | % | 1,872 | 4.9 | % | 60 | % | ||||||||||||
Profit for the period | Rs. | 5,793 | 13.1 | % | 6,628 | 17.2 | % | (13 | %) |
Revenues
Our overall consolidated revenues were Rs.44,175 million for the three months ended June 30, 2020, an increase of 15% as compared to Rs.38,435 million for the three months ended June 30, 2019.
The following table sets forth, for the periods indicated, our consolidated revenues by segment:
For the three months ended June 30, | ||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||
RS. in millions |
Revenues % of Total |
Rs. in millions |
Revenues % of Total |
Increase/ (Decrease) |
||||||||||||||||
Global Generics | Rs. | 35,075 | 79 | % | Rs.32,982 | 86 | % | 6 | % | |||||||||||
Pharmaceutical Services and Active Ingredients | 8,553 | 19 | % | 4,539 | 12 | % | 88 | % | ||||||||||||
Proprietary Products | 56 | 0 | % | 281 | 0 | % | (80 | %) | ||||||||||||
Others | 491 | 1 | % | 633 | 2 | % | (22 | %) | ||||||||||||
Total | Rs. | 44,175 | 100 | % | Rs.38,435 | 100 | % | 15 | % |
34 |
Segment Analysis
Global Generics
Revenues from our Global Generics segment were Rs.35,075 million for the three months ended June 30, 2020, an increase of 6% as compared to Rs.32,982 million for the three months ended June 30, 2019.
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:
· | a 9% increase on account of the introduction of new products during the period, which was partially offset by the decreases referenced below; |
· | a 1% decrease on account of a decrease in the sales volumes of existing products in this segment; and |
· | an approximately 2% decrease 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.17,282 million for the three months ended June 30, 2020, an increase of 6% as compared to Rs.16,323 million for the three months ended June 30, 2019. In U.S. dollar absolute currency terms (i.e., U.S. dollars without taking into account the effect of currency exchange rates), such revenues decreased by 2% in the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.
This decrease in revenues was largely attributable to the price erosion in certain of our existing products which was partially offset by benefit from new product launches between July 1, 2019 and June 30, 2020, such as pyrimethamine, carboprost, esomeprazole naproxen, pregabalin and fosaprepitant.
During the three months ended June 30, 2020, we launched six new products in North America (the United States and Canada). These new products are abiraterone acetate tablets, amphetamine sulphate tablets, colchicine tablets, desmopressin acetate injection, fenofibrate tablets, and NitroDur® (nitroglycerin) transdermal infusion.
During the three months ended June 30, 2020, we made 5 new ANDA filing to the U.S. FDA. As of June 30, 2020, we had 101 filings pending approval with the U.S. FDA, which includes 99 ANDAs and 2 NDAs filed under section 505(b)(2). Out of these 99 ANDA filings, 54 are Paragraph IV filings and we believe we are the first to file with respect to 28 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.3,551 million for the three months ended June 30, 2020, an increase of 48% as compared to Rs 2,404 million for the three months ended June 30, 2019. This increase was primarily on account of an increase in volumes of our existing products and new products launched between July 1, 2019 and June 30, 2020, 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 June 30, 2020 were Rs.6,260 million, a decrease of 10% as compared to Rs.6,960 million for the three months ended June 30, 2019. This decrease was largely attributable to the reduction in sales volume of our existing products; partially offset by increase in price of our existing products and contribution from new product launches during the period. During the three months ended June 30, 2020, we launched four new brands in India.
According to IQVIA in its report for the three months ended June 30, 2020, our secondary sales in India decreased by 19.3% during such period, as compared to the India pharmaceutical market’s decline of 4.9%. Our secondary sales growth is post considering portfolio of products acquired from Wockhardt.
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, wherein the major markets are China, South Africa and Brazil) for the three months ended June 30, 2020 were Rs.7,982 million, an increase of 9% as compared to Rs.7,295 million for the three months ended June 30, 2019.
Russia: Our Global Generics segment’s revenues from Russia for the three months ended June 30, 2020 were Rs.3,272 million, a decrease of 17% as compared to Rs.3,964 million for the three months ended June 30, 2019. In Russian rouble absolute currency terms (i.e., Russian roubles without taking into account the effect of currency exchange rates), such revenues decreased by 15%. The decrease in revenues was primarily on account of a decrease in sales volumes of our existing products, partially offset by an increase in prices of our existing products and contribution from new products launched between July 1, 2019 and June 30, 2020. Our over-the-counter (“OTC”) division’s revenues from Russia for the three months ended June 30, 2020 were 43% of our total revenues from Russia.
35 |
According to IQVIA, as per its report for the two months ended May 31, 2020, 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 May 31, 2020 | ||||||||||||||||
Dr. Reddy's Laboratories | Russian pharmaceutical market | |||||||||||||||
Sales value | Volume | Sales value | Volume | |||||||||||||
Prescription (Rx) | (8.0%) | (16.7%) | (10.3%) | (13.8%) | ||||||||||||
Over-the-counter (OTC) | (3.8%) | (13.2%) | (2.0%) | (8.8%) | ||||||||||||
Total (Rx + OTC) | (6.1%) | (15.5%) | (6.3%) | (10.5%) |
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.1,388 million for the three months ended June 30, 2020, an increase of 15% as compared to Rs.1,206 million for the three months ended June 30, 2019. This increase was largely attributable to an increase in sales volumes of our existing products and additional revenues from new products launched between July 1, 2019 and June 30, 2020, partially offset by a reduction in the prices 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.3,322 million for the three months ended June 30, 2020, an increase of 56% as compared to Rs.2,127 million for the three months ended June 30, 2019. This increase was due to an increase in the sales volumes of our existing products and new products launched between July 1, 2019 and June 30, 2020, partially offset by a reduction in the prices of certain of our existing products.
Pharmaceutical Services and Active Ingredients (“PSAI”)
Our PSAI segment’s revenues for the three months ended June 30, 2020 were Rs.8,553 million, an increase of 88% as compared to Rs.4,539 million for the three months ended June 30, 2019. 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 attributable to an increase in sales volumes of our existing products and new product launched between July 1, 2019 and June 30, 2020, partially offset by a reduction in prices of our existing products.
During the three months ended June 30, 2020, we filed 16 Drug Master Files (“DMFs”) across the world.
Proprietary Products
Revenues from our Proprietary Products segment were Rs.56 million for the three months ended June 30, 2020, a decrease of 80% as compared to Rs.281 million for the three months ended June 30, 2019. This decrease was primarily due to out-licensing of the Neuro brands during the last financial year.
36 |
Gross Profit
Our total gross profit was Rs.24,755 million for the three months ended June 30, 2020, representing 56.0% of our revenues for that period, as compared to Rs.19,859 million for the three months ended June 30, 2019, representing 51.7% 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 June 30, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
(Rs. in millions) | ||||||||||||||||
Gross Profit |
% of Segment Revenue |
Gross Profit |
% of Segment Revenue |
|||||||||||||
Global Generics | Rs. | 21,526 | 61.4 | % | Rs. | 19,007 | 57.6 | % | ||||||||
Pharmaceutical Services and Active Ingredients (“PSAI”) | 2,856 | 33.4 | % | 325 | 7.2 | % | ||||||||||
Proprietary Products | 56 | 100.3 | % | 207 | 73.7 | % | ||||||||||
Others | 317 | 64.6 | % | 320 | 50.5 | % | ||||||||||
Total | Rs. | 24,755 | 56.0 | % | Rs. | 19,859 | 51.7 | % |
The gross profit from our Global Generics segment increased to 61.4% for the three months ended June 30, 2020 from 57.6% for the three months ended June 30, 2019. This increase was on account of the net benefit from exchange rate fluctuations of multiple currencies against the Indian rupee, new product launches with higher gross margins and increases in the proportion of sales of certain products with higher gross margins. This increase was partially offset by reductions on account of price erosion in certain of our products, primarily in the United States, Europe, Brazil and South Africa.
The gross profits from our PSAI segment increased to 33.4% for the three months ended June 30, 2020 from 7.2% for the three months ended June 30, 2020. This increase was primarily on account of operating leverage due to higher sales and changes in existing product mix (i.e., an increase in the proportion of sales of products with higher gross margins and a decrease in the proportion of sales of products with lower gross margins). Manufacturing overheads for our PSAI segment were at same levels during both periods, which further aided the improvement in gross margins of this segment.
Selling, general and administrative expenses
Our selling, general and administrative expenses were Rs.12,786 million for the three months ended June 30, 2020, an increase of 6% as compared to Rs.12,065 million for the three months ended June 30, 2019. 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 increased costs of logistics for supply of goods and increased shipment rates; |
· | a 3% increase due to increased personnel costs, legal & professional and depreciation & amortization, contributing 1% each; |
· | a 2% increase due to increased rent, rates & taxes and insurance expenses; |
· | a 2% increase due to increased other costs; and |
· | the foregoing was partially offset by a 7% decrease due to reduced selling and advertisement expenses. |
As a proportion of our total revenues, our selling, general and administrative expenses decreased to 28.9% for the three months ended June 30, 2020 from 31.4% for the three months ended June 30, 2019.
Research and development expenses
Our research and development expenses were Rs.3,980 million for the three months ended June 30, 2020, an increase of 10% as compared to Rs.3,609 million for the three months ended June 30, 2019. This increase was largely on account of higher developmental expenditures on certain projects in generics and biosimilars.
As a proportion of our total revenues, our research and development expenses was at 9.0% for the three months ended June 30, 2020, as compared to 9.4% for the three months ended June 30, 2019.
37 |
Other income, net
Our net other income was Rs.118 million for the three months ended June 30, 2020, as compared to net other income of Rs.3,759 million for the three months ended June 30, 2019. The other income was higher for the three months ended June 30, 2019 mainly on account of Rs. 3,457 million received from Celgene pursuant to an agreement entered towards settlement of any claim we or our affiliates may have had for damages under section 8 of the Canadian Patented Medicines (Notice of Compliance) Regulations in regard to our ANDS for a generic version of REVLIMID brand capsules, (Lenalidomide) pending before Health Canada.
Finance income, net
Our net finance income was Rs.605 million for the three months ended June 30, 2020, as compared to net finance income of Rs.393 million for the three months ended June 30, 2019. 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.258 million for the three months ended June 30, 2020, as compared to profit on sale of investments of Rs.311 million for the three months ended June 30, 2019; |
· | net interest income of Rs.48 million for the three months ended June 30, 2020, as compared to net interest expense of Rs.72 million for the three months ended June 30, 2019; and |
· | net foreign exchange gain of Rs.299 million for the three months ended June 30, 2020, as compared to net foreign exchange gain of Rs.154 million for the three months ended June 30, 2019. |
Profit before tax
As a result of the above, our profit before tax was Rs.8,789 million for the three months ended June 30, 2020, as compared to Rs.8,500 million for the three months ended June 30, 2019.
Tax expense
Our consolidated weighted average tax rate was 34.1% for the three months ended June 30, 2020, as compared to 22.0% for the three months ended June 30, 2019.
The effective rate of tax for the three months ended June 30, 2020 was higher as compared to three months ended June 30, 2019, primarily on account of the reduction in tax deduction on eligible research and development expenditure from 150% to 100%, with effect from April 1, 2020, as per the provisions of Income Tax Act of India.
Our tax expense was Rs.2,996 million for the three months ended June 30, 2020, as compared to Rs.1,872 million for the three months ended June 30, 2019.
Profit for the period
As a result of the above, our net profit was Rs.5,793 million for the three months ended June 30, 2020, representing 13.1% of our total revenues for such period, as compared to Rs.6,628 million for the three months ended June 30, 2019, representing 17.2% of our total revenues for such period.
38 |
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 June 30, 2020:
Amount (Rs. in millions) | Currency(1) | Interest Rate(2) | ||||||
Pre-shipment credit | Rs. | 11,918 | U.S.$ | 1 Month LIBOR + 12.5 to 16 bps | ||||
INR | 1 Month T-bill + 60 bps with a collar of 4.2% | |||||||
INR | 5.75% | |||||||
Other working capital borrowings | 10,243 | ZAR | 1 Month JIBAR+120 bps | |||||
RUB | 7.15% | |||||||
BRL | 7.25% | |||||||
MXN | TIIE + 1.25% | |||||||
INR | 5.15% - 6.35% | |||||||
INR | Repo rate + 1.5% | |||||||
Long-term foreign currency borrowings (current portion) | 1,888 | U.S.$ | 1 Month LIBOR + 82.7 bps | |||||
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 “ZAR” means South African rand. |
(2) | “LIBOR” means the London Inter-bank Offered Rate, “TIIE” means the Equilibrium Inter-banking Interest Rate (Tasa de Interés Interbancaria de Equilibrio), “JIBAR” means the Johannesburg Interbank Average Rate, “T-bill” means the India Treasury Bill interest rate and “Repo rate” means the rate at which the Reserve Bank of India lends to commercial banks (as decided by Reserve Bank of India in its monetary policy). |
Summary of statements of cash flows
The following table summarizes our statements of cash flows for the periods presented:
For the three months ended June 30, | ||||||||
2020 | 2019 | |||||||
(Rs. in millions) | ||||||||
Net cash from/(used in): | ||||||||
Operating activities | Rs. | 10,913 | Rs. | 9,833 | ||||
Investing activities | (15,724 | ) | (3,691 | ) | ||||
Financing activities | 7,181 | (6,313 | ) | |||||
Net increase /(decrease) in cash and cash equivalents | Rs. | 2,370 | Rs. | (171 | ) |
In addition to cash, inventory and accounts receivable, our unused sources of liquidity included Rs.39,419 million available in credit under revolving credit facilities with banks as of June 30, 2020.
39 |
Cash Flows from Operating Activities
The result of operating activities was a net cash inflow of Rs.10,913 million for the three months ended June 30, 2020, as compared to a cash inflow of Rs.9,833 million for the three months ended June 30, 2019.
The increase in net cash inflow of Rs.1,080 million was primarily due to an increase in our earnings and decrease in our working capital requirements.
Our average days’ sales outstanding (“DSO”) as at June 30, 2020, March 31, 2020 and June 30, 2019 were 94 days, 100 days and 90 days, respectively. The decrease in our DSO as on compared to March 31, 2020 was primarily due to improved collections from customers in the United States.
Cash Flows used in Investing Activities
Our investing activities resulted in net cash outflows of Rs.15,724 million and Rs.3,691 million for the three months ended June 30, 2020 and 2019, respectively which was primarily on account of the following:
· | the payment to Wockhardt Limited, in connection with our acquisition of certain of its business assets, of Rs.14,990 million for the three months ended June 30, 2020 (refer to Note 24 of our interim financial statements for further details); |
· | the acquisition of property, plant and equipment, and other intangible assets of Rs.1,891 million for the three months ended June 30, 2020, as compared to Rs.1,439 million for the three months ended June 30, 2019; and |
· | the net proceeds of other investments of Rs.648 million for the three months ended June 30, 2020, as compared to net purchase of other investments of Rs.2,776 million for the three months ended June 30, 2019. |
Cash Flows from /used in Financing Activities
Our financing activities resulted in a net cash inflow of Rs.7,181 million and a net cash outflow of Rs.6,313 million for the three months ended June 30, 2020 and 2019, respectively.
During the three months ended June 30, 2020, our net cash inflow was primarily on account of net proceeds from short-term and long-term borrowings of Rs.7,520 million, partially offset by interest payments of Rs.283 million. During the three months ended June 30, 2019, our net cash outflow was primarily on account of net repayment of short-term and long-term borrowings of Rs.5,269 million and interest payments of Rs.422 million.
40 |
None
Exhibit Number | Description of Exhibits | |
99.1 | Review report of Independent Registered Public Accounting Firm |
41 |
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: July 29, 2020 | By: | /s/ Sandeep Poddar | |
Name: | Sandeep Poddar | ||
Title: | Company Secretary |
42 |
Exhibit 99.1
Review Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Dr. Reddy’s Laboratories Limited
Results of Review of Interim Financial Statements
We have reviewed the accompanying condensed consolidated interim statement of financial position of Dr. Reddy’s Laboratories Limited and subsidiaries (the Company) as of June 30, 2020, the related condensed consolidated interim income statements, statements of comprehensive income, changes in equity and cash flows for the three month periods ended June 30, 2020 and 2019, and the related notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with International Accounting Standard (IAS) 34, Interim Financial Reporting as issued by the International Accounting Standards Board.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of financial position of the Company as of March 31, 2020, the related consolidated income statement, statement of comprehensive income, changes in equity and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated June 15, 2020, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of March 31, 2020, is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.
Basis for Review Results
These financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ Ernst & Young Associates LLP
Hyderabad, India
July 29, 2020