UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended March 31, 2016
For the Fiscal Year Ended March 31, 2021 |
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
For the transition period fromto
Commission File Number: 1-15182
DR. REDDY’S LABORATORIES LIMITED
(Exact name of Registrant as specified in its charter)
Not Applicable | TELANGANA, INDIA | |
(Translation of Registrant’s name into English) | (Jurisdiction of incorporation or
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8-2-337, Road No. 3, Banjara Hills
Hyderabad, Telangana 500 034, India
+91-40-49002900
(Address of principal executive offices)
Saumen Chakraborty,
Parag Agarwal, Chief Financial Officer, +91-40-49002004, saumenc@drreddys.com+91-40-49002931, parag.agarwal@drreddys.com
8-2-337, Road No. 3, Banjara Hills, Hyderabad, Telangana 500 034, India
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of Each Class | Trading Symbol | Name of Each Exchange on which Registered |
American depositary shares, each representing one equity share | RDY | New York Stock Exchange |
Equity Shares*
* | Not for trading, but only in connection with the registration of American depositary shares, pursuant to the requirements of the Securities and Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act. None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
170,607,653
166,301,231 Equity Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes xþ No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ¨ No xþ
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes xþ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þNo ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer or an emerging growth company. See the definitions of “accelerated filer” and, “large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Non-accelerated filer ¨ | Emerging growth company ¨ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ¨ Non-accelerated filer
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ¨þ
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ¨ | International Financial Reporting Standards as issued by the International Accounting Standards Board | þ | Other ¨ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes ¨ No xþ
Currency of Presentation and Certain Defined Terms
In this annual report on Form 20-F, references to “$” or “U.S.$” or “dollars” or “U.S. dollars” are to the legal currency of the United States and references to “Rs.” or “rupees” or “Indian rupees” or “INR” are to the legal currency of India.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 the United Kingdom and references to “EUR” or “euros” are to the legal currency of the European Union. Our financial statements are prepared in accordance with International Financial Reporting Standards, or “IFRS”, as issued by the International Accounting Standards Board, or “IASB”. These standards include International Accounting Standards, or “IAS”, and their interpretations issued by the International Financial Reporting Interpretations Committee, or “IFRIC”, or its predecessor, the Standing Interpretations Committee, or “SIC”. References to a particular “fiscal” year are to our fiscal year ended March 31 of such year. References to our “ADSs” are to our American Depositary Shares.
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 annual report on Form 20-F 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 HealthHoldings Inc. and its affiliates) (“IMS Health”IQVIA”), a provider of market research to the pharmaceutical industry, unless otherwise stated.
Our financial statements are presented in Indian rupees and translated into U.S. dollars for the convenience of the reader. 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 = Rs.66.25,Rs.73.14, as published by Federal Reserve Board of Governors on March 31, 2016.2021. No representation is made that the Indian rupee amounts have been, could have been or could be converted into U.S. dollars at such a rate or any other rate.
Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.
Our main corporate website address is https://www.drreddys.com. Information contained in our website, www.drreddys.com, is not part of this Annual Report and no portion of such information is incorporated herein.
Forward-Looking Statements and Cautionary StatementRisk Factor Summary
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD- LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
In addition to historical information, this annual report, and the reports and documents incorporated by reference in this annual report, contain certain forward-looking statements within the meaning of Section 27A OF THE SECURITIES ACT OFof the Securities Act of 1933, AS AMENDED AND SECTIONas amended, and Section 21E OF THE SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934, AS AMENDED (THE “EXCHANGE ACT”as amended (the “Exchange Act”). 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, THOSE DISCUSSED IN THE SECTIONS ENTITLED “RISK FACTORS” AND “OPERATING AND FINANCIAL REVIEW AND PROSPECTS” AND ELSEWHERE IN THIS REPORT. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT’S ANALYSIS ONLY AS OF THE DATE HEREOF. IN ADDITION, READERS SHOULD CAREFULLY REVIEW THE OTHER INFORMATION IN THIS ANNUAL REPORT AND IN OUR PERIODIC REPORTS AND OTHER DOCUMENTS FILED AND/OR FURNISHED WITH THE SECURITIES AND EXCHANGE COMMISSION (“SEC”) FROM TIME TO TIME.
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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 annual report and in our periodic reports and other documents filed with and/or furnished to the sec from time to time.
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TABLE OF CONTENTS
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
3.A.Selected financial data
You should read the selected consolidated financial data below in conjunction with our consolidated financial statements and the related notes, as well as the section titled “Operating and Financial Review and Prospects,” all of which are included elsewhere in this Annual Report on Form 20-F. The selected consolidated income statementfinancial data presented below has been derived from our consolidated financial statements, which have been prepared in conformity with IFRS as issued by the IASB. The selected consolidated financial data presented below as of March 31, 2021 and 2020 and for the years ended March 31, 2016, 2015, 2014, 20132021, 2020 and 2012 and the selected2019 are included in Item 18 of this annual report on Form 20-F.
The consolidated statement of financial position datastatements as of March 31, 2016, 2015, 2014, 20132021, 2020 and 20122019 and for the years then ended March 31, 2021, 2020 and 2019 have been prepared and presented in accordance with IFRS as issuedaudited by the IASB, and have been derived fromErnst & Young Associates LLP (“EY”), Hyderabad, India, our auditedindependent registered public accounting firm. The consolidated financial statements as of March 31, 2018 and related notes included elsewhere herein. 2017 and for the years then ended March 31, 2018 and 2017 were audited by KPMG, Hyderabad, India (“KPMG”), our former independent registered public accounting firm.
The selected consolidated financial data below has been presented for the five most recent fiscal years. Historical results are not necessarily indicative of future results.
Income Statement Data
For the year ended March 31, | ||||||||||||||||||||||||
2016 | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||
(Rs. in millions, U.S.$ in millions, both except share and per share data) | ||||||||||||||||||||||||
Convenience translation into U.S.$ | ||||||||||||||||||||||||
Revenues | U.S.$ | 2,335 | Rs. | 154,708 | Rs. | 148,189 | Rs. | 132,170 | Rs. | 116,266 | Rs. | 96,737 | ||||||||||||
Cost of revenues | 942 | 62,427 | 62,786 | 56,369 | 55,687 | 43,432 | ||||||||||||||||||
Gross profit | 1,393 | 92,281 | 85,403 | 75,801 | 60,579 | 53,305 | ||||||||||||||||||
Selling, general and administrative expenses | 690 | 45,702 | 42,585 | 38,783 | 34,272 | 29,907 | ||||||||||||||||||
Research and development expenses | 269 | 17,834 | 17,449 | 12,402 | 7,674 | 5,911 | ||||||||||||||||||
Other (income)/expense, net | (13 | ) | (874 | ) | (917 | ) | (1,416 | ) | (2,479 | ) | (765 | ) | ||||||||||||
Results from operating activities | 447 | 29,619 | 26,286 | 26,032 | 21,112 | 18,252 | ||||||||||||||||||
Finance (expense)/income, net | (41 | ) | (2,708 | ) | 1,682 | 400 | 460 | 160 | ||||||||||||||||
Share of profit of equity accounted investees, net of tax | 3 | 229 | 195 | 174 | 104 | 54 | ||||||||||||||||||
Profit before tax | 410 | 27,140 | 28,163 | 26,606 | 21,676 | 18,466 | ||||||||||||||||||
Tax expense | (108 | ) | (7,127 | ) | (5,984 | ) | (5,094 | ) | (4,900 | ) | (4,204 | ) | ||||||||||||
Profit for the year | 302 | 20,013 | 22,179 | 21,512 | 16,776 | 14,262 | ||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||
Equity holders of the Company | 302 | 20,013 | 22,179 | 21,515 | 16,777 | 14,262 | ||||||||||||||||||
Non-controlling interests | — | — | — | (3 | ) | (1 | ) | — | ||||||||||||||||
Profit for the year | U.S.$ | 302 | Rs. | 20,013 | Rs. | 22,179 | Rs. | 21,512 | Rs. | 16,776 | Rs. | 14,262 | ||||||||||||
Earnings per share | ||||||||||||||||||||||||
Basic | U.S.$ | 1.77 | Rs. | 117.34 | Rs. | 130.22 | Rs. | 126.52 | Rs. | 98.82 | Rs. | 84.16 | ||||||||||||
Diluted | U.S.$ | 1.77 | Rs. | 116.98 | Rs. | 129.75 | Rs. | 126.04 | Rs. | 98.44 | Rs. | 83.81 | ||||||||||||
Weighted average number of equity shares used in computing earnings per equity share* | ||||||||||||||||||||||||
Basic | 170,547,643 | 170,314,506 | 170,044,518 | 169,777,458 | 169,469,888 | |||||||||||||||||||
Diluted | 171,072,780 | 170,933,433 | 170,695,017 | 170,432,680 | 170,177,944 | |||||||||||||||||||
Cash dividend per equity share** | U.S.$ | 0.30 | Rs. | 20 | Rs. | 18 | Rs. | 15 | Rs. | 13.75 | Rs. | 11.25 |
For the year ended March 31, | ||||||||||||||||||||||||
2021 | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||
(Rs. in millions, U.S.$ in millions, both except share and per share data) | ||||||||||||||||||||||||
Convenience translation into U.S.$ | ||||||||||||||||||||||||
Revenues | U.S.$ | 2,594 | Rs. | 189,722 | Rs. | 174,600 | Rs. | 153,851 | Rs. | 142,028 | Rs. | 140,809 | ||||||||||||
Cost of revenues | 1,185 | 86,645 | 80,591 | 70,421 | 65,724 | 62,118 | ||||||||||||||||||
Gross profit | 1,409 | 103,077 | 94,009 | 83,430 | 76,304 | 78,691 | ||||||||||||||||||
Selling, general and administrative expenses | 747 | 54,650 | 50,129 | 48,680 | 46,857 | 46,300 | ||||||||||||||||||
Research and development expenses | 226 | 16,541 | 15,410 | 15,607 | 18,265 | 19,513 | ||||||||||||||||||
Impairment of non-current assets | 117 | 8,588 | 16,767 | 210 | 53 | 445 | ||||||||||||||||||
Other income, net | (13 | ) | (982 | ) | (4,290 | ) | (1,955 | ) | (788 | ) | (1,065 | ) | ||||||||||||
Results from operating activities | 332 | 24,280 | 15,993 | 20,888 | 11,917 | 13,498 | ||||||||||||||||||
Finance income, net | 23 | 1,653 | 1,478 | 1,117 | 2,080 | 806 | ||||||||||||||||||
Share of profit of equity accounted investees, net of tax | 7 | 480 | 561 | 438 | 344 | 349 | ||||||||||||||||||
Profit before tax | 361 | 26,413 | 18,032 | 22,443 | 14,341 | 14,653 | ||||||||||||||||||
Tax expense/(benefit), net | 125 | 9,175 | (1,466 | ) | 3,648 | 4,535 | 2,614 | |||||||||||||||||
Profit for the year | 236 | 17,238 | 19,498 | 18,795 | Rs. | 9,806 | 12,039 | |||||||||||||||||
Earnings per share | ||||||||||||||||||||||||
Basic | U.S.$ | 1.42 | Rs. | 103.94 | Rs. | 117.63 | Rs. | 113.28 | Rs. | 59.13 | Rs. | 72.24 | ||||||||||||
Diluted | U.S.$ | 1.42 | Rs. | 103.65 | Rs. | 117.40 | Rs. | 113.09 | Rs. | 59.00 | Rs. | 72.09 | ||||||||||||
Cash dividend per equity share* | U.S.$ | 0.34 | Rs. | 25 | Rs. | 20 | Rs. | 20 | Rs. | 20 | Rs. | 20 |
* Excludes corporate dividend tax.
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Statement of Financial Position Data
As of March 31, | As of March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2016 | 2016 | 2015 | 2014 | 2013 | 2012 | 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||
(Rs. in millions, U.S.$ in millions, except share data) | (Rs. in millions, U.S.$ in millions, except share data) | |||||||||||||||||||||||||||||||||||||||||||||||
Convenience translation into U.S.$ | Convenience into U.S.$ | |||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | U.S.$ | 74 | Rs. | 4,921 | Rs. 5,394 | Rs. | 8,451 | Rs. | 5,136 | Rs. | 7,379 | U.S.$ | 203 | Rs. | 14,829 | Rs. | 2,053 | Rs. | 2,228 | Rs. | 2,638 | Rs. | 3,866 | |||||||||||||||||||||||||
Other investments (current and non-current) | 559 | 37,022 | 37,076 | 25,083 | 17,172 | 10,773 | 338 | 24,702 | 24,015 | 23,342 | 20,879 | 19,507 | ||||||||||||||||||||||||||||||||||||
Total assets | 3,134 | 207,650 | 194,762 | 170,223 | 142,369 | 119,477 | 3,630 | 265,491 | 232,241 | 225,427 | 225,604 | 219,821 | ||||||||||||||||||||||||||||||||||||
Total long term debt, excluding current portion | 161 | 10,685 | 14,307 | 20,740 | 12,625 | 16,335 | ||||||||||||||||||||||||||||||||||||||||||
Total equity | U.S.$ | 1,937 | Rs. | 128,336 | Rs. 111,302 | Rs. | 90,801 | Rs. | 72,805 | Rs. | 57,287 | |||||||||||||||||||||||||||||||||||||
Total long-term borrowings | 98 | 7,163 | 5,570 | 26,256 | 25,152 | 5,559 | ||||||||||||||||||||||||||||||||||||||||||
Total net assets and equity | U.S.$ | 2,366 | Rs. | 173,062 | Rs. | 154,988 | Rs. | 140,197 | Rs. | 126,460 | Rs. | 124,044 | ||||||||||||||||||||||||||||||||||||
Number of shares outstanding | 170,607,653 | 170,381,174 | 170,108,868 | 169,836,475 | 169,560,346 | 166,301,231 | 166,172,082 | 166,065,948 | 165,910,907 | 165,741,713 |
Subsequent events
On June 14, 2021, we received the arbitration decision and award issued by the American Arbitration Association (“AAA”), International Center for Dispute Resolution (“ICDR”) in favor of Hatchtech Pty Limited (“Hatchtech”) in an amount of U.S.$46.25 million towards milestone payments, interest and fees for the Xeglyze® product. We had recorded a provision for potential liability of U.S.$20 million relating to the AAA-ICDR arbitration filed by Hatchtech and believed that the likelihood of any further liability that may arise pursuant to that arbitration to be not probable. As this constitutes an adjusting subsequent event post our Board meeting dated May 14, 2021, our consolidated financial statements for the year ended March 31, 2021 were adjusted to reflect the impact of this event by recognizing the balance amount of U.S.$26.25 million in our consolidated income statement. Of the total amount of U.S.$46.25 million awarded to Hatchtech, the amount of U.S.$45 million (Rs.3,291 million) was recognized in our consolidated income statement under the heading “Impairment of non-current assets” and the balance of U.S.$1.25 million (Rs.91 million) was recognized under the heading, “Selling, general and administrative expenses.”
Convenience translation
For the convenience of the reader, our consolidated financial statements as of March 31, 20162021 have been translated into U.S. dollars at the certified foreign exchange rate of U.S.$1 = Rs.66.25,Rs.73.14, as published by the Federal Reserve Board of Governors on March 31, 2016.2021. No representation is made that the Indian rupee amounts have been, could have been or could be converted into U.S. dollars at such a rate or any other rate.
Exchange Rates
The following table sets forth, for the fiscal years indicated, information concerning the number of Indian rupees for which one U.S. dollar could be exchanged based on the noon buying rate in the City of New York on business days during the period for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York. The column titled “Average” in the table below is the average of the daily noon buying rate on the last business day of each month during the year.
For the year ended March 31, | Period End | Average | High | Low | ||||||||||||
2012 | 50.89 | 48.01 | 53.71 | 44.00 | ||||||||||||
2013 | 54.52 | 54.48 | 57.13 | 50.64 | ||||||||||||
2014 | 60.00 | 60.35 | 68.80 | 53.65 | ||||||||||||
2015 | 62.31 | 61.34 | 63.67 | 58.30 | ||||||||||||
2016 | 66.25 | 65.58 | 68.84 | 61.99 |
The following table sets forth the high and low exchange rates for the previous six months and is based on the noon buying rates in the City of New York on business days of each month during such period for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York.
Month | High | Low | ||||||
October 2015 | 65.57 | 64.70 | ||||||
November 2015 | 66.86 | 65.46 | ||||||
December 2015 | 67.10 | 66.00 | ||||||
January 2016 | 68.08 | 66.49 | ||||||
February 2016 | 68.84 | 67.57 | ||||||
March 2016 | 67.75 | 66.25 |
On June 17, 2016, the noon buying rate in the city of New York was Rs.67.11 per U.S. dollar.
3.B.Capitalization and indebtedness
Not applicable.
3.C.Reasons for the offer and use of proceeds
Not applicable.
3.D.Risk factors
You should carefully consider all of the information set forth in this Form 20-F, andincluding the following risk factors that we face and that are faced by our industry. The risks below are not the only ones we face. Additional risks not currently known to us or that we presently deem immaterial may also affect our business operations. Our business, financial condition or results of operations could be materially or adversely affected by any of these risks. This Form 20-F also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere. Seeelsewhere in this report and our other SEC filings. For a summary of the risk factors included in this Item 3.D. and for further details on our forward-looking statements, see “Forward-Looking Statements.”Statements and Risk Factors Summary” on page 2.
RISKS RELATED TO PANDEMICS
A pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, and the resulting restrictive measures and economic impacts may materially and adversely impact our business and results of our operations.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The virus has spread globally to multiple countries and regions, including to India, the United States, certain European countries and other countries around the world where we manufacture our products, have operations or conduct our clinical trials.
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Our headquarters and a significant proportion of our operations are based out of India, which has in recent months experienced a trend of rising COVID-19 infection rates. The potential closure of our facilities in which we operate, or other protectionist measures or restrictions inhibiting our employees’ ability to access our facilities, may materially affect our operations, including potentially interrupting our manufacturing, supply chain, clinical trial and pre-commercial launch activities.
The COVID-19 pandemic may also affect our employees, as well as employees and operations at third-party manufacturers or suppliers that may result in delays or disruptions in manufacturing and supply. The COVID-19 pandemic has also led to a new working environment, which may affect employee well-being and engagement, causing stress and fear of infection risks. This in turn may result in lower productivity and motivation among employees.
In 2020, we did not experience significant impacts or delays from the COVID-19 pandemic on our business operations. We have experienced marginal delays in carrying out clinical trials, regulatory approvals of new products due to re-prioritization of regulatory agencies and delays in pre-commercial launch activities. Although new digital capabilities for sales are being implemented, reduced interaction with health care professionals can lead to slower market penetration for recently launched products or penetration into newer geographies and certain markets. Although we increased spending on logistics as we explored alternate routes during recent past, COVID-19 outbreak can disrupt our supply chain that might result in the inability of our suppliers to deliver components or raw materials on a timely basis and exposing us to the risk of temporary disruptions in manufacturing or our ability to deliver materials or finished products to our customers. Increased demand for certain classes of drugs, such as respiratory and immunity medicines, has required production escalations that can potentially result in overstocking, changes in the supply dynamics and forecasting disruptions. While we expect to be able to continue our operations and to satisfy the demand for our products, while protecting the health and safety of our employees and customers, the uncertainty surrounding the full economic implications of the pandemic may result in a period of business disruption. The new working environment, with many employees working remotely, can potentially expose us to cyber-attacks and data security breaches. If such breach were to recur, it may have a material adverse effect on our business, operations and reputation. Despite the foregoing and certain other measures that we continue to undertake in order to transact business, it is difficult to forecast the broad economic downturn and unemployment rate increase that could be associated with the COVID-19 pandemic, which may itself materially affect our business.
We have taken precautionary measures, and may take additional measures, intended to minimize the risk of the COVID-19 pandemic to our employees and operations. The extent of the impact of the COVID-19 pandemic on our operations will depend on future developments, such as the duration and spread of the COVID-19 pandemic and long-term impact on the world’s economy, all of which are uncertain and cannot be predicted. Any COVID-19 related disruption could have a material adverse impact on our business and financial performance. We will continue to monitor the COVID-19 situation closely.
MATERIAL RISKS RELATING TO OUR COMPANY AND OUR BUSINESS
If we fail to comply with the regulatory standards of various regulatory agencies in manufacturing of quality products, it may have potential impact on our business, financials and operations.
Governmental authorities, including among others the U.S. FDA, the U.K. Medicines and Healthcare Products Regulatory Agency (“MHRA”), heavily regulate the manufacturing of our products, including manufacturing quality standards. Periodic audits are conducted on our manufacturing sites, and if the regulatory and quality standards and systems are not found adequate, it could result in an audit observation (on Form 483, if from the U.S. FDA), or a subsequent investigative letter which may require further corrective actions. In recent years, a number of Indian generic pharmaceutical companies were issued import alerts and warning letters by the U.S. FDA. A significant proportion of our manufacturing base of active pharmaceutical ingredients and formulations plants servicing the United States and other markets of our Global Generics business is based out of India. While our quality practices and quality management systems are conducted in a manner designed to satisfy these types of audits, we cannot guarantee that our efforts will prevent adverse outcomes such as audit observations, corrective action requests, warning letters or import bans. For example, in November 2015, we received a warning letter from the U.S. FDA relating to violations at our injectable oncology formulation manufacturing facility at Duvvada, Visakhapatnam, Andhra Pradesh and our API manufacturing facilities at Miryalaguda, Telangana and Srikakulam, Andhra Pradesh. Subsequently, the U.S. FDA issued Establishment Inspection Reports (each, a “EIR”) indicating successful closure of the audits of our API manufacturing facility at Miryalaguda in June 2017, of our facility at Duvvada in February 2019 and of our API manufacturing facility at Srikakulam in May 2020.
In recent years China has introduced numerous reforms and proposals that attempt to address requirements for drug development and registration, including greater adoption of international technical guidelines and practices by the government. However, its unique regulatory requirements continue to pose challenges for multinational companies.
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More generally, unless and until an issue raised in a warning letter from a regulatory agency is resolved to the agency’s satisfaction, they may withhold approvals of our new products and new drug applications, refuse admission of products manufactured at the facilities noted in the warning letter into the United States, and/or take additional regulatory or legal action against us. The delay in approvals due to moving to an alternate site or alternate vendor, or the cost incurred in connection with remedial actions, can have significant adverse impacts on our ongoing business, financial results and operations.
We have been subject to increasing scrutiny of our manufacturing operations, and in the event that any of our facilities is subjected to significant regulatory actions, it will require substantial expenditures of resources to ensure compliance with more stringently applied production and quality control regulations. If any regulatory body were to require one or more of our significant manufacturing facilities to cease or limit production, our business could be adversely affected.
In addition, because regulatory approval to manufacture a drug is site-specific, the delay and cost of remedial actions, or of obtaining approval to manufacture at a different facility also could have a material adverse effect on our business, financial position and results of operations.
We deal with numerous third party manufacturers and, despite our oversight, any lapse in their quality practices and quality management systems could lead to similar adverse outcomes in the event of an audit. If we or our third party suppliers fail to comply fully with applicable regulations or to take corrective actions that are mandated, then there could be an enforced shutdown of our production facilities or an import ban, which in turn could lead to product shortages that delay or prevent us from fulfilling our obligations to customers, or we could be subjected to government fines and penalties from customers.
If we fail to comply fully with government regulations or to maintain continuing regulatory oversight applicable to our research and development activities or regarding the manufacture of our products, or if a regulatory agency amends or withdraws existing approvals, to market our products, it may delay or prevent us from developing or manufacturing our products.of new products and delay realization of product revenues.
Our research and development activities are heavily regulated. If we fail to comply fully with applicable regulations, then there could be a delay in the submission or approval of potential new products for marketing approval. In addition, the submission of an application to a regulatory authority does not guarantee that approvals required to market the product will be granted. Each authority may impose its own requirements and/or delay or refuse to grant approval, even when a product has already been approved in another country. In many of the international markets into which we sell our products, including the United States, the approval process for a new product is complex, lengthy and expensive. The time taken to obtain approval varies by country but generally takes from six months to several years from the date of application. This approval process increases the cost to us of developing new products and increases the risk that we will not be able to successfully sell such new products.
Regulatory agencies may at any time reassess the safety, and efficacy or bio-similarity claims of our products based on new scientific knowledge or other factors. Such reassessments could result in the amendment or withdrawal of existing approvals to market our products, which in turn could result in a loss of revenue and could serve as an inducement to bring lawsuits against us. In
Delays in the receipt of, or failure to obtain approvals for, future products, or new indications and uses, could result in delayed realization of product revenues, reduction in revenues and substantial additional costs.
If we fail to meet all the quality and regulatory requirements of biologic drugs and fail to successfully challenge third party patents as allowed by national patent offices, it may impact production and revenues.
A portion of our bio-similars business,portfolio are “biologic” products. Unlike traditional “small-molecule” drugs, biologic drugs cannot be manufactured synthetically, but typically must be produced from living animal cells or micro-organisms. As a result, the production of biologic drugs that meet all quality and regulatory requirements is especially complex and is more susceptible to batch failures.
Typically, biological therapeutics face third party intellectual property rights, otherwise known as freedom to operate (“FTO”) issues, more than small molecule therapeutics because of the types of patents allowed by national patent offices. Further, our ability to successfully challenge third party patent rights is dependent on the laws of the applicable countries.
The regulatory requirements are still evolving in many markets where we sell or manufacture products, including our biosimilar products, and regulatory requirements may be unclear due to lack of precedents, among other reasons, which may lead to delays in product approvals or other sanctions. In the intrinsic natureUnited States, the Biologics Price Competition and Innovation Act of biologics, our bio-similarity claims can always be contested by our competitors,2009 (“BPCIA”) created a statutory pathway and abbreviated approval processes for the innovator company and/orapproval of biosimilar versions of branded biological products. While the applicable regulators.
Additionally, governmental authorities, includingU.S. FDA has issued guidelines, the regulatory policies in this area are still evolving. Further, while a number of legal challenges concerning the requirements of the abbreviated biosimilar pathway, patent exchange and other provisions of BPCIA have been adjudicated in U.S. courts, legal challenges concerning FTO, patent exchange and trade matters, among others, the U.S. Food and Drug Administration (“U.S. FDA”) and the U.K. Medicines and Healthcare Products Regulatory Agency (“MHRA”), heavily regulate the manufacturingcontinue.
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If we fail to prevent prescription of our products including manufacturing quality standards. Periodic audits are conducted on our manufacturing sites, and if the regulatory and quality standards and systems are not found adequate, it could result in an audit observation (on Form 483, if from the U.S. FDA), or a subsequent investigative letter which may require further corrective actions. More recently, a number of Indian generic pharmaceutical companies were issued import alerts and warning lettersfor off label uses by the U.S. FDA. Aphysicians, we may be subject to significant proportion of our manufacturing base of active pharmaceutical ingredients and formulations plants servicing the United States and other markets of our Global Generics business is based out of India. There has been an increasing trend by the U.S. FDA and governmental regulatorsliability for engaging in other developed countries towards Indian manufacturing site audits. While our quality practices and quality management systems are conducted in a manner designed to satisfy these types of audits, we cannot guarantee that our efforts will prevent adverse outcomes such as audit observations, corrective action requests, warning letters or import bans.off-label marketing.
For example, in November 2015, we received a warning letter from the U.S. FDA relating to cGMP deviations at three of our manufacturing facilities - two API manufacturing sites and one formulations injectable manufacturing site in India. This had an adverse impact on new product approvals from these sites, and we have taken steps to minimize the impact from these sites through site transfers of certain key products. We continue to develop and implement our corrective action plans relating to the warning letter. Unless and until these issues are resolved to the U.S. FDA’s satisfaction, the U.S. FDA may withhold approval of our new products and new drug applications, refuse admission of products manufactured at the facilities noted in the warning letter into the United States, and/or take additional regulatory or legal action against us. Any such further action could have a material and negative impact on our ongoing business and operations.
Furthermore, we deal with numerous third party manufacturers and despite our strict oversight, any lapse in their quality practices and quality management systems could lead to similarly adverse outcomes in the event of an audit.
If we or our third party suppliers fail to comply fully with applicable regulations or to take corrective actions that are mandated, then there could be a government-enforced shutdown of our production facilities or an import ban, which in turn
could lead to product shortages that delay or prevent us from fulfilling our obligations to customers, or we could be subjected to government fines. For example, the U.S. FDA imposed an import ban on our manufacturing facility at Cuernavaca, Mexico from June 2011 through July 2012.
Further, whileWhile physicians may prescribe products for uses that are not described in the product’sproduct labeling and that differ from those approved by the U.S. FDA or other similar regulatory authorities (an “off label”"off label" use), we are permitted to market our products only for the indications for which they have been approved. The U.S. FDA and other regulatory agencies actively enforce regulations prohibiting promotion of off-label uses, and significant liability can be imposed on manufacturers found to be engaged in off-label marketing violations, including fines in the tens or hundreds of millions of dollars, as well as criminal sanctions. If some of our products are prescribed off label, regulatory authorities such as the U.S. FDA could take enforcement actions if they conclude that we or our distributors have engaged in off label marketing.
An increasing portion of our portfolio is “biologic” products. Unlike traditional “small-molecule” drugs, biologic drugs cannot be manufactured synthetically, but typically must be produced from living plant or animal micro-organisms. As a result,
We are subject to the production of biologic drugs that meet all regulatory requirements is especially complex. Even slight deviations at any point in the production processU.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws, which impose restrictions and may lead to batch failures or recalls. In addition, because the production process is based on living micro-organisms, the process could be affected by contaminants that could impact those micro-organisms. In such an event, production shutdowns and extensive and extended decontamination efforts may be required.carry substantial penalties.
The regulatory requirements are still evolving in many developing markets where we sell or manufacture products, including our bio-similar products. In these markets, the regulatory requirements and the policies and opinions of regulators may at times be unclear, inconsistent or arbitrary due to absence of adequate precedents or for other reasons. As a result, there is increased risk of withholding or delay of regulatory approvals for new products or government-enforced shutdowns and other sanctions. And, in some cases, there is increased risk of our inadvertent non-compliance with such regulations.
The U.S. FDA issued final guidanceForeign Corrupt Practices Act, the U.K. Bribery Act and similar anti-bribery laws in April 2015other jurisdictions generally prohibit companies and their intermediaries from making improper payments to public officials or otherwise for the purpose of obtaining or retaining business. These laws may require not only accurate books and records, but also sufficient controls, policies and processes to ensure business is conducted without the influence of bribery and corruption.
Our policies mandate compliance with these anti-bribery laws, which often carry substantial penalties including fines, criminal prosecution and potential debarment from public procurement contracts. Failure to comply may also result in reputational damages.
We operate in certain jurisdictions that experience governmental corruption to some degree or are found to be low on the Transparency International Corruption Perceptions Index and, in some circumstances, anti-bribery laws may conflict with some local customs and practices. In many less-developed markets, we work with third-party distributors and other agents for the marketing and distribution of our products. Although our policies prohibit these third parties from making improper payments or otherwise violating these anti-bribery laws, any lapses in complying with such anti-bribery laws by these third parties may adversely impact us. Business activities in many of these markets have historically been more susceptible to corruption.
If our efforts to screen third-party agents and detect cases of potential misconduct fail, we could be held responsible for the non-compliance of these third parties under applicable laws and regulations, including the U.S. Foreign Corrupt Practices Act. Compliance with the U.S. Foreign Corrupt Practices Act and other anti-bribery laws has been subject to increasing focus and activity by regulatory authorities in recent years.
We may be subject to injunctions or limitations on future conduct, be required to modify our business practices and compliance programs and/or have a compliance monitor imposed on us, or suffer other criminal or civil penalties or adverse impacts, including lawsuits by private litigants or investigations and fines imposed by local authorities. Refer to Note 33 (under “Contingencies - Internal Investigation”) of our consolidated financial statements for current internal investigation details.
We need to constantly review and update our compliance program to keep it current and active. If we fail to do so, our vulnerabilities may increase and our controls may be found to be inadequate.
Actions by our employees, or third-party intermediaries acting on our behalf, in violation of such laws, whether carried out in the United States or elsewhere, may expose us to liability for violations of such anti-bribery laws and accordingly may have a material adverse effect on our reputation and our business, financial condition or results of operations.
Significant disruptions of information technology systems, breaches of data security or other cyber-attacks could adversely affect our business.
Our business is dependent upon increasingly complex and interdependent information technology systems, including internet and cloud based systems, to support our business processes as well as internal and external communications. In addition, our businesses and operating models increasingly depend on outsourcing and collaboration, which requires exchanging data and information. The size and complexity and interconnectivity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion, computer viruses and other cyber-attacks.
Like many companies, we may experience certain of these events given that the external cyber-attack threat continues to grow and although we and our third party service providers have invested in measures to reduce these risks, we cannot be assured that these measures will be successful in preventing the compromise and/or disruption of our information technology systems and related data. Any such compromise or disruption may result in the loss, theft or unauthorized disclosure of key information and/or disruption of production and business processes, such as the conduct of scientific research and clinical trials, the submission of the results of such efforts to regulatory authorities in support of requests for product approvals, the functioning of our manufacturing and supply chain processes, our compliance with legal obligations and other key business activities, any of which could materially and adversely affect our business.
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We maintain cybersecurity insurance to further mitigate these risks, but there can be no assurance that a policy exclusion will not apply, or that our insurance coverage limits will be sufficient to protect us against the financial, legal, business or reputational losses that may result from an interruption or breach of our systems, or that any such insurance proceeds will be paid to us in a timely manner.
In addition, our systems are potentially vulnerable to data security breaches, whether by employees or others that may expose sensitive data to unauthorized persons. On October 22, 2020, we experienced a cybersecurity incident related to ransom-ware. We employed two leading cyber security incident response firms to assist with the investigation process. The incident was contained in a timely fashion and an enterprise-wide remediation was undertaken to ensure all traces of infection are completely removed from the network. Since then, we have strengthened a series of technical controls to augment the current cyber security posture and have also focused on implementing an abbreviated biosimilar approval pathway. significant improvements to our cyber and data security systems to safeguard from such risks in the future.
Such data security breaches could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of personal information (including sensitive personal information) of our employees, clinical trial patients, customers and others. Such breaches of security could result in reputational damage and could otherwise have a material adverse effect on our business, financial condition and results of operations. Further, increasing use of information technology (“IT”) systems in manufacturing processes would require us to manage issues arising out of human error and/or sabotage.
In March 2015,our pursuit of operational excellence, several change management initiatives across our organization are ongoing, including but not limited to information technology automation in the U.S. FDA approvedareas of manufacturing, research and development, supply chain and shared services.
We have outsourced our IT hardware and applications in order to improve IT capability and performance. Any failure by such outsourced service providers to deliver timely and quality services and to co-operate with one another could create disruption, which could materially adversely affect our business or results of operations. Further, any failure by us to effectively manage such change initiatives or implement adequate controls in automation, security or availability of information technology systems could have a material adverse effects on our business.
Increased outsourcing or use of cloud services for conducting our business requires highly secure controls to ensure adequate security of information, considering potential for sabotage as well as availability. Data integrity, confidentiality and data privacy requirements are increasingly concerning regulators, and are incorporated into legal contracts. While we have invested heavily in the first biosimilar product submitted underprotection of data and information technology to reduce these risks, there can be no assurance that our efforts or those of our third party service providers would be sufficient to protect against data deterioration or loss in the abbreviated biosimilar pathway. event of a system malfunction, or prevent data from being stolen or corrupted in the event of a security breach.
While the U.S. FDA has issued guidelines, these guidelines contain features that could significantly prolong the biosimilar development process and significant ambiguity and questions remain, including, for example, questions regarding standards and criteria for biosimilars and interchangeables. In addition,many of our personnel are working remotely due to the recent submissionsCOVID-19 pandemic, the risk of cyber incidents may be increased and our dependence on secure access from remote work locations has increased. If our information systems are unsuccessfully implemented, fail, suffer errors or interruptions, or become unavailable, that might have a materially adverse impact on our business operations and our financial position or results of operations.
Our success depends on our ability to successfully develop and commercialize new pharmaceutical products.
Our future results of operations depend, to a significant degree, upon our ability to successfully develop and commercialize additional products in our Global Generics and Pharmaceutical Services and Active Ingredients segments.
Our research and development efforts are also dependent on collaborating with third party partners and contract research organizations which have the capability to handle complex technologies and products. Lack of effective project management at our end, or any failure to manage collaboration arrangements among multiple partners, may pose significant risks to product development, to our ability to obtain requisite regulatory approvals of abbreviated biosimilar applications,in a number of legal challenges construing the requirementstimely manner, and to our ability to successfully and profitably produce and market such products.
Additionally, if we fail to adequately protect critical proprietary or confidential information or associated intellectual property rights or fail to manage third party partners and contract research organizations that our business depends on, it might have a material adverse impact on our product development execution.
From time to time we also acquire in-process research and development assets, which require significant resources and expenses to continue to develop, both through our own efforts and through collaborations. Because of the abbreviatedinherent risk associated with research and development efforts in our industry, including the high cost and uncertainty of conducting clinical trials (where required), such efforts may not result in the successful introduction of new pharmaceutical products approved by the relevant regulatory bodies.
Our results of operations may suffer if these products are not timely developed, approved or successfully commercialized. Refer to Note 14 of our consolidated financial statements for details of impairment of intangible assets.
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We must develop, test and manufacture generic products as well as prove that our generic products are bio-equivalent or biosimilar pathway areto their branded counterparts, either directly or in partnership with contract research organizations. The development and commercialization process, particularly with respect to complex molecules and biosimilars, is both time consuming and costly and involves a high degree of business risk.
Our products currently under review. For example,development, if and when fully developed and tested, may not perform as we expect or meet our standards of safety and efficacy. Necessary regulatory approvals may not be obtained in July 2015, the U.S. Courta timely manner, if at all, and we may not be able to successfully and profitably produce and market such products. Our approved products may not achieve expected levels of Appeals for the Federal Circuit held that biosimilar applicants were not required to provide copies of the biosimilar application or manufacturing information but needed to provide 180-day commercial marketing notice to the reference sponsor. Although we do not have any existing biosimilar product directly impacted by this decision and other ongoing legal challenges, there remains some uncertainty regarding the abbreviated biosimilar approval pathway.market acceptance.
We operate in a highly competitive and rapidly consolidating industry which may adversely affect our revenues and profits.profits.
Our products face intense competition from products commercialized or under development by competitors in all of our business segments based in India, the United States and overseas.other markets. Many of our competitors have greater financial resources and marketing capabilities than we do.
Our competitors may succeed in developing technologies and products that are more effective, more popular or cheaper than any we may develop or license, thus rendering our technologies and products obsolete or uncompetitive, which would harm our business and financial results. It is also possible that alternate therapies or substitutable products that we developed for the same indication would lead to cannibalization of revenues from our products.
In
Further, in recent years the goals established under the Generic Drug User Fee Act, and increased funding of the U.S. FDA’s Office of Generic Drugs, have led to more and faster generic approvals, and consequently increased competition.
The U.S. FDA has established new steps to enhance competition, promote access and lower drug prices and is approving record-breaking numbers of generic applications. While these improvements are expected to benefit our proprietarygeneric product pipeline, they will also benefit competitors that seek to launch products in established generic markets where we currently offer products. The U.S. FDA’s efforts to increase the pace at which generics enter the market has also resulted in a trend of many first time generic manufacturers entering the market, which is further increasing competition in the market.
Our generics business manyis also facing increasing competition from brand-name manufacturers who do not face any significant regulatory approvals or barriers to enter into the generics market. These brand name manufacturers have devised numerous strategies for example, sell generic versions of their products directly or by forming strategic alliances with our competitor generic pharmaceutical companies or by granting them rights to sell “authorized generics”. Moreover, brand companies continually seek new ways to delay the introduction of generic products and decrease the impact of generic competition, such as filing new patents on drugs whose original patent protection is about to expire, developing patented controlled-release products, change the dosage form or dosing regimen of the brand product prior to generic introduction while the generic applicant seeks to amends its ANDA dossier to match the changes in the brand product, changing product claims and product labeling, or developing and marketing as over-the-counter products those branded products that are about to face generic competition, or pricing the branded product at a discount equivalent to generic pricing.
Our competitors, which include major multinational corporations, are consolidating, and the strength of the combined companies could affect our competitive position in all of our business areas. Furthermore, if one of our competitors have greater experience than we do in clinical testing, human clinical trials, obtaining regulatory approvals and in marketing and selling of brand, innovative and consumer-oriented products. They may be able to respond more quickly to new or emerging market preferences or to devote greater resources to the development and marketing of new products and/or technologies than we can. As a result,their customers acquires any products and/or innovations that we develop may become obsolete or noncompetitive before we can recover the expenses incurred in connection with their development. In addition, for these product categories we need to emphasize to physicians, patients and third-party payors the benefits of our products relative to competing products that are often more familiarcustomers or otherwise better established. If competitors introduce new products or new variations on their existing products, our marketed products, even those protected by patents, may be replaced in the marketplace orsuppliers, we may be required to lower our prices.lose business from the customer or lose a supplier of a critical raw material.
In our generics business, to the extent that we succeed in being the first to market a generic version of a significant product, and particularly if we obtain the 180-day period of market exclusivity in the United States provided under the Hatch-Waxman Act of 1984, as amended, our sales and profit can be substantially increased in the period following the introduction of such product and prior to a competitor’s introduction of the equivalent product or the launch of an authorized generic.
Prices of generic drugs typically decline, often dramatically, especially as additional generic pharmaceutical companies receive approvals and enter the market for a given product. Consequently, our ability to sustain our sales and profitability of any product over time is dependent on both the number of new competitors for such product and the timing of their approvals.
The number of significant new generic products for which Hatch-Waxman exclusivity is available, and the size of those product opportunities, has decreased in recent years and may decrease in future years in comparison to those available in the past. Patent challenges have become more difficult in recent years. Additionally, we increasingly share the 180-day exclusivity period with other generic competitors, which diminishes the commercial value of the exclusivity.
Our generics In our Proprietary Products business, is also facing increasing competition from brand-name manufacturers who do not face any significant regulatory approvals or barriers to enter into the generics market. These brand-name companies sell generic versions of their products to the market directly or by acquiring or forming strategic alliances with our competitor generic pharmaceutical companies or by granting them rights to sell “authorized generics.” Moreover, brand-name companies continually seek new ways to delay the introduction of generic products and decrease the impact of generic competition, such as filing new patents on drugs whose original patent protection is about to expire, developing patented controlled-release products, changing product claims and product labeling, or developing and marketing as over-the-counter products those branded products that are about to face generic competition.
Our competitors, which include major multinational corporations, are consolidating, and the strength of the combined companies could affect our competitive position in all of our business areas. Furthermore, if onemany of our competitors or their customers acquires any of our customers or suppliers,have greater experience than we may lose business from the customer or lose a supplier of a critical raw material. In addition, our increased focus on innovative and specialty pharmaceuticals requires much greater use of a direct sales force than does our core generic business. Our ability to realize significant revenues from direct marketing and sales activities depends on our ability to attract and retain qualified sales personnel. Competition for qualified sales personnel is intense. We may also need to enter into co-promotion, contract sales force or other such arrangements with third parties, for example, where our own direct sales force is not large enough or sufficiently well-aligned to achieve maximum penetration in the market. Any failure to attract or retain qualified sales personnel or to enter into third-party arrangements on favorable terms could prevent us from successfully maintaining current sales levels or commercializing new innovative and specialty products.
Reforms in the health care industry and the uncertainty associated with pharmaceutical pricing, reimbursement and related matters could adversely affect the marketing, pricing and demand for our products.
Our success depends, in part, on the extent to which government and health administration authorities, private health insurers and other third-party payors will pay for our products. Increasing expenditures for health care has been the subject of considerable public attention in almost every jurisdiction where we conduct business. Both private and governmental entities are seeking ways to reduce or contain health care costs by limiting both coverage and the level of reimbursement for new therapeutic products. These pressures are particularly strong given the lingering effects of the recent global economic and financial crisis, including the ongoing debt crisis in certain countries in Europe. In many countries in which we currently operate, including India, pharmaceutical prices are subject to regulation. Our products continue to be subject to increasing price and reimbursement pressure that can limit the revenues we earn from our products in many countries due to, among other things:
The existence of government-imposed price controls and mandatory discounts and rebates;
removal of drugs from government reimbursement schemes (for example products determined to be less cost-effective than alternatives);
increased difficulty in obtaining and maintaining satisfactory drug reimbursement rates;
increase in cost containment policies related to health expenses in a context of economic slowdown;
more demanding evaluation criteria applied by Health Technology Assessment (“HTA”) agencies when considering whether to cover new drugs at a certain price level; and
more governments using international reference pricing to set the price of drugs based on international comparisons.
We expect these efforts to continue as healthcare payors around the globe, in particular government-controlled health authorities, insurance companies and managed care organizations, step up initiatives to reduce the overall cost of healthcare.
India
Under the present drug policy of the Government of India, certain drugs have been specified under the Drugs (Prices Control) Order, 2013 (the “DPCO”) as subject to price control. The Government of India established the National Pharmaceutical Pricing Authority, 2012 (“NPPA”), to control pharmaceutical prices. Under the DPCO, the NPPA has the authority to fix the maximum selling price for specified products. As a result, hundreds of drugs on India’s National List of Essential Medicines were identified and subjected to price controls in India. On May 15, 2013, the Department of Pharmaceuticals of the Government of India released Drugs (Price Control) Order, 2013 governing the price control mechanism for 348 drugs listed in the National List of Essential Medicines.
Recently, there has been a series of proposals and announcements by the Government of India regarding price controls. First, in December 2015 a proposal was issued to list certain additional drugs on the National List of Essential Medicines. That was followed with an announcement on March 3, 2016 of a reduction in the maximum prices of various drugs, as a result of negative inflation as measured by India’s Wholesale Price Index. Further, on March 10, 2016, the Department of Pharmaceuticals notified the Drugs (Prices Control) Amendment Order, 2016 (“DPCAO 2016”), which amended the Drugs (Price Control) Order, 2013 and revised the National List of Essential Medicines. Under the DPCAO 2016, a total of 106 medicines were added to and 70 medicines were deleted from the National List of Essential Medicines, which now contains 376 drugs. The NPPA was in the process of notifying / re-notifying the prices for scheduled drugs as of March 31, 2016. The individual drug price notifications for majority of the products have been released by the NPPA. Based on these notifications, we believe that we could be adversely impacted by approximately 3% to 5% of our annual revenues from sales of all of our products in India.
Additionally, on March 12, 2016, the Department of Health and Family Welfare under the ministry of Health and Family Welfare of the Government of India banned 344 fixed dose combination drugs (i.e., two or more active drugs combined in a fixed ratio into a single dosage). A number of pharmaceutical companies, including us, have filed a writ petition before the Delhi High Court challenging the ban. The Delhi High Court granted an interim stay on the ban notification. In the event that this notification comes into effect, it could adversely impact our revenues by approximately 0.7% on an annual basis. Further, it could adversely impact the Indian pharmaceutical industry by approximately 3.1% on an annual basis (as per AWACS, a provider of market research to the Indian Pharmaceutical Industry).
The NPPA has since notified changes to pricing of different products multiple times, which have impacted certain of our oncology and chronic condition products.
Such ongoing changes can disrupt the Indian branded pharmaceutical market and negatively impact the revenues and profitability of our Indian business and our company.
United States
In the United States, numerous proposals that would affect changes in the health care system have been introduced in Congress and in some state legislatures.
Patient Protection and Affordable Care Act
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the “PPACA”), were signed into law. The PPACA is one of the most significant healthcare reform measures in the United States in decades, and is expected to significantly impact the U.S. pharmaceutical industry. The PPACA imposes additional rebates, discounts and fees, mandates certain reporting and contains various other requirements that could adversely affect our business, as more particularly described under “Patient Protection and Affordable Care Act” in our Global Generics segment’s discussion of U.S. Government regulations below in Item 4.B. ‘Business overview’.
On June 28, 2010 the Departments of Health and Human Services, Labor, and the Treasury jointly issued interim final regulations to implement the provisions of the PPACA that prohibit the use of preexisting condition exclusions, eliminate lifetime and annual dollar limits on benefits, restrict contract rescissions, and provide patient protections.
On January 27, 2012, The Centers for Medicare and Medicaid Services (“CMS”) issued its long awaited proposed rule implementing the Medicaid pricing and reimbursement provisions of the PPACA and related legislation. CMS accepted comments on this proposed rule through April 2, 2012.
On June 28, 2012, the U.S. Supreme Court ruled on certain challenged provisions of the PPACA. The U.S. Supreme Court generally upheld the constitutionality of the PPACA, including its individual mandate that requires most Americans to buy health insurance starting in 2014, and ruled that the Anti-Injunction Act did not bar the Court from reviewing that PPACA
provision. However, the U.S. Supreme Court struck down the PPACA’s provisions requiring each state to expand its Medicaid program or lose all federal Medicaid funds. The Court did not invalidate the PPACA’s expansion of Medicaid for states that voluntarily participate; it only held that a state’s entire Medicaid funding cannot be withheld due to its failure to participate in the expansion.
On February 1, 2016, the CMS published a Final Regulation in the Federal Register to implement changes to and clarify ambiguities in the Medicaid Drug Rebate Program that were enacted by the PPACA. With some exceptions, the Final Regulation will be applied prospectively effective April 1, 2016. The key provisions covered under the Final Regulation included, without limitation, the following: (i) the adoption of a final definition of “retail community pharmacy” (“RCP”), (ii) the adoption of a rule permitting inhalation, infusion, instilled, implanted, or injectable drugs (“5i drugs”) to be deemed not to be “generally dispensed” through a RCP, and thus excluded from the calculation of their AMP, if 70% or more of its sales were to entities other than RCPs or wholesalers for drugs distributed to RCPs (the prior threshold was 90%), (iii) the inclusion of authorized generics in calculations of AMP and best price, (iv) narrowing the regulatory definition for “best price”, (v) requiring additional Medicaid rebate payments for generic drugs, effective as of April 1, 2017, and (vi) clarification of the definition of “bona fide service fees” based on a four part test.
Pending full implementation of the PPACA, we are continuing to evaluate all potential scenarios surrounding its implementation and the corresponding impact on our financial condition, results of operations and cash flow.
Germany
In Germany, the government has introduced several healthcare reforms in order to control healthcare spending and promote the prescribing of generic drugs. As a result, the prices of generic pharmaceutical products in Germany have declined, impacting our revenues, and may further decline in the future. Furthermore, in 2007, the shift to a tender (i.e., competitive bidding) based supply model in Germany has led to a significant decline in the prices for our products and impacted our market opportunities in that country. Similar developments may take place in our other key markets. We cannot predict the nature of the measures that may be adopted or their impact on the marketing, pricing and demand for our products.
European Union
The European Union enacted the European Falsified Medicines Directive (Directive 2011/62/EU) to reform the rules for importing into the European Union active substances for medicinal products for human use. As of January 2, 2013, all imported active substances must have been manufactured in compliance with standards of good manufacturing practices (“GMP”) at least equivalent to the GMP of the European Union. The manufacturing standards in the European Union for active substances are those of the “International Conference for Harmonisation” — ICH Q7. The provisions of the Directive are intended to reduce the risk of counterfeit medicines entering the supply chain.
Russia
During the fiscal year ended March 31, 2012, Russia introduced Federal Law # 323, titled “On the Foundations of Healthcare for Russian Citizens”. This law imposes stringent restrictions on interactions between (i) healthcare professionals, pharmacists, healthcare management organizations, opinion leaders (both governmental and from the private sector) and certain other parties (collectively referred to as “healthcare decision makers”), and (ii) companies that produce or distribute drugs or medical equipment and any representatives or intermediaries acting on their behalf (collectively referred to as “medical product representatives”). Some of the key provisions of this law include prohibitions on:
one-on-one meetings and communications between healthcare decision makers and medical product representatives, except for participationdo in clinical testing, human clinical trials, pharmacovigilance, group educational eventsobtaining regulatory approvals and certain other limited exceptions;
the acceptance by a healthcare decision maker of compensation, gifts or entertainment paid by medical product representatives;
the agreement by a healthcare decision maker to prescribe or recommend drug products or medical equipment; or
the engagement by a healthcare decision maker in a “conflict of interest” transaction with a medical product representative, unless approved by regulators pursuant to certain specified procedures.
Although certain of the above prohibitions technically restrict only the actions of healthcare decision makers, liability for non-compliance with such restrictions nonetheless extends to both the healthcare decision maker and the medical product representative.
In March 2015, Russia enacted amendments to Article 61 of the Federal Law ‘On Circulation of Medicines’, which amendments create new rules for the registration, manufacture and quality control of medicines, including new rules for the calculation and registration of the maximum retail prices of vital and essential medicines established by the list of “Essential and Vital Drugs” (also known as the “ZhNVLS”).
The Eurasian Economic Union (“EEU”), whose member states are Russia, Belarus, Kazakhstan, Armenia, and Kyrgyzstan, officially started functioning on January 1, 2015. Among other things, the member states of the EEU signed an international agreement establishing common principles and rules of functioning of the market for medicines within the EEU, which agreement was originally expected to be made effective from January 1, 2016. For these purposes, the member states are working on the necessary regulatory framework and EEU plans for its member states to sign 25 acts governing various stages of drugs circulation. According to the agreement, the market authorization for a particular medicine received in one EEU member state will be valid throughout the whole EEU territory. This agreement, together with Russia’s “Priority Action Plan for sustainable economic and social stability development in 2015,” is expected to have a number of impacts on pharmaceutical pricing and import substitution preferences in Russia.
Other
Governments throughout the world heavily regulate the marketing of pharmaceutical products. Most countries also place restrictions on the manner and scope of permissible marketing to government agencies, physicians, pharmacies, hospitals and other health care professionals. In certain countries certain prescribed marketing codes or guidelines are required to be followed by the pharmaceutical companies. Although our company policies prohibit our employees and third party distributors from violating such regulations, we may not be able to completely prevent this, especially in markets that have historically been more susceptible to corruption. The effect of such regulations may be to limit the amount of revenue that wecommercialization. They may be able to derive from a particular product. Moreover, ifrespond more quickly to new or emerging market preferences or to devote greater resources to the development of new products and/or technologies than we or our third party distributors fail to comply fully with such regulations, then civil or criminal actions could be brought against us, which may have a material adverse effect on our reputation and our business, financial condition or results of operations.
We have operations in certain countries susceptible to political and economic instability that could lead to disruption or other adverse impacts upon such operations.
We expect to derive an increasing portion of our sales from regions such as Latin America, Russia and other countries of the former Soviet Union, Central Europe, Eastern Europe and South Africa, all of which may be more susceptible to political and economic instability. For example, ascan. As a result, of severe political instability and ongoing conflict in Ukraine, the United States and the European Union have imposed sanctions on certain individuals and companies in Ukraine and Russia, including sanctions targeted at the Crimea region of Ukraine which was annexed by Russia. Political instability in the region has combined with low worldwide oil prices that significantly devalued the Russian rouble and may continue to have a negative impact on the Russian economy. In addition, the Ukrainian hryvnia also experienced significant devaluation in 2014. Some of these are new marketsany products and/or innovations that we have recently entered, anddevelop may become obsolete or non-competitive before we may decide to enter other new markets incan recover the future and thus may face additional risks arising out of political and economic instability.
We monitor significant political, legal and economic developments in these regions and attempt to mitigate our exposure where possible. However, mitigation is not always possible, and our international operations could be adversely affected by political, legal and economic developments, such as changes in capital and exchange controls; expropriation and other restrictive government actions; intellectual property protection and remedy laws; trade regulations; procedures and actions affecting approval, production, pricing and marketing of, reimbursement for and access to our products; and intergovernmental disputes, including embargoes and/or military hostilities.
Significant portions of our manufacturing operations are conducted outside the markets in which our products are sold, and accordingly we often import a substantial number of products into such markets. We may, therefore, be denied access to our customers or suppliers or denied the ability to ship products from any of our sites as a result of closing of the borders of the countries in which we sell our products, or in which our operations are located, due to economic, legislative, political and military conditions, including hostilities and acts of terror, in such countries.
From time to time we enter new markets, and face risks arising out of our limited knowledge of the market and the customs, laws and regulatory systems that may apply.
From time to time we enter new markets in which we have limited knowledge of the market and the customs, laws, regulatory, political and social systems that may apply. Our success in these new markets is dependent upon the acceptability of our product and brand, the ease of doing business in such market and various other social and economic factors that may be
specific to such market. Further, limitations by the local authorities of repatriation of generated funds may pose a risk to our success in these new markets. Our sales and profit margins may be adversely affected if we fail to provide competitive options in the market or our brands fail to gain acceptability in the market.
Class action lawsuits could expose us to significant liabilities, result in negative publicity, harm our reputation and have a material adverse effect on the price of our ADSs.
Shareholders of a public company sometimes bring securities class action lawsuits against the company following periods of instability in the market price of that company’s securities. As a public company grows in size, the risk of such litigations may increase. If we were to be sued in any such class action suit, irrespective of the merits of the underlying case, it could have adverse effects on us, including among other things: (a) a diversion of management’s time and attention and other resources from our business and operations, which could harm our results of operations; (b) negative publicity, which could harm our reputation and restrict our ability to raise capital in the future; (c) requiring us to incur significant expenses to defend the suit; and (d) if a claim against us is successful, we may be required to pay significant damages and, in certain circumstances, to indemnify our directors and officers if they are named as defendants in the class action suit. Any of the foregoing could, individually or in the aggregate, have a material adverse effect on our financial condition and results of operations and/or the price of our ADSs.
A relatively small group of products may represent a significant portion of our net revenues, gross profit or net earnings from time to time.
Sales of a limited number of products may represent a significant portion of our net revenues, gross profit and net earnings. If the volume or pricing of such products declines in the future, our business, financial position and results of operations could be materially adversely affected.
The use of tender systems and other forms of price control could reduce prices for our products or reduce our market opportunities.
A number of markets in which we operate have implemented or may implement tender systems in an effort to lower prices. Under such tender systems, manufacturers submit bids which establish prices for generic pharmaceutical products. Upon winning the tender, the winning company will receive a preferential reimbursement for a period of time. The tender system often results in companies underbidding one another by proposing low pricing in order to win the tender.
For example, this has resulted in more than 90% of generic products currently sold in German retail outlets being supplied through contracts procured in competitive bidding tenders, thereby causing significant pressure on product margins.
Certain other countries may consider the implementation of a tender system or other forms of price controls. Even if a tender system is ultimately not implemented, the anticipation of such could result in price reductions. Failing to win tenders, or the implementation of similar systems or other forms of price controls in other markets leading to further price declines, could have a material adverse effect on our business, financial condition, results of operations, cash flows, and/or share price.
If we are unable to patent new products and processes or to protect our intellectual property rights or proprietary information, or if we infringe on the patents of others, our business may be materially and adversely impacted.
Our overall profitability depends, among other things, on our ability to continuously and timely introduce new generic as well as proprietary products. Our success depends, in part, on our ability in the future to obtain patents, protect trade secrets, intellectual property rights and other proprietary information and operate without infringing on the proprietary rights of others. Our competitors may have filed patent applications, or hold issued patents, relating to products or processes that compete with those we are developing, or their patents may impair our ability to successfully develop and commercialize new products.
Our success with our proprietary products depends, in part, on our ability to protect our current and future innovative products and to defend our intellectual property rights. If we fail to adequately protect our intellectual property, competitors may manufacture and market products similar to ours. We have been issued patents covering our innovative products and processes and have filed, and expect to continue to file, patent applications seeking to protect our newly developed technologies and products in various countries, including the United States. Any existing or future patents issued to or
licensed by us may not provide us with any competitive advantages for our products or may even be challenged, invalidated or circumvented by competitors. In addition, such patent rights may not prevent our competitors from developing, using or commercializing products that are similar or functionally equivalent to our products.
We also rely on trade secrets, unpatented proprietary know-how and continuing technological innovation that we seek to protect, in part by confidentiality agreements with licensees, suppliers, employees and consultants. It is possible that these agreements may be breached and we may not have adequate remedies for any such breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Furthermore, our trade secrets and proprietary technology may otherwise become known or be independently developed by our competitors. Therefore, despite all of our information security systems and practices, we may still not be able to ensure the confidentiality of information relating to such products.
If pharmaceutical companies are successful in limiting the use of generics through their legislative, regulatory and other efforts, sales of our generic products may be adversely impacted.
Many pharmaceutical companies increasingly have used state and federal legislative and regulatory means to delay generic competition. These efforts have included:
pursuing new patents for existing products that may be granted just before the expiration of earlier patents, which could extend patent protection for additional years or otherwise delay the launch of generics;
introducing “next-generation” products prior to the expiration of market exclusivity for the reference product, which often materially reduces the demand for the generic or the reference product for which we seek regulatory approval;
obtaining extensions of market exclusivity by conducting clinical trials of brand drugs in pediatric populations or by other methods;
selling the brand product as an authorized generic, either by the brand company directly, through an affiliate or by a marketing partner;
using the Citizen Petition process to request amendments to U.S. FDA standards or otherwise delay generic drug approvals;
seeking changes to U.S. Pharmacopeia, an organization that publishes industry recognized compendia of drug standards;
attaching patent extension amendments to non-related federal legislation;
engaging in state-by-state initiatives to enact legislation that restricts the substitution of some generic drugs, which could have an impact on products that we are developing; and
seeking patents on methods of manufacturing certain active pharmaceutical ingredients.
If pharmaceutical companies or other third parties are successful in limiting the use of generic products through these or other means, our sales of generic products may decline, leading to a material adverse effect on our results of operations, financial condition and cash flows.
If sales of authorized generic products are restricted, our sales of certain authorized generic products may suffer.
Recently, some U.S. generic pharmaceutical companies who obtained rights to market and distribute a generic alternative of a brand product (i.e., an “authorized generics” arrangement) under the brand manufacturer’s new drug application (“NDA”) have experienced challenges to their ability to distribute authorized generics during a competitors’ 180-day period of abbreviated new drug application (“ANDA”) exclusivity under the Hatch-Waxman Act. These challenges have come in the form of Citizen Petitions filed with the U.S. FDA, lawsuits alleging violation of the antitrust and consumer protection laws, and seeking legislative intervention. For example, in February 2011, legislation was introduced in both the U.S. Senate and the U.S. House of Representatives that would have prohibited the marketing of authorized generics during the 180-day period of ANDA exclusivity under the Hatch-Waxman Act. If distribution of authorized generic versions of brand products is otherwise restricted or found unlawful, our results of operations, financial condition and cash flows could be materially adversely affected.
If we are unable to defend ourselves in patent challenges, we could be subject to injunctions preventing us from selling our products, or we could be subject to substantial liabilities that could adversely affect our profits. Further, our patent settlement agreements with the innovators may face government scrutiny, exposing us to significant damages.
There has been substantial patent related litigation in the pharmaceutical industry concerning the manufacture, use and sale of various products. In the normal course of business, we are regularly subject to lawsuits and the ultimate outcome of litigation could adversely affect our results of operations, financial condition and cash flow. Regardless of regulatory approval, lawsuits are periodically commenced against us with respect to alleged patent infringements by us, such suits often being triggered by our filing of an application for governmental approval, such as an ANDA or NDA. The expense of any such litigation and the resulting disruption to our business, whether or not we are successful, could harm our business. The uncertainties inherent in patent litigation make it difficult for us to predict the outcome of any such litigation.
If we are unsuccessful in defending ourselves against these suits, we could be subject to injunctions preventing us from selling our products, resulting in a decrease in revenues, or to damages, which may be substantial. An injunction or substantial damages resulting from these suits could adversely affect our consolidated financial position, results of operations or liquidity.
Further, we have been involved in various litigations involving challenges to the validity or enforceability of registered patents and therefore settling said patent litigations has been and is likely to continue to be an important part of our business. Parties to such settlement agreements in the U.S., including us, are required by law to file them with the Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice for review. The FTC has publicly stated that, in its view, some of the brand-generic settlement agreements violate the antitrust laws and has brought actions against some brand and generic companies that have entered into such agreements. For example, in May 2015, Teva Pharmaceutical Industries agreed to a $1.2 billion settlement with the FTC to resolves anti-competition charges over sales of provigil, a sleep-disorder prescription drug. Accordingly, we may receive formal or informal requests from the FTC for information about a particular settlement agreement, and there is a risk that the FTC may commence an action against us alleging violations of the antitrust laws.
Such settlement agreements may further expose us to claims by purchasers of the products for unlawfully inhibiting competition.
Similarly, the European Commission has placed European operations of several brand and generic companies, under intense scrutinyincurred in connection with its inquiry into possible anticompetitive conditions in the European pharmaceutical sector. More generally, there is a risk that the increased scrutiny of the European pharmaceutical sector may lead to changes in the regulation of our business that would have an adverse impact on our results of operations in Europe.their development.
If we elect to sell a generic product prior to the final resolution of outstanding patent litigation, we could be subject to liabilities for damages.
At times we seek approval to market genericcompetitors introduce new products before the expiration of patents for thoseor new variations on their existing products, based upon our belief that such patents are invalid, unenforceable, or would not be infringed by our products. As a result, we are involved in patent litigation, the outcome of which could materially adversely affect our business. Based upon a complex analysis of a variety of legal and commercial factors, we may elect to market a generic product even though litigation is still pending. This could be before any court decision is rendered or while an appeal of a lower court decision is pending. To the extent we elect to proceed in this manner, if the final court decision is adverse to us, we could be required to cease the sale of the infringing products and face substantial liability for patent infringement. These damages may be significant as they may be measured by a royalty on our sales or by the profits lost by the patent owner and not by the profits we earned. Because of the discount pricing typically involved with generic pharmaceutical products, patented brand products generally realize a significantly higher profit margin than generic pharmaceutical products. In the case of a willful infringer, the definition of which is unclear, these damages may even be trebled.
Furthermore, there may be risks involved in entering into in-licensing arrangements for products, which are often conditioned upon the licensee’s sharing in the patent-related risks.
For business reasons, we continue to examine such product opportunities (i.e., involving non-expired patents) going forward and this could result in patent litigation, the outcomes of which may have a material adverse effect on our results of operations, financial condition and cash flows.
Any failure to comply with the complex reporting and payment obligations under the Medicare and Medicaid programs or other laws regulating marketing practices may result in litigation or sanctions and adversely impact our business.
The U.S. laws and regulations regarding Medicare and/or Medicaid reimbursement and rebates and other governmental programs are complex. Some of the applicable laws may impose liability even in the absence of a specific intent to defraud.
The subjective decisions and complex methodologies used in making calculations under these programs are subject to review and challenge, and it is possible that such reviews could result in material changes in the calculation outcomes. In the past several years, state and federal government agencies have conducted ongoing investigations of manufacturers’ reporting practices with respect to a drug’s average wholesale price (“AWP”) and wholesale acquisition cost (“WAC”), and in some cases have filed lawsuits in which they have alleged that reporting of inflated AWPs or WACs has led to excessive payments by Medicare and/or Medicaid for prescription drugs. In addition, we are notified from time to time of governmental investigations regarding marketing practices or pricing issues. In the United States, we are currently responding to federal investigations into our marketing practices with regard to some of our products, which could result in civil litigation brought on behalf of the federal government.
Responding to such queries and any resulting investigations or lawsuits is costly and unpredictable, and involves a significant diversion of management’s attention. Such allegations could, if proven or settled, result in significant monetary penalties and possible exclusion from Medicare, Medicaid and other programs. In addition, government authorities have significant leverage to persuade pharmaceutical companies to enter into corporate integrity agreements, which can be expensive and disruptive to operations.
If any of the above queries and/or investigations were to result in a lawsuit that was determined adversely to us or in a large cash settlement, it could require us to pay significant amounts and may have a material adverse effect on our business, results of operations, financial condition and cash flows.
Research and development efforts invested in our differentiated formulations pipeline may not achieve expected results.
In our Proprietary Products, segment, our business model focuses on building a pipelineeven those protected by patents, may experience substantial reductions in the therapeutic areas of neurology and dermatology. We must invest increasingly significant resources to develop differentiated products, both through our own efforts and through collaborations, in-licensing and acquisition of products from or with third parties. The development of differentiated products involves processes and expertise different from those used in the development of generic drugs, which increases the risks of failure. During each stage, we may encounter obstacles that delay the development process and increase expenses, leading to significant risks that we will not achieve our goals and may be forced to abandon a potential product in which we have invested substantial amounts of time and money. These obstacles may include: preclinical failures; difficulty enrolling patients in clinical trials; delays in completing formulation and other work needed to support an application for registration; adverse reactions or other safety concerns arising during clinical testing; insufficient clinical trial data to support the safety or efficacy of the product candidate; and failure to obtain, or delays in obtaining, the required regulatory approvals for the product candidate or the facilities in which it is manufactured.value.
Because of the amount of capital required to be invested in augmenting our differentiated products pipeline, in some cases we are reliant on partnerships and joint ventures with third parties, and consequently face the risk that some of these third parties may fail to perform their obligations, or fail to reach the levels of success that we are relying on to meet our revenue and profit goals. Accordingly, our investment in research and development of innovative products can involve significant costs with no assurances of future revenues or profits.
Our Proprietary Products segment, particularly our Specialty businesses in the United States, faces intense competition from companies that are more entrenched than we are or have greater resources than ours.
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Our risk profile for our Proprietary Products segment is lower than the comparable risk profile of companies working with completely novel entities. Nevertheless, the exposure that the businesses in this segment face is higher than that of the Generics business due to several factors outlined below.
Market penetration requires successful commercial positioning in relation not only to past therapies but also new competitors. All of the therapeutic areas in which we compete have many active competitors, each vying for market share in similar indications with products that may have some similar attributes. As such, success in our Proprietary Products segment requires the ability to strategically differentiate our offerings from those of our competitors, which often requires time and investment in additional clinical studies, and brings with it the typical uncertainty of outcome that faces many clinical studies. An additional emerging challenge is access to physicians, who can explicitly refuse to see our sales representatives, and new approaches need to be found to provide them with the information required in order to make informed and appropriate prescription decisions. While the impact of these challenges is currently limited, they could potentially become significant in the future.
Even if we are able to successfully differentiate our products, adequate reimbursement from third party payors for our products is necessary. Typically, a managed care plan relies on a committee made up of physicians and others to decide which drugs will appear on its formulary. Without a reasonable position on the formulary of managed care plans, patients will not be
able to obtain access to our products. Further, even after we contract for access on managed care formularies, we often have to provide additional point-of-sale discounts to patients in order to make their out-of-pocket payments affordable. All of these are necessary in this business segment, as all managed care plans attempt to aggressively direct their patients towards generic medicines.
Additionally, because the Specialty business of our Proprietary Products segment works primary with reformulated drugs, another risk is that the patents that protect the product are easier to engineer around than traditional composition of matter patents. While every attempt is made to create a robust intellectual property ring fence around these assets, the products in our U.S. Specialty business portfolio may enjoy lesser exclusivity periods than traditional innovative products.
If we fail to comply with environmental laws and regulations, or face environmental litigation, our costs may increase or our revenues may decrease.
We may incur substantial costs complying with requirements of environmental laws and regulations. In addition, we may discover currently unknown environmental problems or conditions. In all countries where we have production facilities, we are subject to significant environmental laws and regulations that govern the discharge, emission, storage, handling and disposal of a variety of substances that may be used in or result from our operations. In the normal course of our business, we are exposed to risks relating to possible releases of hazardous substances into the environment, which could cause environmental or property damage or personal injuries, and that could require remediation of contaminated soil and groundwater, which could cause us to incur substantial remediation costs that could adversely affect our consolidated financial position, results of operations or liquidity.
If any of our plants or the operations of such plants are shut down, it may severely hamper our ability to supply our customers and we may continue to incur costs in complying with regulations, appealing any decision to close our facilities, maintaining production at our existing facilities and continuing to pay labor and other costs, which may continue even if the facility is closed. As a result, our overall operating expenses may increase and our profits may decrease significantly.
If we are sued by consumers for defects in our products, it could harm our reputation and thus our profits.
Our business inherently exposes us to potential product liability claims, and the severity and timing of such claims are unpredictable. Notwithstanding pre-clinical and clinical trials conducted during the development of potential products to determine the safety and efficacy of products for use by humans following approval by regulatory authorities, unanticipated side effects may become evident only when drugs and bio-similars are introduced into the marketplace. Due to this fact, our customers and participants in clinical trials may bring lawsuits against us for alleged product defects. In other instances, third parties may perform analyses of published clinical trial results which raise questions regarding the safety of pharmaceutical products, and which may be publicized by the media. Even if such reports are inaccurate or misleading, in whole or in part, they may nonetheless result in claims against us for alleged product defects.
Under the current regulatory scheme in the United States, branded drug manufacturers can independently update product labeling through the “changes being effected” (“CBE”) supplement process, but a generic manufacturer is only permitted to use the CBE process to update its label if the branded drug manufacturer changes its label first. This can prevent generic manufacturers from complying with state law warning requirements and, as a result, state product liability suits based on failure-to-warn and design defect claims against generics manufacturers have generally been determined to be preempted by Federal law.
Following the United States Supreme Court’s June 2013 ruling inMutual Pharmaceutical Co. v. Bartlett upholding such preemption and immunity of generic manufacturers, the U.S. FDA proposed a new rule in November 2013 that would allow generic manufacturers to independently update product labeling through the CBE supplement process. If the U.S. FDA’s proposed new rule is adopted, it may eliminate this preemption and increase our potential exposure to lawsuits relating to product safety, side effects and warnings on labels. This new potential exposure to lawsuits may also increase the risk that, in the future, we may not be able to obtain the type and amount of coverage we desire at an acceptable price and self-insurance may become the sole commercially reasonable means available for managing the product liability risks of our business.
Additionally, the proposed rule is likely to increase management and operating costs as a result of the need to set up database and software systems to monitor and track changes made, revisit internal processes regarding product label changes by regulatory teams, enable signal detection by pharmacovigilance and make changes in packaging and logistics involving our supply chain teams. Any failure to do this adequately can lead to an increase in our potential exposure to product liability claims and litigation. The U.S. FDA has announced that it will issue a final rule in April 2017.
The risk of exposure to lawsuits is likely to increase as we develop our own new patented products, or limited competition/complex products, such as injectables or biosimilars, in addition to making generic versions of drugs that have been in the market for some time. In addition, the existence or even threat of a major product liability claim could also damage our reputation and affect consumers’ views of our other products, thereby negatively affecting our business, financial condition and results of operations.
There has been a trend of increased regulatory review of over-the-counter products for safety and efficacy questions, which could potentially affect our over-the-counter products business.
In recent years, significant questions have arisen regarding the safety, efficacy and potential for misuse of certain over-the-counter medicine products. Litigation, particularly in the United States, sometimes gives rise to these questions. As a result, health authorities around the world have begun to re-evaluate some important over-the-counter products, leading to restrictions on the sale of some of them and even the banning of certain products. For example, in 2010, the U.S. FDA undertook a review of one cough medicine ingredient to consider whether over-the-counter sales of the ingredient remained appropriate. While the U.S. FDA has not, to date, changed the ingredient’s status, further regulatory or legislative action may follow. Additional actions and litigation regarding over-the-counter products are possible in the future. If the U.S. FDA or another regulator were to review one or more of our over-the-counter products for such purposes, and if such review resulted in the U.S. FDA or another regulator charging us with violations applicable to such product, it could have a significant adverse effect on our sales of such over-the-counter products and, thus, our overall profitability.
If we have difficulty in identifying candidates for or consummating acquisitions and strategic alliances, our competitiveness and our growth prospects may be harmed.
In order to enhance our business, we frequently seek to acquire or make strategic investments in complementary businesses or products, or to enter into strategic partnerships or alliances with third parties. It is possible that we may not identify suitable acquisition, strategic investment or strategic partnership candidates, or if we do identify suitable candidates, we may not complete those transactions on terms commercially acceptable to us. We compete with others to acquire companies, and we believe that this competition has intensified and may result in decreased availability or increased prices for suitable acquisition candidates. Even after we identify acquisition candidates and/or announce that we plan to acquire a company, we may ultimately fail to consummate the acquisition. For example, we may be unable to obtain necessary regulatory approvals, including the approval of antitrust regulatory bodies.
All acquisitions involve known and unknown risks that could adversely affect our future revenues and operating results. For example:
The use of tender systems and other forms of price control could reduce prices for our products or reduce our market opportunities.
A number of markets in which we operate have implemented or may implement tender systems in an effort to lower prices. Under such tender systems, manufacturers submit bids which establish prices for generic pharmaceutical products. Upon winning the tender, the winning company will receive a preferential reimbursement for a period of time. The tender system often results in companies underbidding one another by proposing low pricing in order to win the tender.
For example, this has resulted in more than 90% of generic products currently sold in German retail “pharmacies” being supplied through contracts procured in competitive bidding tenders, thereby causing significant pressure on product margins.
Certain other countries may consider the implementation of a tender system or other forms of price controls. Even if a tender system is ultimately not implemented, the anticipation of such a system could result in price reductions. Failing to win tenders, or the implementation of similar systems or other forms of price controls in other markets leading to further price declines, could have a material adverse effect on our business, financial condition, results of operations, cash flows, and/or share price.
We have concentrations of sales to certain customers and consolidation among distributors and pharmaceutical companies could increase the concentration risk and also adversely impact our business prospects.
In the United States, similar to other pharmaceutical companies, we sell our products through wholesale distributors and large retail chains in addition to hospitals, pharmacies and other groups. During the year ended March 31, 2021, our ten largest customers accounted for approximately 81% of our North America Global Generics segment’s revenues, and two of these customers collectively represented approximately 15% of our total company revenues. Refer to Note 5 (under “Information about major customers”) of our consolidated financial statements for certain major customer details. Consolidation and integration of the drug wholesalers, retail drug chains, private insurers, managed care organizations and other purchasing organizations may continue to adversely affect pharmaceutical manufacturers. Such consolidations has resulted in these groups gaining additional purchasing leverage and, consequently, increasing the product pricing pressures facing our business. We expect this trend of increased pricing pressures to continue. Such pressures have reduced, and could continue to reduce, our revenue, margins and profitability. Additionally, the emergence of large buying groups representing independent retail pharmacies, and the prevalence and influence of managed care organizations and similar institutions, creates competition among pharmaceutical companies to have their products included in the formulary of those groups and enables those groups to extract price discounts on our products.
If we fail to comply with environmental laws and regulations, or face environmental litigation, our costs may increase or our revenues may decrease.
We may failincur substantial costs complying with requirements of environmental laws and regulations. In addition, we may discover currently unknown environmental problems or conditions. In all countries where we have production facilities, we are subject to successfully integrate our acquisitions in accordance with our business strategy.
The initial rationale forsignificant environmental laws and regulations that govern the acquisition may not remain viable due todischarge, emission, storage, handling and disposal of a variety of factors, including unforeseen regulatory changes and market dynamics after the acquisition, and this may result in a significant delay and/or reduction in the profitability of the acquisition.
We may not be able to retain the skilled employees and experienced managementsubstances that may be necessaryused in or result from our operations. In the normal course of our business, we are exposed to operaterisks relating to possible releases of hazardous substances into the businesses we acquire. environment, which could cause environmental or property damage or personal injuries, and that could require remediation of contaminated soil and groundwater, which could cause us to incur substantial remediation costs that could adversely affect our consolidated financial position, results of operations or liquidity. Refer to Note 33 (“Contingencies - Environmental matters”) of our consolidated financial statements for further details on current environmental matters.
If we cannot retainany of our plants or the operations of such personnel,plants are shut down, it may severely hamper our ability to supply our customers and we may not be ablecontinue to locate or hire new skilled employeesincur costs in complying with regulations, appealing any decision to close our facilities, maintaining production at our existing facilities and experienced managementcontinuing to replace them.pay labor and other costs, which may continue even if the facility is closed.
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We
If we elect to sell a generic product prior to the final resolution of outstanding patent litigation, we could be subject to liabilities for damages.
At times we seek approval to market generic products before the expiration of patents for those products, based upon our belief that such patents are invalid, unenforceable, or would not be infringed by our products. As a result, we might be involved in patent litigation, the outcome of which could materially adversely affect our business. Based upon a complex analysis of a variety of legal and commercial factors, we may purchaseelect to market a company that has contingent liabilities that include, among others, knowngeneric product even though litigation is still pending. This could be before any court decision is rendered or unknownwhile an appeal of a lower court decision is pending. To the extent we elect to proceed in this manner, if the final court decision is adverse to us, we could be required to cease the sale of the infringing products and face substantial liability for patent infringement. These damages may be significant as they may be measured by a royalty on our sales or product liability claims or environmental liability claims.
Weby such damages as may purchase companies located in jurisdictions where we do not have operations andbe awarded by the court as a result we may not be ableof final litigation outcome. Refer to anticipate local regulations and the impact such regulations haveNote 33 (“Contingencies”) for further details on our business.current product and patent related litigations.
In addition, if we make one or more significant acquisitions in which
Because of the consideration includes equity shares or other securities, our equity sharesdiscount pricing typically involved with generic pharmaceutical products, patented brand products generally realize a significantly higher profit margin than generic pharmaceutical products. Furthermore, there may be significantly dilutedrisks involved in entering into in-licensing arrangements for products, which are often conditioned upon the licensee’s sharing in the patent-related risks.
For business reasons, we continue to examine such product opportunities (i.e., involving non-expired patents) going forward and maythis could result in patent litigation, the outcomes of which may have a reductionmaterial adverse effect on our results of earnings per equity share. If we make oneoperations, financial condition and cash flows.
Impairment charges or morewrite downs in our books could have a significant acquisitions in which the consideration includes cash, we may be required to use aadverse effect on our results of operations and financial results.
A substantial portion of the value of our available cash or incurassets pertains to various intangible assets and goodwill. The proportion of the intangible assets and goodwill to our total assets could increase significantly as we pursue various growth strategies. The value of these intangible assets and goodwill could be substantially impaired upon indications of impairment, with adverse effects on our financial condition and the value of our assets.
For example, during the year ended March 31, 2017, we acquired from Teva and an affiliate of Allergan plc a significant amountportfolio of debt or otherwise arrange additional funds to completeeight ANDAs for our North American Generics business. The transaction, valued at U.S.$350 million, represents the
largest assets acquisition which may result in a decrease in our net incomehistory. However, certain products forming part of the said portfolio were impaired during the years ended March 31, 2021 and a consequential reduction in our earnings per equity share. Also, an increasing proportion2020. Refer to Note 14 (“Other Intangible Assets”) of our alliances begin with research and development.consolidated financial statements for further details. Our results of operations may suffer if existing joint venture or collaboration partners withdraw, or if these products are not timely developed, approved or successfully commercialized. We cannot guarantee
Class action lawsuits could expose us to significant liabilities, result in negative publicity, harm our reputation and have a material adverse effect on the successful outcomeprice of our ADSs.
Shareholders of a public company sometimes bring securities class action lawsuits against the company following periods of instability in the market price of that company’s securities. Refer to Note 33 (“Contingencies”) of our consolidated financial statements for details on our current securities class action lawsuits. As a public company grows in size, the risk of such litigations may increase. If we were to be sued in any such class action suit, irrespective of the merits of the underlying case, it could have adverse effects on us, including among other things: (a) a diversion of management’s time and attention and other resources from our business and operations, which could harm our results of operations; (b) negative publicity, which could harm our reputation and restrict our ability to raise capital in the future; (c) require us to incur significant expenses to defend the suit; and (d) if a claim against us is successful, we may be required to pay significant damages and, in certain circumstances, to indemnify our directors and officers if they are named as defendants in the class action suit. Any of the foregoing could, individually or in the aggregate, have a material adverse effect on our financial condition and results of operations and/or the price of our ADSs.
Reforms in the health care industry and the uncertainty associated with pharmaceutical pricing, reimbursement and related matters could adversely affect the marketing, pricing and demand for our products.
Our businesses are operating in an ever more challenging environment, with significant pressures on the pricing of our products and on our ability to obtain and maintain satisfactory rates of reimbursement for our products by governments, insurers and other payors.
For example, in the United States, Congress continues to consider drug pricing legislation that, if passed and signed into law, could impact companies’ ability to increase prices for prescription drugs, even in case of increase in our input costs, to maintain our margins. For instance, the U.S. Department of Health and Human Services and U.S. FDA’s Safe Importation Action Plan was announced in July 2019. Following this framework, the U.S. FDA proposed a draft rule in December 2019 that would allow importation of certain lower-cost prescription drugs from Canada, and in September 2020 the rulemaking was finalized by the U.S. FDA along with an industry guidance document.
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Under the rule, states or certain other non-federal governmental entities would be able to submit importation program proposals to the U.S. FDA for review and authorization of two-year programs (with the opportunity to extend for two more years). The new rule became effective on November 30, 2020, although its implementation has been delayed and its impact is uncertain, in part because lawsuits have been filed challenging the government’s authority to promulgate it. Certain states have also proposed measures that are designed to control the costs of pharmaceuticals for which they provide reimbursement.
The growth of overall healthcare costs as a percentage of gross domestic product in many countries means that governments and payors are under intense pressure to control healthcare spending even more tightly than in the past.
These pressures are particularly strong given the persistently weak economic and financial environment in many countries and the increasing demand for healthcare resulting from the aging of the global population and associated increases in non-communicable diseases. These pressures are further compounded by consolidation among distributors, retailers, private insurers, managed care organizations and other private payors, which can increase their negotiating power. In addition, these pressures are augmented by intense publicity regarding the pricing of pharmaceuticals by our competitors, as well as government investigations and legal proceedings regarding pharmaceutical pricing practices. Refer to Note 33 (“Contingencies”) of our consolidated financial statements for current investigations and legal proceedings. In many countries in which we currently operate, pharmaceutical prices are increasingly subject to regulation.
Our products continue to be subject to increasing price and reimbursement pressure that can limit the revenues we earn from our products in many countries due to, among other things:
· | the existence of government-imposed price controls, tender systems, mandatory discounts and rebates, and pricing transparency mandates; |
· | more governments using international reference pricing to set the price of drugs based on international comparisons (Refer to “Our Principal areas of Operations - Global Generic segment” in Item 4.A. below for details); |
· | increased difficulty in obtaining and maintaining satisfactory drug reimbursement rates; |
· | increase in cost containment policies related to health expenses in the context of economic slowdown; |
· | more demanding evaluation criteria applied by Health Technology Assessment (“HTA”) agencies when considering whether to cover new drugs at a certain price level; and |
We expect these efforts norto continue as healthcare payors around the globe, in particular government-controlled health authorities, insurance companies and managed care organizations, step up initiatives to reduce the overall cost of healthcare.
If pharmaceutical companies are successful in limiting the use of generics through their legislative, regulatory and other efforts, sales of our generic products may be adversely impacted.
Many pharmaceutical companies increasingly have used state and federal legislative and regulatory means to delay or eliminate generic competition. These efforts have included:
· | pursuing new patents for existing products that may be granted just before the expiration of earlier patents, which could extend patent protection for additional years or otherwise delay the launch of generics; |
· | selling the brand product as an authorized generic, either by the brand company directly or through a marketing partner; |
· | introducing “next-generation” products prior to the expiration of market exclusivity for the generic product, which often materially reduces the demand for the generic product for which we seek regulatory approval; |
· | obtaining extensions of market exclusivity by conducting clinical trials of brand drugs in pediatric populations; |
· | using the Citizen Petition process to request amendments to U.S. FDA standards on testing bio-equivalence; |
· | seeking changes to U.S. Pharmacopeia, an organization that publishes industry recognized compendia of drug standards; |
· | attaching patent extension amendments to non-related federal legislation; |
· | engaging in state-by-state initiatives to enact legislation that restricts the substitution of some generic drugs, which could have an impact on products that we are developing; |
· | seeking patents on methods of manufacturing certain active pharmaceutical ingredients; |
· | attempting to use the legislative and regulatory process to have drugs reclassified or rescheduled; and |
· | entering into agreements with pharmacy benefit management companies that have the effect of blocking the dispensing of generic products. |
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We may be susceptible to significant product liability claims that are not covered by insurance.
Our business inherently exposes us to potential product liability claims, and the severity and timing of such claims are unpredictable. Notwithstanding pre-clinical and clinical trials conducted during the development of potential products to determine the safety and efficacy of products for use by humans following approval by regulatory authorities, unanticipated side effects may become evident only when drugs are introduced into the marketplace. Due to this fact, our customers and participants in clinical trials may bring lawsuits against us for alleged product defects. In other instances, third parties may perform analyses of published clinical trial results which raise questions regarding the safety of pharmaceutical products, and which may be publicized by the media. Even if such reports are inaccurate or misleading, in whole or in part, they willmay nonetheless result in any intellectual property rights or productsclaims against us for alleged product defects.
Under the current regulatory scheme in the United States, branded drug manufacturers can independently update product labeling through the “changes being effected” (“CBE”) supplement process, but a generic manufacturer is only permitted to use the CBE process to update its label if the branded drug manufacturer changes its label first. This can prevent generic manufacturers from complying with state law warning requirements and, as a result, state product liability suits based on failure-to-warn and design defect claims against generics manufacturers have generally been determined to be preempted by Federal law.
However, emerging developments in various countries laws relating to the liability of generic pharmaceutical manufacturers for certain product liability claims could increase our exposure to litigation costs and damages. This potential exposure to lawsuits would also have increased the risk that, inurein the future, we would not be able to our benefit.
If,obtain the type and amount of insurance coverage we desire at an acceptable price The risk of exposure to lawsuits is likely to increase as we expand intodevelop our own new international markets, we failpatented products, or limited competition/complex products, such as injectable vaccines or biosimilar products, in addition to adequately understandmaking generic versions of drugs that have been in the market for some time. In addition, the existence or even threat of a major product liability claim could also damage our reputation and comply with the local laws and customs, these operations may incur losses or otherwise adversely affect consumers’ views of our other products, thereby negatively affecting our business, financial condition and results of operations.
Currently,
A relatively small group of products may represent a significant portion of our net revenues, gross profit or net earnings from time to time.
In certain markets, sales of a limited number of products may represent a significant portion of our net revenues, gross profit and net earnings. If the volume or pricing of such products declines in the future, our business, financial position and results of operations could be materially adversely affected.
Research and development efforts invested in our complex generics, differentiated formulations and biologics products may not achieve expected results.
Our business model focuses on building a pipeline in various therapies targeted at both emerging markets and more regulated markets. We must invest increasingly significant resources to develop complex generics, differentiated products and biosimilars, both through our own efforts and through collaborations, in-licensing and acquisition of products from or with third parties. In our Proprietary Products segment, our business model focuses on building a pipeline in the therapeutic areas of neurology and dermatology. In our biologic segment, our business model focuses on building a pipeline in various therapies targeted at both emerging markets and highly regulated markets. The development of complex generics, differentiated products and biosimilars involves processes and expertise significantly more complex, which increases the risks of failure. During each stage, we may encounter obstacles that delay the development process and increase expenses, leading to significant risks that we will not achieve our goals and may be forced to abandon a potential product in which we have invested substantial amounts of time and money.
These obstacles may include: preclinical failures; difficulty enrolling patients in clinical trials; delays in completing formulation and other work needed to support an application for registration; adverse reactions or other safety concerns arising during clinical testing; insufficient clinical trial data to support the safety or efficacy of the product candidate; and failure to obtain, or delays in obtaining, the required regulatory approvals for the product candidate or the facilities in which it is manufactured.
Because of the amount of capital required to be invested in augmenting our differentiated products and biosimilar pipeline, in some cases we are reliant on partnerships and joint ventures with third parties, and consequently face the risk that some of these third parties may fail to perform their obligations, or fail to reach the levels of success that we are relying on to meet our revenue and profit goals.
We are subject to data privacy and security laws and regulations in many different jurisdictions and countries where we do business, and our or our partners’ failure to comply could result in fines, penalties, reputational damage, and could impact the way we operate our business.
We are subject to laws and regulations governing the collection, use and transmission of health information, including personal data. As the legislative and regulatory landscape for data privacy and protection continues to evolve around the world, there has been an increasing focus on privacy and data protection issues that may affect our business.
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For example, the European Union’s General Data Protection Regulation (“GDPR”) that became fully effective in May 2018, requires Companies to satisfy new requirements regarding the handling of personal and sensitive data and includes significant new penalties for non-compliance, with fines up to EUR 20 million or 4% of global turnover of the preceding fiscal year, whichever is higher.
Additionally, the California Consumer Privacy Act (“CCPA”) became effective on January 1, 2020, creating new individual privacy rights for California consumers and placing increased privacy and security obligations on entities handling personal data of consumers or households. The CCPA requires covered companies to provide new disclosures to California consumers, provides such consumers new ways to opt-out of certain sales of personal information, and allows for a new cause of action for data breaches.
Other countries in which we do business have, or are developing, laws governing the collection, use and transmission of personal information as well that may affect our business or require us to adapt our technologies or practices. Some countries, including India, are considering legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements.
The European Data Protection Board (“EDPB”) has asserted that data protection laws do not cause any hindrance to the measures taken in the fight against the coronavirus pandemic, noting that the GDPR authorizes employers and health authorities to process personal data without consent in the context of epidemics.
Legal requirements relating to the collection, storage, handling, and transfer of personal information and personal data continue to evolve and may result in ever-increasing public scrutiny and escalating levels of enforcement, sanctions and increased costs of compliance.
These data protection laws and similar initiatives could increase the cost of developing, implementing or maintaining our information technology systems and require us to allocate more resources to compliance initiatives thereby increasing our costs.
In addition, a failure by us, or our third-party vendors, to comply with applicable data privacy and security laws could result in financial, legal, business, and reputational harm to us and could have a material adverse effect on the way we operate our business, in certain countries through subsidiaries, joint ventures and equity investees or through supply and marketing arrangements with our alliance partners. In those countries where we have limited experience in operating subsidiaries and joint ventures and in reviewing equity investees, we are subject to additional risks related to complying with a wide variety of national and local laws, including restrictions on the import and export of certain intermediates, drugs and technologies. There may also be multiple, and possibly overlapping, tax structures. In addition, we may face competition in certain countries from companies that may have more experience with operations in such countries. We may also face difficulties integrating new facilities in different countries into our existing operations, as well as integrating employees that we hire in different countries into our existing corporate culture. If we do not effectively manage our operations in these subsidiaries and joint ventures and review equity investees effectively, or if we fail to manage our alliances, we may lose money in these countries and it may adversely affect our businessfinancial condition and results of operations.
If
Our Proprietary Products segment, particularly our Specialty businesses in the United States, faces intense competition from companies that are more entrenched than we improperly handle anyare or have greater resources than ours.
Our risk profile for our Proprietary Products segment is lower than the comparable risk profile of companies working with completely novel entities. Nevertheless, the risk that the businesses in this segment face is higher than that of the dangerous materials usedgenerics business due to several factors outlined below.
Success in our business and accidents result,Proprietary Products segment requires the ability to strategically differentiate our offerings from those of our competitors.
Even if we could face significant liabilities that would lower our profits.
We handle dangerous materials including explosive, toxic and combustible materials such as acetyl chloride. If improperly handled or subjectedare able to successfully develop a differentiated version, the wrong conditions, these materials could hurt our employeesdesired potential can only be unlocked if the partner is able to get favorable unrestricted reimbursement from payors (i.e., the managed care plan). Typically, a managed care plan relies on a committee comprised of physicians and other persons, cause damagedecision makers and influencers to decide which drugs will appear on its formulary. The randomized clinical trial data generated to obtain U.S. FDA approval will no longer be sufficient to gain a favorable access decision. Typically, all managed care plans attempt to aggressively direct their patients towards generic medicines due to their lack of belief in differentiation or overall cost improvement. Thus it is imperative for the specific product profile to satisfy the committee that there is sufficient evidence that the impact of the differentiation and/or incremental innovation of our products is significantly higher, in order to persuade them to list it on their respective formularies. Without these specific products attaining a reasonable position on the formulary of managed care plans, patients will not be able to obtain access to our propertiesproducts and harmphysicians become less likely to prescribe the environment. Also, increases inproducts.
Additionally, because the Specialty business and operationsof our Proprietary Products segment works primarily with known active molecules, there remains a risk that these products are easier to engineer around than products possessing composition of matter patents. Although we strive to create a robust intellectual property portfolio to protect these assets, the products in our plants, andU.S. Specialty business portfolio may nonetheless enjoy fewer years of exclusivity than traditional innovative products. This may cause a decline in the consequent hiring of new employees, can pose increased safety hazards. Such hazards need to be addressed through training, industrial hygiene assessments and other safety measures and, if not carried out, can lead to industrial accidents. Anycommercial value potential of the foregoing could subject us to significant litigationportfolio. Our results of operations may suffer if these products are not timely developed, approved or adversely impact our other litigation matters then outstanding, which could lower our profits in the event we were found liable, and could also adversely impact our reputation. In a worst case scenario, this could also result in a government forced shutdown of our manufacturing plants, which in turn could lead to product shortages that delay or prevent us from fulfilling our obligations to customers and would harm our business and financial results.successfully commercialized.
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GENERAL RISKS THAT ARE NOT SPECIFIC TO OUR COMPANY
If there is delay and/or failure in supplies of materials, services and finished goods from third parties or failure of finished goods from our key manufacturing sites, it may adversely affect our business and results of operations.
In some of our businesses, we rely on third parties for the timely supply of active pharmaceutical ingredients (“API”), specified raw materials, equipment, formulation or packaging services and maintenance services, and in some cases there could be a single source of supply.
Although, we actively manage these third party relationships to ensure continuity of supplies and services on time and to our required specifications, events beyond our control could result in the complete or partial failure of supplies and services or in supplies and services not being delivered on time.
In the event that we experience a shortage in our supply of raw materials, we might be unable to fulfill all of the API needs of our Global Generics segment, which could result in a loss of production capacity for this segment. Moreover, we may continue to be dependent on vendors, strategic partners and alliance partners for supplies of some of our existing products and new generic launches.
Any unanticipated capacity or supply related constraints affecting such vendors, strategic partners or alliance partners can adversely affect our business or results of operations. Our key generics manufacturing sites also may have capacity constraints and, at times, we may not be able to generate sufficient supplies of finished goods.
If any of the foregoing delays or prevents us from timely delivery of our productswe are unable to our customers, our relationships with the adversely affected customers could be harmed anddefend ourselves in patent challenges, we could be subject to contractually imposedinjunctions preventing us from selling our products, or we could be subject to substantial liabilities that could adversely affect our profits. Further, our patent settlement agreements with the innovators may face government scrutiny, exposing us to significant damages.
There has been substantial patent related litigation in the pharmaceutical industry concerning the manufacture, use and sale of various products. In the normal course of business, we are regularly subject to lawsuits and the ultimate outcome of litigation could adversely affect our results of operations, financial penalties and/condition and cash flow. Regardless of regulatory approval, lawsuits are periodically commenced against us with respect to alleged patent infringements by us, such suits often being triggered by our filing of an application for governmental approval, such as an ANDA or lawsuits,NDA.
The expense of any such litigation and the resulting disruption to our business, whether or not we are successful, could harm our business. The uncertainties inherent in patent litigation make it difficult for us to predict the outcome of any such litigation.
California recently passed the Preserving Access to Affordable Drugs (AB-824), legislation that could adversely impact our ability to settle patent litigations. The law, which took effect on January 1, 2020, creates a presumption that a patent settlement has anti-competitive effects, and thus violates California's state antitrust law, if it provides for the generic pharmaceutical company to receive “anything of value” from the branded pharmaceutical company and if the generic pharmaceutical company agrees to delay the launch of a generic product for any period of time. The law specifically identifies exclusive licenses and agreements by the branded pharmaceutical company “not to launch an authorized generic version” of its branded product as things of value that would trigger the presumption. Such presumption may make it more difficult to negotiate settlement agreements which are subject to this new law.
If we are unsuccessful in defending ourselves against these suits, we could be subject to injunctions preventing us from selling our products, resulting in a decrease in revenues, or to damages, which may be substantial. An injunction or substantial damages resulting from these suits could adversely affect our consolidated financial position, results of operations or liquidity.
Further, we have been involved in various litigations involving challenges to the validity or enforceability of registered patents and therefore settling such patent litigations has been and is likely to continue to be an important part of our business.
Parties to patent litigation settlement agreements in the United States, including us, are required by law to file them with the Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice for review. The FTC has publicly stated that, in its view, some of the brand-generic settlement agreements violate the antitrust laws and has brought actions against some brand and generic companies that have entered into such agreements. Accordingly, such settlement agreements may expose us to antitrust violation claims.
If we improperly handle any of the dangerous materials used in our business and accidents result, we could face significant liabilities that would lower our profits.
We handle dangerous materials including explosive, toxic and combustible materials. If improperly handled or subjected to the wrong conditions, these materials could hurt our employees, cause damage to our properties and harm the environment. Also, changes in business and operations in our plants, from new products or increased demand for existing products, can pose increased safety hazards. Such hazards need to be addressed through training, industrial hygiene assessments and other safety measures and, if not carried out, can lead to industrial accidents.
Any of the foregoing could subject us to significant litigation or adversely impact our other litigation matters then outstanding, which could lower our profits in the event we were found liable, and could also adversely impact our reputation.
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In a worst case scenario, this could also result in a government forced shutdown of our manufacturing plants, which in turn could lead to product shortages that delay or prevent us from fulfilling our obligations to customers and would adversely affect our business and results of operations.
Counterfeit versions of our products could harm our patients and reputation.
Our industry has been increasingly challenged by the vulnerability of distribution channels to illegal counterfeiting and the presence of counterfeit products in a growing number of markets and over the Internet. Third parties may illegally distribute and sell counterfeit versions of our products, which do not meet the rigorous manufacturing and testing standards that our products undergo. Counterfeit products are frequently unsafe or ineffective, and can be potentially life-threatening.
Counterfeit medicines may contain harmful substances, the wrong dose of the API or no API at all. However, to distributors and patients, counterfeit products may be visually indistinguishable from the authentic version.
Reports of adverse reactions to counterfeit drugs or increased levels of counterfeiting could materially affect patient confidence in the authentic product, and harm the business of companies such as ours. Additionally, it is possible that adverse events caused by unsafe counterfeit products would mistakenly be attributed to the authentic product. In addition, there could be thefts of inventory at warehouses, plants or while in-transit, which are not properly stored and which are sold through unauthorized channels.
There has been a trend of increased regulatory review of over-the-counter products for safety and efficacy questions, which could potentially affect our over-the-counter products business.
In recent years, significant questions have arisen regarding the safety, efficacy and potential for misuse of certain over-the-counter medicine products. Litigation, particularly in the United States, sometimes gives rise to these questions. As a result, health authorities around the world have begun to re-evaluate some important over-the-counter products, leading to restrictions on the sale of some of them and even the banning of certain products. Any bans or restrictions imposed by the government or regulatory agencies on some of our over-the-counter products would have an adverse effect on our sales and, thus, our overall profitability.
If we are unable to obtain robust patents or otherwise protect our intellectual property rights or proprietary information, or if we infringe on the intellectual property rights of others, our business may be materially and adversely impacted.
Our overall profitability depends, among other things, on our ability to continuously and timely introduce new generic as well as proprietary products. Our success in doing so depends, in large part, on two important factors:
· | Our ability to obtain patents and to protect trade secrets and other intellectual property rights for our novel products. For our Proprietary Products business in particular, obtaining robust patents and the resultant market exclusivity is key. Our failure to adequately protect our intellectual property would allow competitors to market products similar to ours or impact our market leadership for our products. Such situations may materially and adversely impact our business. |
· | In addition, we need to ensure that our novel products do not infringe on the proprietary rights of others. Our competitors may have filed patent applications, or hold issued patents, relating to products or processes that compete with those we are developing, or their patents may impair our ability to successfully develop and commercialize new products. Our business may be materially and adversely impacted if we fail to identify such competing patents early on and are not able to develop a non-infringing strategy for such patents. |
We have been successful in obtaining multiple patents claiming our innovative products and processes. Recently, we have filed several patent applications seeking to protect our newly developed technologies and products in various countries, including the United States, and we plan to continue making such filings. Any existing or future patents issued to or licensed by us may not provide us with any competitive advantages for our products or may even be challenged by competitors. In addition, sometimes such patent rights may not prevent our competitors from developing, using or commercializing products that are similar or functionally equivalent to our products.
We also rely on trade secrets, unpatented proprietary know-how and continuing technological innovation that we seek to protect, in part, by confidentiality agreements with licensees, suppliers, employees and consultants. It is possible that these agreements may be breached and we may not have adequate remedies for any such breach. Disputes may arise concerning the ownership of intellectual property or the applicability of the confidentiality or other relevant clauses of these agreements. Furthermore, our trade secrets and proprietary technology may otherwise become known to or be independently developed by our competitors. Therefore, despite all of our information security systems and practices, we may still not be able to ensure the confidentiality of information relating to such products, which may materially and adversely impact our business.
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If we fail to maintain a supply of compliant, quality product, it may adversely affect our reputation and our business.
We may experience difficulties, delays and interruptions in the manufacturing and supply of our products for various reasons, including among other reasons:
· | demand significantly in excess of forecast demand, which may lead to supply shortages (this is particularly challenging before the launch of a new product); |
· | supply chain disruptions, including those due to natural or man-made disasters at one of our facilities or at a critical supplier or vendor; |
· | delays in construction of new facilities or the expansion of existing facilities, including those intended to support future demand for our products (the complexities associated with biologics facilities, especially for drug substance, increases the probability of delay); |
· | the inability to supply products due to a product quality failure or regulatory agency compliance action such as license withdrawal, product recall or product seizure; |
· | other manufacturing or distribution problems, including changes in manufacturing production sites, limits to manufacturing capacity due to regulatory requirements, changes in the types of products produced, or physical limitations or other business interruptions that could impact continuous supply; |
· | the ongoing impact of the COVID-19 pandemic, and the restrictive measures to control the outbreak, on the supply chain, manufacturing and delivery logistics for our products, all as more fully discussed above (see “A pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, and the resulting restrictive measures and economic impacts may materially and adversely impact our business and results of our operations”); and |
· | the difficulties inherent in the manufacture and sale of sterile products, including oncology products, which are technically complex to manufacture, and require sophisticated environmental controls. Because the production process for such products is so complex and sensitive, any production failures may lead to lengthy supply interruptions. |
Any failure to comply with the complex reporting and payment obligations under the Medicare and Medicaid programs or resultsother laws regulating marketing practices may result in litigation or sanctions and adversely impact our business.
The U.S. laws and regulations regarding Medicare and/or Medicaid reimbursement and rebates and other governmental programs are complex. Some of the applicable laws may impose liability even in the absence of a specific intent to defraud. The subjective decisions and complex methodologies used in making calculations under these programs are subject to review and challenge, and it is possible that such reviews could result in material changes in the calculation outcomes.
The Patient Protection and Affordable Care Act, as amended, continues to face uncertainty due to administrative efforts to repeal, substantially modify or invalidate some or all of its provisions, as well as challenges to its constitutionality. In addition, government authorities have significant leverage to persuade pharmaceutical companies to enter into corporate integrity agreements, which can be expensive and disruptive to operations.
If any of the above queries and/or investigations were to result in a lawsuit that was determined adversely to us or in a large cash settlement, it could require us to pay significant amounts.
Fluctuations in exchange rates and interest rate movements may adversely affect our business and results of operations.
A significant portion of our revenues are in currencies other than the Indian rupee, especially in the U.S. dollar, the Euro, the Russian rouble, Venezuelan bolivar and the U.K. pound sterling, while a significant portion of our costs are in Indian rupees.
As a result, if the value of the Indian rupee appreciates relative to these other currencies, our revenues measured in Indian rupees may decrease and our financial performance may be adversely impacted. This also exposes us to additional risks in the event of devaluations, hyperinflation or restrictions on the conversion of foreign currencies, such as the devaluation of the Venezuelan bolivar that occurred in March 2016, as described below.
In February, 2016, the Venezuelan government announced changes to its foreign currency exchange mechanisms, including the devaluation of its official exchange rate. The following changes became effective as of March 10, 2016:
The CENCOEX preferential rate was replaced with a new “DIPRO” rate. The DIPRO rate is only available for purchases and sales of essential items such as food and medicine. Further, the preferential exchange rate was devalued from 6.3 VEF per U.S.$1.00 to 10 VEF per U.S.$1.00;
The SICAD exchange rate mechanism, which last auctioned U.S. Dollars for approximately 13 VEF per U.S.$1.00, was eliminated; and
The SIMADI exchange rate mechanism was replaced with a new “DICOM” rate, which governs all transactions not subject to the DIPRO exchange rate and will fluctuate according to market supply and demand. As of March 31, 2016, the DICOM exchange rate was 272.5 VEF per U.S.$1.00.
We have not yet received approvals from the Venezuelan government to repatriate any amount at preferential rates beyond the U.S.$4 million already approved and received during the year ended March 31, 2016. We believe that in the interim, it is appropriate to use the DICOM rate (i.e., 272.5 VEF per U.S.$1.00) instead of the preferential rate of VEF 10 per U.S.$1.00 for translating the monetary assets and liabilities of our Venezuelan subsidiary as at March 31, 2016. Accordingly, we recorded foreign exchange loss of Rs.4,621 million in the consolidated income statement during the year ended March 31, 2016. Notwithstanding the ongoing uncertainty, we continue to actively engage with the Venezuelan Government and seek approval to repatriate funds at preferential rates so that we may continue to provide affordable medicine to fulfill the needs of people of their country.
Further, we may also be exposed to credit risks in some of the emerging markets from our customers on account of adverse economic conditions.
We use derivative financial instruments to manage interest rate fluctuations and some of our net exposure to currency exchange rate fluctuations in the majorcertain key foreign currencies in which we operate. We do not use derivative financial instruments or other “hedging” techniques to cover allcurrencies.
A significant portion of our potential exposure. Therefore,borrowing costs are linked to U.S. dollar London Interbank Offered Rate (“LIBOR”), and hence any increase in U.S. dollar LIBOR adversely impacts our financial performance.
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In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist. As such, depending on the future of LIBOR, a comparable or successor reference rate as determined under our credit agreements may apply, or we are subjectedmay need to exchange rate fluctuations thatrenegotiate certain terms of our credit agreements to replace U.S. dollar LIBOR with a new standard. In either case, our interest rates and interest expense could significantlyincrease, which could adversely affect our financial results.condition, operating results and cash flows.
In
Risks from disruption to production, supply chain or operations from natural disasters could adversely affect our business and operations and cause our revenues to decline.
If flooding, droughts, earthquakes, volcanic eruptions or other natural disasters were to directly damage, destroy or disrupt our manufacturing facilities, it could disrupt our operations, delay new production and shipments of existing inventory or result in costly repairs, replacements or other costs, all of which would negatively impact our business. A significant portion of our manufacturing facilities are situated around Hyderabad and Vishakhapatnam, India, regions that have experienced earthquakes, floods and droughts in the recent pastpast. Even if we take precautions to provide back-up support in the event of such a natural disaster, the disaster may nonetheless affect our facilities, harming production and particularly since March 2013,ultimately our business. And, even if our manufacturing facilities are not directly damaged, a large natural disaster may result in disruptions in distribution channels or supply chains. The impact of such occurrences depends on the Indian rupee exchange rates as compared to the U.S. dollar have been highly volatile. In the year ended March 31, 2016, the Indian rupee depreciated by approximately 7% against the U.S. dollar. Such depreciationspecific geographic circumstances but could be significant.
Changes in tax regulations of the Indian rupee against the U.S. dollar has had positive benefits tocountries we operate in may increase our financial results. However, the Russian rouble and Euro depreciated by approximately 27% and 7%, respectively, against the Indian rupee during the year ended March 31, 2016. Such depreciation of foreign currencies has caused, and further depreciation in the future will cause, our foreign currency revenues as measured in Indian rupees to decrease,tax liabilities and thus adversely affect our financial results.
Currently, we are entitled to various tax benefits and exemptions under Indian tax laws, such as tax benefits on research and development spending and exemptions applicable to income derived from manufacturing facilities located in certain tax exempted zones. Any changes in these laws or their application may increase our tax liability and thus adversely affect our financial results.
India’s Finance Act, 2016 amended the test of residence for foreign companies. While a non-resident company is generally taxed only on its Indian sourced income, a resident company is taxed on its global income. Under the amended rule, a company not formed under the laws of India would be considered a resident in India if its place of effective management in the previous year was in India.
The term “place of effective management” (or “PoEM”) has been defined to mean a place where key management operates and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made.
Changes in tax regimes in India and other countries in which we have significant operations, could result in a material impact on our cash tax liabilities and tax charges, resulting in either an increase or a reduction in financial results depending upon the nature of the change.
We operate in jurisdictions that impose transfer pricing and other tax-related regulations on our intercompany arrangements, and any failure to comply could materially and adversely affect our profitability.
We are required to comply with various transfer pricing regulations in India and other countries. Failure to comply with such regulations may impact our effective tax rates and consequently affect our net margins. Additionally, we operate in numerous countries and our failure to comply with the local and municipal tax regimes may result in additional taxes, penalties and enforcement actions from such authorities.
Although our intercompany arrangements are based on accepted tax standards, tax authorities in various jurisdictions may disagree with and subsequently challenge the amount of profits taxed in such jurisdictions, which may increase our tax liabilities and could have a material adverse effect on the results of our operations. Further, the base erosion and profit shifting (“BEPS”) project undertaken by the Organization for Economic Cooperation and Development (“OECD”) contemplates changes to numerous international tax principles. Various countries have incorporated such tax principles into their domestic legislations by way of enactment. These enactments are significant in nature and require compliance on a regular basis. Although we will continue to adhere to such compliance, significant uncertainties remain as to the outcome of these efforts.
A slowdown in economic growth in India may adversely affect our business and results of operations.
Our performance and the quality and growth of our business are necessarily dependent on the health of the overall Indian economy. The Indian economy has grown significantly over the past few years. Any future slowdown in the Indian economy could harm us, our customers and other contractual counterparties. In addition, the Indian economy is in a state of transition. The share of the services sector of the Indian economy is rising while that of the industrial, manufacturing and agricultural sector is declining. It is difficult to gauge the impact of these fundamental economic changes on our business.
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If wage costs or inflation rise in India, it may adversely affect our competitive advantages over higher cost countries and our profits may decline.
Wage costs in India have historically been significantly lower than wage costs in developed countries and have been one of our competitive strengths. However, wage increases in India may increase our costs, reduce our profit margins and adversely affect our business and results of operations.
Due to various macro-economic factors, the rate of inflation has recently been volatile in India. If the inflation rises, we may not be able to pass these inflationary costs on to our customers by increasing the price we charge for our products.
Stringent labor laws may adversely affect our ability to have flexible human resource policies; labor union problems could negatively affect our production capacity and overall profitability.
Labor laws may restrict our ability to have human resource policies that would allow us to react swiftly to the needs of our business. As of March 31, 2021, approximately 3.4% of our employees belonged to a number of different labor unions. If we experience problems with our labor unions that may adversely affect our production capacity and our overall results and operations.
In 2019, the Ministry of Labour and Employment in India introduced 4 bills to consolidate 29 central laws regulating: (i) wages, (ii) industrial relations, (iii) social security, and (iv) occupational safety, health and working conditions. The Government of India replaced these bills with new ones on September 19, 2020.
India’s Code on Social Security, 2020, which aims to consolidate, codify and revise certain existing social security laws, received Presidential assent in September 2020 and has been published in the Gazette of India. However, the related final rules have not yet been issued and the date on which this Code will come into effect has not been announced. We will assess the impact of this Code and the rules thereunder when they come into effect.
Increasing use of social media could give rise to liability or breaches of data security.
We and our business associates are increasingly relying on social media and mobile tools as a means of communications. To the extent that we seek as a company to use these tools as a means to communicate about our products or about the diseases our products are intended to treat, there are significant uncertainties as to either the rules that apply to such communications, or as to the interpretations that health authorities will apply to the rules that exist. As a result, despite our efforts to comply with applicable rules, there is a significant risk that our use of social media and mobile tools for such purposes may cause us to nonetheless be found in violation of them. In addition, because of the universal availability of social media tools, our associates or third parties may make use of them in ways that may not be sanctioned by us, and that may give rise to liability, or that could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of personal information (including sensitive personal information) of our employees, clinical trial patients, customers and others. Such uses of social media could have a material adverse effect on our business, financial condition and results of operations.
Social media posts could also contain information purported to be disclosed by us that is false or otherwise damaging, which could have a material adverse effect on our reputation and the price of our equity shares and ADSs.
Increasing scrutiny and changing expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance (“ESG”) practices.
Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, supply chain management, diversity and human rights.
We are subject to various laws and regulations concerning, among other things, the environment, climate change, regulation of chemicals, employee safety and product safety. These requirements include regulation of the handling, manufacture, transportation, storage, use and disposal of materials, including the discharge of regulated materials and pollutants into the environment.
In the normal course of our business, our operations are also exposed to risks relating to (i) increased severity of extreme weather events, such as cyclones and floods; (ii) regulatory changes which can require us to transition to newer forms of energy sources like renewable energy; and (iii) increased water scarcity and water stress, apart from water contamination. Failure to adapt to or comply with regulatory requirements, or investor or stakeholder ESG expectations and standards, could negatively impact our reputation or harm our business.
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Opposition to free trade agreements and changes in trade policies of countries in which we operate could adversely affect the pricing and demand for our products.
Opposition to free trade agreements was an important component of the campaign platform of the new U.S. administration, and there are ongoing efforts to achieve that goal. For example, the United States withdrew from the Trans-Pacific Partnership (“TPP”) free trade agreement and recently announced that it will end preferential trade treatment for India, currently being extended under its Generalized System of Preferences (“GSP”). In the current scheme, there might not be any direct impact on U.S. imports of pharmaceutical products due to this withdrawal. However, any such changes in free trade agreements could, among other things, interfere with free trade in goods, impose additional customs duties or tariffs, increase the costs and difficulties of international transactions and potentially disturb the international flow of goods and, in particular, trade between the United States and other countries, and thus may have an adverse effect on our financial performance.
Any new tariffs or other changes in U.S. trade policy could trigger retaliatory actions by affected countries, potentially escalating and resulting in “trade wars”. For example, in March and April 2018, the U.S. government announced new tariffs on steel and aluminum from China, as well as more than 1,300 other Chinese exports. In response, the Chinese government announced that it would enact retaliatory tariffs on more than 100 American products. Trade policy changes or internal policy changes such as these can result in increased costs for goods, which may reduce customer demand for these products if the parties having to pay those tariffs increase their prices, or in increased costs to trading partners. If these consequences are realized, they may materially and adversely affect our sales and our business.
Our success depends on our ability to retain and attract key qualified personnel and, if we are not able to retain them or recruit additional qualified personnel, we may be unable to successfully develop our business.
We are highly dependent on the principal members of our management and scientific staff, the loss of whose services might significantly delay or prevent the achievement of our business or scientific objectives. In India, it is not our practice to enter into employment agreements with our executive officers and key employees that are as extensive as are generally used in the United States, and each of those executive officers and key employees may terminate their employment upon notice and without cause or good reason. Currently, we are not aware of any executive officer’s or key employee’s departure that has had, or planned departure that is expected to have, any material impact on our operations. Competition among pharmaceutical companies for qualified employees is intense, and the ability to retain and attract qualified individuals is critical to our success. There can be no assurance that we will be able to retain and attract such individuals currently or in the future on acceptable terms, or at all, and the failure to do so would have a material adverse effect on our business, financial condition and results of operations. In addition, we do not maintain “key person” life insurance on any officer, employee or consultant.
We have concentrationsSince a large part of sales to certain customers that increases our credit risks. Consolidation among distributors and pharmaceutical companies could increase this risk, and also adversely impact our business prospects.
Incenters around the United States, similarchanges to other pharmaceutical companies, we sell our products through wholesale distributorsthe U.S. immigration laws could make it more difficult to obtain non-immigrant work authorizations in the United States. There have been and large retail chains in addition to hospitals, pharmacies and other groups. During the year ended March 31, 2016, our ten largest customers accounted for approximately 85% of our North America Global Generics segment’s revenues. We are exposed to a concentration of credit risk in respect of these customers such that if one or more are affected by financial difficulty, it could materially and adversely affect our financial results. If the recent trend of consolidation among distributors continues, this risk may increase.
Furthermore, the recent trend of consolidation among distributors and pharmaceutical companies, both innovator and generic companies, could have an adverse impact on our business prospects as well as our customers’ choices and preferences. There has been increased concern by pharmaceutical companies and their investors and other stakeholders over geographic and customer concentration risks, as well as the implementation of counter-measures and risk mitigation strategies. Some of our key risk mitigation strategies, such as key account management and locking up customer relationships, are likelywill continue to be at risk from such consolidations. If our responsecalls for extensive changes to these changes is not adequateU.S. immigration laws regarding the admission of highly-skilled temporary and timely, our growth prospectspermanent workers.
There are some legislative proposals which, if passed and business can be adversely impacted.
Counterfeit versions of our productssigned into law, could harm our patients and reputation.
Our industry has been increasingly challenged by the vulnerability of distribution channelsadd further costs and/or restrictions to illegal counterfeiting and the presence of counterfeit products in a growing number of markets and over the Internet. Third parties may illegally distribute and sell counterfeit versions of our products, which do not meet the rigorous manufacturing and testing standards that our products undergo. Counterfeit products are frequently unsafe or ineffective, and can be potentially life-threatening. Counterfeit medicines may contain harmful substances, the wrong dosesome of the API or no API at all. However, to distributorshigh-skilled temporary worker categories and, patients, counterfeit products may be visually indistinguishable from the authentic version.
Reportsin turn, our cost of adverse reactions to counterfeit drugs or increased levels of counterfeiting could materially affect patient confidencedoing business in the authentic product, and harm the business of companies such as ours. Additionally, it is possible that adverse events caused by unsafe counterfeit products would mistakenly be attributed to the authentic product. In addition, there could be thefts of inventory at warehouses, plants or while in-transit, which are not properly stored and which are sold through unauthorized channels. Public loss of confidence in the integrity of pharmaceutical products as a result of counterfeiting or theftUnited States may increase. This could have a material and adverse effect on our business, financial position and results of operations and could cause the market value of our equity shares and ADSs to decline.
Significant disruptions of information technology systems or breaches of data security could adversely affect our business.
Our business is dependent upon increasingly complex and interdependent information technology systems, including Internet-based systems, to support business processes as well as internal and external communications. In addition, our businessesrevenues and operating models increasingly depend on outsourcing and collaboration, which requires exchanging data and information. The size and complexity and interconnectivity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and computer viruses. Any such disruption may result in the loss of key information and/or disruption of production and business processes, which could materially and adversely affect our business.results.
In addition, our systems are potentially vulnerable to data security breaches, whether by employees or others, that may expose sensitive data to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of personal information (including sensitive personal information) of our employees, clinical trial patients, customers and others. Such breaches of security could result in reputational damage and could otherwise have a material adverse effect on our business, financial condition and results of operations. Further, increasing use of information technology (“IT”) systems in manufacturing processes would require us to manage issues arising out of human error and/or sabotage.
In our pursuit of operational excellence, several change management initiatives across our organization are currently in progress, including but not limited to information technology automation in the areas of manufacturing, research and development, supply chain and shared services. We have outsourced our IT hardwareoperations in certain countries susceptible to political and applications in order to improve IT capability and performance. Any failure by such outsourced service providers to deliver timely and quality services and to
co-operate with one another could create disruption, which could materially adversely affect our business or results of operations. Further, any failure by us to effectively manage such change initiatives or implement adequate controls in automation, security or availability of information technology systems could have a material adverse effects on our business.
Increased outsourcing or use of cloud services for conducting our business requires highly secure controls to ensure adequate security of information, considering potential for sabotage as well as availability. Data integrity, confidentiality and data privacy requirements are increasingly concerning regulators, and are incorporated into legal contracts. While we have invested heavily in the protection of data and information technology to reduce these risks, there can be no assurance that our efforts or those of our third-party service providers would be sufficient to protect against data deterioration or loss in the event of a system malfunction, or prevent data from being stolen or corrupted in the event of a security breach. We currently do not have any insurance that could mitigate the impact from all such risks.
Increasing use of social media could give rise to liability or breaches of data security.
We and our business associates are increasingly relying on social media tools as a means of communications. To the extent that we seek as a company to use these tools as a means to communicate about our products or about the diseases our products are intended to treat, there are significant uncertainties as to either the rules that apply to such communications, or as to the interpretations that health authorities will apply to the rules that exist. As a result, despite our efforts to comply with applicable rules, there is a significant risk that our use of social media for such purposes may cause us to nonetheless be found in violation of them. In addition, because of the universal availability of social media tools, our associates may make use of them in ways that may not be sanctioned by us, and that may give rise to liability, oreconomic instability that could lead to the loss of trade secretsdisruption or other adverse impact on such operations.
We expect to derive an increasing portion of our sales from regions such as China, Latin America, Russia and other countries of the former Soviet Union, Central Europe, Eastern Europe and South Africa, all of which may be more susceptible to political and economic instability.
We monitor significant political, legal, regulatory and economic developments in these regions and attempt to mitigate our exposure where possible. However, mitigation is not always possible, and our international operations could be adversely affected by political, legal, regulatory and economic developments, such as changes in capital and exchange controls; expropriation and other restrictive government actions; intellectual property protection and remedy laws; trade regulations; procedures and actions affecting approval, production, pricing and marketing of, reimbursement for and access to our products; and intergovernmental disputes, including embargoes and/or could lead to the public exposure of personal information (including sensitive personal information)military hostilities.
Significant portions of our employees, clinical trial patients, customersmanufacturing operations are conducted outside the markets in which our products are sold, and others. In either case,accordingly we often import a substantial number of products into such uses of social media could have a material adverse effect on our business, financial condition and results of operations.
Compliance with new and changing corporate governance and public disclosure requirements adds uncertaintymarkets. We may, therefore, be denied access to our compliance policies and increasescustomers or suppliers or denied the ability to ship products from any of our costs of compliance.
Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure, including the Sarbanes Oxley Act of 2002, new SEC regulations, New York Stock Exchange rules, provisions of India’s Companies Act 2013, Securities and Exchange Board of India rules and Indian stock market listing regulations, create uncertainty for our company. These new or changed laws, regulations and standards may lack specificity and are subject to varying interpretations. Their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs of compliancesites as a result of ongoing revisions to such governance standards.
In particular, continuing compliance with Section 404closing of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal control over financial reporting requires the commitment of significant financial and managerial resources and our independent auditor’s independent assessmentborders of the internal control over financial reporting. Further, India’s Companies Act 2013 requires companies listedcountries in India to be compliant with provisions concerning “Internal Financial Controls”.
In connection with this Annual Report on Form 20-F for the year ended March 31, 2016,which we sell our management conducted an assessment of the effectiveness of our internal controls over financial reporting as of March 31, 2016 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Based on this assessment, our management has concluded that our internal controls over financial reporting were effective as of March 31, 2016. As we continue to undertake management assessments of our internal control over financial reporting in connection with annual reports on Form 20-F for future years, any deficiencies uncovered by these assessments or any inability of our auditors to issue an unqualified opinion could harm our reputation and result in a loss of investor confidence in the reliability of our financial statements, which could cause the price of our equity shares and ADSs to decline.
We are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In addition, the new laws, regulations and standards regarding corporate governance may make it more difficult for us to obtain director and officer liability insurance. Further, our board members, chief executive
officer and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may face difficulties attracting and retaining qualified board members and executive officers, which could harm our business. If we fail to comply with new or changed laws or regulations and standards differ, our business and reputation may be harmed.
We are subject to the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws, which impose restrictions and may carry substantial penalties.
The U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business. These laws may require not only accurate books and records, but also sufficient controls, policies and processes to ensure business is conducted without the influence of bribery and corruption. Our policies mandate compliance with these anti-bribery laws, which often carry substantial penalties including fines, criminal prosecution and potential debarment from public procurement contracts. Failure to comply may also result in reputational damages.
We operate in certain jurisdictions that experience governmental corruption to some degree or are found to be low on the Transparency International Corruption Perceptions Index and, in some circumstances, anti-bribery laws may conflict with some local customs and practices. In many less-developed markets, we work with third-party distributors and other agents for the marketing and distribution of our products. Although our policies prohibit these third parties from making improper payments or otherwise violating these anti-bribery laws, any lapses in complying with such anti-bribery laws by these third parties may adversely impact us. Business activities in many of these markets have historically been more susceptible to corruption. If our efforts to screen third-party agents and detect cases of potential misconduct fail, we could be held responsible for the noncompliance of these third parties under applicable laws and regulations, including the U.S. Foreign Corrupt Practices Act.
Compliance with the U.S. Foreign Corrupt Practices Act and other anti-bribery laws has been subject to increasing focus and activity by regulatory authorities in recent years. We may be subject to injunctions or limitations on future conduct, be required to modify our business practices and compliance programs and/or have a compliance monitor imposed on us, or suffer other criminal or civil penalties or adverse impacts, including lawsuits by private litigants or investigations and fines imposed by local authorities.
We need to constantly review and update our compliance program to keep it current and active. If we fail to do so, our vulnerabilities may increase and our controls may be found to be inadequate.
Actions by our employees, or third-party intermediaries acting on our behalf, in violation of such laws, whether carried out in the United States or elsewhere, may expose us to liability for violations of such anti-bribery laws and accordingly may have a material adverse effect on our reputation and our business, financial condition or results of operations.
Our success depends on our ability to successfully develop and commercialize new pharmaceutical products.
Our future results of operations depend, to a significant degree, upon our ability to successfully develop and commercialize additional products, in our Pharmaceutical Services and Active Ingredients, Global Generics and Proprietary Products segments. We must develop, test and manufacture generic products as well as prove that our generic products are bio-equivalent or bio-similar to their branded counterparts, either directly or in partnership with contract research organizations. The developmentwhich our operations are located, due to economic, legislative, political and commercialization process, particularly with respect to proprietary productsmilitary conditions, including hostilities and biosimilars, is both time consuming and costly and involves a high degreeacts of business risk. Our products currently under development, if and when fully developed and tested, may not perform as we expect or meet our standards of safety and efficacy. Necessary regulatory approvals may not be obtainedterror, in a timely manner, if at all, and we may not be able to successfully and profitably produce and market such products. Our approved products may not achieve expected levels of market acceptance.
Our research and development efforts are increasingly dependent on collaborating with third party partners and contract research organizations which have the capability to handle complex technologies and products. Lack of effective project management at our end, or any failure to manage collaboration arrangements among multiple partners, may pose significant risks to product development, to our ability to obtain requisite regulatory approvals in a timely manner, and to our ability to successfully and profitably produce and market such products. Additionally, if we fail to adequately protect critical proprietary or confidential information or associated intellectual property rights or fail to manage third party partners and contract research organizations that our business depends on, it might have a material adverse impact on our product development execution.
We have grown at a very rapid pace. Our inability to properly manage or support this growth may have a material adverse effect on our business.
We have grown very rapidly over the past few years. This growth has significantly increased demands on our processes, systems and people. We have been making additional investments in personnel, systems and internal control processes to help manage our growth. Attracting, retaining and motivating key employees in various departments and locations to support our growth is critical to our business, and competition for these people can be intense.
To facilitate our growth, we are carrying out reorganizations and deploying initiatives to improve our focus on delivery, to build decisive competitive advantages or/and to build sustainable cost structures. There is also an increasing need to manage information and asset related security.
If we are unable to hire and retain qualified employees, or if we do not invest in systems and processes to manage and support our rapid growth, the failure to do so may have a material adverse effect on our business, financial condition and results of operations.
Fluctuations in our quarterly revenues, operating results and cash flows may adversely affect the trading price of our shares and ADSs.
Our quarterly revenues, operating results and cash flows have fluctuated significantly in the past and may fluctuate substantially from quarter to quarter in the future. Such fluctuations result from a variety of factors, including but not limited to changes in demand for our products, timing of regulatory approvals and of launches of new products by us and our competitors (particularly where we obtain the 180-day period of market exclusivity in the United States provided under the Hatch-Waxman Act of 1984), timing of our retailers’ promotional programs and successful development and commercialization of limited competition and complex products. Such fluctuations may result in volatility in the price of our equity shares and our ADSs. In such an event, the trading price of our shares and ADSs may be adversely affected.
Impairment charges or write downs in our books could have a significant adverse effect on our results of operations and financial results.
A substantial portion of the value of our assets pertains to various intangible assets and goodwill. The proportion of the intangible assets and goodwill to our total assets could increase significantly as we pursue various growth strategies. The value of these intangible assets and goodwill could be substantially impaired upon indications of impairment, with adverse effects on our financial condition and the value of our assets. For example, our financial performance for the years ended March 31, 2009 and 2010 was significantly impacted as a result of the impairments pertaining to our Germany operations.
There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with IFRS. Any future changes in estimates, judgments and assumptions used or necessary revisions to prior estimates, judgments or assumptions or changes in accounting standards could lead to a restatement or revision to previously issued financial statements.
The consolidated financial statements included in the periodic reports we file with the SEC are prepared in accordance with IFRS. The preparation of financial statements in accordance with IFRS involves making estimates, judgments and assumptions in areas such as valuation of inventories, sales returns, rebates and chargebacks provisions, determination of useful life of property, plant and equipment and intangible assets, assets and obligations relating to employee benefits, business combinations and contingencies. Estimates, judgments and assumptions are inherently subject to change in the future and any necessary revisions to prior estimates, judgments or assumptions could lead to a restatement. Furthermore, although we have recorded reserves for litigation related contingencies based on estimates of probable future costs, such litigation related contingencies could result in substantial further costs. Also, any new or revised accounting standards may require adjustments to previously issued financial statements. Any such changes could result in corresponding changes to the amounts of liabilities, revenues, expenses and income. Any such changes could have a material adverse effect on our business, financial condition, results of operations, cash flows, and/or share price.
There are risks associated with executing on our strategy.
There are risks associated with executing the strategies we adopt to achieve our core purpose as discussed in Item 4.B. below. Significant execution risks associated with our strategies include, but are not limited to:countries.
developing and executing our complex product development, manufacturing and marketing strategies for North America and other key markets;
executing on our strategies for increasing our customer share and for key account management in our Active Pharmaceutical Ingredients (“API”) and Custom Pharmaceutical Services (“CPS”) businesses; and
executing our execution excellence and change management initiatives to ensure process safety, product quality and availability.
Changes in Indian tax regulations may increase our tax liabilities and thus adversely affect our financial results.
Currently, we are entitled to various tax benefits and exemptions under Indian tax laws, such as tax benefits on research and development spending and exemptions applicable to income derived from manufacturing facilities located in certain tax exempted zones. Any changes in these laws or their application may increase our tax liability and thus adversely affect our financial results.
The Union Budget, 2016 has proposed that the weighted deduction on research and development activities be reduced in a phased manner from 200% to 150% commencing April 1, 2017 and from 150% to 100% commencing April 1, 2020. Further, Special Economic Zone (“SEZ”) units commencing manufacture or production of article and things after April 1, 2020 will not be eligible for SEZ tax deductions.
India’s Finance Act, 2015 amended the test of residence for foreign companies. While a non-resident company is generally taxed only on its Indian sourced income, a resident company is taxed on its global income. Under the amended rule, a company not formed under the laws of India would be considered a resident in India if its place of effective management in the previous year was in India. The term “place of effective management” (or “PoEM”) has been defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made. It is expected that final rules providing guidance on the interpretation and application of PoEM will be issued during the year ended March 31, 2017.
In India’s Finance Act, 2012, the Government of India introduced a levy of service tax based on a negative list of services. Consequently, all services have become taxable, except notified exempted services. The Finance Act, 2015 increased the rate of service tax from 12.36% (inclusive of surcharge and cess) to a consolidated rate of 14% effective as of June 1, 2015. Furthermore, effective November 2015, the service tax of 14% was increased by an additional 0.5% cess called the “Swatch Bharat Cess” to a consolidated rate of 14.50%. Effective June 1, 2016, the Finance Act 2016 further increased the service tax rate to 15% through introduction of another 0.5% cess called the “Krishi Kalyan Cess”.
Further, the Union Budget, 2015 proposed to implement Goods and Service Tax (“GST”) from April 1, 2016. GST will put in place a state-of-the-art indirect tax system which will integrate State economies and boost overall growth. It is proposed to subsume other taxes (such as central excise duty, service tax, octroi, value added tax, sales tax, and entry tax) into GST, thus avoiding the multiple layers of taxation that currently exist in India. A Constitution amendment bill approving the GST was approved by India’s lower house of the Parliament (i.e. Lok Sabha) on May 6, 2015. This Constitution amendment bill is currently pending in the Upper house of the Parliament (i.e. Rajya Sabha), but it is expected that a number of issues (such as the elimination of a controversial proposed 1% additional tax and the introduction of a cap on the maximum GST rate) will need to be resolved before this Constitution amendment bill is likely to be finalized and approved.
Under the Finance Act, 2013, the effective rate of dividend distribution tax (“DDT”) was 16.995% inclusive of surcharge and cess. The Finance Act (No 2) 2014 made an amendment in section 115-O, which requires grossing up of the dividend amount distributed for computing DDT. Pursuant to the amendment, effective October 1, 2014, the effective rate of DDT increased from 16.995% to 19.994% inclusive of surcharge and cess, and as a result, dividend amounts receivable by our shareholders after taxes are reduced. Furthermore, as a result of the increase in rate of surcharge in the Finance Act, 2015, effective April 1, 2015, the effective rate of DDT increased from 19.994% to 20.3576%. If the effective rate of dividend distribution tax increases in the future, the dividend amount receivable by our shareholders after taxes may decrease further.
We operate in jurisdictions that impose transfer pricing and other tax-related regulations on our intercompany arrangements, and any failure to comply could materially and adversely affect our profitability.
We are required to comply with various transfer pricing regulations in India and other countries. Failure to comply with such regulations may impact our effective tax rates and consequently affect our net margins. Additionally, we operate in numerous countries and our failure to comply with the local and municipal tax regimes may result in additional taxes, penalties and enforcement actions from such authorities. Although our intercompany arrangements are based on accepted tax standards, tax authorities in various jurisdictions may disagree with and subsequently challenge the amount of profits taxed in such jurisdictions, which may increase our tax liabilities and could have a material adverse effect on the results of our operations. Further, the base erosion and profit shifting (“BEPS”) project undertaken by the Organization for Economic Cooperation and Development (“OECD”) contemplates changes to numerous international tax principles, as well as national tax incentives. It is hardnot possible to predict how the principleseconomic impact and recommendations developed by the OECD in the BEPS project will translate into specific national laws adversely impacting our tax liabilities, and therefore we cannot predict at this stage the magnitude of the effect of such rules on our financial results.
We enter into various agreements inongoing coronavirus pandemic and the normal course of business which periodically incorporate provisions whereby we indemnifyrestrictive measures to control the other party to the agreement.
In the normal course of business, we periodically enter into agreements with vendors, customers, alliance partners, innovators and others that incorporate terms for indemnification provisions. Our indemnification obligations under such agreements may be unlimited in duration and amount. We maintain insurance coverage that we believe will effectively mitigate our obligations under certain of these indemnification provisions (for example, in the case of outsourced clinical trials). However, should our obligations under an indemnification provision exceed our coverage or should coverage be denied,outbreak, it could have a material adversesignificantly impact on our business financial positionoperations and supply chain. See “A pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, and the resulting restrictive measures and economic impacts may materially and adversely impact our business and results of operations.our operations” above.
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Current economic conditions may adversely affect our industry, financial position and results of operations.
In recent years, the global economy has experienced volatility and an unfavorable economic environment, and these trends may continue in the future. Reduced consumer spending, reduced funding for national social security systems or shifting concentrations of payors and their preferences, may force our competitors and us to reduce prices. The growth of our business may be negatively affected by high unemployment levels and increases in co-pays, which may lead some patients to delay treatments, skip doses or use less effective treatments to reduce their costs.
We have exposure to many different industries and counterparties, including our partners under our alliance, research and promotional services agreements, suppliers of raw materials, drug wholesalers and other customers, who may be unstable or may become unstable in the current economic environment. We run the risk of delayed payments or even non-payment by our customers, which consist principally of wholesalers, distributors, pharmacies, hospitals, clinics and government agencies.
Significant changes and volatility in the consumer environment and in the competitive landscape may make it increasingly difficult for us to predict our future revenues and earnings.
Risks
Uncertainty and volatility in relation to the U.K.’s planned exit from disruptionthe EU
On June 23, 2016, the United Kingdom (“U.K.”) held a remain-or-leave referendum on its membership within the European Union (“EU”), the outcome of which was a decision for the U.K. to production, supply chainexit from the EU (the “Brexit”).
The U.K. formally withdrew from the EU on January 31, 2020 with status quo arrangements through a transition period. The transition period began on February 1, 2020 and ended December 31, 2020.
During the Withdrawal Agreement negotiations, both the United Kingdom and the EU recognised the necessity of safeguarding the 1998 Good Friday (Belfast) Agreement, avoiding a hard border on the island of Ireland and protecting North-South cooperation, while ensuring the integrity of the EU’s Single Market for goods, along with all the guarantees it offers in terms of consumer protection, public and animal health protection, and combatting fraud and trafficking. In other words, it essentially keeps Northern Ireland (NI) inside the EU, and checks and controls need to be imposed on goods moving form Great-Britain (GB) to NI.
On December 24, 2020, the U.K. Government and European Commission agreed the terms of a Trade and Cooperation Agreement which sets out the relationship between the U.K. and the EU following the end of the transition period. The agreement comprises a Free Trade Agreement, rules on governance and dispute resolution and, security cooperation. The Free Trade Agreement provides for zero tariffs and zero quotas on all goods that comply with the appropriate rules of origin; maintains a level playing field in areas such as environmental protection, social and labor rights, tax transparency and state aid, with enforcement and a binding dispute settlement mechanism and maintains air, road, rail and maritime connectivity but with new customs and passport checks and limitations on haulage operations. In April 2021, European lawmakers ratified the agreement.
The Trade and Cooperation Agreement is comprehensive, but does not cover all areas of regulation pertinent to the pharmaceutical industry, so certain complexities remain. This finalization of the long-term relationship between the United Kingdom and the European Union will dictate how the European Union will be impacted and may result in an impact on our business operations in Europe.
In November 2020, the European Commission published a “Pharmaceutical strategy for Europe,” which sets out a suite of policies that will shape the future European regulatory environment. These wide-ranging policies represent a multi-year program aimed, through review and revision of existing legislation, to provide a flexible regulatory system that, amongst other things, will lead to accelerated availability of medicines and promote sustainability of that system.
The situation could potentially result in changes to intellectual property rights, regulatory approval requirements and pharmaceutical regulations, or operationsincreased cost and burdens arising from natural disastersother new or diverging rules and regulations, any of which may have an adverse impact on our operations. As the process evolves, we will continue to assess its impact on us.
Compliance with new and changing corporate governance and public disclosure requirements adds uncertainty to our compliance policies and increases our costs of compliance.
Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure, including the Sarbanes Oxley Act of 2002, new SEC regulations, New York Stock Exchange rules, NSE IFSC Exchange’s listing and corporate governance rules and requirements, provisions of India’s Companies Act 2013, Securities and Exchange Board of India rules and Indian stock market listing regulations, create uncertainty for our company. These new or changed laws, regulations and standards may sometimes lack specificity and are subject to varying interpretations. Their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could adversely affectresult in continuing uncertainty regarding compliance matters and higher costs of compliance as a result of ongoing revisions to such governance standards.
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We are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard have resulted in, and are likely to continue.
In addition, the new laws, regulations and standards regarding corporate governance may make it more difficult for us to obtain director and officer liability insurance. Further, our board members, chief executive officer, and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may face difficulties attracting and retaining qualified board members and executive officers, which could harm our business. If we fail to comply with new or changed laws or regulations and standards differ, our business and operations and cause our revenues to decline.reputation may be harmed.
If flooding, droughts, earthquakes, volcanic eruptions or other natural disasters were to directly damage, destroy or disrupt our manufacturing facilities, it could disrupt our operations, delay new production and shipments of existing inventory or result in costly repairs, replacements or other costs, all of which would negatively impact our business. A significant portion of our manufacturing facilities are situated around Hyderabad, India, a region that has experienced earthquakes, floods and droughts in the past.
Even if we take precautions to provide back-up support in the event of such a natural disaster, the disaster may nonetheless affect our facilities, harming production and ultimately our business. And, even if our manufacturing facilities are not directly damaged, a large natural disaster may result in disruptions in distribution channels or supply chains. The impact of such occurrences depends on the specific geographic circumstances but could be significant.
In addition, there is increasing concern that climate change is occurring and may have dramatic effects on human activity without aggressive remediation steps. A modest change in temperature may cause a rising number of natural disasters. We cannot predict the economic impact, if any, of natural disasters or climate change.
If the world economy is affected due to acts of terrorism, wars or epidemics, it may adversely affect our business and results of operations.
Several areas of the world, including India, have experienced terrorist acts and retaliatory operations in recent years. Local disturbances, terrorist attacks, riots, social disruption, wars, or regional hostilities in the countries in which we or our partners and suppliers operate could affect the economy, our operations and employees by disrupting operations and communications, making travel and the conduct of our business more difficult, and/or causing our customers to be concerned about our ability to meet their needs. If the economy of any of our key markets (including but not limited to the United States, the United Kingdom, Germany, India, VenezuelaChina and Russia) is affected by such acts, our business and results of operations may be adversely affected as a consequence.
In the last decade, Asia experienced outbreaks of avian influenza
Epidemics and Severe Acute Respiratory Syndrome, or “SARS”. In addition, in 2009 a rising death toll in Mexico from a new strain of Swine Flu led the World Health Organization to declare aother public health emergencycrises, such as the ongoing novel coronavirus (COVID-19) and the restrictive measures to control the outbreak, could significantly impact our business operations and supply chain. See “A pandemic, epidemic or outbreak of international concern. In May 2015,an infectious disease, such as COVID-19, and the Pan American Health Organization issued an alert regarding the first confirmed Zika virus infection in Brazil,resulting restrictive measures and since then it has spread across the Americas. In the United States, there have been reports of local mosquito-borne transmission of the Zika virus in Puerto Rico, the U.S. Virgin Islands,economic impacts may materially and American Samoa, and there have been reports of cases in the continental United States in returning travelers. If the economy of our key markets is affected by such outbreaks or other epidemics,adversely impact our business and results of operationsour operations” above.
From time to time we enter new markets, and face risks arising out of our limited knowledge of the market and the customs, laws and regulatory systems that may apply.
From time to time we enter new markets in which we have limited knowledge of the market and the customs, laws, regulatory, political and social systems that may apply. Our success in these new markets is dependent upon the acceptability of our product and brand, the ease of doing business in such market and various other social and economic factors that may be specific to such market. Further, limitations by the local authorities of repatriation of generated funds may pose a risk to our success in these new markets. Our sales and profit margins may be adversely affected as a consequence.
Our principal shareholders have significant control over us and, if they take actions that are notwe fail to provide competitive options in the best interests ofmarket or our minority shareholders, the value of their investment in our ADSs may be harmed.
Our full time directors and members of their immediate families,brands fail to gain acceptability in the aggregate, beneficially owned 25.58% of our issued shares as at March 31, 2016. As a result, these people, acting in concert, are likely to have the ability to exercise significant control over most matters requiring approval by our shareholders, including the election and removal of directors and significant corporate transactions. This significant control by these directors and their family members could delay, defer or prevent a change in control, impede a merger, consolidation, takeover or other business combination involving us, or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. As a result, the value of the equity shares and/or ADSs of our minority shareholders may be adversely affected or our minority shareholders might be deprived of a potential opportunity to sell their equity shares and/or ADSs at a premium.market.
RISKS RELATING TO INVESTMENTS IN INDIAN COMPANIES
We are an Indian company. Our headquarters are located in India, a substantial part of our operations are conducted in India and a significant part of our infrastructure and other assets are located in India. In addition, a substantial portion of our total revenues for the year ended March 31, 20162021 continued to be derived from sales in India. As a result, the following additional risk factors apply that are not specific to our company or industry.
We may be subjected to additional compliance and litigation risks as a result of introduction of theperiodic amendments in certain key Indian regulations, including The Indian Companies Act, 2013 in India and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.2015 and the Foreign Exchange Management Act, 1999.
As a company that is incorporated in India, we are governed by thecertain key Indian rules and regulations, covered underincluding the Indian Companies Act, 1956. Significant amendments to the1956, as amended, and The Companies Act, were adopted in 2013 and 2014 and a majority of the provisions of the new Act (called the “Companies Act, 2013”) were implemented beginning in April, 2014.2012. Some of the significant changes from The Companies Act, 2012 were in the areas of board and governance processes, boardroom responsibilities, disclosures, compulsory corporate social responsibility, audit matters, initiation of class action suits by shareholders or depositors, fraud reporting and whistle-blower mechanisms.
In addition, on September 2, 2015, the Securities and Exchange Board of India (“SEBI”) issued the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the “Listing Regulations”) which replaced the former Listing Agreement, that must be followed by all listed Indian public companies effective December 1, 2015.companies. These Listing Regulations were intended to consolidate and streamline the provisions of the existing listing agreements for different segments of the capital markets (e.g., equity securities, debt securities, Indian depository receipts, etc.). The Listing Regulations have thus been structured to provide ease of reference by consolidating into one single document across various types of securities listed on the stock exchanges.
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Key features of the Listing Regulations include:
A framework has been prescribed for disclosure of material events and information by listed entities to the Indian stock exchanges. Certain events mentioned in the regulations are deemed material and disclosure is mandatory. Certain events are to be disclosed based on application of the guidelines for materiality as prescribed. The Board of Directors is required to frame a policy for determination of materiality and disclose the same on the website of the company.
Entities will be required to frame policies on preservation of documents, determination of material subsidiaries, risk management, code of conduct, remuneration of directors, key managerial personnel and other employees, board diversity, materiality of related party transactions and dealing with related party transactions and criteria for evaluation of directors.
· | A framework has been prescribed for disclosure of material events and information by listed entities to the Indian stock exchanges. Certain events mentioned in the regulations are deemed material and disclosure is mandatory. Certain events are to be disclosed based on application of the guidelines for materiality as prescribed. The Board of Directors is required to frame a policy for determination of materiality and disclose the same on the website of the company. |
· | Entities are required to frame policies on preservation of documents, determination of material subsidiaries, risk management, code of conduct, remuneration of directors, key managerial personnel and other employees, board diversity, materiality of related party transactions and dealing with related party transactions and criteria for evaluation of directors. |
Existing listed entities are required to sign the shortened version of the listing agreement with stock exchanges within six months of the issuance of the Listing Regulations.
However, certain provisions of the Companies Act, 2013 and the new Listing Regulations provisions are subject to varying interpretations and their application in practice may evolve over time as additional guidance is provided by regulatory and governing bodies. ThisFurther, the Companies Act, 2013, the rules made thereunder and the new Listing Regulations have been and are being amended from time to time.
These amendments relate to, among other things, governance, related party transactions, financial reporting, audits and auditors, disclosures and other board and shareholders related matters. All of the foregoing may collectively result in delays or continuing uncertainty regarding compliance matters and higher costs of compliance as a result of ongoing revisions.
If communal disturbances or riots erupt in India, or if regional hostilities increase, this would adversely affect the Indian economy, which our business depends upon.
India has experienced communal disturbances, terrorist attacks and riots during recent years. For example, Mumbai, India’s commercial capital, was the target of serial railway bombings in July 2006 as well as the “26/11” attacks on November 26, 2008. Hyderabad, the city in which we are headquartered, was also subjected to terrorist acts in May and August 2007 and more recently in February 2013, although none of our operations were impacted by these terrorist acts.
During the last several years, the state of Telangana, where our headquarters is located, experienced political disruption relating to a movement to bifurcate a part of the then existing undivided state of Andhra Pradesh into a new separate state of “Telangana”. In February 2014, the Indian Parliament approved such bifurcation and announced creation of a new state of “Telangana” with effect from June 2, 2014.
Due to civil disturbances and “Bandhs” (i.e., political protests in the form of worker strikes), several productive days were lost from forced or precautionary closures of our production units and offices during the agitation movement. We experienced such issues in 2009 and 2013 in Andhra Pradesh (now Telangana). If there are any such strikes, political protests or civil unrest in the future, our business and results of operations may be adversely affected as a consequence.
Additionally, India has from time to time experienced hostilities with neighboring countries. The hostilities have continued sporadically. Hostilities and tensions may occur in the future and on a wider scale. These hostilities and tensions could lead to political or economic instability in India and harm our business operations, our future financial performance and the price of our shares and our ADSs.
A slowdown in economic growth in India may adversely affect our business and results of operations.
Our performance and the quality and growth of our business are necessarily dependent on the health of the overall Indian economy. The Indian economy has grown significantly over the past few years. Any future slowdown in the Indian economy could harm us, our customers and other contractual counterparties. In addition, the Indian economy is in a state of transition. The share of the services sector of the Indian economy is rising while that of the industrial, manufacturing and agricultural sector is declining. It is difficult to gauge the impact of these fundamental economic changes on our business.
If wage costs or inflation rise in India, it may adversely affect our competitive advantages over higher cost countries and our profits may decline.
Wage costs in India have historically been significantly lower than wage costs in developed countries and have been one of our competitive strengths. However, wage increases in India may increase our costs, reduce our profit margins and adversely affect our business and results of operations.
Due to various macro-economic factors, the rate of inflation has recently been highly volatile in India. According to the economic report released by the Department of Economic Affairs, Ministry of Finance in India, the annual inflation rate in India, as measured by the benchmark wholesale price index, Base 2004-05=100 was -0.85% for the year ended March 31, 2016 (as compared to -2.33% for the year ended March 31, 2015). This trend may continue to fluctuate and/or the rate of inflation may rise substantially. We may not be able to pass these inflationary costs onRisks Relating to our customers by increasing the price we charge for our products. If this occurs, our profits may decline.
Stringent labor laws may adversely affect our ability to have flexible human resource policies; labor union problems could negatively affect our production capacity and overall profitability.
Labor laws in India are more stringent than in other parts of the world. These laws may restrict our ability to have human resource policies that would allow us to react swiftly to the needs of our business. Approximately 5% of our employees belong to a number of different labor unions. If we experience problems with our labor unions, our production capacity and overall profitability could be negatively affected.
OTHER RISKS RELATING TO OUR ADSS
ADSsTHAT ARE NOT SPECIFIC TO OUR COMPANY OR INDUSTRY
Our principal shareholders have significant control over us and, if they take actions that are not in the best interests of our minority shareholders, the value of their investment in our ADSs may be harmed.
Our full time directors and members of their immediate families, in the aggregate, beneficially owned 26.74% of our issued shares as of March 31, 2021. As a result, these people, acting in concert, are likely to have the ability to exercise significant control over most matters requiring approval by our shareholders, including the election and removal of directors and significant corporate transactions. This significant control by these directors and their family members could delay, defer or prevent a change in control, impede a merger, consolidation, takeover or other business combination involving us, or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. As a result, the value of the equity shares and/or ADSs of our minority shareholders may be adversely affected or our minority shareholders might be deprived of a potential opportunity to sell their equity shares and/or ADSs at a premium.
The market price of our ADSs may be volatile, and the value of your investment could materially decline.
Investors who hold our ADSs may not be able to sell their ADSs at or above the price at which they purchased such ADSs. The price of our ADSs fluctuate from time to time, and we cannot predict the price of our ADSs at any given time. The risk factors described herein could cause the price of our ADSs to fluctuate materially.
In addition, the stock market in general, including the market for generic and specialty pharmaceutical companies, has experienced price and volume fluctuations. These broad market and industry factors may materially harm the market price of our ADSs, regardless of our operating performance. In addition, the price of our ADSs may be affected by the valuations and recommendations of the analysts who cover us, and if our results do not meet the analysts’ forecasts and expectations, the price of our ADSs could decline as a result of analysts lowering their valuations and recommendations or otherwise.
Fluctuations in our quarterly revenues, operating results and cash flows may adversely affect the trading price of our shares and ADSs.
Our quarterly revenues, operating results and cash flows have fluctuated significantly in the past and may fluctuate substantially from quarter to quarter in the future. Such fluctuations result from a variety of factors, including but not limited to changes in demand for our products, timing of regulatory approvals and of launches of new products by us and our competitors (particularly where we obtain the 180-day period of market exclusivity in the United States provided under the Hatch-Waxman Act of 1984), timing of our retailers’ promotional programs and successful development and commercialization of limited competition and complex products. Such fluctuations may result in volatility in the price of our equity shares and our ADSs. In such an event, the trading price of our shares and ADSs may be adversely affected.
Negative media coverage and public scrutiny may adversely affect the prices of our equity shares and ADSs.
Media coverage, including social media coverage such as blogs, of our companyus has increased dramatically over the past several years. Any negative media coverage, regardless of the accuracy of such reporting, may have an adverse impact on our reputation and investor confidence, resulting in a decline in the share price of our equity shares and our ADSs.
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Indian law imposes certain restrictions that limit a holder’s ability to transfer the equity shares obtained upon conversion of ADSs and repatriate the proceeds of such transfer, which may cause our ADSs to trade at a premium or discount to the market price of our equity shares.
Under certain circumstances, the Reserve Bank of India must approve the sale of equity shares underlying ADSs by a non-resident of India to a resident of India. The Reserve Bank of India has given general permission to effect sales of existing shares or convertible debentures of an Indian company by a resident to a non-resident, subject to certain conditions, including the price at which the shares must be sold. Additionally, except under certain limited circumstances, if an investor seeks to convert the Indian rupee proceeds from a sale of equity shares in India into foreign currency and then repatriate that foreign currency from India, he or she will have to obtain an additional approval from the Reserve Bank of India for each such transaction. Required approval from the Reserve Bank of India or any other government agency may not be obtained on terms favorable to a non-resident investor or at all.
Investors who exchange our ADSs for our underlying equity shares may be subject to the provisions of the Companies Act, 2013 and to the disclosure obligations that may be necessary pursuant to the deposit agreement with our applicable depositary. The Companies Act, 2013 requires that, where the registered owner of shares does not hold the beneficial interest in such shares, both the registered owner and the beneficial owner of such equity shares are required to disclose to the company the nature of their interest, particulars of the registered owner and certain other details.
There are limits and conditions to the deposit of shares into the ADS facility.
Indian legal restrictions may limit the supply of our ADSs. The only way to add to the supply of our ADSs will be through a primary issuance because the depositary is not permitted to accept deposits of our outstanding shares and issue ADSs representing those shares. However, an investor in our ADSs who surrenders an ADS and withdraws our shares will be permitted to redeposit those shares in the depositary facility in exchange for our ADSs. In addition, an investor who has purchased our shares in the Indian market will be able to deposit them in the ADS program, but only in a number that does not exceed the number of underlying shares that have been withdrawn from and not re-deposited into the depositary facility. Moreover, there are restrictions on foreign institutional ownership of our equity shares as opposed to our ADSs.
The global pandemic, persistently weak global economic and financial environment in many other countries, particularly emerging market countries, in Asia, and increasing political and social instability could have a material adverse effect on our business and the price and liquidity of our shares and our ADSs.
Many of the world’sworld's largest economies and financial institutions continue to be impacted by the ongoing global pandemic, a weak ongoing global economic and financial environment, with some continuing to face financial difficulty, liquidity problems and limited availability of credit. We continue to see weak economic growth or a slowing of economic growth rates in certain emerging growth markets, such as China, Russia, Brazil and India. It is uncertain how long these effects will last, or whether economic and financial trends will worsen or improve. In addition, these issues may be further impacted by the unsettled political conditions currently existing in the United States and Europe, as well as thelockdown restrictions, difficult conditions existing in parts of the Middle East, and places such as Ukraine, as well as the ongoing refugee crisis, anti-immigrant activities, social unrest and fears of terrorism that have followed in many countries. Such uncertain times may have a material adverse effect on business and financial performance and, if circumstances worsen, our ability to raise capital at reasonable rates. For example, financial weakness in certain countries has increased pressures on those countries, and on payors in those countries, to force healthcare companies to decrease the prices at which we may sell them our products.
The Indian markets and the Indian economy are influenced by economic and market conditions in other countries, particularly emerging market countries in Asia. Although economic conditions are different in each country, investors’ reactions to developments in one country can have adverse effects on the securities of companies in other countries, including India. Any worldwide financial instability or any loss of investor confidence in the financial systems of Asian or other emerging markets could increase volatility in Indian financial markets or adversely affect the Indian economy in general. Either of these results could harm our business, our future financial performance and the price of our equity shares and ADSs.
If U.S. investors in our ADSs are unable to exercise preemptive rights available to our non-U.S. shareholders due to the registration requirements of U.S. securities laws, the investment of such U.S. investors in our ADSs may be diluted.
A company incorporated in India must offer its holders of shares preemptive rights to subscribe and pay for a proportionate number of shares to maintain their existing ownership percentages prior to the issuance of any shares, unless these rights have been waived by at least 75% of ourits shareholders present and voting at a shareholders’ general meeting.
U.S. investors in our ADSs may be unable to exercise preemptive rights for the shares underlying our ADSs unless a registration statement under the Securities Act of 1933 is effective with respect to the rights or an exemption from the registration requirements of the Securities Act is available. Our decision to file a registration statement will depend on the costs and potential liabilities associated with a registration statement as well as the perceived benefits of enabling U.S. investors in our ADSs to exercise their preemptive rights and any other factors we consider appropriate at the time. We might choose not to file a registration statement under these circumstances. If we issue any of these securities in the future, such securities may be issued to the depositary, which may sell them in the securities markets in India for the benefit of the investors in our ADSs.
There can be no assurances as to the value, if any, the depositary would receive upon the sale of these securities. To the extent that U.S. investors in our ADSs are unable to exercise preemptive rights, their proportional interests in us would be reduced.
Our equity shares and our ADSs may be subject to market price volatility, and the market price of our equity shares and ADSs may decline disproportionately in response to adverse developments that are unrelated to our operating performance.
Market prices for the securities of Indian pharmaceutical companies, including our own, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies.
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Factors such as the following can have an adverse effect on the market price of our ADSs and equity shares:
general market conditions,
· | general market conditions, |
speculative trading in our shares and ADSs, and
· | speculative trading in our shares and ADSs, and |
· | developments relating to our peer companies in the pharmaceutical industry. |
developments relating to our peer companies in the pharmaceutical industry.
There may be less company information available in Indian securities markets than securities markets in developed countries.
There
We are incorporated in India, and there are certain differences in the rights and protections of shareholders under the laws of India as compared to the laws of the United States and other developed economies.
For example, there is a difference between the level of regulation and monitoring of the Indian securities markets over the activities of investors, brokers and other participants, as compared to the level of regulation and monitoring of markets in the United States andsuch other developed economies.countries. The Securities and Exchange Board of India is responsible for improving disclosure and other regulatory standards for the Indian securities markets. The Securities and Exchange Board of India has issued regulations and guidelines on disclosure requirements, insider trading and other matters. There may, however, be less publicly available information about Indian companies than is regularly made available by public companies in developed countries, which could affect the market for our equity shares and ADSs.
Indian stock exchange closures, broker defaults, settlement delays, and Indian Government regulations on stock market operations could affect the market price and liquidity of our equity shares.
The Indian securities markets are smaller than the securities markets in the United States and Europe and have experienced volatility from time to time. The regulation and monitoring of the Indian securities market and the activities of investors, brokers and other participants differ, in some cases significantly, from those in the United States and some European countries. Indian stock exchanges have at times experienced problems, including temporary exchange closures, broker defaults and settlement delays and if similar problems were to recur, they could affect the market price and liquidity of the securities of Indian companies, including our shares. Furthermore, any change in Indian Government regulations of stock markets could affect the market price and liquidity of our equity shares and ADSs.
Sale of our equity shares may adversely affect the prices of our equity shares and ADSs.
The Government of India has recently issued a notice of the implementation of theIndia’s Depository Receipts Scheme, 2014, which permits liberalized rules for sponsored and unsponsored secondary market issue of depository receipts, subject to the existing sectorial cap on foreign investment. OnceUnder the regulations are fully implemented, an Indian company’s equity shares can be freely issued to a depository for the purpose of issuing depository receipts through any mode permissible for the issue of such securities to other investors. This would enableenables us to more readily issue shares to the depositary for our ADSs and conduct U.S. securities issuances of our ADSs, which wouldmay impact the share price and available float in Indian stock exchanges as well as the price and availability of our ADSs on the NYSE. Refer to Item 10.D. “Exchange controls – ADS guidelines” for further details.
Further, the SEBI introduced a detailed framework for issuance of Depository Receipts (“DRs”) by a company incorporated and listed on a recognized stock exchange in India pursuant to its circular dated October 10, 2019. The framework inter alia sets out eligibility requirements, permissible jurisdictions, international exchanges, and permissible holder of DRs, as well as certain other obligations to be complied with by issuers of DRs, the Indian depository, the foreign depository and the domestic custodian. Further, pursuant to its circular dated November 28, 2019 and December 18, 2020, the SEBI gave notice of the permissible jurisdictions for listing of DRs and amended the scope and process for permissible holders of DRs, respectively.
ITEM 4. INFORMATION ON THE COMPANY
4.A.History and development of the company
Dr. Reddy’s Laboratories Limited was incorporated in India under the Companies Act, 1956, by its promoter and our former Chairman, the late Dr. K. Anji Reddy, as a Private Limited Company on February��February 24, 1984. We were converted to a Public Limited Company on December 6, 1985 and listed on the BSE Limited (formerly known as the Bombay Stock Exchange Limited), the National Stock Exchange of India Limited and certain other Indian Stock Exchangesstock exchanges in August 1986, and on the New York Stock Exchange on April 11, 2001. We also listed on the NSE IFSC Limited, a stock exchange in the International Financial Services Centre in Gujarat, India, on December 9, 2020. We are registered with the Registrar of Companies, Hyderabad, Telangana, India as Company No. 4507 (Company Identification No. L85195TG1984PLC004507).L85195TG1984PLC004507. Our registered office is situated at 8-2-337, Road No. 3, Banjara Hills, Hyderabad, Telangana 500 034, India and the telephone number of our registered office is +91-40-49002900. The name and address of our registered agent in the United States is Dr. Reddy’s Laboratories, Inc., 107 College Road East, Princeton, New Jersey 08540. Our main corporate website address is https://www.drreddys.com.
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The SEC maintains an Internet website (at www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. This annual report on Form 20-F and other information filed by us with or furnished by us to the SEC can be accessed via such website. Certain (but not all) of such materials are also available on our website, at www.drreddys.com, as soon as reasonably practicable after having been electronically filed with or furnished to the SEC. Information contained in our website, www.drreddys.com, is not part of this annual report on Form 20-F and no portion of such information is incorporated herein or any other materials filed with or furnished to the SEC.
Key business developments:
Receipt of warning letter from
Business Transfer Agreement with Wockhardt Limited
On June 10, 2020, we completed the U.S. FDA
We received a warning letter dated November 5, 2015 from the U.S. FDA relating to cGMP deviations at our API manufacturing facilities at Srikakulam, Andhra Pradesh and Miryalaguda, Telangana, as well as violations at our oncology formulation manufacturing facility at Duvvada, Visakhapatnam, Andhra Pradesh previously raised in Form 483 observations following inspections of these sites by the U.S. FDA in November 2014, January 2015 and February-March 2015, respectively.
This has had an adverse impact on new product approvals from these sites, and we have taken steps to minimize the impact from these sites through site transfers of certain key products. We continue to develop and implement our corrective action plans relating to the warning letter.
The warning letter does not restrict production or shipment of our products from these facilities. However, unless and until we are able to correct outstanding issues to the U.S. FDA’s satisfaction, the U.S. FDA may withhold approval of our new products and new drug applications, refuse admission of products manufactured at the facilities noted in the warning letter into the United States, and/or take additional regulatory or legal action against us. Any such further action could have a material and negative impact on our ongoing business and operations.
We submitted our response to the warning letter on December 7, 2015. Further, we provided updates on the progress of our corrective actions to the U.S. FDA in January 2016, March 2016 and May 2016.
We believe that we can resolve the issues raised by the U.S. FDA satisfactorily in a timely manner. We take the matters identified by U.S. FDA in the warning letter seriously, and will continue to work diligently to address the observations identified in the warning letter, and are concurrently continuing to refine and implement our corrective action plans relating to the warning letter.
Venezuela operations
Refer to Note 41 to our consolidated financial statements.
Acquisitionacquisition of select portfoliodivisions of the established productsWockhardt Limited's branded generics business of UCB in India and the territories of Nepal, Sri Lanka, Bhutan and Maldives. The fair value of consideration transferred was Rs.16,115 million.
Refer to Note 6 toof our consolidated financial statements.statements for further details.
Product approval under section 505(b)(2) New Drug Applications from the U.S. Food and Drug Administration
For our Proprietary Products segment, duringDefinitive agreement with Glenmark Pharmaceuticals Limited
During the year ended March 31, 2016,2021, we received U.S. FDA approval of our New Drug Applications (each,entered into a “NDA”) for two products and tentative approval of our NDA for one product, all under section 505(b)(2) of the Federal Food, Drug and Cosmetic Act:
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Asset purchasedefinitive agreement with Teva Pharmaceutical Industries LtdGlenmark Pharmaceuticals Limited to acquire marketing authorizations and other rights of select brands in four “Emerging Markets” countries for a total consideration of Rs.1,516 million.
Refer to Note 45 to14 of our consolidated financial statements.statements for further details.
Product launches
For a list of other products we launched in the United States during the year ended March 31, 2016, refer to Item 5.A – ‘Operating results’.
Principal capital expenditures:
During the years ended March 31, 2016, 20152021, 2020 and 2014,2019, we invested Rs.11,933Rs.12,476 million, Rs.9,167Rs.5,725 million and Rs.9,996Rs.8,376 million (net of sales of capital assets), respectively, in capital expenditures for manufacturing, research and development facilities and other assets.
In addition, during the year ended March 31, 2021, we made payment in connection with our acquisition of certain business assets from Wockhardt Limited for Rs.15,514 million. Refer to Note 6 of our consolidated financial statements for further details.
We believe that these investments will create the capacity to support our strategic growth agenda. As of March 31, 2016,2021, we also had contractual commitments of Rs.5,065Rs.9,841 million for capital expenditures. These commitments included Rs.4,872 million to be spent in India and Rs.193 million in other countries. We currently intend to finance our additional capital expansion plans entirely through our operating cash flows and through cash and other investments.
Established in 1984, we are an integrated global pharmaceutical company committed to providingaccelerating access to affordable and innovative medicines through our three core business segments:medicines. Our reportable operating segments are as follows:
Global Generics;
· | Global Generics; |
· | Pharmaceutical Services and Active Ingredients (“PSAI”); |
· | Proprietary Products; and |
· | Others. |
Pharmaceutical Services and Active Ingredients (“PSAI”); and
Proprietary Products.
Global Generics.This segment consists of our 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 our biologics business.
Pharmaceutical Services and Active Ingredients. This segment includesprimarily consists of our business of manufacturing and marketing active pharmaceutical ingredients and intermediates, also known as “API” or bulk drugs,, 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 our contract research services business and ourthe manufacture and sale of active pharmaceutical ingredients and steroids in accordance with the specific customer requirements.
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Proprietary Products.This segment consists of our business that focuses on the research development, and manufacturedevelopment of differentiated formulationsformulations. The segment is expected to earn revenues arising out of monetization of such assets and new chemical entities (“NCEs”). These novel products fall within the dermatology and neurology therapeutic areas and are marketed and sold through Promius™ Pharma, LLC.subsequent royalties, if any.
Others.This includessegment consists of the operations of our 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 and whichinflammation. ADTL works with established pharmaceutical and biotechnology companies in early-stage collaborations, bringing drug candidates from hit generation through Investigational New Drug (“IND”) filing.customized models of drug-discovery collaborations.
We have a strong presence in highly regulated
Our key markets such asinclude the United States, the United Kingdom and Germany, as well as other key markets such as India, Russia Venezuela, Romania, South Africa and certainother countries of the former Soviet Union.Union, and Europe.
OUR STRATEGY
Our strategy is guided by our core purpose is to accelerateof accelerating access to affordable and innovative medicines, because “Good Health Can’t Wait”.
Spiraling health care costs across the world have put many medicines out of the reach of millions of people who desperately need them. As a global generic pharmaceutical company, we take very seriously our responsibility to offer affordable alternatives to expensive medicines and help patients manage their disease better. To do this, we strive to fulfill the following five promises:
We deliver on our purpose through a set of promises we make to bring expensive medicines within reach;our customers and partners:
· | to bring expensive medicines within reach; |
to address unmet patient needs by developing new products;
· | to address unmet patient needs; |
· | to help patients manage disease better; |
· | to work with partners to help them succeed; and |
· | to enable and help our partners ensure that our products are always available where needed. |
In order to help manage disease bettermaximize our impact and reach a greater number of patients, we are committed to ease the burdendelivering on patients;three themes:
· | Leadership in chosen spaces; |
to equip our partners to succeed; and
· | Operational excellence and continuous improvement; and |
· | Patient centric product innovation. |
to ensure that our products are always onFurther, the shelf.
The key elementscore of our strategy is to focus on portfolio, patient centricity, people and quality, to achieve sustained growth.
The operational aspects and sources of competitive advantage for achieving these promises include the following:us are discussed below.
Strengths in Sciencescience and Technologytechnology
Our strengths in science and technology range from synthetic organic chemistry, formulation development and biologics development andto small molecule based drug discovery. Furthermore, our wholly owned subsidiary, Aurigene Discovery Technologies Limited, is a specialized biotechnology company engaged in discovery and early clinical development of novel, best in class therapies to treat cancer and inflammatory diseases. Such expertise enables the creation of unique competitive advantagesus to deliver first-to-market, difficult-to-make products with an industry-leadingindustry leading intellectual property and technology-leveragedtechnology leveraged product portfolio.
Product Offerings
Global Generics: Through our branded and unbranded drug products, we aim to offer affordable alternatives to highly-priced innovator brands, both directly and through key partnerships.
Branded Generics: We seek to have a portfolio that is strongly focused on delivering first-to-market, differentiated products to doctors and patients. Many of our brands hold significant market shares in the molecule and therapy areas where they are present. We have also entered into strategic partnerships with third parties to sell our products in markets where we have not established our own sales and distribution operations. |
Unbranded Generics: We aim to ensure that our development capabilities remain strong and enable us to deliver products that are first to market, tough-to-make and technologically challenging. |
Our biologics business seeks to accelerate access to bio-similar products globally through process development and relevant clinical research. We were the first company to launch a generic version of rituximab in 2007, and have launched 4 bio-similar
· | Biologics: Our biologics business seeks to accelerate access to biosimilar products globally through process development and relevant clinical research. We were the first company to launch a biosimilar version of rituximab in 2007, and have launched multiple biosimilar products in India and other key markets. |
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Our vertical integration and process innovation helps to ensure that quality products are available to patients in need at all times.
Pharmaceutical Services and Active Ingredients: Our Pharmaceutical Services and Active IngredientsPSAI segment is comprised of our Active Pharmaceutical Ingredients (“API”)API business and our Custom Pharmaceutical Services (“CPS”) business. Through our API and CPS businesses, we aim to offer technologically advanced product lines and niche product services through partnerships internally and externally.
Our product offerings in our API business are positioned to offer intellectual property and technology-advantaged products to enable launches ahead of others at competitive prices.
· | Our product offerings in our API business are positioned to offer intellectual property and technology-advantaged products to enable launches ahead of others at competitive prices. |
· | Through our CPS business, we aim to offer niche product service capabilities, technology platforms, and competitive cost structures to innovator and biotechnology companies. |
Through our CPS business, we aim to offer niche product service capabilities, technology platforms, and competitive cost structures to innovator and biotechnology companies.
Proprietary Products: Our Proprietary Products segment is comprised of our Differentiated Formulations businessdifferentiated formulations business. In this segment, we work to improve patient outcomes by identifying unmet and our New Chemical Entity (“NCE”) research business in the therapeutic areas of dermatologyunder-met medical needs and neurology.addressing them through innovative products and services that are affordable and accessible.
Operating priorities |
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Execution Excellence (Building Blocks)
Execution excellence provides the framework to create sustainable customer value across all of our activities. We have been investing in the following to achieve this:
Safety |
Quality |
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Leadership Development |
OUR PRINCIPAL AREAS OF OPERATIONS
The following table shows our revenues and the percentage of total revenues of our business segments for the years ended March 31, 2016, 20152021, 2020 and 2014,2019, respectively:
For the year ended March 31, | For the year ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment | 2016 | 2015 | 2014 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||
(Rs. in millions, U.S.$ in millions) | (Rs. in millions, U.S.$ in millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Global Generics | U.S.$ | 1,933 | Rs. | 128,062 | 83 | % | Rs. | 119,397 | 81 | % | Rs. | 104,483 | 79 | % | U.S.$ | 2,111 | Rs. | 154,404 | 81 | % | Rs. | 138,123 | 79 | % | Rs. | 122,903 | 80 | % | ||||||||||||||||||||||||||||
Pharmaceutical Services and Active Ingredients | 338 | 22,379 | 14 | % | 25,456 | 17 | % | 23,974 | 18 | % | ||||||||||||||||||||||||||||||||||||||||||||||
PSAI | 437 | 31,982 | 17 | % | 25,747 | 15 | % | 24,140 | 16 | % | ||||||||||||||||||||||||||||||||||||||||||||||
Proprietary Products | 40 | 2,659 | 2 | % | 2,172 | 1 | % | 2,459 | 2 | % | 7 | 523 | 0 | % | 7,949 | 5 | % | 4,750 | 3 | % | ||||||||||||||||||||||||||||||||||||
Others | 24 | 1,608 | 1 | % | 1,164 | 1 | % | 1,254 | 1 | % | 38 | 2,813 | 2 | % | 2,781 | 1 | % | 2,058 | 1 | % | ||||||||||||||||||||||||||||||||||||
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Total Revenue | U.S.$ | 2,335 | Rs. | 154,708 | 100 | % | Rs. | 148,189 | 100 | % | Rs. | 132,170 | 100 | % | U.S.$ | 2,594 | Rs. | 189,722 | 100 | % | Rs. | 174,600 | 100 | % | Rs. | 153,851 | 100 | % | ||||||||||||||||||||||||||||
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Revenues by country and by therapeutic area for the years ended March 31, 2016, 20152021, 2020 and 20142019 are discussed in Note 5 to our consolidated financial statements.
Global Generics Segment
Revenues from our Global Generics segment were Rs.154,404 million for the year ended March 31, 2021, an increase of 12% as compared to Rs.138,123 million for the year ended March 31, 2020. The revenue increase was in all the four business geographies of this segment: North America (the United States and Canada), Europe, India and “Emerging Markets” (which is comprised of Russia, other countries of the former Soviet Union, Romania and certain other countries from our “Rest of the World” markets, including South Africa, China, Brazil and Australia).
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The production processes for finished dosages of generics are similar, to a certain extent, regardless of whether the finished dosages are to be marketed to highly regulated or less regulated markets. In many cases, the processes share common and interchangeable facilities and employee bases, and use similar raw materials. However, differences remain between highly regulated and less regulated markets in terms of manufacturing, packaging and labeling requirements and the intensity of regulatory oversight, as well as the complexity of patent regimes.
While the degree of regulation in certain markets may impact product development, we are observing increasing convergence of development needs throughout both highly regulated and less regulated markets. As a result, when we begin the development of a product, we may not necessarily target it at a particular market, but will instead target the product towards a cluster of markets that will include both highly regulated and less regulated markets.
Today, we are one of the leading generic pharmaceutical companies in the world. With the integration of all the markets where we are selling generic pharmaceuticals into our Global Generics segment, our front-end business strategies in various markets and our support services in India are increasingly being developed with a view to leverage our global infrastructure.
Our Global Generics segment’s revenues were Rs.128,062 million for the year ended March 31, 2016, as compared to Rs.119,397 million for the year ended March 31, 2015. The revenue growth was largely led by this segment’s operations in the United States, India, Germany and the United Kingdom.
The following is a discussion of the key markets in our Global Generics segment.
India
Approximately 17% of our Global Generics segment’s revenues in
During the year ended March 31, 2016 were derived from sales in the Indian market.2021, India accounted for 22% of our total Global Generics segment sales. In India, our key therapeutic categories include gastro-intestinal, cardiovascular pain management and oncology. We are also increasing our presence in the niche areas ofanti-diabetic, dermatology, oncology, respiratory, stomatology, urology and nephrology.
As of March 31, 2016,2021, we had a total of 296382 branded products in India. Our top ten branded products together accounted for 31%27% of our revenues in India in the year ended March 31, 2016.2021. According to IMS Health,IQVIA, a provider of market research to the pharmaceutical industry, in its moving annual total report for the 12-monthtwelve month period ended March 31, 2016,2021, our secondary sales in India grew by 12.2%3.1%. In comparison, the Indian pharmaceutical market experienced growth of 14.4%4.3% during such period. IMS Health is a provider of market research to the Indian pharmaceutical industry. Strategic Marketing Solutions and Research Center Private Limited (“SMSRC”), a prescription market research firm, in its report measuring pharmaceutical prescriptions in India for the twelve month period from November 2015 to February 2016,ended March 2021, ranked us 10th6th in terms of the number of prescriptions generated in India during such period.
Sales, marketing and distribution network
We generate demand for our products through our 5,6627,345 sales representatives (which include representatives engaged by us on a contract basis through a service provider) and front line managers, who frequently visit doctors to detail our related product portfolio. They also visit various pharmacies to ensure that our brands are adequately stocked.
We sell our products primarily through clearing and forwarding agents to approximately 3,0005,000 wholesalers who decide which brands to buy based on demand. The wholesalers pay for our products inwithin an agreed credit period and in turn sell these products to retailers. Our clearing and forwarding agents are responsible for transporting our products to the wholesalers. We pay our clearing and forwarding agents on a commission basis. We have insurance policies that cover our products during shipment and storage at clearing and forwarding locations.
In April 2015, we entered into a definitive agreement with UCB India Private Limited and other UCB group companies (together referred to as “UCB”) to acquire a select portfolio of established products business in the territories of India, Nepal, Sri Lanka and Maldives. The purchased business was acquired on a slump sale basis (an Indian tax law concept which refers to the transfer of a business as a going concern without values being assigned to individual assets and liabilities). The transaction includes approximately 350 employees engaged in operations of the acquired India business. The acquisition is expected to strengthen our presence in the areas of dermatology, respiratory and pediatric products. The total purchase consideration was Rs.8,000 million. The acquisition was closed on June 16, 2015.
Competition
We compete with different companies in the Indian formulations market, depending upon therapeutic and product categories and, within each category, upon dosage strengths and drug delivery. On the basis of sales, we were the 1211th largest pharmaceutical company in India, with a market share of 2.4%2.3%, according to IMS HealthIQVIA in its moving annual total report for the 12-monthtwelve month period ended March 31, 2016.
Some of the key observations on the performance of the Indian pharmaceutical market, as published by IMS Health in its moving annual total report for the 12-month period ended March 31, 2016, are as follows:2021.
The Indian pharmaceutical market experienced growth of 14.4% for such period;
New products launched in the preceding 24 months accounted for 5% of total Indian pharmaceutical growth for such period;
The top 300 existing brands grew at a rate of 15.9%, which was 1.5% higher than the Indian pharmaceutical market’s overall average, and together they account for 30.5% of the market’s total sales; and
There was an increasing emergence of bio-similar products to address the needs of patients in the oncology therapeutic area.
Our principal competitors in the Indian market include Cipla Limited, GlaxoSmithKline Pharmaceuticals Limited, Zydus Cadila Healthcare Limited, Sun Pharmaceutical Industries Limited, Piramal Enterprises Ltd, Alkem Limited, Mankind Pharma Limited, Pfizer Limited, Abbott India Limited, Lupin Limited, Aristo Pharma Limited, Intas Pharma,Pharmaceuticals Limited, Sanofi India Limited, Glenmark Pharmaceuticals Limited and Emcure Pharmaceuticals Limited.
Government regulations
The manufacturing and marketing of drugs, drug products and cosmetics in India is governed by many statutes, regulations and guidelines, including but not limited to the following:
· | The Drugs and Cosmetics Act, 1940 and the Drugs and Cosmetics Rules, 1945; |
· | The Drugs and Magic Remedies (Objectionable Advertisements) Act, 1954; |
· | The Narcotic Drugs and Psychotropic Substances Act, 1985; |
· | The Drugs (Price Control) Order, 1995 and 2013, read in conjunction with the Essential Commodities Act, 1955; and |
· | The National Pharmaceuticals Pricing Policy, 2012. |
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The Drugs and Magic Remedies (Objectionable Advertisements) Act, 1954;
The Narcotic Drugs and Psychotropic Substances Act, 1985;
The Drugs (Price Control) Order, 1995 and 2013, read in conjunction with the Essential Commodities Act, 1955;
The Medicinal and Toilet Preparations (Excise Duties) Act, 1955; and
The National Pharmaceuticals Pricing Policy, 2012.
These statutes, regulations and guidelines govern the manufacturing, testing, manufacturing, packaging, labeling, storing, record-keeping, safety, approval, pricing, advertising, promotion, sale and distribution of pharmaceutical products.
Pursuant to the amendments in May 2005 to Schedule Y of the Drugs and Cosmetics Act, 1940, manufacturers of finished dosages are required to submit additional technical data to the Drugs Controller General of India in order to obtain a no-objection certificate for conducting clinical trials as well as to manufacture new drugs for marketing.
An approval is required from the Ministry of Health before a generic equivalent of an existing or referenced brand drug can be marketed. When processing a generics application, the Ministry of Health usually waives the requirement of conducting complete clinical studies, although it generally requires bio-availability and/or bio-equivalence studies. “Bio-availability” indicates the rate and extent of absorption and levels of concentration of a drug product in the blood stream needed to produce a therapeutic effect. “Bio-equivalence” compares the bioavailability of one drug product with another, and when established, indicates that the rate of absorption and levels of concentration of the active drug substance in the body are equivalent for the generic drug with the previously approved drug. A generic application may be submitted for a drug on the basis that it is the equivalent of a previously approved drug. Before approving our generic products, the Ministry of Health also requires that our procedures and operations conform to current Good Manufacturing Practice (“cGMP”) regulations, relating to good manufacturing practices as defined by various countries. We must follow the cGMP regulations at all times during the manufacture of our products. We continue to spend significant time, money and effort in the areas of production and quality testing to help ensure full compliance with cGMP regulations.
The timing of final Ministry of Health approval of a generic application depends on various factors, including patent expiration dates, sufficiency of data and regulatory approvals.
Pursuant to the amendments in May 2005 to Schedule Y of the Drugs and Cosmetics Act, 1940, manufacturers of finished dosages are required to submit additional technical data to the Drugs Controller General of India in order to obtain a no-objection certificate for conducting clinical trials as well as to manufacture new drugs for marketing.
On March 22, 2005, the Government of India passed the Patents (Amendment) Bill, 2005 (the “2005 Amendment”), introducing a product patent regime for food, chemicals and pharmaceuticals in India. The 2005 Amendment specifically provides that new medicines (patentability of which is not specifically excluded) for which a patent has been applied for in India on or after January 1, 1995 and for which a patent is granted cannot be manufactured or sold in India by anyone other than the patent holder and its assignees and licensees. This has resulted in a reduction of new product introductions in India for all Indian pharmaceutical companies engaged in the development and marketing of generic finished dosages and APIs. Processes for the manufacture of APIs and formulations were patentable in India even prior to the 2005 Amendment, so no additional impact results from patenting of such processes.
Under the present drug policy of the Government of India, certain drugs have been specified under the Drugs (Prices Control) Order, 2013 (the “DPCO”) as subject to price control. The Government of India established the National Pharmaceutical Pricing Authority, 2012 (“NPPA”), to control pharmaceutical prices. Under the DPCO, the NPPA has the authority to fix the maximum selling price for specified products.
During the year ended March 31, 2013, the Department of Pharmaceuticals under the ministryMinistry of Chemicals and Fertilizers of the Government of India proposed the National Pharmaceuticals Pricing Policy, 2012, a revised nationalNational Pharmaceutical Pricing policyPolicy to apply price controls to 348 drugs listed in National List of Essential Medicines. Some of our formulation products arewere subject to these price controls.
On May 15, 2013, the Department of Pharmaceuticals released the DPCO governing the price control mechanism for 348 drugs listed in the National List of Essential Medicines. Under the DPCO, the prices of each of the drugs are determined based on the simple average of all drugs having market share of more than 1% by value. The individual drug price notifications for almost all of the products were released by the NPPA. Based on these notifications, we were adversely impacted by approximately 3% (the annualized impact is approximately 4%) of our annual revenues from sales of all of our formulation products in India during the year ended March 31, 2014.
Recently, there has been a series of proposals and announcements by the Government of India regarding price controls. First, in December 2015 a proposal was issued to list certain additional drugs on the National List of Essential Medicines. That was followed with an announcement on March 3, 2016 of a reduction in the maximum prices of various drugs, as a result of negative inflation as measured by India’s Wholesale Price Index. Further, on March 10, 2016, the Department of Pharmaceuticals notified the Drugs (Prices Control) Amendment Order, 2016 (“DPCAO 2016”), which amended the DPCO and revised the National List of Essential Medicines. Under the DPCAO 2016, a total of 106 medicines were added to and 70 medicines were deleted from the National List of Essential Medicines, whichas revised in 2016, now contains 376 drugs. The NPPA was in the process of notifying or re-notifying prices for these scheduled drugs as of March 31, 2016. The individual drug price notifications for a majority of the products have been released by the NPPA. Based on these notifications, we believe that we could be adversely impacted by approximately 3% to 5% of our annual revenues from sales of all of our products in India for the year ending on March 31, 2017.
Additionally, on
On March 12, 2016, the Department of Health and Family Welfare under the ministryMinistry of Health and Family Welfare of the Government of India banned 344 fixed dose combination drugs (i.e., two or more active drugs
combined in a fixed ratio into a single dosage). A number of pharmaceutical companies, including us, have filed a writ petition before the Delhi High Court challenging the ban. The Delhi High Court initially granted an interim stay on the ban notification.notification and on December 1, 2016, it overturned the government imposed ban on the 344 fixed dosage combinations. Subsequently, the Government of India filed an appeal of the decision in the Supreme Court of India. In December 2017, the event that this notification comes into effect, it could adversely impact our revenues by approximately 0.7% on an annual basis. Further, it could adversely impactSupreme Court of India referred the Indian pharmaceutical industry by approximately 3.1% on an annual basis (as per AWACS, a provider of market researchissue to the Indian pharmaceutical industry).government’s expert body, the Drugs Technical Advisory Board (“DTAB”), for a fresh review of safety, efficacy and therapeutic justification of the drugs before recommending action. DTAB subsequently completed its review and, in September 2018, the Government of India banned 328 fixed dose combination drugs. The impact of this ban was negligible on our revenue.
The
On February 27, 2019, the NPPA invoked special powers granted under paragraph 19 of the DPCO, and released an Office Memorandum through which it brought 42 non-scheduled anti-cancer medications under price control by capping their trade margin (the difference between the price at which the manufacturers sell the medicines to distributors and the price paid by the end user) at 30%.This Office Memorandum had no material financial impact on our revenue.
From time to time (most recently on March 26, 2021), the NPPA has since notified changes to pricingannounced an upward revision in the maximum prices of different products multiple times, which have impacted certainvarious drugs, as a result of our oncology and chronic condition products.positive inflation as measured by India’s Wholesale Price Index.
Such ongoing price control changes, product bans and other changes can disrupt the Indian branded pharmaceutical market and negatively impact the revenues and profitability of our Indian business and our company.
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Russia and other Countries of the former Soviet Union and Romania
Russia
Russia accounted for 8%10% of our Global Generics segment’s revenues in the year ended March 31, 2016. IMS Health2021. IQVIA ranked us 17th16th in sales in Russia, with a market share of 1.7%, as of March 31, 2016 in its moving annual total report for the 12-monthstwelve months ended March 31, 2016. 2021.
According to IMS Health,IQVIA, as per its moving annual total report for the 12twelve months ended March 31, 2016,2021, our retail sales value decrease was 0.9% and our sales value growth and volume decrease were 5.6% and 3.9%, respectively,decreased by 5.7% for the year ended March 31, 2016such period, as compared to the Russian pharmaceutical market value growth of 8.4%3.3% and sales volume decrease of 4.0%, respectively,5.1% for such period. We were the top ranked Indian pharmaceutical company in Russia for such period.
Our top fourfive brands, Nise, Omez, KetorolNasivin, Cetrine and Cetrine,Ibuclin accounted for 55%62.1% of our Global Generics segment’s revenuesretail sales in Russia for the year12 months ended March 31, 2016.2021. Nise (pain management product, including systemic and topical form), Omez (an anti-ulcerant product), NiseNasivin (for cold and Ketorol (both pain management products)flu), Cetrine (for allergy) and Cetrine (a respiratory product)Ibuclin (for cold and flu) and were ranked as the 58th, 11th, 112th27th, 56th, 161st, 170th and 176th172nd best-selling formulation brands, respectively, in the Russian market as of March 31, 2016 by IMS HealthIQVIA in its moving annual total retail segment report for the 12moving twelve months ended March 31, 2016.
2021. (Note that Nasivin is distributed and promoted by us under a licensing agreement and the brand is owned by the licensor). Our strategy in Russia is to focus on the gastro-intestinal, pain management, anti-infectives, respiratory,cough and cold, allergy and oncology and cardiovascular therapeutic areas. Our focus is on building leading brands in these therapeutic areas in prescription, over-the-counter and hospital sales. Nise, Omez, Ketorol, Cetrine and Ciprolet continue to be brand leaders in their respective categories, as reported by IMS Health in its moving annual total report for the 12-months ended March 31, 2016.
Our Global Generics segment’s revenues in Russia increased by 1% (in Russian rouble absolute currency terms) during the year ended March 31, 2016,2021, which was drivenlargely attributable to an increase in the sales price and sales from new product launches during the year ended March 31, 2021, and was partially offset by increased marketing and pharmacy chain activities for over-the-counter medicines. However, such revenue growtha reduction in sales due to lower volumes in some of our key existing products. Such revenues, measured in Indian rupees, was adversely impacted due to depreciation of the Russian roubledecreased by approximately 27%6% as compared to the year ended March 31, 2015.2020.
Other Countries of the former Soviet Union and Romania
We operate in other countries of the former Soviet Union, including Ukraine, Kazakhstan, Belarus, Uzbekistan and Romania. For the year ended March 31, 2016,2021, revenues from these countries accounted for approximately 3%5% of our total Global Generics segment’s revenues.
During the year ended March 31, 2016, the Ukrainian hryvnia and the Kazakhstani tenge devalued significantly and adversely impacted our revenues from these markets.
Sales, marketing and distribution network
Our marketing and promotion efforts in our Russian prescription divisionRussia market is driven by a team of 268472 medical representatives and 3854 managers to detail our products to doctors in 77 cities in Russia.
Our Russian over-the-counter (“OTC”) division has 216 medical representatives and 31commercial team consists of 16 key account managers and is focused on establishing a network of relationships with key pharmacy chains and individual pharmacies.chains. Our RussianRussia hospital division has 3837 hospital specialists and 17 key account managers, and is focused on expanding our presence in hospitals and institutes.hospitals.
In Russia, we generally extend credit only to customers after they have established a satisfactory history of payment with us. The credit ratings ofterms offered to these customers are based on turnover, payment record and the number of the customers’ branches or pharmacies, and are reviewed on a periodic basis. We review the credit terms offered to our key customers on a periodic basis and modify them to take into account the macro-economic scenario in Russia.
Competition
Our principal competitors in the Russian market include Berlin Chemi AG, Gedeon RichterBerlin-Chemie/Menarini Pharma, GmbH, KRKA Pharma Limited, Krka d.d., Teva Pharmaceutical Industries Ltd.,Limited, Lek-Sandoz Pharmaceuticals (an affiliate of Novartis Pharma A.G.), and Zao Ranbaxy Laboratories Limited, Nycomed International Management GmbH and Zentiva N.V. (an affiliate of Sanofi-Aventis S.A.)Sun Pharmaceutical Industries Limited).
Government regulationregulations
Promotion of local industry
Healthcare system development in Russia
In order to promote local industry, in October 2009the year 2012 the Russian government announcedapproved the Strategy of Pharmaceutical Industry Development in the Russian Federation for the period up to the year 2020 (or the “Pharma 2020 plan”), which aimsaimed to develop the research, development and manufacturing of pharmaceutical products by Russia’s domestic pharmaceutical industry.
The goal of the Pharma 2020 plan iswas to reduce Russia’s reliance on imported pharmaceutical products and increase Russia’s self-sufficiency in that regard. According to this program, 90% of drugs from the list of “Essential and Vital Drugs” (also known as the “ZhNVLS”) should be produced by local pharmaceutical companies. By the end of the year 2018, this target was almost achieved (84.2% vs planned 90%). In the year 2018, the Russian government announced a new planned “Pharma-2030” program for the further development of Russian pharmaceutical production. One of the key goals of this program is to increase by 500% to 600% the export of locally produced drugs. This program is expected to be approved during calendar year 2021.
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The Russian government approved the State Program for Healthcare System Development on December 26, 2017. The objectives of this program are increasing life expectancy at birth, reducing mortality of the working-age population, reducing mortality from circulatory diseases and tumors (including malignant ones) and raising medical care quality satisfaction.
The Government of the Russian Federation has approved a Strategy for the development of immunoprophylaxis for the next 15 years. The document was developed on behalf of the President of Russia and defines an action plan until 2035. The strategy focuses on the immunoprophylaxis of a number of infections, such as diphtheria, measles, rubella, viral hepatitis B, and seasonal flu. The strategy's activities are divided into six main areas:
Reference pricing regime
During the year ended March 31, 2010, the Russian government announced a reference pricing regime, pursuant to which a price freeze on certain drugs categorized as “essential” was implemented effective as of April 2010. Pharmaceutical companies have had to register maximum import prices for approximately 5,000 drugs, based on a list of “Essential and Vital Drugs” (also known as the “ZhNVLS”). During the year ended March 31, 2011, the Russian government announced price re-registration in local currency (Russian roubles) for drugs categorized as “essential” and the new registered prices were was implemented effective as of December 10,April 2010. Also, effective as of September 1, 2010, the price controls on certain drugs categorized as “non-essential” were removed by the Russian Ministry of Health.
For the past several years, the Russian Ministry of Industry and Trade has enacted and renewed short termshort-term government regulations under which local manufacturers (i.e., in Russia, Belarus and Kazakhstan) get a 15% price preference over non-local manufacturers in procurement tenders by the state.
A draft of “Rules for State registration and re-registration of the maximum ex-works manufacturer prices of medicines included in EDL” was published by the Russian Ministry of Health in 2017 and subsequently has undergone several changes. Federal Law No. 134-FZ dated June 6, 2019 establishes, and obligates the holder of a registration certificate for a reference drug to re-register, the maximum selling prices for drugs included in the list of vital and essential drugs. It also provides for an automatic re-registration of maximum selling prices for generics and biosimilar based on step-down coefficient.
State Regulation of Prices for Vital and Essential Medicines
Russia’s Federal Law No. 34-FZ dated March 8, 2015 amendsamended the Federal Law 61-FZ “On Circulation of Medicines”. The amendments createcreated new rules for the registration, manufacture and quality control of medicines, including new rules for the calculation and registration of the maximum retail prices of vital and essential medicines established by the ZhNVLS. Most of the changes are effective commencing July 1, 2015, with certain changes effective starting in 2016 or 2017.ZhNVLS (the “EDL”).
Calculation of the maximum sale price for medicines included in the ZhNVLSEDL list shall beis determined by the Government of the Russian Federation taking into account a variety of economic and/or social criteria. These amendments became effective from March 16, 2015. The updated EDL lists for 20152020, approved by the Decree of the Government No. 2782-p2406-p dated December 30, 2014October 12, 2019, became effective from MarchJanuary 1, 2015.2020. These lists include the list of drugs for provision to specific groups of citizens, medicines prescribed by a decision of a medical commission of medical organizations, medical supplies from the 7 Nosologies program list (which covers expensive treatments for patients with certain severe chronic diseases), as well as the minimum range of medicines required for medical aid.
Restrictions on access of foreign drugs
The
In 2015, the Russian Government approvedenacted the Priority Action Plan for sustainable economic and social stability development and regulation No. 128. This plan and regulation affects medicines included in 2015 (the “Priority Action Plan”). The Priority Action Plan was signed by the Russian Prime Minister on January 27, 2015. TheEDL, and some of their key areasterms that may impacthave impacted the pharmaceutical industry in the Priority Action Plan are (i) supporting import substitution; (ii) optimization ofoptimizing budget costs and reduction ofreducing inefficient expenses; and (iii) particularly, in the public healthcare area, the following measures:
On February 2, 2015, the Russian Ministry of Health (“MoH”), Russian Federal Service on Tariffs and Russian Ministry of Economic Development (“MoED”) amended the Federal Law 61-FZ “On Circulation of Medicines” to provide the possibility of one-time indexation of prices for low-cost essential drugs;
On February 27, 2015, the Russian Ministry of Finance, MoH and MoED suggested improvements for public drugs supply; and
On February 15, 2015, the Russian Ministry of Industry and Trade enacted restrictions on access of foreign drugs to state procurement tenders, if two or more locally manufactured drugs participate in the relevant tender. The new regulation No. 1289 of the Russian Government came into effect on December 10, 2015 and affects medicines included in Russia’s Vital and Essential Drugs List. However, the restrictions will not apply to purchases of drugs packaged in countries of the Eurasian Economic Union until December 31, 2016.
Interactions between healthcare professionals and medical product companies:companies
During the year ended March 31, 2012, Russia introduced Federal Law # 323, titled “On the Foundations of Healthcare for Russian Citizens”. Portions of this new law became effective on November 23, 2011 and the remainder became effective on January 1, 2012. This new law imposes stringent restrictions on interactions between (i) healthcare professionals, pharmacists, healthcare management organizations, opinion leaders (both governmental and from the private sector) and certain other parties (collectively referred to as “healthcare decision makers”) and (ii) companies that produce or distribute drugs or medical equipment (collectively referred to as “medical product companies”) and any representatives or intermediaries acting on their behalf (collectively referred to as “medical product representatives”).
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Some of the key provisions of this law are prohibitions on:
one-on-one meetings and communications between healthcare professionals and medical product representatives, except for participation in clinical trials, pharmacovigilance, group educational events and certain other limited exceptions approved by Russia’s Healthcare Organization Administration;
· | one-on-one meetings and communications between healthcare professionals and medical product representatives, except for participation in clinical trials, pharmacovigilance, group educational events and certain other limited exceptions approved by Russia’s Healthcare Organization Administration; |
the acceptance by a healthcare professional of compensation, gifts or entertainment paid by medical product representatives;
· | the acceptance by a healthcare professional of compensation, gifts or entertainment paid by medical product representatives; |
the agreement by a healthcare professional to prescribe or recommend a drug product or medical equipment; or
· | the agreement by a healthcare professional to prescribe or recommend a drug product or medical equipment; or |
· | the engagement by a healthcare decision maker in a “conflict of interest” transaction with a medical product representative, unless approved by regulators pursuant to certain specified procedures. |
the engagement by a healthcare decision maker in a “conflict of interest” transaction with a medical product representative, unless approved by regulators pursuant to certain specified procedures.
At the end of 2013, the State Duma (i.e., the lower chamber of the Russian parliament) adopted a series of amendments to various healthcare related laws. Among other things, the “Law on Medicines”Medicines" was amended to add regulations restricting interactions between medical product representatives with medical professionals in connection with events sponsored by medical product companies. Under these regulations, in the event that medical product companies wish to sponsor certain scientific, medical education or similar events, they are required to disclose the date, place and time of the event and the plans, programs and agendas for discussion.
Disclosure is to be made by publishing appropriate information on their official websites not later than two months before the indicated events, and the same information shall also be sent to Russia’s Federal Healthcare Service (Roszdravnadzor).
Liability for non-compliance with such restrictions extends to both the healthcare professional and the medical product representative. Except for requiring the disclosure of information on conflicts of interest, no specific liability has been currently prescribed for medical product companies.
On July 2, 2013, the Ministry of Health of the Government of Russia published an order on its website that binds physicians to prescribe medicinal products by International Nonproprietary Name (i.e., active substance) or by combination list (which combines different International Nonproprietary Names in one treatment group).
Russia signed the agreement onis a member of a common market for medicines within the Eurasian Economic Union
The Eurasian Economic Union (“EEU”), whose member states was established in January 2015 with the aim of creating a shared economic space for its members. EEU rules for the circulation of medicines have been in effect since 2017. In 2018, the information base of the pharmaceutical market of the Union was created. In 2019, the EEU began re-registering medicines under the EEU rules, which allow manufacturers in EEU countries to re-register medicines under common procedures and reduce costs.
More than three dozen medicines and medical devices have already been registered under the EEU's rules, and more than 200 applications for registration are Russia, Belarus, Kazakhstan, Armenia, and Kyrgyzstan, officially started functioning on January 1, 2015. Among other things,in process. Work is being actively carried out to inspect pharmaceutical production facilities for compliance with the member statesrules of good manufacturing practice (“GMP”) of the EEU, signed an international agreement establishing common principles and rules of functioningabout 20 certificates have already been issued. This year the first part of the marketfirst volume of the Union Pharmacopoeia is releasing.
In 2020-2022, the Eurasian Economic Commission plans to update a number of documents of the Union on good practices in the field of circulation of medicines (GMP, Good Pharmacovigilance Practice (“GVP”), and Good Clinical Practice (“GCP”), rules for registration of medicines, withinand requirements for inspection of pharmaceutical production. It is also continuing to develop new recommendations on certain aspects of treatment, such as clinical research, biostatistics, and peculiarities of production of certain types of drugs.
The Union Pharmacopoeia was established by Decision of College of the EEU, which agreementEurasian Economic Commission № 100 dated August 11, 2020. According to relevant decision The Union Pharmacopoeia came into effect on March 1, 2021. Registration dossiers must be for compliance with its requirements by January 1, 2026.
The decision of the Council of the Eurasian Economic Commission № 128 dated December 23, 2020 was originally expectedmade to be made effectiveextend for six months (until July 1, 2021) the opportunity for pharmaceutical manufacturers to choose the registration of new drugs according to the national procedure in four union states (the Republic of Armenia, the Republic of Belarus, the Republic of Kazakhstan and the Kyrgyz Republic).
From July 1, 2021 (and in the Russian Federation - from January 1, 2021), new medicinal products (that is, medicinal products that are not valid registration certificates of the Member States of the Union) can be registered only in accordance with the Rules for the registration and examination of medicinal products for medical application approved by the Decision of the EEC Council No. 78 dated November 3, 2016. For these purposes,
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Union market participants should take into account that all registration certificates issued under the "national" rules of the member states are working on the necessary regulatory framework and EEU plans for its member statesvalid until their expiration, but no later than December 31, 2025.
With regard to sign 25 acts governing various stages of drugs circulation. According to the agreement, the market authorization for a particular medicine received ininspection, one EEU member state will be valid throughout the whole EEU territory.
Political Instability
There has been severe political instability in Ukraine following civilian riots and political unrest which began in November 2013, destabilization of the Ukrainian President’s officerecent innovations in February 2014, and subsequent military action inthis area can be considered the destabilized country operating under a temporary government.
As a result of ongoing conflict in the region, the United States and the European Union have imposed sanctions on certain designated individuals and companies in Ukraine and Russia. These sanctions were targeted at persons threatening the peace and security of Ukraine, senior officialsdecree of the Government of the Russian Federation dated September 5, 2020 No. 1361 "On Amending the Rules for the Organization and Conduct of Inspection of Medicinal Products Manufacturers for Compliance with the Requirements of Good Manufacturing Practice, as well as the issuance on the compliance of the manufacturer of medicinal products with the specified requirements”. Previously, foreign drug manufacturers could confirm the fact that the discovered remarks were eliminated only during the next inspection. Now, in the event of inconsistencies, foreign companies will be able to submit a corrective action plan even before the inspection report is generated.
Mutual recognition of national GMP certificates of the EEU members was adopted. Decision of the EEC Council No. 66 of September 4, 2020 establishes for the period from 2021 to 2025, mutual recognition of, firstly, national GMP certificates of the states of the Eurasian Economic Union, secondly, GMP certificates of the Union when making changes to the registration dossier and renewing national registration certificates for medicines produced in the EEU, and thirdly, during the national registration of the Union's GMP certificates for medicines produced in third countries. These changes will make it possible to exclude the resumption of repeated inspections of drug manufacturers by the authorized bodies of the EEU states from January 1, 2021.
An important innovation is the granting of the Russian Ministry of Industry and Trade the status of an authorized organization for organizing and/or conducting pharmaceutical inspections of the production of medicines for medical use for compliance with the requirements of the GMP rules of the EEU, including jointly with the pharmaceutical inspectorates of another state which is a member of the EEU (see the Resolution of the Government of the Russian Federation of September 15, 2020 No. 1446).
A distinctive feature of 2020 is the transition to remote inspection. As of September 18, 2020, 184 such remote inspections were held by the Federal State Institution «State Institute of Drugs and Good Practices» (also known as “FSI «SID & GP»”), a subordinate agency of the Russian Ministry of Industry and Trade.
Monitoring System of Movement of Medicines from the Producer to the Final Consumer
In 2019, the Ministry of Health in Russia proposed a full serialization system to track and trace the passage of pharmaceuticals through the entire supply chain, from the manufacturers to the end users, known as Markirovka or “MDLP”. The proposed federal repository and tracking system would provide the manufacturers, supply chain and end users of pharmaceuticals many functionalities. Listed below are some of the functions that would be available in addition to the usual authentication and track and trace services:
· | the system would provide price controls on products designated as vital and essential medicines; |
· | consumers would be able to compare the price of the drug to its official price limit, find which pharmacies do have the drug available, and get the product information; |
· | manufacturers would be able to get real time data on the logistics and storage of their products in the market; |
· | pharmacists could get information related to the price, and monitor expiration dates; |
· | health care institutions would be able to track registration and prices; and |
· | federal agencies would have capability to monitor all medicinal products on the market to facilitate price controls as well as report on and analyze the industry. |
The provisions on manufacturers’ obligations to label the package with the identification marks, to submit the data to the monitoring system as well as the terms governing liability for non-compliance will become effective starting July 1, 2020. (As per Art. 2, Federal Law No. 462-FZ dated December 27, 2019).
The implementation of serialization caused great difficulties for all participants in the pharmaceutical supply chain and has affected the availability of drugs. The notification regime of the MDLP, which began at the end of October 2020 and was fixed in November resolution No. 1779, helped resolve these problems. Now the participants in the turnover do not have to wait for acceptance from suppliers and can independently enter medicines and promote them further along the chain. For pharmacies and medical organizations, the regime remains simplified indefinitely. For the rest of the participants of the turnover, the regime will be valid until July 1, 2021.
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Antimonopoly compliance in Russia
On March 1, 2020, the Russian President signed the bill setting forth the legal framework for the internal systems of antimonopoly compliance (the "Compliance Amendments"). The Compliance Amendments came into force on March 12, 2020.
The Compliance Amendments set forth the optional right of Russian companies to introduce an internal system of antimonopoly compliance which is designed to assess and prevent violations of Russian antimonopoly laws and promote internal controls for the same (the "Compliance System"). If a Compliance System is adopted by a company and properly functions, this can serve as a mitigating factor, and potentially reduce liability, in the event of an antimonopoly law violation.
A Russian company is entitled to file the Compliance System with the Russian Federal Antimonopoly Service (the “FAS”) for prior approval. This mechanism allows minimizing risks of violation of the antimonopoly law and imposition of the respective administrative fines if the Compliance System is approved by the FAS and the energy, defense and financial services sectors of Russia, but they have had macroeconomic consequences beyond those persons and industries. In December 2014, the United States imposed further sanctions aimed at blocking new investmentscompany follows it in the Crimea region of Ukraine which was annexed by Russia, and blocking trade between the United States or U.S. persons and Crimea. These sanctions also authorized the United States government to impose sanctions on any U.S. persons determined to be operating in the Crimea region of Ukraine, subject to certain authorizationspractice.
E-Commerce for the export and reexport of certain agricultural commodities, medicine, medical supplies, and replacement parts to Crimea.Medical Products
Political instability in the region has combined with low worldwide oil prices to significantly devalue the Russian rouble. In addition, the Ukrainian hryvnia experienced significant devaluation in 2014 and 2015. The possibility of additional sanctions implemented by the United States and/or the European Union against Russia or vice versa, continued political instability, civil strife, deteriorating macroeconomic conditions and actual or threatened military action in the region may result in serious economic challenges in Ukraine, Russia and the surrounding areas.
Among our operations, we are engaged in sales, distribution and marketing of pharmaceutical products in Russia and Ukraine, including the Crimea region, all through non-U.S. entities that sell to distributors. Our sales in Russia and Ukraine are not to any of the individuals, companies or sectors designated by the current sanctions, and our sales in the Crimea region accounted for approximately 0.06% of our total revenues for the year ended March 31, 2016. We do not believe that our business in Russia, Ukraine or the Crimea region violates any of the current sanctions. However, relevant regulators could take a view that is different from ours on the issue. We continue to monitor our subsidiaries’ activities inIn light of the restrictions imposedvolatile situation with COVID-19, on April 3, 2020 the President of Russia signed Decree No. 187 dated March 17, 2020 “On Retail Trade of Medicines for Medical Use” under which online retail sales of over-the-counter medicinal products (except illegal drugs, psychedelic medicines and medicines containing over 25% of ethyl alcohol) in the Russian Federation is now permitted. In the case of prescription medicines, online retail sales are now permitted in cases of urgent medical need and emergency or where there is an “occurrence of a threat of transmission of a disease constituting a danger to the public.” The online retail sales of medicines can be undertaken by theseany person (including medicine manufacturers and retail traders) that trades through a licensed pharmacy and has obtained the requisite government agency permission. The law does not set forth any future sanctions.procedures for e-commerce authorization issuance and medical product delivery. The permits are granted by the Federal Service for Surveillance in Healthcare, also known as the Roszdravnadzor.
North America (the United States and Canada)
During the year ended March 31, 2016,2021, North America (the United States and Canada) accounted for 59%46% of our total Global Generics segment sales. In the United States, we sell generic drugs that are the chemical and therapeutic equivalents of reference branded drugs, typically sold under their generic chemical names at prices below those of their brand drug equivalents. Generic drugs are finished pharmaceutical products ready for consumption by the patient. These drugs are required to meet the U.S. FDA or Health Canada, as applicable, standards that are similar to those applicable to their brand-name equivalents and must receive regulatory approval prior to their sale.
Generic drugs may be manufactured and marketed only if relevant patents on their brand name equivalents and any additional government-mandated market exclusivity periods have expired, been challenged and invalidated, or otherwise validly circumvented. Generic pharmaceutical companies sometimes conduct “at-risk launches”, in which the product is launched prior to resolution of a patent challenge.
Generic pharmaceutical sales have increased significantly in recent years, partlythe last decade, primarily due to an increased awareness and acceptance among consumers, physicians and pharmacists that generic drugs are the equivalent of brand name drugs. Among the factors contributingdrugs, and have resulted in substantial cost savings to this increased awareness are theU.S. healthcare and further due to support by governments through passage of legislation permitting or encouraging substitutiongeneric drug alternatives.
However, the generic pharmaceutical business has been negatively impacted by consolidation among wholesalers and retailers and the publication by regulatory authoritiesformation of lists of equivalent drugs,group purchasing organizations (“GPOs”), which provide physicians and pharmacists with generic drug alternatives.has led to increased pricing pressures in the market. In addition, various government agenciesaccelerated approval from the U.S. FDA under the timelines of the Generic Drug User Fee Act, as amended, has led to more competition and many private managed care or insurance programs encourage the substitution of generic drugs for brand-name pharmaceuticals asresulted in a cost-savings measuredecline in the purchase of, or reimbursement for, prescription drugs. We believe that these factors should lead to continued expansiongrowth of the generic pharmaceuticals market as a whole.companies in North America. We intend to capitalize oncontinue building our presence in the opportunities resulting from this expansion of the marketregion by leveraging our product development capabilities and alliance management, manufacturing capacities inspected by various international regulatory agencies and access to our own APIs, which offer significant supply chain efficiencies.
In April 2008, we acquired BASF’s pharmaceutical contract manufacturing business and related facility in Shreveport, Louisiana, U.S.A. The acquisition included the relevant business, customer contracts, certain supplier contracts, related Abbreviated New Drug Applications (“ANDAs”) and New Drug Applications (“NDAs”), trademarks, as well as the manufacturing facility and assets owned by BASF in Shreveport, Louisiana. The facility is designed to manufacture solid, semi-solid and liquid dosage forms.
In March 2011, we acquired from GlaxoSmithKline plc and Glaxo Group Limited (collectively, “GSK”) a penicillin-based antibiotics manufacturing site in Bristol, Tennessee, U.S.A., the product rights for GSK’sAugmentin®andAmoxil®brands of oral penicillin-based antibiotics in the United States (GSK retained the existing rights for these brands outside the United States), certain raw materials and finished goods inventory associated with Augmentin®, and rights to receive certain transitional services from GSK. The acquisition enabled us to enter the U.S. oral antibiotics market with a comprehensive product filing and a dedicated manufacturing site. Due to high competition in our antibiotics portfolio, with minimal or no margin for certain dosage strengths, we have restructured our antibiotics manufacturing operations during the year ended March 31, 2016, including a workforce reduction and the discontinuation of certain dosage strengths of Amoxil® andAugmentin®.
During the year ended March 31, 2016, we completed the transition and integration of the Habitrol® business (an over-the-counter Nicotine Replacement Therapy transdermal patch) that2017, we acquired from Novartis Consumer Healthcare Inc.Teva and an affiliate of Allergan plc a portfolio of eight ANDAs for our North American Generics business. The transaction, valued at U.S.$350 million, represents the largest assets acquisition in our history. However, certain products forming part of the said portfolio were impaired during the yearyears ended March 31, 2015, including operational integration2021 and customer onboarding. The business is now fully integrated into2020. Refer to Note 14 of our company, and we are working to grow the franchise through expansion of distribution into new channels and through product innovation.consolidated financial statements for further details.
Through the coordinated efforts of our teams in the United States and India, we constantly seek to expand our pipeline of generic products. During the year ended March 31, 2016,2021, we made 14 filings including 1320 new ANDA filings and 1 new NDA filing under section 505(b)(2) of the Federal Food, Drug and Cosmetic Act (a “505(b)(2) NDA”) in the United States, including 10 Paragraph IV filings. During the year ended March 31, 2016, the U.S. FDA granted us 2 final ANDA approvals. As of March 31, 2016, we had filed a cumulative total of 233 ANDA in the United States, out of which 79 ANDAs were pending approval at the U.S. FDA, including 12 tentative approvals. As of March 31, 2016, we had also filed three NDAs under section 505(b)(2) of the Federal Food, Drug and Cosmetic Act in the United States onewith the U.S. FDA. As of March 31, 2021 our cumulative filings were 304, which is tentatively approvedincludes 5 NDA filings under section 505(b)(2) and awaits final approval. 299 ANDA filings. These 299 ANDA filings include 8 ANDAs that we acquired from Teva and an affiliate of Allergan plc. As of March 31, 2021, we had 95 filings pending approval with the U.S. FDA (92 ANDAs and 3 NDAs under the 505(b)(2) route, including 21 tentative approvals). Of the 92 ANDAs which are pending approval, 47 are Paragraph IV filings (see “U.S. REGULATORY ENVIRONMENT” below), and we believe that we are the first to file with respect to 23 of these filings.
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We have also filed two new Investigational New Drugs (“INDs”IND”), applications, for our proposed biosimilars to rituximab and PEG-GCSF.pegylated granulocyte colony stimulating factor (“PEG-GCSF”). For each of these two products, arituximab, Phase 1 clinical trial,trials have been successfully completed and Phase 3 clinical trials are currently in progress under the applicable IND, is currently in progress.
During the year ended March 31, 2016, we in-licensed six ANDAs in the United States, of which two are Paragraph IV filings. As of March 31, 2016, we have in-licensedIND. For PEG-GCSF, our partner Fresenius Kabi has successfully completed their clinical trials and has submitted a cumulative total of eleven ANDAs in the United States, out of which eight were pending approvalBiologics License Application (“BLA”) with the U.S. FDA.FDA and a Marketing Authorization Application (“MAA”) with the European Medicines Agency (“EMA”), and the respective agencies have accepted the same for review.
Our Canada business generated revenues of Rs.478Rs.1,902 million during the year ended March 31, 2016.2021. This business includes revenues from certain profit sharing arrangements with distributors who market certain of our generic products. As of March 31, 2021 we have filed a cumulative total of 1 New Drug Submission (“NDS”), 1 COVID-19 Interim Order Application, 1 Drug Identification Number (DIN-A) Application and 43 Abbreviated New Drug Submissions (“ANDS”) in Canada, out of which 32 were approved, 3 were withdrawn and 11 are pending approval.
We have also submitted a New Drug Submission under Interim Order Respecting Importation, Sale and Advertising of Drugs for Favipiravir Tablets, 200 mg, for treatment of mild to moderate COVID-19 patients that is under review with Health Canada.
Sales, Marketing and Distribution Network
Dr. Reddy’s Laboratories, Inc., our wholly-owned subsidiary headquartered in Princeton, New Jersey, United States, is primarily engaged in the marketing of our generic products in the United States. In early 2003, we commenced sales of generic products under our own label. We have our own sales and marketing team to market these generic products. Our key account representatives for generic products call on procurement buyers for chain drug stores, drug wholesalers and distributors, mass merchandisers, group purchasing organizations (“GPOs”) for hospitals, specialty distributors and pharmacy buying groups.
The majority of revenue from our North America Generics business is derived from sales of oral solids, as well as sales of various products (both oral solids and OTC products) to retail chains. This portion of the business represents nearly three quarters of this segment’s gross revenues for this region. The product portfolio includes a wide range of therapeutic areas.
Our over-the-counter (“OTC”) division primarily markets and distributes store brand OTC products.products, but expanded into the branded OTC segment in May 2016, developing a new channel for our growth. This division has successfully launched 10over 15 products. OTC products include store brand generic equivalents of products that approved to be sold Over-the-counter in the U.S. market. Many of the products may also originally have had prescription drug status and are switched to OTC drug status by the innovator upon U.S. FDA approval (sometimes called “Rx-to-OTC switch” products). Our entry into the OTC branded space in May 2016 was through the acquisition from Ducere Pharma of the rights to six OTC brand products, including Doan’s, Bufferin and Nupercainal. Our OTC division services a broad range of customers, including drug retailers, mass merchandisers, food chains, drug wholesalers, distributors, GPOs, and distributors, and GPOs. Formore recently, e-commerce or online retailers as well. We launched 3 new products in the market during the year ended March 31, 2016,2021, which included Nicotine Lozenges, Diclofenac Gel and Olopatadine Eye drops. We also re-launched 2 dormant products of Famotidine Tablets and Fexofenadine 60mg Tablets.
During the year ended March 31, 2021, we continued to ramp up our OTC division generated Rs.11,200 millionpresence in revenues.the e-commerce channel with the launch of multiple new products on Amazon marketplace. We feel very optimistic about significantly growing this segment, with evolving consumer trends in the United States moving towards a higher share of e-commerce, especially with COVID-19 accelerating some of these trends. Additionally, we continue to strengthen our presence in the smoking cessation space with our Habitrol® business. We secured approval and launched for Nicotine lozenges (mint and original) in July 2020.
A significant portion of our revenue is derived from the sale of injectable products in the therapeutic areas of oncology neurology and anti-allergy. During the years ended March 31, 2015 and 2014, we launched docetaxel, azacitidine, decitabine and zoledronic acid in the United States.critical care. We have also expanded our presence tofrom drug wholesalers GPOs,to specialty distributors, integrated distribution networks (“IDNs”), clinics, and hospitals to market these products.
In the year ended March 31, 2014, we started supplying We also supply products for private label customers for injectable prescription products.
Competition
Revenues and gross profit derived from the sales of generic pharmaceutical products are affected by certain regulatory and competitive factors. As patents and regulatory exclusivity for brand name products expire, the first manufacturer to receive regulatory approval for generic equivalents of such products is generally able to achieve significant market penetration. As competing manufacturers receive regulatory approvals on similar products, market share, revenues and gross profit typically decline, in some cases significantly.
Accordingly, the level of market share, revenues and gross profit attributable to a particular generic product is normally dependent upon the number of competitors and the timing of that product’s regulatory approval and launch, in relation to competing approvals and launches. Consequently, we must continue
to develop and introduce new products in a timely and cost-effective manner to maintain our revenues and gross margins.
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In addition, the other competitive factors critical to this business include price, product quality, consistent and reliable product supplies, customer service and reputation. Our major competitors in the United States include Teva, Pharmaceutical Industries Limited, Mylan Inc., Sandoz a(a division of Novartis Pharma A.G.), Endo PharmaceuticalsInternational plc (including its subsidiarysubsidiaries Endo Pharmaceuticals Inc. and Par Pharmaceutical)Pharmaceutical Inc.), Sun Pharmaceuticals Limited, Lupin Limited, Aurobindo Pharma Limited, Fresenius Kabi, Sagent Pharmaceuticals, Amneal Pharmaceuticals, Inc., Cadila Healthcare Limited (also known as Zydus Cadila), and Lupin Limited.Hikma Pharmaceuticals plc.
Continued consolidation
Consolidation of customer purchasing power through acquisitions, alliances and joint ventures (such as the Walgreens Boots Alliance Development, the proposed acquisition of Rite Aid by Walgreens, the Red Oak Sourcing joint venture between CVS and Cardinal Health, and the acquisitions of Omnicare and Target Pharmacy by CVS) has served to intensify the competition and drive down prices. Consolidation of manufacturers is also continuing and, at the same time, newimpacts pricing. New manufacturers continue to enter the generic market in the United States, which may further lower our pricing power and adversely affect our revenues in that market.
Brand name manufacturers have devised numerous strategies to delay competition from lower costby introducing lower-cost generic versions of their products. One of these strategies is to change the dosage form or dosing regimen of the brand product prior to generic introduction, which may reduce the demand for the original dosage form as sought by a generic ANDA dossier applicant or create regulatory delays, sometimes significant, while the generic applicant, to the extent possible, amends its ANDA dossier to match the changes in the brand product. In many of these instances, the changes to the brand product may be protected by patent or exclusivities, further delaying generic introduction. Another strategy is the launch by the innovator or its licensee of an “authorized generic” during the 180-day generic exclusivity period, resulting in two generic products competing in the market rather than just the product that obtained the generic exclusivity. This may result in reduced revenues for the generic company which has been awarded the generic exclusivity period.
The U.S. market for OTC pharmaceutical products is highly competitive. Competition is based on a variety of factors, including price, quality, product mix, customer service, marketing support, and the reliability and flexibility of the supply chain for products. Our competition in store brand and innovator branded products in the United States consists of several publicly traded and privately owned companies, including large brand-name pharmaceutical companies.
The competition is highly fragmented in terms of both geographic market coverage and product categories, such that a competitor generally does not compete across all product lines. In the store brand market, we compete directly with companies, such as Perrigo, Apotex, PLD Aurobindo and Sun Pharma that sell store brand OTC products. In the branded market, we compete directly with companies, such as Bayer and Pfizer, which sell branded OTC products.
With the acquisition of Habitrol®Habitrol®, we now not only compete with store brands but also with large branded companies such as GlaxoSmithKline Consumer Care, which is an industry leader in the nicotine replacement therapy category. In addition, since a majority of our products are generic equivalents of innovator brands, we also compete against large brand-name pharmaceutical companies.
The competitive landscape and market dynamics of the OTC market are rapidly evolving. Large brand-name pharmaceutical companies have begun to more aggressively pursue Rx-to-OTC switches in new categories, which could present opportunities for us and other companies that sell store brand products. At the same time, pricing pressures continue to increase with the entry of new competitors in the market. On key select molecules, the expectation is that competition in this area will continue to grow as newer categories experience Rx-to-OTC switches.
Government regulations
U.S. REGULATORY ENVIRONMENTRegulatory Environment
All pharmaceutical manufacturers that sell products in the United States are subject to extensive regulation by the U.S. federal government, principally pursuant to the Federal Food, Drug and Cosmetic Act, the Hatch-Waxman Act, the Generic Drug Enforcement Act and other federal government statutes and regulations. These regulations govern or influence the testing, manufacturing, packaging, labeling, storing, record keeping, safety, approval, advertising, promotion, sale and distribution of products.
Our facilities and products are periodically inspected by the U.S. FDA, which has extensive enforcement powers over the activities of pharmaceutical manufacturers. Non-compliance with applicable requirements can result in fines, criminal penalties, civil injunction against shipment of products, recall and seizure of products, total or partial suspension of production, sale or import of products, refusal of the U.S. government to enter into supply contracts or to approve new drug applications and criminal prosecution. The U.S. FDA also has the authority to deny or revoke approvals of drug active pharmaceutical ingredients and dosage forms and the power to halt the operations of non-complying manufacturers. Any failure to comply with applicable U.S. FDA policies and regulations could have a material adverse effect on the operations in our generics business.
U.S. FDA approval of an ANDA is required before a generic equivalent of an existing or referenced brand drug can be marketed. The ANDA approval process is abbreviated because the U.S. FDA waives the requirement of conducting complete
clinical studies, although it generally requires bio-availability and/or bio-equivalence studies. An ANDA may be submitted for a drug on the basis that it is the equivalent of a previously approved drug or, in the case of a new dosage form, is suitable for use for the indications specified.
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An ANDA applicant in the United States is required to review the patents of the innovator listed in the U.S. FDA publication entitled Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the “Orange Book,” and make an appropriate certification. There are several different types of certifications that can be made. A Paragraph IV filing is made when the ANDA applicant believes its product or its manufacture, use or sales thereof does not infringe on the innovator’s patents listed in the Orange Book or where the applicant believes that such patents are not valid or enforceable. The first generic company to file a Paragraph IV filing may be eligible to receive a six-month marketing exclusivity period starting from either the first commercial marketing of the drug by any of the first applicants or a decision of a court holding the patent that is the subject of the paragraph IV certification to be invalid or not infringed. A Paragraph III filing is made when the ANDA applicant does not intend to market its generic product until the patent expiration. A Paragraph II filing is made where the patent has already expired. A Paragraph I filing is made when there are no patents listed in the Orange Book. Another type of certification is made where a patent claims a method of use, and the ANDA applicant’s proposed label does not claim that method of use. When an innovator has listed more than one patent in the Orange Book, the ANDA applicant must file separate certifications as to each patent.
Before approving a product, the U.S. FDA also requires that our procedures and operations conform to current Good Manufacturing Practice (“cGMP”)cGMP regulations, relating to good manufacturing practices as defined in the U.S. Code of Federal Regulations. We must follow cGMP regulations at all times during the manufacture of our products. We continue to spend significant time, money and effort in the areas of production and quality to help ensure full compliance with cGMP regulations.
The timing of final U.S. FDA approval of an ANDA depends on a variety of factors, including whether the applicant challenges any listed patents for the drug and whether the brand-name manufacturer is entitled to one or more statutory exclusivity periods, during which the U.S. FDA may be prohibited from accepting applications for, or approving, generic products. In certain circumstances, a regulatory exclusivity period can extend beyond the life of a patent, and thus block ANDAs from being approved on the patent expiration date. For example, in
The “pediatric exclusivity” program under The Best Pharmaceuticals for Children Act provides a six-month period of extended exclusivity, applicable to certain circumstanceslisted patents and to other regulatory exclusivities for all formulations of an active ingredient, if the sponsor performs and submits pediatric studies requested by the U.S. FDA may extend the exclusivity of a product by six months past the date of patent expiration if the manufacturer undertakes studies on thewithin specified timeframes. An effect of their product in children, a so-called pediatric extension.this program has been to delay the launch of numerous generic products by an additional six months.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act of 2003”) modified certain provisions of the Hatch-Waxman Act. In particular, significant changes were made to provisions governing 180-day exclusivity and forfeiture thereof. The new statutory provisions governing 180-day exclusivity may or may not apply to an ANDA, depending on whether the first Paragraph IV certification submitted by any applicant for the drug was submitted prior to the enactment of the Medicare Amendments on December 8, 2003.
Wherethereof where the first Paragraph IV certification was submitted on or after December 8, 2003,2003.
Under the new statutory provisions apply. Under theserevised provisions, 180-day exclusivity is awarded to each ANDA applicant submitting a Paragraph IV certification for the same drug with regard to any patent on the first day that any ANDA applicant submits a Paragraph IV certification for the same drug. The180-day exclusivity period begins on the date of first commercial marketing of the drug by any of the first applicants or a decision of a court holding the patent that is the subject of the paragraph IV certification to be invalid or not infringed.
However, a first applicant may forfeit its exclusivity in a variety of ways, including, but not limited to (a) failure to obtain tentative approval within 30 months after the application is filed or (b) failure to market its drug by the later of two dates calculated as follows: (x) 75 days after approval or 30 months after submission of the ANDA, whichever comes first, or (y) 75 days after each patent for which the first applicant is qualified for 180-day exclusivity is either (1) the subject of a final court decision holding that the patent is invalid, not infringed, or unenforceable or (2) withdrawn from listing with the U.S. FDA (court decisions qualify if either the first applicant or any applicant with a tentative approval is a party; a final court decision is a decision by a court of appeals or a decision by a district court that is
not appealed). The foregoing is an abbreviated summary of certain provisions of the Medicare Act of 2003, and accordingly such act should be consulted for a complete understanding of both the provisions described above and other important provisions related to 180-day exclusivity and forfeiture thereof.
Where
The federal Controlled Substances Act (the “CSA”) and its implementing regulations establish a closed system of controlled substance distribution for legitimate handlers. The CSA imposes registration, security, recordkeeping and reporting, storage, manufacturing, distribution, importation and other requirements upon legitimate handlers under the first Paragraphoversight of the U.S. Drug Enforcement Administration (the “DEA”). The DEA categorizes controlled substances into one of five schedules — Schedule I, II, III, IV, certification was submittedor V — with varying qualifications for listing in each schedule. Facilities that manufacture, distribute, import or export any controlled substance must register annually with the DEA. The DEA inspects manufacturing facilities to review security, record keeping and reporting and handling prior to enactmentissuing a controlled substance registration.
Failure to maintain compliance with applicable requirements, particularly as manifested in the loss or diversion of controlled substances, can result in enforcement action, such as civil penalties, refusal to renew necessary registrations, or the Medicareinitiation of proceedings to revoke those registrations. In certain circumstances, violations could lead to criminal prosecution.
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On October 23, 2019, the DEA launched the Suspicious Orders Report System (“SORS”) Online, a centralized database required by the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act of 2003, the statutory provisions governing 180-day exclusivity prior(the “SUPPORT Act”). The SUPPORT Act requires that all DEA registrants that distribute controlled substances report suspicious orders to the Medicare ActDEA. Therefore, the SORS Online system should only be used by DEA registrants that distribute controlled substances to other DEA registrants. On November 2, 2020, the DEA released a proposed rule to clarify the procedures for identifying, reporting, and refusing to distribute certain orders of 2003 still apply. The U.S. FDA interprets these statutory provisions to award 180-day exclusivity to each ANDA applicant submitting a Paragraph IV certification for the same drug on the same day with regard to the same patent on the first day that any ANDA applicant submits a Paragraph IV certification for the same drug with regard to the same patent. The 180-day exclusivity period begins on the date of first commercial marketing of the drug by any of the first applicants or on the date of a final court decision holding that the patent is invalid, not infringed, or unenforceable, whichever comes first. A final court decision is a decision by a court of appeals or a decision by a district court that is not appealed.controlled substances received under suspicious circumstances.
Food and Drug Administration Safety and Innovation Act, (“FDASIA”) and Generic Drug User Fee Agreement (“GDUFA”)Act, Biosimilar User Fee Act and Food and Drug Administration Reauthorization Act
In 2012, the United States enacted the Food and Drug Administration Safety and Innovation Act (“FDASIA”), a landmark legislation intended to enhance the safety and security of the U.S. drug supply chain by imposing stricter oversight and by holding all drug manufacturers supplying products to the United States to the same U.S. FDA inspection standards. Specifically, prior to the passage of FDASIA, U.S. law required U.S. based manufacturers to be inspected by the U.S. FDA every two years but remained silent with respect to foreign manufacturers, causing some foreign manufacturers to go as many as nine years without a routine U.S. FDA current Good Manufacturing Practice (“cGMP”)cGMP inspection, according to the Government Accountability Office. FDASIA requires foreign manufacturers to have cGMP inspections at least every two years, or more frequently for manufacturers with high risk profiles.
FDASIA also includes the Generic Drug User Fee AgreementAct (“GDUFA”) and Biosimilar User Fee Act (“BuFA”), a programprograms to provide the U.S. FDA with additional funds through newly imposed user fees imposed on generic and biosimilar products. These newUnder GDUFA, total fees are estimated to total approximately $1.5 billion through 2018, and are intended to fund increases in the U.S. FDA’s operations and staffing with a focus on three key aims:
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The establishment of dedicated biosimilar fees should also help ensure that the U.S. FDA has appropriate resources for managing the introduction of biosimilar products on the U.S. market. Under GDUFA, 70% of the total fees will be derived primarily from facility fees paid by finished dosage form manufacturers and active pharmaceutical ingredient facilities listed or referenced in a pending or approved generic drug application. The remaining 30% of the total fees will beA significant portion is also derived from application fees, including generic drug application fees, prior approval supplement fees and drug master file fees.
U.S.
The FDA Proposed New Labeling RuleReauthorization Act of 2017 (“FDARA”) and the GDUFA Amendments (“GDUFA II”), signed into law on August 18, 2017, extended the user fee program for a period of another five years through September, 2022. Under the provisions of these acts, an additional generic drug applicant program fee will be established, which will be based on the number of ANDAs the applicant holds and the prior approval supplement fees will be eliminated. Of the total GDUFA user fee revenue, 35% will be generated from this ANDA-based fee. Further, the GDUFA II commitment letter describes a consolidated review goals scheme for all cohorts of ANDAs, prior approval supplements and amendments. This includes shorter review goals for generic drug submissions that are public health priorities.
On November 13, 2013,
The establishment of dedicated biosimilar fees was also intended to help ensure that the U.S. FDA proposed a new labeling rule whichhas appropriate resources for managing the agency believes will speed upintroduction of biosimilar products on the dissemination of new safety information about generic drugs to health professionals and patients by allowing generic drug manufacturers to use the same process as brand drug manufacturers to update safety information in the product labeling.U.S. market. Under the proposal, generic drug manufacturers wouldFDARA, for the first time, an independent fee structure for biosimilars will be able to independently update product labeling (also called prescribing information or package inserts) with newly-acquired safety information beforeimplemented, including an initial biosimilar development fee which will be assessed the U.S. FDA’s reviewfirst year a manufacturer begins clinical trials. Further, an annual biosimilar development fee for subsequent years of the change, indevelopment process, a biosimilar program fee for approved biosimilars, and an application fee for new biosimilar applications will be introduced. The legislation also reauthorizes several programs that are designed to simplify and expedite the same way brandregulatory process for the development of drugs and devices that aid patients with rare diseases.
In addition, under the FDARA, a drug manufacturers do today.is eligible for designation as a “Competitive Generic manufacturers would also be required to inform the brand name manufacturer about the change. The U.S. FDA would then evaluate whether the proposed change is justified and make an approval decision on the generic drug labeling change and the corresponding brand drug labeling change at the same time, so that brand and generic drug products would ultimately have the same U.S. FDA-approved prescribing information.
Currently, generic manufacturers must wait to update product safety information until the corresponding brand name product has received approval to update its safety information. Brand drug manufacturers are allowed to independently update and promptly distribute updated safety information by submitting a “changes being effected” (“CBE”Therapy” (or “CGT”) supplement to the U.S. FDA. Generic manufacturers must notifyif the U.S. FDA determines that there is inadequate generic competition i.e., with respect to a drug, there is not more than one approved drug on the list of new safetydrugs described in section 505(j)(7)(A) (not including drugs on the discontinued section of such list) that is (a) the reference listed drug; or (b) a generic drug with the same reference listed drug as the drug for which designation as a competitive generic therapy is sought. A draft guidance on Competitive Generic Therapy was published on February 2019 which provides more clarity on eligibility for and forfeiture and relinquishment of CGT exclusivity. Final guidance was issued by the U.S. FDA in March 2020. This final guidance provides a description of the process that applicants should follow to request designation of a drug as a CGT and the criteria for designating a drug as a CGT. It also includes information on the actions the U.S. FDA may take to expedite the development and waitreview of ANDAs for drugs designated as CGTs. Finally, it provides information on how the U.S. FDA implements the statutory provision for a 180-day exclusivity period for certain first approved applicants that submit ANDAs for CGTs.
As part of GDUFA II, in order to accelerate access to generic version of complex products, GDUFA II pre-ANDA program product development meetings can be initiated by the U.S. FDA for an ongoing ANDA development program for complex products. These meetings will encourage applicants for product development meetings, pre-submission meetings and mid-review cycle meetings to clarify regulatory expectations early in product development. Furthermore, in November 2017, the Manual of Policy and Procedures (“MAPP”) 5240.3, “Review Order of Original ANDAs, Amendments, and Supplements” was revised to MAPP 5240.3 Rev 4, and on January 30, 2020 to MAPP 5240.3 Rev 5 “Prioritization of the Review of Original ANDAs, Amendments and Supplements” under which a priority review may be granted by the U.S. FDA if an original ANDA, amendment, or supplement meets one of the prioritization factors set forth in the MAPP, and may receive either a shorter goal date or an expedited review, as defined in the MAPP.
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On July 21, 2020, the U.S. FDA kicked off a GDUFA III reauthorization process for fiscal years 2023 through 2027. GDUFA reauthorization meetings were held with industry members to discuss various topics, including opportunities to increase first cycle approvals, exploring transparency and communications between the U.S. FDA and the brand manufacturerindustry members, as well as proposals to determine the updated labeling, which may result inset a delay in getting new information to health care professionalssound foundation for continued programmatic success, inspections, and patients.
Under current law, generic and brand drug manufacturers are required to promptly review safety information about their drugs and comply with the U.S. FDA’s reporting and recordkeeping requirements. When new information becomes available that causes the product labeling to be inaccurate, all drug manufacturers must take steps to update the labeling.
To enhance transparency whilecontrolled correspondence. GDUFA III reauthorization discussions between the U.S. FDA is reviewing the change and to make safety-related changes to drug labeling quickly available to health care professionals and the public, the U.S. FDA plans to create a web page where safety-related changes proposed by all drug manufacturers would be posted. Members of the public could subscribe to receive updates.
Because the current regulatory scheme only permits a generic manufacturer to use the CBE process to update its label if the branded drug manufacturer changes its label first, this can prevent generic manufacturers from complying with state law warning requirements. As a result, state product liability suits based on failure-to-warn and design defect claims against generics manufacturers have generally been held pre-empted by Federal law, and in June 2013 the United States Supreme Court upheld such pre-emption and immunity of generic manufacturers inMutual Pharmaceutical Co. v. Bartlett.
If the U.S. FDA’s proposed new rule is adopted, it may eliminate this pre-emption and increase our potential exposure to lawsuits relating to product safety, side effects and warnings on labels. This new potential exposure to lawsuits may also increase the risk that, in the future, we may not be able to obtain the type and amount of insurance coverage we desire at an acceptable price and self-insurance may become the sole commercially reasonable means available for managing the product liability risks of our business.
Comments on the proposed labeling rule were initially due on March 13, 2014. However, the U.S. FDA subsequently reopened the comment period from February 18, 2015 until April 27, 2015 in light of both the significant amount of interest in the proposal and the emergence of alternate proposals put forth and endorsed by the generic pharmaceutical industry.industry members are ongoing. The U.S. FDA has announcedissued guidance with regards to risk assessments for nitrosamine impurities that it will issue a final rule in April 2017.required the manufacturer to complete risk assessments for all approved or marketed drug products by March 31, 2021.
Prescription Drug Marketing Act and Laws Regulating Payments to Healthcare Professionals
The U.S. FDA also enforces the requirements of the Prescription Drug Marketing Act, which, among other things, imposes various requirements in connection with the distribution of product samples to physicians. Sales, marketing and scientific/educational grant programs must comply with the federal anti-kickback statute, the Medicare-Medicaid Anti-Fraud and Abuse Act, as amended, the False Claims Act, as amended, and similar state laws. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990, as amended.
We are also subject to Section 6002 of the Patient Protection and Affordable Care Act, commonly known as the Physician Payment Sunshine Act, which regulates disclosure of payments to certain healthcare professionals and providers.
Patient Protection and Affordable Care Act and Medicaid Drug Rebate Program
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the “PPACA”), were signed into law. The PPACA is one of the most significant healthcare reform measures in the United States in decades, and is expected to significantly impactimpacts the U.S. pharmaceutical industry.
The PPACA imposes additional rebates, discounts and fees, mandates certain reporting and contains various other requirements that could adversely affect our business, including the following:
business. The PPACA imposes annual, non-deductible fees for entities that manufacture or import certain prescription drugs and biologics. This fee is calculated based upon each manufacturer’s percentage share of total branded prescription drug and biologics sales to U.S. government programs (such as Medicare, Medicaid, Veterans’ Affairs and Public Health Service discount programs), and authorized generic products are generally treated as branded products. The manufacturer must have at least $5 million in sales of branded prescription drugs or biologics in order to be subject to this fee.
The PPACA changed the computations used to determine Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program by redefining the average manufacturer’s price (“AMP”), effective October 1, 2010, and by using 23.1% instead of 15.1% of AMP for most branded drugs and 13% instead of 11% of AMP for generic drugs, effective January 1, 2010.
The PPACA also increased the number of healthcare organizations eligible to participate in the Public Health Service pharmaceutical pricing program, which provides for government controlled prices that result in substantial discounts for participants.
The PPACA has pro-generic provisions that could increase competition in the generic pharmaceutical industry and therefore adversely impact our selling prices or costs and reduce our profit margins. Among other things, the PPACA creates an abbreviated pathway to U.S. FDA approval of “biosimilar” biological products and allows the first interchangeable bio-similar biological product 18 months of exclusivity, which could increase competition for our bio-similars business. Conversely, the PPACA has some anti-generic provisions that could adversely affect our bio-similars business, including provisions granting the innovator of a biological drug product 12 years of exclusive use before generic drugs can be approved based on being biosimilar.
The PPACA makesmade several important changes to the federal anti-kickback statute, false claims laws, and health care fraud statutes that may makemade it easier for the government or whistleblowers to pursue such fraud and abuse violations. In addition, the PPACA increasesincreased penalties for fraud and abuse violations. If our past, present or future operations are found to be in violation of any of the laws described above or other similar governmental regulations to which we are subject, we may be subject to the applicable penalty associated with the violation which could adversely affect our ability to operate our business and our financial results.
The PPACA changed the computations used to determine Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program by redefining the average manufacturer’s price (“AMP”). In November 2015, the Bipartisan Budget Act of 2015 (the “BBA”) amended the Medicaid Drug Rebate Program to impose a penalty rebate on generic drugs whose price increases exceed the inflation rate. Initially, the penalty rebate had only applied to brand drugs and authorized generics, but other generic drugs were subject to a fixed base rebate of 13% of AMP. The BBA imposed a price increase penalty rebate on generic drugs similar to that of the price increase penalty on brand drugs and authorized generics.
The additional penalty rebate for generic drugs applies to rebate periods beginning with the first quarter of 2017. The additional penalty rebate due for generic drugs is equal to the AMP for the current quarter minus the baseline AMP adjusted for inflation based upon the Consumer Price Index for Urban Consumers.
The PPACA also increased the number of healthcare organizations eligible to participate in the Public Health Service pharmaceutical pricing program, which provides for government controlled prices that result in substantial discounts for participants. To further facilitate the government’s efforts to coordinate and develop comparative clinical effectiveness research, the PPACA establishesestablished a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in such research. The manner in which the comparative research results would be used by third-party payors is uncertain.
The PPACA has created an abbreviated pathway to U.S. FDA approval of “biosimilar” biological products and allows the first interchangeable biosimilar biological product 18 months of exclusivity, which could increase competition for our biosimilars business. The PPACA also has some anti-generic provisions that could adversely affect our biosimilars business, including provisions granting the innovator of a biological drug product 12 years of exclusive use before generic drugs can be approved based on being biosimilar.
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On June 28, 2010, the Departments of Health and Human Services, Labor, and the Treasury jointly issued interim final regulations to implement the provisions of the PPACA that prohibit the use of preexisting condition exclusions, eliminate lifetime and annual dollar limits on benefits, restrict contract rescissions, and provide patient protections. On June 20, 2014 the Departments of Health and Human Services, Labor, and the Treasury jointly issued final regulations clarifying the relationship between a group health plan’s eligibility criteria and the PPACA’s 90-day limit on waiting periods.
On January 27, 2012, The Centers for Medicare and Medicaid Services (“CMS”) issued its long awaited proposed rule implementing the Medicaid pricing and reimbursement provisions of the PPACA and related legislation. CMS accepted comments on this proposed rule through April 2, 2012.
On June 28, 2012, the U.S. Supreme Court ruled on certain challenged provisions of the PPACA. The U.S. Supreme Court generally upheld the constitutionality of the PPACA, including its individual mandate that requires most Americans to buy health insurance starting in 2014, and ruled that the Anti-Injunction Act did not bar the Court from reviewing that the PPACA provision. However, the U.S. Supreme Court invalidated the PPACA’s provisions requiring each state to expand its Medicaid program or lose all federal Medicaid funds. The Court did not invalidate the PPACA’s expansion of Medicaid for states that voluntarily participate; it only held that a state’s entire Medicaid funding cannot be withheld due to its failure to participate in the expansion.
On February 1, 2016, the CMSCenters for Medicare & Medicaid Services (“CMS”) published in the Federal Register a Final Regulation with comment period to implement the Medicaid Drug Rebate Program. The Final Regulation was to clarify ambiguities in the ACA amendments. The key provisions covered under the Final Regulation included, without limitation, the following: (i) the adoption of a final definition of “retail community pharmacy” (“RCP”), (ii) the adoption of a rule permitting inhalation, infusion, instilled, implanted, or injectable drugs (“5i drugs”) to be deemed not to be “generally dispensed” through a RCP, and thus excluded from the calculation of their AMP, if 70% or more of its sales were to entities other than RCPs or wholesalers for drugs distributed to
RCPs (the prior threshold was 90%), (iii) the inclusion of authorized generics in calculations of AMP and best price, (iv) narrowing the regulatory definition for “best price”, (v) requiring additional Medicaid rebate payments for generic drugs, effective as of April 1, 2017, and (vi) clarification of the definition of “bona fide service fees” based on a four part test.
Pending full implementation
We are still awaiting guidance from CMS on a delay in the participation of the U.S. territories in the Medicaid Drug Rebate Program until April 1, 2022 an aspect of the rule that was deferred for later implementation. We will evaluate the financial impact of this when it becomes effective.
The PPACA required manufacturers to calculate an alternate rebate amount for drugs that are “line extensions” of an oral solid dosage form. CMS was responsible under the PPACA for providing a regulatory definition of “line extension,” although the CMS February 2016 final rule did not do so. The Comprehensive Addiction and Recovery Act enacted on July 22, 2016 included a statutory definition of line extension as follows: “with respect to a drug, a new formulation of the drug, such as an extended release formulation, but does not include an abuse-deterrent formulation of the drug (as determined by the Secretary), regardless of whether such abuse-deterrent formulation is an extended release formulation.” On April 1, 2019, CMS published a final rule and interim final rule which reiterated prior guidance that manufacturers rely on the statutory definition and where appropriate, may use “reasonable assumptions” to determine if a drug qualifies as a line extension drug. On December 21, 2020, the CMS issued a final rule that defines “line extension” as “a new formulation of the drug, which does not include an abuse-deterrent formulation of the drug,” and defines “new formulation” as “a change to the drug, including, but not limited to: an extended release formulation or other change in release mechanism, a change in dosage form, strength, route of administration, or ingredients.” We are not currently marketing any drugs that we are continuingbelieve would be a line extension.
In addition, Such December 21, 2020 final rule also made several other changes to evaluate all potential scenarios surrounding its implementationthe Medicaid Drug Rebate Program regulations, including some changes to the treatment of value-based purchasing arrangements and price reporting for patient benefit programs sponsored by pharmaceutical manufacturers.
In October 2017, the U.S. President Trump signed an Executive Order directing federal agencies to modify how the PPACA is implemented, ending the subsidies to health care insurance companies that sell insurance to low income consumers through state health insurance marketplaces.
Further, the Tax Cuts and Jobs Act enacted in December 2017 effectively repealed the PPACA’s individual mandate by removing the penalties imposed for failure to purchase healthcare insurance. As a result of this change, in December 2018, a U.S. federal district court ruled that the PPACA is unconstitutional. An appellate review of this decision by the Fifth Circuit Court of Appeals in December 2019 held that the individual mandate under the PPACA was unconstitutional, and remanded the case back to the Texas federal judge to conduct a re-evaluation of the entire PPACA to determine which provisions, if any, could survive without the individual mandate provision. The case was appealed to the U.S. Supreme Court in January 2020. On June 17, 2021, the U.S. Supreme Court declined to strike down the individual mandate or the PPACA as a whole, ruling that the plaintiffs who brought the case did not have standing to sue and keeping the PPACA intact.
The Bipartisan Budget Act of 2018 amended the PPACA, effective January 1, 2019, to close the coverage gap (commonly referred to as the “donut hole”) in most Medicare drug plans, and also increased in 2019 the percentage by which a drug manufacturer must discount the negotiated price of branded prescription drugs dispensed to Medicare Part D patients in the coverage gap from 50% to 70%.
The Continuing Appropriations Act of 2020 and the corresponding impactHealth Extenders Act of 2019 became effective, amending the Medicaid Drug Rebate Statute in two key ways: (i) by requiring manufacturers to exclude (rather than include) the prices paid by wholesalers to manufacturers for authorized generic drugs from the calculation of the “average manufacturers’ price” for the branded drug and (ii) by deleting references to “manufacturers” from the definition of wholesaler.
In November 2020, the U.S. Department of Health and Human Services finalized a regulation aimed at lowering prescription drug prices and out-of-pocket spending for prescription drugs by excluding rebates on our financial condition, resultsprescription drugs paid by manufacturers to or purchased by Medicare Part D plan sponsors or pharmacy benefit managers acting under contract with Medicare Part D plan sponsors from the existing discount safe harbor under the federal Anti-Kickback Statute.
On November 27, 2020, the CMS published an interim final rule that imposes a mandatory most favored nation pricing model on certain drugs and biosimilars reimbursed by Medicare Part B. Originally set to be effective January 1, 2021, several groups filed litigation to enjoin the implementation process, and it is currently subject to a court injunction on implementation pending a final rule (based on the interim final rule) published in the Federal Register. Following his inauguration in January 2021, President Biden ordered a regulatory freeze on all pending substantive executive actions in order to permit incoming department and agency heads to review them. Accordingly, it remains to be seen whether this interim final rule advances to the final rule stage.
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On December 21, 2020, the CMS issued a final rule that implements changes to the Medicaid Drug Rebate Program regulations in several areas, including with respect to how manufacturers should calculate AMP and best price in value-based purchasing arrangements, the definition of operationskey terms “line extension” and cash flow.“new formulation,” and the price reporting treatment of manufacturer-sponsored patient benefit programs.
The American Rescue Plan Act of 2021, the US$1.9 trillion stimulus package passed by Congress and signed into law by President Biden on March 11, 2021, includes a provision that eliminates the statutory cap on rebates drug manufacturers pay to Medicaid at the end of 2023, which will eliminate the rebate cap of 100 percent of the AMP.
Drug Quality and Security Act
On November 28, 2013, the Drug Quality and Security Act was signed into law in the United States. The legislation introduces a federal track-and-trace system for medicines with serial numbers added to individual packs and (non-mixed) cases within four years of the legislation’s adoption, and electronic tracing of production through the supply chain mandated within 10ten years. It also strengthens licensure requirements for wholesale distributors and third-party logistics providers, and requires the U.S. FDA to maintain a database of wholesalers that will be available to the public through its website. The law also boosts oversight of compounding pharmacies that make drugs to order, and increases the powers of the U.S. FDA to oversee large-volume or ‘outsourcing’ compounders without individual prescriptions. During 2017, the U.S. FDA delayed the enforcement of serialization requirements for manufacturers until November 2018 to provide manufacturers with additional time to comply and avoid supply disruptions. We completed all of the activities necessary to implement serialization, and the batches packaged after November 26, 2018 are being serialized.
Title XI of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)
On October 6, 2016, the U.S. FDA issued a final rule to implement new regulations that govern the approval of applications under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act in the United States, and of ANDAs. This rule revises and clarifies U.S. FDA regulations as to matters such as: the procedures and requirements for providing notice to each patent owner and the NDA holder of certain patent certifications made by applicants submitting 505(b)(2) applications or ANDAs; the availability of 30-month stays of approval on 505(b)(2) applications and ANDAs that are otherwise ready to be approved; submission of amendments and supplements to 505(b)(2) applications and ANDAs; and the types of bioavailability and bioequivalence data that can be used to support these applications. This rule was effective December 5, 2016.
Biologics Pathway
The Biologics Price Competition and Innovation Act of 2009 (“BPCIA”) created a statutory pathway and abbreviated approval processes for the approval of biosimilar versions of brand-namebranded biological products andproducts. Under the BPCIA, a processbiosimilar must be highly similar with no clinically meaningful differences compared to resolve patent disputes. On April 28, 2015,the reference medicine. Approval of a biosimilar in the United States requires the submission of a BLA to the U.S. FDA, finalized three substantial draft guidance documents originally published in February 2012 that are intendedincluding an assessment of immunogenicity, and pharmacokinetics or pharmacodynamics. The BLA for a biosimilar can be submitted as soon as four years after the initial approval of the reference biologic, but can only be approved 12 years after the initial approval of the reference biologic.
This pathway is still relatively new and some aspects remain untried, controversial and subject to provide a roadmap for development of biosimilar products. On May 13, 2015,ongoing litigation. Though the U.S. FDA released another biosimilar guidance document. Thesehas issued and updated various technical guidance documents addressaddressing quality considerations, scientific considerations and questions and answers regarding commonly posed issues.issues to assist the biopharmaceutical industry in developing biosimilar products in compliance with the BPCIA, there remains some uncertainty regarding the abbreviated biosimilar pathway. On December 11, 2018, the U.S. FDA released final guidance defining biologics, transitioning biological products approved under an NDA to a deemed BLA, and outlining an abbreviated pathway for biosimilar licensure. As part of the publication of the final guidance, the U.S. FDA is allowing for ongoing comments from the public, which may result in further changes or revisions to such guidance. On May 10, 2019, the U.S. FDA issued final guidance on “Considerations in Demonstrating Interchangeability With a Reference Product,” which is intended to provide guidance as to how to demonstrate that a proposed therapeutic protein product is interchangeable with a reference product for the purposes of submitting a marketing application or supplement under section 351(k) of the Public Health Service Act (PHS Act) (42 U.S.C. 262(k)).
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Trans-Pacific Partnership21st Century Cures Act
The Trans-Pacific Partnership (“TPP”) free trade agreement
On December 13, 2016, the 21st Century Cures Act was concludedenacted into law in October 2015 by the United States, Australia, New Zealand, Peru, Chile, Mexico,and is intended to promote biomedical innovation and personalized medicines. The 21st Century Cures Act includes increased funding for the National Institutes of Health and the U.S. FDA and provides for the implementation of, among other reforms, enhanced pathways for medical product approval and the modernization and harmonization of clinical trial procedures over a period of several years.
Blueprint to Lower Drug Prices and Safe Importation Action Plan
In May 2018, U.S. President Trump released “American Patients First: The Trump Administration Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs,” which outlined actions that his administration proposed to take to lower prescription drug prices, including certain actions that would be taken immediately by the U.S. Department of Health and Human Services (“HHS”) and issues on which HHS would solicit public feedback before determining any additional reform proposals. This blueprint sought to increase competition, improve negotiation, and incentivize lower list prices and lower out-of-pocket costs.
It called for, among other things, greater transparency of drug prices, better informing consumers about prescription drugs, increased promotion of generic drugs and experimenting with value-based payment. We are currently evaluating the impact of this blueprint on our business, and we cannot yet be certain what the effect will be.
To create better incentives for lower list prices, the blueprint called for HHS to consider requiring the inclusion of list prices in direct-to-consumer advertising. On May 30, 2018, the CMS announced a final rule that requires direct-to-consumer television advertisements for prescription pharmaceuticals covered by Medicare or Medicaid to include the list price if such price is equal to or greater than $35 for a month’s supply or the usual course of therapy. This rule became effective starting on July 9, 2019.
The U.S. Department of Health and Human Services and U.S. FDA’s Safe Importation Action Plan was announced in July 2019. Following this framework, the U.S. FDA proposed a draft rule in December 2019 that would allow importation of certain lower-cost prescription drugs from Canada, Singapore, Brunei, Malaysia, Vietnam and Japan.in September 2020 the rulemaking was finalized by the U.S. FDA along with an industry guidance document. The new rule became effective on November 30, 2020, although its implementation has been delayed and its impact is uncertain, in part because lawsuits have been filed challenging the government’s authority to promulgate it.
State Efforts to Lower Drug Prices
A number of states have passed legislation intended to impact pricing or requiring price transparency reporting, including among others California, Colorado, Connecticut, Louisiana, Maine, Maryland, Nevada, Oregon, Texas, Vermont, and Washington, and a number of other states have proposed such legislation is recent years. While the disclosure requirements vary by state, these laws typically require manufacturers to report certain product price information or other financial data to the state, and, in some cases, provide advance notification of price increases. It is expected that states will continue their focus on pharmaceutical price transparency and that this focus will continue to exert pressure on product pricing.
Right to Try Act
On May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017 (the “Right to Try Act”) was signed into law in the United States. The law, among other things, provides a federal framework for certain patients to request access to certain investigational new drug products that have completed a Phase I clinical trial and that are undergoing investigation for U.S. FDA approval. There is no obligation for a pharmaceutical manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act, although in 2020 the U.S. FDA published a notice of proposed rulemaking that would require manufacturers who do so to make annual reports of those programs to the U.S. FDA. Following his inauguration in January 2021, President Biden ordered a regulatory freeze on all pending substantive executive actions in order to permit incoming department and agency heads to review them. Accordingly, it remains to be seen whether the proposed rule for annual reporting under the Right to Try Act advances to the final rule stage.
Final Conscience Rule
In May 2019, the U.S. Department of Health and Human Services (“HHS”) published final rules to enforce so-called “conscience laws,” a series of previously enacted laws that allow health professionals, insurers and employers to opt out of participating in certain health care activities that violate the worker's conscience or religious beliefs, such as abortion, sterilization, vaccination or assisted suicide. The final textrule would significantly expand the authority of HHS’s Office of Conscience and Religious Freedom to enforce federal conscience protection laws and implement new enforcement mechanisms. The conscience laws and the final rule could potentially impact certain pharmaceutical products, including the availability of such products from hospitals and other prescribers and the availability of insurance coverage for such products. A number of lawsuits were filed challenging the final rule’s constitutionality and, before it became effective, three federal courts in New York, Washington and California issued rulings invalidating the final rule. Although the Trump administration appealed these decisions, the Biden administration subsequently moved to delay the appeals, indicating that new leadership at HHS would reassess the rule. Accordingly, the overall status of the TPP agreement requires TPP-signatory countriesfinal conscience rule is uncertain. We are currently evaluating the impact of these conscience laws and the final rule on our business, and we cannot yet be certain what their effect will be.
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Coronavirus Aid, Relief, and Economic Security (CARES) Act 2020
The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act signed into law by President Donald Trump on March 27, 2020, in response to provide biopharmaceutical products with a minimumthe economic fallout of either eight yearsthe COVID-19 pandemic in the United States.
The CARES Act includes authorities that enhance FDA’s ability to identify, prevent, and mitigate possible drug shortages by, among other things, enhancing FDA’s visibility into drug supply chains. Specifically, section 3112(e) amends the Federal Food, Drug, and Cosmetic Act to require that each registered drug establishment annually report the “amount of data exclusivityeach drug . . . that was manufactured, prepared, propagated, compounded, or five yearsprocessed” by the registrant for commercial distribution. This CARES Act amendment also provides that such “information may be required to be submitted in an electronic format." The effective date of data exclusivity coupledthis reporting requirement under section 3112 (e) of the CARES Act was implemented by FDA on September 23, 2020, which is 180 days after the CARES Act was enacted.
In addition to the COVID-19 response efforts, the CARES Act includes statutory provisions that reform and modernize the way OTC monograph drugs are regulated in the United States. Specifically, the CARES Act replaces the rulemaking process with an administrative order process for issuing, revising, and amending OTC monographs. The CARES Act also provides FDA the authority to assess and collect user fees dedicated to OTC monograph drug activities (OMUFA) FDA anticipates that this user fee program will provide additional three years of other measures that must deliverresources to help the agency conduct these important regulatory activities in a comparable outcome intimely manner and ultimately help provide the market, recognizing that market circumstances also contributepublic with access to effective market protection to deliver a comparable outcome in the market. Notably, the TPP fails to explain what “other measures” or “market circumstances” will deliver “a comparable outcome in the market.” The TPP agreement only sets a minimum period for exclusivity and not a maximum, and so the United States will be permitted to maintain the current BPCIA rules granting biologics manufacturers 12 years of combined data and market exclusivity. The text of the TPP agreement must now be ratified and signed according to the procedures of each nation concerned.innovative OTC monograph drugs.
Other matters
Civil Investigative Demand from the Office
Refer to Note 33, “Contingencies”, of our consolidated financial statements for discussions of the following lawsuits, investigations and proceedings:
· | Child resistant packaging matter complaint under the False Claims Act (“FCA”); |
· | Ranitidine recall and litigation; |
· | United States Antitrust Multi-District Litigations; |
· | Civil Investigative Demand from the Office of the Attorney General, State of Texas |
· | Subpoena duces tecum from the Office of the Attorney General, California |
· | Subpoenas from the Antitrust Division of the U.S. Department of Justice (“DOJ”) and the office of the Attorney General for the State of Connecticut; and |
· | Civil Investigative Demand from the Civil Division of the DOJ. |
On or about November 10, 2014, Dr. Reddy’s Laboratories, Inc., one of our subsidiaries in the U.S., received a Civil Investigative Demand (“CID”) from the Office of the Attorney General, State of Texas (the “Texas AG”) requesting certain information, documents and data regarding sales and price reporting in the U.S. marketplace of certain products for the period of time between January 1, 1995 and the date of the CID. Compliance with the CID is ongoing, and we understand that the investigation is continuing.
Subpeona duces tecum from the Office of the Attorney General, California
On November 3, 2014, Dr. Reddy’s Laboratories, Inc. received a subpoena duces tecum to appear before the Office of the Attorney General, California (the “California AG”) and produce records and documents relating to the pricing of certain products. A set of five interrogatories related to pricing practices was served as well. Compliance with the subpoena is ongoing, and we understand that the investigation is continuing.
CANADA REGULATORY ENVIRONMENT
In Canada, we are required to file product dossiers with the Health Canada for permission to market a generic pharmaceutical product. The regulatory authorities may inspect our manufacturing facility before approval of the dossier. As of March 31, 2016,2021, we had filed a cumulative total of 241 New Drug Submission (“NDS”), 1 COVID-19 Interim Order Application, 1 DIN-A Application and 43 Abbreviated New Drug Submissions (“ANDS”) in Canada, out of which, 8 ANDS32 were approved, 3 were withdrawn and 11 are pending approvalapproval.
Health Canada has also introduced various flexibilities to address the COVID-19 pandemic. This includes expedited authorization of drugs and 2 were rejected.vaccines for Covid-19; measures to address critical drug shortages; extension of the New Evidence Required by (“NERBY”) date on the drug establishment license for all foreign buildings importing drugs into Canada until further notice; and flexibility with GMP and importation requirements.
Health Canada has issued various guidance documents with regards to the risk assessments for nitrosamine impurities, and required manufacturers to complete risk assessments for drug products containing chemically synthesized APIs by March 31, 2021. Manufacturers are also required to evaluate the risk of the presence of nitrosamine impurities in biologics and radiopharmaceuticals by November 30, 2021.
Europe
Our sales of generic medicines in Europe for the year ended March 31, 20162021 were Rs.7,732Rs.15,404 million, which accounted for approximately 6%10% of our Global Generics segment’s sales. Our principal markets in Europe are Germany and the United Kingdom. We have also established our presence in other markets, including Italy, France and Spain.
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Sales, Marketing and Distribution Network
Germany
In Germany, we sell a broad range of generic pharmaceutical products under the “betapharm” brand.
Over the last decade, the German pharmaceutical market has significantly changed. Health care reforms by the government have significantly increased the power of insurance companies and statutory health insurance funds (“SHI funds”) to influence dispensing of medicines. Pursuant to the reforms, those pharmaceutical products which are covered by rebate contracts with insurance companies and SHI funds will be prescribed by physicians and dispensed by pharmacies with priority. As a result, many SHI funds have enacted tender (i.e., competitive bidding) processes to determine which pharmaceutical companies they will enter into rebate contracts with. This has resulted in more than 90% of generic products currently sold in German retail outlets being supplied through contracts procured in competitive bidding tenders, thereby causing significant pressure on product margins.
United Kingdom and other Countries within Europe
We market our generic products in the United Kingdom through our U.K. subsidiary, Dr. Reddy’s Laboratories (U.K.) Limited. This subsidiary was formed in the year ended March 31, 2003 after our acquisition of Meridian Healthcare Limited, a United Kingdom based generic pharmaceutical company. We currently sell more than 60 products in the United Kingdom, covering both International Nonproprietary Name (“INN”) generics and branded generics. INN generics are sold via wholesale and retail channels, and hospitals. In the U.K., we work closely with the Clinical Commissioning Groups (i.e., groups that commission healthcare services for their local communities and include all of the general practitioner groups in their geographical area) to promote our range of branded generics. While the retail business covers a broad range of therapeutic areas, the hospital business focuses mainly on oncology, anti-infectives and HIV.
In 2016, we established a commercial structure in Italy, Spain and France to expand our direct footprint in the western European region. Our initial focus has been to supply products through hospitals and to institutional clients. Our product mix in these markets focuses on a limited number of key therapy areas such as oncology, anti-infectives and HIV, leveraging our portfolio. This market’s business is predominantly tender-driven, without the need for a large sales force.
Competition
The German market is highly competitive as a result of a large number of generic players and the predominance of a tender system which drives competition. Our key competitors within the German generics market include Sandoz International GmbH, Teva Pharmaceutical Industries Limited (“Teva”), Zentiva Pharma GmbH and Stada Arzneimittel AG.
According to the British Generic Manufacturers Association, the United Kingdom is one of the largest markets for generic pharmaceuticals in Europe, with generic penetration of around 84%, and is also one of the most price competitive markets due to a high degree of vertical integration and consolidation of buyers, as more than 70% of the retail pharmacies are owned by wholesalers or are part of retail chains, and has low barriers of entry. The market is dominated by global pharmaceutical companies such as Teva, the Sandoz group of Novartis Pharma A.G. and Mylan Inc.
In Italy, Spain and France, we compete with companies such as Hospira (an affiliate of Pfizer Limited), Fresenius SE & Co. KGaA, Teva and Accord Healthcare Limited (an affiliate of Intas Pharmaceuticals Ltd.), each of which has a well-established presence in the hospital segment of these countries.
Government regulations
In the European Union (the “EU”),EU, the manufacture and sale of pharmaceutical products is regulated in a manner substantially similar to that in the United States. Legal requirements generally prohibit the handling, manufacture, marketing and importation of any pharmaceutical product unless it is properly registered and manufactured in accordance with applicable law. The registration file relating to any particular product must contain scientific data related to product chemistry, efficacy and safety, including results of clinical testing and references to medical publications, as well as detailed information regarding production methods and quality control. Regulatory authorities are authorized to suspend, restrict or cancel the registration of a product if it is found to be harmful or ineffective, or manufactured and marketed other than in accordance with registration conditions.
Sales, Marketing and Distribution Network
Germany
In Germany, we sell Additionally, a broad range of generic pharmaceutical products underproduct registration can be cancelled, if the “betapharm” brand.
Over the last few years, the German pharmaceutical market has significantly changed. The healthcare reform known as the Statutory Health Insurance (SHI)—Competition Strengthening Act or Wettbewerbsstärkungsgesetz (“GKV-WSG”) (an act to strengthen the competition in public health insurance), which was effective as of April 1, 2007, has significantly increased the power of insurance companies and statutory health insurance funds (“SHI funds”) to influence dispensing of medicines.
Pursuant to the GKV-WSG law, those pharmaceutical products covered by rebate contracts with insurance companies and SHI funds have to be prescribed by physicians and dispensed by pharmacies with priority. This has increased the power of insurance companies and SHI funds. As a result, many SHI funds have enacted tender (i.e., competitive bidding) processes to determine which pharmaceutical companies they will enter into rebate contracts with. This has resulted inregistration is not used for more than 90% of generic products currently sold in German retail outlets being supplied through contracts procured in competitive bidding tenders, thereby causing significant pressure on product margins. In response to these market changes, betapharm underwent a comprehensive restructuring of its sales force, with a reduction of more than 200 employees since we acquired it in March 2006. In addition, we are participating inthree years (under the tender opportunities by bidding at prices which meet our internal incremental profitability thresholds. In view of this, our success ratio in winning these tender awards has declined and, accordingly,regulation’s “sun-set clause”) or the ratio of our tender based sales to our overall sales has significantly reduced over the past few years.renewal deadline is missed.
United Kingdom and other Countries within Europe
We market our generic products in the United Kingdom and other EU countries through our U.K. subsidiary, Dr. Reddy’s Laboratories (U.K.) Limited. This subsidiary was formed in the year ended March 31, 2003 after our acquisition of Meridian Healthcare Limited, a United Kingdom based generic pharmaceutical company.
Competition
Our key competitors within the German generics market include the Sandoz group of Novartis Pharma A.G. (including its Hexal, Sandoz and 1A Pharma subsidiaries), the Ratiopharm group of Teva Pharmaceutical Industries Ltd. (including its Ratiopharm, AbZ-Pharma and CT Arzneimittel subsidiaries), Winthrop Arzneimittel GmbH and the Stada group of Stada Arzneimittel AG (including its Stada and Aliud subsidiaries). In the rebate contracts with SHI funds, prices are one of the most important competitive factors.
According to British Generics Manufacturers Association, the United Kingdom is one of the largest markets for generic pharmaceuticals in Europe with high generic penetration 82% and is also one of the most price competitive markets due to a high degree of vertical integration and consolidation of buyers, as more than 65% of the retail pharmacies are owned by wholesalers or are part of retail chains, and low barriers of entry.
Government regulations
European Union Regulatory Environment
The activities of pharmaceutical companies within the European UnionEU are governed in particular by Directives 2001/83/EC and 2003/94/EC and Regulation 1234/2008, in each case as amended, and as implemented in national laws within the countries of the European Union. TheseEU. The Directives outline the legislative framework, including the legal basis of marketing authorization procedures, and quality standards including manufacture, patient information and pharmacovigilance activities.
Prior approval of a marketing authorization is required to supply products within the European Union.EU. Such marketing authorizations may be restricted to one memberone-member state, cover a selection of member states or can be for the whole of the European Union,EU, depending upon the form of registration procedure selected.
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An abridged application can be filed for obtaining EU marketing authorization for a generic drug. Generic or abridged applications omit full non-clinical and clinical data but contain limited non-clinical and clinical data, depending upon the legal basis of the application or to address a specific issue. In the case of a generic medicine application,However, the applicant is required to demonstrate that its generic product contains the same active pharmaceutical ingredients in the samean equivalent dosage form for the same indication as the innovator product.
Specific data is included in the application to demonstrate that the proposed generic product is interchangeable to the innovator product with respect to quality, safe usage and continued efficacy. European UnionEU laws prevent regulatory authorities from accepting applications for approvalregistration of generics that rely on the safety and efficacy data of an innovator of a branded product until the expiration of the innovator’s data exclusivity period (usually 8 years from the first marketing authorization in the European Union,EU, depending on the circumstances). The applicant is also required to demonstrate bioequivalence or bioavailability, respectively, with the EU reference product. Once all these criteria are met, a marketing authorization may be considered for grant.
Unlike in the United States, there is no equivalent regulatory mechanism within the European UnionEU to incentivize challenge to any patent protection, nor is any period of market exclusivity conferred upon the first generic approval.
In situations where the period of data exclusivity given to the innovator of a branded product expires before their patent expires, the launch of our product would then be delayed until patent expiration.
Our U.K. facilities are licensed and periodically inspected by the U.K. Medicines and Healthcare products Regulatory Agencies (“MHRA”) good manufacturing practice Inspectorate, which has extensive enforcement powers over the activities of pharmaceutical manufacturers. Non-compliance can result in product recall, plant closure or other penalties and restrictions. In addition, the U.K. MHRA Inspectorate has approved and periodically inspected our manufacturing facilities based in Hyderabad, Telangana, India for the manufacture of generic medicines for supply to Europe. The Regierung von Oberbayern, the district government of Upper Bavaria in Germany, has also inspected our plants in Hyderabad as well as Vishakapatnam.
All pharmaceutical companies that manufacture and market human medicinal products in Germany are subject to the applicable rules and regulations executed by the BfArMFederal Institute for Drugs and Medical devices (“BfArM”) or the Paul-Ehrlich-Institut (“PEI”) and the supervisory authorities of the respective federal state in Germany. All pharmaceutical companies in Upper Bavaria, Germany are periodically inspected by the competent supervisory authority,Regierung von Oberbayern (the district government of Upper Bavaria in Germany), which has extensive enforcement powers over the activities of pharmaceutical companies. Non-compliance can result in closure of the facility.
In Germany, the government The Regierung von Oberbayern has also inspected our plants in recent years enacted a number of laws designed to limit pharmaceutical cost increases, including the GKV-WSG discussed aboveHyderabad and the Economic Optimization of Pharmaceutical Care Act (also known as the “AVWG”). During the fiscal year ended March 31, 2011, the German government introduced a new law entitled “Act on the reorganization of the pharmaceutical market in the public health insurance” (or“Arzneimittelmarktneuordnungsgesetz”,commonly referred to as “AMNOG”), which affects reimbursement of drugs within Germany’s statutory health care system in order to further control the costs of medical care. The key elements of this law are as follows:Visakhapatnam.
Historically, the pharmaceutical companies had been free to set the initial asking price for novel drugs in the German public health system, subject to certain mandatory rebates. Under this new law, a pharmaceutical company determines the price for a new drug or new therapeutic indication for the first year after launch, but must submit to the Joint Federal Committee (the Gemeinsamer Bundesausschuss or “G-BA”) a benefit/risk assessment dossier on the drug at or prior to its launch. The G-BA analyzes whether the drug shows an additional clinical benefit in comparison to a corresponding established drug (the “appropriate comparator therapy”).
If an additional benefit is established, the pharmaceutical company must negotiate the price of the drug with the Federal Association of the health insurance funds. If no agreement is reached in the negotiation, then the price is determined pursuant to an arbitration procedure. There must be a minimum term of one year.
If no additional benefit is established, the drug is immediately included in a group of drugs with comparable pharmaceutical and therapeutic characteristics, for which maximum reimbursement prices have already been set. If this is not possible due to the drug’s novelty, then the pharmaceutical company must negotiate a reimbursement price with the Federal Association of the health insurance funds that may not exceed the costs of the appropriate comparator therapy.
The prices determined pursuant to the above procedures also apply to private insurance agencies, privately insured persons and self-payers, although they may negotiate further discounts.
For drugs developed specifically to treat rare medical conditions that are designated as “orphan drugs”, the orphan drug will be presumed to have an additional benefit under certain circumstances.
A new regulation for packaging size had to be implemented in 2013. Standard sizes are now based upon the duration of therapies, instead of being based on fixed quantity. Three different types of package sizes are now allowed: N1-packages for treatment periods of 10 days; N2-packages for treatment periods of 30 days; and N3-packages for treatment periods of 100 days.
The law increases the choice to patients by the use of co-payment as an option for patients opting for a non-rebated generic drug.
In Germany, the German Drug Law (Arzneimittelgesetz) (“AMG”), which implements European Union requirements, is the primary regulation applicable to medicinal products. In 2012, the 16th Amendment to the AMG and related laws were enacted in order to implement European Directives into national laws. Among other things, the most important changes refer to pharmacovigilance, clinical trials, protection measures against counterfeited medicines and liberalization of German drug advertising law. These transpositions of European Union legislation into national law also took place in the United Kingdom.
The German Social Code’s price freeze imposed on reimbursable drugs, which was due to expire at the end of 2013,2017, was amended in 2013 and 2014 to extend the price freezeextended until December 31, 2017,2022 for all patent free drugs launched before August 1, 2010, although the continued price freeze will not apply to medicines subject to internal reference pricing.
New
European pharmacovigilance legislation (Regulation (EU) No 1235/2010 and Directive 2010/84/EU) was implementedenacted in July 2012. These new requirements are intended to improve patient safety, but will also increase our administrative burdensAmong other things, this legislation amended certain prior regulations regarding pharmacovigilance of medicinal products for human use, and therefore our costs. In 2015, the European Commission introduced pharmacovigilance service fees that industry paysprocedures for the simplificationauthorization and maintenancesupervision of the European pharmacovigilance system, as well as feesmedicinal products for the assessment of aggregate safety reportshuman and protocols and study reports mandated following a safety referral. The service fees payable for these reports are unpredictable, as the Pharmacovigilance Risk Assessment Committee (“PRAC”) of the European Medicine Agency (“EMA”) can initiate a safety referral for any medicine or class of medicines with a significant new safety concern at any time.veterinary use.
The International Standards for Identification of Medicinal Products (“IDMP”), comprised of five International Organization for Standardization (“ISO”) standards, were approved in calendar year 2012. These standards are designed to allow unambiguous identification of medicinal products across companies and regions in order to support and improve pharmacovigilance and other activities. In
The implementation of IDMP has, for a variety of reasons, experienced a series of delays. But the European Union, these standardsEMA has now published an updated EU Implementation guide, and the latest implementation timelines published in February 2021 state a mandatory implementation date for calendar year 2023.
The EMA has adopted the Health Level 7 (“HL7”) Fast Healthcare Interoperability Resources (“FHIR”) messaging standard for the EU wide implementation of IDMP, and the full implementation will become mandatory for medicinal product information by mid-2018.happen through 4 domains: Substance, Product, Organization, and Reference Data (sometimes referred to, collectively, as “SPOR”).
The submission of medicinal product data to support pharmacovigilance has been required since 2012 in the European Union.EU. The original European database for data regarding medicinal products, the Eudravigilance Medicinal Product Dictionary (“EVMPD”), was launched by the EMA at the end of 2001. It was designed to standardize the collection, reporting, coding, and evaluation of authorized and investigational medicinal product information. In 2012 it became mandatory for marketing-authorzsationmarketing-authorization holders to supply information to the extended version of the EVMPD (xEVMPD or Article 57 database). However, this is an interim solution andcurrently contains only a fraction of the data that eventually will have to be submitted to the IDMP-compliant database for each authorized product in the European Union.
EU. In order for us to support the maintenance of medicinal product data in the IDMP-compliant database, we will be requiredhave to invest in new systems and make significant changes to our processes and procedures.
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In order to prevent counterfeit medicines entering into the supply chain, in October 2015, as part of the Falsified Medicines Directive (the “FMD”), the European Commission adopted regulations providing detailed rules for the safety features appearing on the packaging of medicinal products for human use. Accordingly, all medicinal products generally subject to prescription must bear safety features that facilitate specifically the identification of individual packs and the verification of their authenticity. Effective as of February 9, 2019, we have successfully implemented the FMD and only those prescription drugs which have a unique serial number on the pack, and where the integrity of the pack can be seen, have been placed on the market ever since.
The decision for the United Kingdom to exit from the EU (the “Brexit”) has impacted pharmacovigilance operations. The Brexit transition period ended as of December 31, 2020 and the U.K. MHRA have issued guidance for the pharmaceutical industry to follow from January 1, 2021. The new requirements include the appointment of a “Qualified Person” for pharmacovigilance for U.K. nationally authorized products. The MHRA will continue to support EU harmonized approaches for certain safety data, but require U.K. specific supplemental information to be provided. In addition, parallel, U.K. specific processes must be implemented for certain activities including adverse event reporting. These additional requirements are expected to result in increased costs for the marketing authorization holders (“MAHs”).
In the EU, there must be at least one “Qualified Person” who is responsible for a medicinal product’s batch certification and release. Each batch of an imported medicinal product placed onto the market in the EU must be tested in laboratory in the EU prior certification. The MAH’s Qualified Person, or a qualified partner, must then certify that the product is in accordance with the requirement of Annex 16 of the EU-GMP Guidelines (Certification by a Qualified Person and Batch Release) and can therefore be released to the market. As a consequence of the Brexit, this activity will no longer be able to be conducted in the U.K. for the EU. Following implementationthe Brexit vote, the EU moved the headquarters of the EMA from the U.K. to the Netherlands in March 2019.
In the European Union, the term of certain pharmaceutical patents may be extended by up to five years (subject to further patent term extension under certain conditions) through a Supplementary Patent Certificate (“SPC”). The purpose of this extension is to compensate for the patent term lost during regulatory review processes.
Effective July 2019, the European Union’s new SPC Manufacturing Waiver Regulation exempts businesses which satisfy its conditions from infringement of a pharmaceutical product protected by a SPC. The exemption covers the manufacture of a product for either the purpose of exporting it to countries outside the European Union, or the purpose stockpiling inventory of such product for up to six months for launch in the European Union it is expected that the U.S. FDA will also implement these standards.upon SPC expiration.
“Rest of the World”World” markets of our Global Generics segment
We refer to all markets of our Global Generics segment other than North America, Europe, Russia and other countries of the former Soviet Union and Romania and India as our “Rest of the World” markets. Our significant Rest of the World markets include Venezuela,China, Kazakhstan, South Africa, Australia, Brazil, Vietnam and Australia. Myanmar.
We started our operations in China in the year 2000, by setting up a joint venture in the city of Kunshan, Jiangsu Province. Over the past several years, our joint venture called Kunshan Rotam Reddy Pharmaceuticals Company Limited (“KRRP”) has commercialized several products. Some of these products are manufactured by KRRP at its manufacturing plant in Kunshan while some others are imported in bulk packs, repackaged and sold in China. In calendar year 2020, KRRP started manufacturing capacity expansion at the Kunshan facility, and the same is in progress and likely to be completed in calendar year 2021.
Over the last few years, we have also increased our operations with respect to the filing of dossiers and obtaining new product registrations in China. Upon successful registration and approval by the China regulatory authorities, we intend to launch these products in the coming years.
Further, in September 2019, one of our products Olanzapine, which we had commercialized in China through a distribution and supply agreement with a Chinese company, was successfully listed in the national volume based procurement program, which is a tender-style bidding system for centralized procurement of medicines in China.
Our revenues from our “Rest of the World” markets were Rs.9,416Rs.11,844 million in the year ended March 31, 2016, a decrease2021, an increase of 28%25% as compared to the year ended March 31, 2015. This decrease was primarily2020. The growth is largely attributable to a reductionincreased sales volumes of our sales in Venezuela.
Venezuela
Venezuela accounted for 3.7% of our Global Generics segment’s revenues in the year ended March 31, 2016. In comparison, Venezuela accounted for 7% of our Global Generics segment’s revenues in the year ended March 31, 2015. This reduction in sales was primarily attributableexisting business and to the ongoing economic crisis in the country and, correspondingly, our risk mitigation approach by way of moderating the supply ofnew products to this country.
In February 2015, the Venezuelan government launched an overhaul of the exchange rate system and introduced a new exchange rate mechanism. The Marginal Currency System (known as “SIMADI”) was the third mechanism in this three-tier exchange rate regime and allowed for legal trading of the Venezuelan bolivar for foreign currency with fewer restrictions than other mechanisms in Venezuela (CENCOEX and SICAD). As per the then existing laws in Venezuela, payments towards the importation of pharmaceutical products qualified for the CENCOEX preferential rate of 6.3 VEF per U.S.$1.00, and we were receiving approvals at such preferential rate.
In February, 2016, the Venezuelan government announced further changes to its foreign currency exchange mechanisms, including the devaluation of its official exchange rate. The following changes became effective as of March 10, 2016:
The CENCOEX preferential rate was replaced with a new “DIPRO” rate. The DIPRO rate is only available for purchases and sales of essential items such as food and medicine. Further, the preferential exchange rate was devalued from 6.3 VEF per U.S.$1.00 to 10 VEF per U.S.$1.00;
The SICAD exchange rate mechanism, which last auctioned U.S. Dollars for approximately 13 VEF per U.S.$1.00, was eliminated; and
The SIMADI exchange rate mechanism was replaced with a new “DICOM” rate, which was 272.5 VEF per U.S.$1.00 as at March 31, 2016. The DICOM rate governs all other transactions not covered by DIPRO and will fluctuate according to market supply and demand.
We have not received approvals from the Venezuelan government to repatriate any amounts at preferential rates beyond U.S.$4 million already approved and received during the year ended March 31, 2016. We believe that2021. The foregoing was partially offset by decline in the interim, it is appropriaterevenues due to use the DICOM rate (i.e., 272.5 VEF per U.S.$1.00) instead of the preferential rate of VEF 10 per U.S.$1.00 for translating the monetary assets and liabilitiesprice erosion in some of our Venezuelan subsidiary as at March 31, 2016. Accordingly, we recorded foreign exchange loss of Rs.4,621 million under finance expenses in the income statement during the year ended March 31, 2016.existing products.
Notwithstanding this ongoing uncertainty, we continue to actively engage with the Venezuelan Government and seek approval to repatriate funds at preferential rates so that we may continue to provide affordable medicine to fulfill the needs of people of their country.
GSK Alliance
We have a strategic partnership with GlaxoSmithKline plc (“GSK”) to develop and market select products across emerging markets outside India. The products are manufactured by us, and licensed and supplied to GSK in markets such as Latin America, Africa, the Middle East and Asia Pacific, excluding India.
During the year ended March 31, 2016, as part of our company strategy and in light of our strong portfolio of products, we have decided to expand into select new markets. To supplement our own entry and growth in these markets, we have reached an agreement with GSK to take back the marketing rights for key products in these markets. To enable this, both the parties have agreed to terminate the old agreement.
Collaboration agreement with Merck Serono
On June 6, 2012, we entered into a collaboration agreement with the biosimilars division of Merck KGaA, Darmstadt, Germany, formerly known as Merck Serono (hereinafter, “Merck KGaA”), to co-develop a portfolio of biosimilar compounds in oncology, primarily focused on monoclonal antibodies. The arrangement covers co-development, manufacturing and commercialization of the compounds around the globe, with some specific country exceptions. During the year ended March 31, 2016, the collaboration agreement was amended to rearrange and realign the development of compounds, territory rights and royalty payments. Both parties will undertake commercialization based on their respective regional rights as defined in the agreement. We will lead and support early product development towards or including Phase I development. Merck KGaA will carry out manufacturing of the compounds and will lead further development for its territories. In our exclusive and co-exclusive territories, we will carry out our own development, wherever applicable, for commercialization. As before, we will continue to receive royalty payments upon commercialization by Merck KGaA in its territories.
During the three months ended December 31, 2015, we received from Merck KGaA certain amounts relating to its share of development costs and other amounts linked to the achievement of milestones for the development of compounds under the collaboration agreement, as amended.
Global Generics Manufacturing and Raw Materials
Manufacturing for our Global Generics segment entails converting active pharmaceutical ingredients (“API”)API into finished dosages. As of March 31, 2016,2021, we had thirteeneleven manufacturing facilities within this segment. ElevenTen of these facilities are located in India, including four in a Special Economic Zone, and two are locatedone in the United States (Shreveport, Louisiana; and Bristol, Tennessee)Louisiana). In addition, we also have one packaging facility in the United Kingdom. All of the facilities are designed in accordance with and are compliant with current Good Manufacturing Practice (“cGMP”)cGMP requirements and are used for the manufacture of tablets, hard gelatin capsules, injections, liquids and creams for sale in India as well as other markets. All of our manufacturing sites’ laboratories and facilities are designed and maintained to meet increasingly stringent requirements of safety and quality. All of our sites outside of India are approved by the respective regulatory bodies in the jurisdictions where they are located.
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We manufacture most of our finished products at these facilities and also use contract manufacturing arrangements as we determine necessary. For each of our products, we continue to identify, upgrade and develop alternate vendors as part of risk mitigation and continual improvement.
The ingredients for the manufacture of the finished products are sourced from in-house API manufacturing facilities and from vendors, both local and non-local. Each of these vendors undergo a thorough assessment as part of the vendor qualification process before they qualify as an approved source. We attempt to identify more than one supplier in each drug application or make plans for alternate vendor development from time to time, considering the supplier’s history and future product requirements. Arrangements with international raw material suppliers are subject to, among other things, respective country regulations, various import duties and other government clearances.
The prices of our raw materials generally fluctuate in line with commodity cycles. Raw material expense forms the largest portion of our cost of revenues. We evaluate and manage our commodity price risk exposure through our operating procedures and sourcing policies.
The logistics services for storage and distribution in the United States, Germany, Venezuela,the European Union, Russia, the United Kingdom, South Africa, Australia and Australiaother emerging markets are outsourced to a third party service provider.
We manufacture formulations in various dosage forms including tablets, capsules, injections, liquids and creams. These dosage forms are then packaged, quarantined and subject to stringent quality tests, to assure product quality before release into the market. We manufacture our key brands for our Indian markets at our facilities in Baddi, Himachal Pradesh, to take advantage of certain fiscal benefits offered by the Government of India, which includes partial exemption from income taxes for a specified period.
All pharmaceutical manufacturers that sell products in any country are subject to regulations issued by the Ministry of Health (or its equivalent) of the respective country. These regulations govern, or influence the testing, manufacturing, packaging, labeling, storing, record-keeping, safety, approval, advertising, promotion, sale and distribution of products. Our facilities and products are periodically inspected by various regulatory authorities such as the U.S. FDA, the U.K. MHRA, the German BfARM, the South African Medicines Control Council, the Brazilian ANVISA, the Romanian National Medicines Agency, Ukrainian State Pharmacological Center, the local World Health Organization and Drug Control Authority of India, all of which have extensive enforcement powers over the activities of pharmaceutical manufacturers operating within their jurisdiction.
In November 2015, we received a warning letter from the U.S. FDA relating to violations at our injectable oncology formulation manufacturing facility at Duvvada, Visakhapatnam, Andhra Pradesh. Refer to Item 4.A. “History and developmentSubsequently in February 2019, the U.S. FDA issued an Establishment Inspection Report (“EIR”) indicating successful closure of the company - Key business developments” for further details.audit of such facility.
Changes in OctoPlus N.V. operations
In the year ended March 31, 2013, we acquired Netherlands-based specialty pharmaceutical company OctoPlus N.V. (“OctoPlus”). OctoPlus has developed significant in-house expertise in the development and creation of micro-spheres and liposomes using certain polymer based technologies that enhance and enable controlled-release of the subject API into the human body. OctoPlus is well-known in the market for formulating complex injectables using polylactic-co-glycolic acid (“PLGA”) technology, which requires significant expertise and experience. In addition, OctoPlus also uses its own patented PolyActive™ technology in specific project based injectables.
OctoPlus was previously engaged in our internal drug development projects as well as providing pharmaceutical development services to external customers. During the year ended March 31, 2015, we decided to significantly increase the utilization of OctoPlus’s technical know-how and its time and effort on internal drug development projects, and to scale-down its external pharmaceutical development services.
Pharmaceutical Services and Active Ingredients (“PSAI”) segment
Our Pharmaceutical Services and Active Ingredients (“PSAI”)PSAI segment primarily includes our business of manufacturing and marketing active pharmaceutical ingredients and intermediates, also known as “API” or bulk drugs,, 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 our contract research services business and our manufacture and sale of steroids in accordance with specific customer requirements.
Our PSAI segment’s revenues for the year ended March 31, 20162021 were Rs.22,379Rs.31,982 million, a declinean increase of 12%24% as compared to Rs.25,747 million for the year ended March 31, 2015.2020. Our PSAI segment accounted for 14%17% of our total revenues for the year ended March 31, 2016.2021.
During the year ended March 31, 2016,2021, we filed 50149 Drug Master Files (“DMFs”) worldwide, of which 814 were filed in the United States, 318 were filed in Europe and 39117 were filed in other countries. Cumulatively, our total active DMFs filed worldwide as of March 31, 20162021 were 768,1,172, including 218223 (active) DMFs filed in the United States.
We produce and market more than 100154 different APIs for numerous markets. Our PSAI segment’s API business is operated independently from our Global Generics segment and, in addition to supplying API to our Global Generics segment, our PSAI segment sells API to third parties for use in manufacturing generic products, subject to any patent rights of other third parties.
We export API to more than 8076 countries, and our principal overseas markets in this business segment include North America (the United States and Canada) and Europe. Our PSAI segment’s API business also manufactures and supplies the API requirements of our pharmaceutical services business. The research and development group within our API business contributes to our business by creating intellectual property (principally with respect to novel and non-infringing manufacturing processes and intermediates)polymorphs), providing research intended to reduce the cost of production of our products and developing new products.
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The pharmaceutical services (contract research and manufacturing) arm of our PSAI segment was established in 2001 to leverage our strength in process chemistry to serve the niche segment of Innovator pharmaceutical and finespecialty chemicals industry. Over the years, our business strategy in this area has evolved to focus on the marketing of process development and manufacturing services. Our objective is to be the preferred partner for innovator pharmaceutical companies, providing a
complete range of services that are necessary to takesupport their innovations to bring the new drug to the market speedilyquickly and more efficiently.
The focus is to leverage our skills in process development, analytical development, formulation development and Current Good Manufacturing Practice (“cGMP”) to serve variousoutsourcing needs of innovator pharmaceutical companies. We have positioned our PSAI segment’s Custom Pharmaceutical Services business to be the partner of choice for large, medium and emerging innovator companies across the globe, with service offerings spanning the entire value chain of pharmaceutical services.
Effective June 1, 2020, our Custom Pharmaceutical Services business has been integrated with Aurigene Discovery Technologies Limited’s (“ADTL”) service business, and the integrated business model was commenced under Aurigene Pharmaceutical Services Limited (“APSL”). APSL is a subsidiary of ADTL within our group. APSL has been formed to service the needs of innovator customers in the areas of medicinal chemistry and biology, contract development and manufacturing services for clinical and commercial needs. Our aspiration is to make APSL a global leader in offering end-to-end integrated solutions across discovery, development and manufacturing.
Sales, Marketing and Distribution
Developed Markets.Our PSAI segment’s principal overseas markets are the United States and Europe. Our PSAI segment’s sales to these markets were Rs.12,365Rs.13,942 million for the year ended March 31, 2016,2021, and accounted for 55%44% of our PSAI segment’s revenues for the year ended March 31, 2016. 2021.
In the United States and Europe, the patent protection for a large number of high value branded pharmaceutical products expired in years ended March 31, 2011, 2012 and 2013 and this opened the market to generic products that sourced their API from our PSAI segment. However, during the years ended March 31, 2014 2015 and 2016,through March 31, 2019, such expirations were much less frequent, which resulted in a decrease in new opportunities in these markets for the customers of our PSAI segment. We market our products through our subsidiaries in the United States and Europe. These subsidiaries are engaged in all aspects of marketing activity and support our customers’ pursuit of regulatory approval for their products, focusing on building long-term relationships with the customers.
Other Key Markets.India is an important market for our PSAI segment, with total sales of Rs.2,618Rs.2,821 million, and it accounted for 12%9% of the PSAI segment’s revenues in the year ended March 31, 2016.2021. In India, we market our API products to Indian and multinational companies, many of whom are also our competitors in our Global Generics segment. The market in India is highly competitive, with severe pricing pressure and competition from lower cost foreign imports in several products.
Being the highest growing emerging market, China is a lucrative market to operate in. Our PSAI segment has a strong pipeline of products for the Chinese market has concentrated talent deployment in the region. Our PSAI segment’s sales to all of the other markets (excluding the United States, Europe and India) were Rs.7,396was Rs.15,220 million for the year ended March 31, 20162021 and accounted for 33%47% of our PSAI segment’s revenues for the year.
Our PSAI segment’s other key markets include Brazil, Mexico, South KoreaChina and Japan. While we work through our agents in these markets, our zonal marketing managers also interact directly with our key customers in order to service their requirements. With the aim of being closer to the customers, and in their respective time zones, our PSAI business has sales operations now in 8 markets, including India, the United States, Europe, Mexico and Brazil. And new PSAI segment operations have been added in China, Japan and Russia during the year ended March 31, 2020, with local sales and regulatory managers to cater to the local customer needs.
Our focus is on building relationships with top customers in each of these markets and partnering with them in product launches by providing timely technical and analytical support.
For our custom pharmaceuticalcontract development and manufacturing services line of business, we have focused business development teams dedicated to our key geographies of North America (the United States and Canada), the European Union and Asia Pacific. These teams target large, medium and emerging innovator companies to build long-term business relationships focused on catering to their outsourcing needs.
Going forward, we expect our PSAI segment to show growth on account of our investments in newer technologies and platforms. We are also pursuing a partnership model to enable our customers to reach more markets faster and efficiently by leveraging our cost leadership and presence across the globe. Our PSAI Segment has been investing in digital solutions to revitalize our engagement and transparency with our customers. We consider this as a small step in the right direction to become partner of choice for our customers.
PSAI Manufacturing and Raw Materials
The infrastructure for our PSAI segment consists of eight U.S. FDA-inspected plants (six of which are in India, including one of which isin a Special Economic Zone, one in Mexico, and one of which is in Mirfield, United Kingdom) and threetwo technology development centers (two of which are(one in Hyderabad, India and one of which is in Cambridge, United Kingdom). In addition, we have also set up a new manufacturing facility which is part of a Special Economic Zone located in Devunipalavalasa, Srikakulam, Andhra Pradesh, India.
India. All of our facilities in India are located in the states of Andhra Pradesh and Telangana. We have the flexibility to produce quantities that range from a few kilograms to several metric tons. The manufacturing process consumes a wide variety of raw materials that we obtain from sources that comply with the requirements of regulatory authorities in the markets to which we supply our products. We procure raw materials on the basis of our requirement planning cycles. We utilize a broad base of suppliers in order to minimize risk arising from dependence on a single supplier. We also source several APIs from third party suppliers for resale. During the year ended March 31, 2016, approximately 6% of our total API revenues resulted from sales of API procured from third-party suppliers. We maintain stringent quality controls when procuring materials from third-party suppliers.
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In November 2015, we received a warning letter from the U.S. FDA relating to cGMP deviations at our API manufacturing facilities at Miryalaguda, Telangana and Srikakulam, Andhra Pradesh andPradesh. In June 2017, the U.S. FDA issued an EIR which indicated that the inspection of our API manufacturing facility at Miryalaguda Telangana. Refer to Item 4.A. “History and developmentwas successfully closed. In May 2020, we received an EIR from the U.S. FDA, for our API manufacturing facility at Srikakulam, indicating closure of the company - Key business developments” for further details.audit and classifying the inspection of this facility as Voluntary Action Indicated (“VAI”).
The prices of our raw materials generally fluctuate in line with commodity cycles although the prices of raw materials used in our API business are generally more volatile. Raw material expense forms the largest portion of our cost of revenues. We evaluate and manage our commodity price risk exposure through our operating procedures and sourcing policies.
Mexico. Our manufacturing plant in Cuernavaca, Mexico (the “Mexico facility”) was acquired from Roche during the year ended March 31, 2006. In addition to manufacturing the active pharmaceutical ingredients, naproxen and naproxen sodium and a range of intermediates, the Mexico facility synthesizesmanufactures steroids as active ingredients for use in pharmaceuticalhuman and veterinary pharmaceutical products.
United Kingdom. The Dowpharma Small Moleculessmall molecules business which we acquired from The Dow Chemical Company in April 2008, continues to offer niche capabilities, such as biocatalysis, chemocatalysis and hydroformulation,supply complex chiral APIs to customers at a range of scales. This business is also able to provide cost effective solutions for chiral molecules. The non-exclusive license to Dow’s Pfēnex Expression Technology™ for biocatalysiscontract development also acquired as part of the acquisition, continues to offer us opportunities to provide technology leveragedand manufacturing servicesorganization solutions to innovators including major globaldeveloping new pharmaceutical companies.products, tapping into the expertise of our parent company as required.
We have invested in this business to update equipment and implement modern data acquisition systems to meet today’s stringent regulatory requirements.
For our contract researchdevelopment and manufacturing services, we have well-resourced synthetic organic chemistry laboratories, medicinal chemistry analytical laboratories and kilo laboratories at our technology development centers at MiyapurHyderabad and JeedimetlaBengaluru in Hyderabad, India. Our chemists and process engineers understand cGMPare experts in discovery, development and manufacturing and regulatory requirements for synthesis, manufacture and formulation of a NCEservices, from the pre-clinical stage to commercialization. To complete the full value chain in development services, we also provide formulation development services. We have facilities for pre-formulation and formulation development, analytical development, clinical trial supplies, pilot scale and product regulatory support. The inspection of our Miyapur facility in Hyderabad, India was completed by the U.S. FDA on September 21, 2017 with zero observations, and the U.S. FDA issued an EIR in December 2017. This facility also follows rigorous Safety and Information Security practices and is certified against ISO 27001:2013 standards for information security. Larger quantities of APIs are sourcedcan be manufactured from our API plants in India, the United Kingdom and Mexico. We also offer end to end project management support for effective deliveries.
Our contract researchdevelopment and manufacturing business isservices are uniquely positioned in the market where it utilizes assets (both in terms of physical assets and technical know-how) of a vertically integrated pharmaceutical company and combines this with the service model which we have built over the last few years.
Raw Materials
Raw material expense forms the largest portion of our cost of revenues. Raw materials consist of fine chemicals, bulk chemicals, solvents, catalysts, and basic and advanced intermediates. The prices of these raw materials generally fluctuate in line with commodity cycles, demand supply situations and changes to government policies. We evaluate and manage our commodity price risk exposure through periodical supply contracts as well as agile and responsive sourcing procedures
Competition
The global API market can broadly be divided into regulated and less regulated markets. The less regulated markets offer low entry barriers in terms of regulatory requirements and intellectual property rights. The regulated markets, like the United States and Europe, have high entry barriers in terms of intellectual property rights and regulatory requirements, including facility approvals. As a result, there is a premium for quality and regulatory compliance along with relatively greater stability for both volumes and prices. As an API supplier, we compete with a number of manufacturers within and outside India, which vary in size. Our main competitors in this segment are Divis Laboratories Limited, Aurobindo Pharma Limited, Cipla Limited, Mylan Laboratories Limited, Sun Pharmaceutical Industries Limited and MSN Laboratories Limited, all based or operating in India. In addition, we experience competition from European businesses and Chinese manufacturers like Zhejiang Huahai, Tianyu, as well as from Teva Pharmaceuticals Industries Limited, based in Israel.
With respect to our custom pharmaceuticals business,contract development and manufacturing services, we believe that contract research and manufacturing is a significant opportunity for Indian pharmaceutical companies, based on their strengths of a skilled workforce and a low-cost manufacturing infrastructure. Key competitors in India include Divis Laboratories Limited, Dishman Pharmaceuticals & Chemicals Limited, Jubilant Organosys LimitedSynegene International Ltd. and Nicholas Piramal India Limited.Enterprises Ltd. Key competitors from outside India include Lonza Group, Koninklijke DSM N.V., Albany Molecular Research,AMRI Inc., Patheon Inc., Catalent Inc., Cambrex Inc., and Cardinal Health, Inc.WuXi Apptec. We distinguish ourselves from our keyIndian competitors by offering a wider range of cost effective services spanning the entire pharmaceutical value chain. Growth
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For competitors from outside India, we distinguish ourselves through cost effectiveness. Keeping on par with the advancements in technology and changing needs of the innovator and mid-sized pharmaceutical companies, we are positioning ourselves in niche technologies. With growth in contract research and manufacturing isservices likely to be driven by increasingincreased outsourcing of late-stageby small and off-patent molecules by largemedium size pharmaceutical companies, to compete with generics. Weparticularly those focused on biotechnology and therapy, we expect India to emerge as an alliance and outsourcing destination of choice for global pharmaceutical companies.due to speed, skill and cost advantage.
Government regulations
All pharmaceutical companies that manufacture and market productsdrugs, medical devices and cosmetics in India are subject to various national and state laws and regulations, which principally include the Drugs and Cosmetics Act, 1940 and the Drugs and Cosmetics Rules 1945, the New Drugs and Clinical Trials. Rules, 2019, the Cosmetics Rules, 2020, the Medical Devices Rules 2017, the Drugs (Prices Control) Order, 1995,2013, as well as various environmental laws, labor laws and other government statutes and regulations. These regulations govern the manufacturing, testing, manufacturing, packaging, labeling, storing, record-keeping,recordkeeping, safety, approval, advertising, promotion, sale and distribution of pharmaceutical products.
In India, manufacturing licenses for drugs, cosmetics and pharmaceuticalsmedical devices are generally issued by state druglicensing authorities. Under the Drugs and Cosmetics Act, 1940, the state drug administration agencieslicensing authorities are empowered to issue manufacturing licenses for drugs if they are approved for marketing in India by the Drug Controller General of India (“DCGI”). Prior to granting licenses for any new drugs or combinations of new drugs, the DCGI clearance has to be obtained in accordance with the Drugs and Cosmetics Act, 1940.
We submit a DMF for active pharmaceutical ingredients to be commercialized in the United States. Any drug product for which an ANDA is being filed must have a DMF in place with respect to a particular supplier supplying the underlying API.
The manufacturing facilities are inspected by the U.S. FDA to assess compliance with current Good Manufacturing Practice regulations (“cGMP”).cGMP. The manufacturing facilities and production procedures utilized at the manufacturing facilities must meet U.S. FDA standards before products may be exported to the United States. Eight of our manufacturing facilities are inspected and approved by the U.S. FDA.standards. For European markets, we submit a European DMF and, wherewherever applicable, obtain a certificate of suitability from the European Directorate for the Quality of Medicines.
Proprietary Products Segment
Our Proprietary Products segment focuses on the research, development, and manufacturecommercialization of differentiated formulations and new chemical entities (“NCEs”). These novelby building a pipeline of high value, globally relevant products fall within the dermatology and neurologyin therapeutic areas of high unmet need and are marketed and soldcommercializing these pipeline products through Promius™ Pharma, LLC.partnerships to maximize value.
We continue to leverage our semi-virtual research and development model to expand our portfolio of specialty formulation products.
Our efforts primarily focus on repurposing or improving the clinical properties of already approved and well-characterized active pharmaceutical ingredients (“API”)APIs for application in the dermatologic and neurologictargeted disease areas. We achieve this by utilizing internal resources as well as efficiently collaborating with leading technology and platform based companies and service providers, tapping into their expertise areas across different phases of the development process. We continue to progress towards building a diversified portfolio with a sustainable mix of branded proprietary formulations generated through research and development with significantly reduced fixed costs.
Our research and development efforts have a unique “medicines-to-molecules” approach to product development. In this approach, we identify areas of medical need and then leverage in an integrated manner the disciplines of biology, chemistry, drug delivery, clinical development, regulatory and commercial positioning to develop differentiated formulations.
Our research and development model is both in-house and virtual (i.e., operations are outsourced, subject to our supervision of strategic and project management functions), and follows these core principles:
develop creative research and development investment models and partnerships to access external innovation focused on leveraging, rather than replicating, unique core competencies;
· | develop creative research and development investment models and partnerships to access external innovation focused on leveraging, rather than replicating, unique core competencies; |
select assets based on potential for early risk mitigation, both with respect to product development and commercialization; and
· | select assets based on potential for early risk mitigation, both with respect to product development and commercialization; and |
· | leverage knowledge and presence in emerging markets (India and other developing countries) to maximize cost advantages. |
leverage knowledge and presence in emerging markets (India and other developing countries) to maximize cost advantages.
Our principal research laboratory is based in Hyderabad, India. As of March 31, 2016,2021, we employed a total of 16667 scientists, including 3710 scientists who hold Ph.D. degrees and fourthree with a M.D. degrees. We pursue an integrated research strategy through a mix of translational, formulation and analytical research at our laboratories. We focus on discovery of new molecular targets, design of assays to screen promising molecules and development of novel formulations of currently marketed drugs or combinations thereof to address unmet medical needs.degree.
While we conduct clinical development of candidate drugs ourselves, we continue to seek licensing and development opportunities with third parties to further expand our product pipeline. Our goal is to balance the development of our own product candidates with in-licensing of promising compounds that complement our product offering. We also pursue licensing and joint development of some of our lead compounds with companies looking to enhance their own product portfolio.
Pipeline Status
As of March 31, 2016,2021, we had 19 activethree late stage projects at different stages of development, ranging from products that have completed Phase 2 clinical trials to a product developmentthat is undergoing pivotal studies for registration. In addition, we have multiple other programs in the early stages of development (i.e., exploratory stage through Phase 2) in our pipeline. During January and February 2016, we received U.S. FDA approval of our New Drug Applications (each, a “NDA”) for two products and tentative approval of our NDA for one product, all under section 505(b)(2) of of the Federal Food, Drug and Cosmetic Act.
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The details of our products in Phase III, for which an NDA has been filed as of March 31, 2016 or which are approved by U.S. FDA during the year ended March 31, 2016late stage assets are as follows:
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| Three patent applications have been filed with the USPTO(1) (1 granted). There are also other patent applications pending in fourteen other countries including Europe, Japan, Brazil, Canada, China, India and Russia. | |||||
Current status/ expected NDA filing(2) | Phase | Approval enabling study is ongoing. Submission of |
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(1) | “USPTO” means the United States Patent and Trademark Office. |
(2) | The timelines for expected filing may change due to various factors, including outcome of Approval enabling/Phase |
Details regarding certain of other late stage pipeline assets are as follows:
· | DFD-11 (XeglyzeTM): U.S. FDA approval was received on July 24, 2020. |
Patents. Our Proprietary Products segment hadhas created a strong patent portfolio, with 134 grants by the followingUSPTO with a validity of 10+ years. Following is the patent applications filed and patents filed/granted status as of March 31, 2016:2021:
Category | USPTO(1) (# Filed) | USPTO(1) (# Granted) | PCT(2) (# Filed) | India (# Filed) | India (# Granted) | USPTO(1) (# Filed) | USPTO(1) (# Granted) | PCT(2) (# Filed) | India (# Filed) | India (# Granted) | ||||||||||||||||||||||||||||||
Anti-diabetic | 85 | 17 | 62 | 117 | 45 | 85 | 17 | 62 | 117 | 45 | ||||||||||||||||||||||||||||||
Anti-cancer | 18 | 11 | 14 | 45 | 15 | 18 | 11 | 14 | �� | 45 | 15 | |||||||||||||||||||||||||||||
Anti-bacterial | 8 | 7 | 10 | 22 | 4 | 8 | 7 | 10 | 22 | 4 | ||||||||||||||||||||||||||||||
Anti-inflammation/cardiovascular | 47 | 26 | 35 | 26 | 3 | 47 | 27 | 35 | 26 | 3 | ||||||||||||||||||||||||||||||
Anti-ulcerant | 1 | 1 | — | 1 | — | 1 | 1 | - | 1 | - | ||||||||||||||||||||||||||||||
Miscellaneous | 15 | 6 | 4 | 26 | 8 | 29 | 26 | 4 | 29 | 11 | ||||||||||||||||||||||||||||||
Differentiated formulations | 27 | 4 | 15 | 24 | — | 70 | 45 | 28 | 71 | 5 | ||||||||||||||||||||||||||||||
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TOTAL | 201 | 72 | 140 | 261 | 75 | |||||||||||||||||||||||||||||||||||
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Total | 258 | 134 | 153 | 311 | 83 |
(1) | “USPTO” means the United States Patent and Trademark Office. |
(2) | “PCT” means the Patent Cooperation Treaty, an international treaty that facilitates foreign patent filings for residents of member countries when obtaining patents in other member countries. |
Competition
The pharmaceutical and biotechnology industries are highly competitive. We face intense competition from organizations such as large and small pharmaceutical companies and biotechnology companies. The major pharmaceutical organizations competing with us have greater capital resources, larger overall research and development staff and facilities, and considerably more experience in drug development. Biotechnology companies competing with us may have these advantages as well.
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In addition to competition from collaborators and investors, these companies and institutions also compete with us in recruiting and retaining highly qualified scientific and management personnel.
Government regulations
Virtually all pharmaceutical and biologics products that we or our collaborative partners develop will require regulatory approval by governmental agencies prior to commercialization. The nature and extent to which these regulations apply varies depending on the nature of the products and also vary from country to country. In particular, human pharmaceutical products are subject to rigorous nonclinical and clinical testing and other approval procedures by the relevant regulatory agency. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country
In order to market a drug in the United States, we or our partners are subject to regulatory requirements governing human clinical trials, marketing approval and post-marketing activities for pharmaceutical products and biologics. Various federal, and in some cases state, statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record-keeping and marketing of these products. The process of obtaining these approvals and the subsequent compliance with applicable statutes and regulations is time consuming and requires substantial resources, and the approval outcome is uncertain.
Stages of Testing Development.The stages of testing required before a pharmaceutical product can be marketed in the United States are generally as follows:
Stage of Development | Description | |
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For ethical, scientific and legal reasons, animal studies are required in the discovery and safety evaluation of new medicines. Nonclinical tests assess the potential safety and efficacy of a product candidate in animal models. The results of these studies must be submitted to the U.S. FDA as part of an Investigational New Drug (“IND”) application before human testing may proceed.
U.S. law further requires that studies conducted to support approval for product marketing be “adequate and well controlled.” In general, this means that either a placebo or a product already approved for the treatment of the disease or condition under study must be used as a reference control. Studies must also be conducted in compliance with good clinical practice requirements, and adverse event and other reporting requirements must be followed.
The clinical trial process can take five to ten years or more to complete, and there can be no assurance that the data collected in compliance with good clinical practice regulations will demonstrate that the product is safe or effective, or, in the case of a biologic product, pure and potent, or will provide sufficient data to support U.S. FDA approval of the product. The U.S. FDA may place clinical trials on hold at any point in this process if, among other reasons, it concludes that clinical subjects are being exposed to an unacceptable health risk. Trials may also be terminated by Institutional Review Boards (“IRBs”) or Ethics Committees (“ECs”), which must review and approve all research involving human subjects. Side effects or adverse events that are reported during clinical trials can delay, impede, or prevent marketing authorization.
Competition
The pharmaceutical and biotechnology industries are highly competitive. We face intense competition from organizations such as large pharmaceutical companies, biotechnology companies and academic and research organizations. The major pharmaceutical organizations competing with us have greater capital resources, larger overall research and development staff and facilities and considerably more experience in drug development. Biotechnology companies competing with us may have these advantages as well.
In addition to competition from collaborators and investors, these companies and institutions also compete with us in recruiting and retaining highly qualified scientific and management personnel.
Government regulations
Virtually all pharmaceutical and biologics products that we or our collaborative partners develop will require regulatory approval by governmental agencies prior to commercialization. The nature and extent to which these regulations apply varies depending on the nature of the products and also vary from country to country. In particular, human pharmaceutical products are subject to rigorous nonclinical and clinical testing and other approval procedures by the relevant regulatory agency. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country.
In India, under the Drugs and Cosmetics Act, 1940, the regulation of the manufacture, sale and distribution of drugs is primarily the concern of the state authorities while the Central Drug Control Administration is responsible for approval of new drugs, clinical trials in the country, establishing the standards for drugs, control over the quality of imported drugs, coordination of the activities of state drug control organizations and providing expert advice with a view of bringing about the uniformity in the enforcement of the Drugs and Cosmetics Act, 1940.
In order to market a drug in the United States, we or our partners will be subject to regulatory requirements governing human clinical trials, marketing approval and post-marketing activities for pharmaceutical products and biologics. Various federal, and in some cases state, statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record-keeping and marketing of these products. The process of obtaining these approvals and the subsequent compliance with applicable statutes and regulations is time consuming and requires substantial resources, and the approval outcome is uncertain.
Generally, in order to gain U.S. FDA approval, a company first must conduct nonclinical studies in the laboratory and in animal models to gain preliminary information on a compound’s activity and to identify any safety problems. Nonclinical studies must be conducted in accordance with U.S. FDA regulations. The results of these studies are submitted as part of an IND application that the U.S. FDA must review before human clinical trials of an investigational drug can start. If the U.S. FDA does not respond with any questions, a drug developer can commence clinical trials thirty days after the submission of an IND.
In order to eventually commercialize any products, we or our collaborator first will be required to sponsor and file an IND and will be responsible for initiating and overseeing the clinical studies to demonstrate the safety and efficacy that is necessary to obtain U.S. FDA marketing approval. Clinical trials are normally done in three phases and generally take several years to complete. The clinical trials have to be designed taking into account the applicable U.S. FDA guidelines. Furthermore, the U.S. FDA may suspend clinical trials at any time if the U.S. FDA believes that the subjects participating in trials are being exposed to unacceptable risks or if the U.S. FDA finds deficiencies in the conduct of the trials or other problems with our product under development.
After completion of clinical trials of a new product, U.S. FDA marketingNDA approval must be obtained. If the product is classified as a new pharmaceutical, we or our collaborator will beare required to file a New Drug Application (“NDA”),NDA, and receive approval before commercial marketing of the drug. The testing and approval processes require substantial time and effort. NDAs submitted to the U.S. FDA can take several years to obtain approval and the U.S. FDA is not obligated to grant approval at all.
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Even if U.S. FDA regulatory clearances are obtained, a marketed product is subject to continual review. If and when the U.S. FDA approves any of our or our collaborators’ products under development, the manufacture and marketing of these products will beare subject to continuing regulation, including compliance with cGMP, adverse event reporting requirements and prohibitions on promoting a product for unapproved uses. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of pharmaceutical products.
Our research and development processes involve the controlled use of hazardous materials and controlled substances. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and waste products.
Promius Pharma LLCCommercialization
Promius Pharma
In January and February 2016, we received U.S. FDA approval of our New Drug Applications (each, a “NDA”) for two products – our dermatology product SERNIVO® and our neurology product ZEMBRACE®. Both products were launched in the U.S. market during the year ended March 31, 2017. In May and November 2017, we received U.S. FDA approval for two dermatology products – DFD-10 (minocycline hydrochloride) and DFD-06, Impoyz® our brand of clobetasol propionate cream. Furthermore, in January 2019, we received U.S. FDA approval for TOSYMRA®, our brand of sumatriptan intranasal spray (DFN-02).
In August 2017, we sold the future development, manufacturing and commercialization rights for DFD-06, a topical high potency steroid, to Encore Dermatology Inc. During the three months ended September 30, 2018, we sold our rights for Cloderm® (clocortolone pivalate) Cream 0.1% and its authorized generic to EPI Health, LLC, (“Promius Pharma”) isan affiliate of EPI Group, LLC.
In March 2019 we sold to Encore Dermatology Inc. our subsidiary based in Princeton, New Jerseyrights for SERNIVO® (betamethasone dipropionate) Spray 0.05% and assigned them our rights to market and distribute PROMISEB® topical cream and TRIANEX® 0.05% (triamcinolone acetonide ointment, USP) in the United States focusing onStates.
In June 2019, we sold to Upsher-Smith Laboratories, LLC, our U.S. Specialty Business, which is engaged in the development and sales of branded specialty products in the therapeutic areas of dermatology and neurology.
Promius Pharma has a portfolio of in-licensed patented dermatology products. It also has an internal pipeline of dermatology products that are in different stages of development. Promius Pharma’s current portfolio contains innovative productsselect territory rights for the treatment of seborrheic dermatitis, acne and steroid responsive dermatoses. It has commercialized six products: EpiCeram®, a skin barrier emulsion for the treatment of atopic dermatitis; Scytera™, a foam for the treatment of psoriasis; Promiseb™, a cream for the treatment of seborrheic dermatitis; ClodermZEMBRACE® (clocortolone pivalate 0.1%), a cream used for treating corticosteroid-responsive dermatoses; TrianexSYMTOUCH®, a cream for the treatment of the inflammatory (sumatriptan injection) 3 mg and pruritic manifestations of corticosteroid-responsive dermatoses; Zembrace SymTouch (subcutaneous sumatriptan 3mg), an autoinjector for treatment of migraine headaches; and Sernivo (betamethasone propionate, 0.05%), a spray for the treatment of mildTOSYMRA® (sumatriptan nasal spray) 10 mg, (formerly referred to moderate plaque psoriasis. Promius Pharma also markets and promotes Zenatane (isotretinoin)as “DFN-02”).
Promius Pharma leverages our research, development
In March 2021, we out-licensed to Ethypharm SAS select territory rights (in France, Germany, Italy, Spain and manufacturing facilities in Hyderabad, India. Promius Pharma also works with various third party research organizations in conducting product development, nonclinical and clinical studies. Manufacturing is also outsourced to reputable contract manufacturing organizations in the United States and Europe. Both of Promius Pharma’s commercial groups - dermatology and neurology - have the support of teams spanning marketing, sales operations, and medical affairs. The dermatology team includes 72 marketing and sales employees targeting dermatologists, and the neurology team includes 59 marketing and sales employees targeting primary care physicians and neurologists who treat migraine headaches.Kingdom) for ELYXYBTM (formerly referred to as “DFN 15”).
Seasonality
Certain parts of our business are affected by seasonality, primarily our Global Generics segment’s business in India and Russia. The seasonal impact of these particular businesses may affect a quarterly comparison within any fiscal year. However, there is generally no significant seasonality impact on a year to year basis.
Dr. Reddy’s Laboratories Limited is the parent company in our group. Refer to Note 4642 of our consolidated financial statements for a list of our subsidiaries associates and joint ventures.
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4.D.Property, plant and equipment
Our principal executive offices are located in Hyderabad, Telangana, India. Our business operates through a number of subsidiaries having offices, research facilities and production sites throughout the world. The following table sets forth current information relating to our principal facilities:
Sl. No. | Location | Approximate Area (Square feet) | Built up Area (Square feet) | Certifications | Installed Capacity | Actual Production | ||||||||||||||||
Sl No. | Name/Location | Approximate Area (Square feet) | Segments Which Primarily Use | |||||||||||||||||||
Within India | Within India | |||||||||||||||||||||
1 | API Hyderabad Plant 1, Telangana, India(21) | 734,013 | 411,657 | U.S. FDA and EUGMP | 4,767(8)(11) | 2,726(8)(11) | API Hyderabad Plant 1, Telangana, India | 645,995 | Global Generics and PSAI | |||||||||||||
2 | API Hyderabad Plant 2, Telangana, India(21) | 725,274 | 401,271 | U.S. FDA and EUGMP | See above(11) | See above(11) | API Hyderabad Plant 2, Telangana, India | 781,379 | Global Generics and PSAI | |||||||||||||
3 | API Hyderabad Plant 3, Telangana, India(21) | 715,610 | 333,681 | U.S. FDA and EUGMP | See above(11) | See above(11) | API Hyderabad Plant 3, Telangana, India | 644,805 | Global Generics and PSAI | |||||||||||||
4 | API Hyderabad Plant 4, Telangana, India(21) | 189,343 | 150,002 | U.S. FDA and EUGMP | See above(11) | See above(11) | API Nalgonda Plant, Telangana, India | 3,397,680 | Global Generics and PSAI | |||||||||||||
5 | API Nalgonda Plant, Telangana, India(21)(24) | 3,402,907 | 631,320 | U.S. FDA and EUGMP | See above(11) | See above(11) | API Srikakulam Plant, Andhra Pradesh, India | 4,027,688 | Global Generics and PSAI | |||||||||||||
6 | API Srikakulam Plant, Andhra Pradesh, India(21)(24) | 4,047,595 | 1,618,579 | U.S. FDA and EUGMP | See above(11) | See above(11) | API Srikakulam Plant (SEZ), Andhra Pradesh, India | 9,917,739 | Global Generics and PSAI | |||||||||||||
7 | API Srikakulam Plant (SEZ), Andhra Pradesh, India(22) | 11,001,863 | 414,351 | — | N/A | N/A | Aurigene Pharmaceutical Services Limited, Hyderabad, Telangana, India | 300,564 | PSAI | |||||||||||||
8 | Technology Development Centre Hyderabad 1, Telangana, India(23) | 113,256 | 96,445 | ISO 27001: 2005 Information Security Management System | N/A | N/A | Technology Development Centre Hyderabad 2, Telangana, India | 68,825 | Global Generics and PSAI | |||||||||||||
9 | Technology Development Centre Hyderabad 2, Telangana, India(23) | 68,825 | 23,538 | ISO 27001: 2005 Information Security Management System | N/A | N/A | Integrated Product Development Center (Pilot Plant), Telangana, India | 271,379 | Global Generics | |||||||||||||
10 | Formulations Hyderabad Plant 1, Telangana, India(22) | 217,729 | 195,348 | (2) | 8,160(6)(13)(15) | 4,898(6)(13) | Formulations Hyderabad Plant 2, Telangana, India | 3,207,826 | Global Generics | |||||||||||||
11 | Formulations Hyderabad Plant 2, Telangana, India(22) | 3,202,862 | 987,765 | (3) | See above(13) | See above(13) | Formulations Baddi Plant 1, Himachal Pradesh, India | 728,234 | Global Generics | |||||||||||||
12 | Formulations Yanam Plant, Pondicherry, India(22) | 457,000 | 63,738 | — | See above(13) | See above(13) | Formulations Baddi Plant 2, Himachal Pradesh, India | 381,342 | Global Generics | |||||||||||||
13 | Formulations Baddi Plant 1, Himachal Pradesh, India(22) | 728,234 | 304,185 | (19) | See above(13) | See above(13) | Formulations Baddi Plant 3, Himachal Pradesh, India | 70,220 | Global Generics | |||||||||||||
14 | Formulations Baddi Plant 2, Himachal Pradesh, India(22) | 381,342 | 222,119 | — | See above(13) | See above(13) | Biologics Hyderabad, Telangana, India | 1,242,767 | Global Generics | |||||||||||||
15 | Biologics Hyderabad, Telangana, India(22) | 789,727 | 213,002 | (2) | 125,122(9)(14) | 47,077(9) | Formulations Hyderabad Plant 3, Telangana, India | 1,539,089 | Global Generics | |||||||||||||
16 | Formulations Hyderabad Plant 3, Telangana, India(22) | 1,539,098 | 906,030 | (4) | 11,600(6)(10) | 5,509(6) | Formulations Srikakulam Plant 1 (SEZ), Andhra Pradesh, India | 879,041 | Global Generics | |||||||||||||
17 | Formulations Srikakulam Plant 1 (SEZ), Andhra Pradesh, India(17)(22) | 878,054 | 644,997 | U.S. FDA | 960(6) | 455 | Formulations Srikakulam Plant 2 (SEZ), Andhra Pradesh, India | 334,105 | Global Generics | |||||||||||||
18 | Formulations Srikakulam Plant 2 (SEZ), Andhra Pradesh, India(17)(22) | 328,912 | 200,082 | — | N/A | N/A | Formulations Srikakulam Plant 11, Andhra Pradesh, India | 740,520 | Global Generics | |||||||||||||
19 | Formulations Visakhapatnam Plant 1 (SEZ), Andhra Pradesh, India(22)(25) | 581,880 | 209,542 | U.S. FDA and BfARM, Germany | 127(6)(7) | 4(6) | Formulations Visakhapatnam Plant 1 (SEZ), Andhra Pradesh, India | 582,206 | Global Generics | |||||||||||||
20 | Formulations Visakhapatnam Plant 2 (SEZ), Andhra Pradesh, India(22) | 528,529 | 278,038 | — | N/A | N/A | Formulations Visakhapatnam Plant 2 (SEZ), Andhra Pradesh, India | 544,322 | Global Generics | |||||||||||||
21 | ADTL Hyderabad, Telangana, India(7) | 187,308 | 114,512 | — | N/A | N/A | Aurigene Pharmaceutical Services Limited, Bengaluru, Karnataka, India | 58,754 | PSAI | |||||||||||||
22 | ADTL Bengaluru, Karnataka, India(7) | 718,716 | 271,799 | — | N/A | N/A | Aurigene Discovery Technologies Limited, Bengaluru, Karnataka, India | 630,462 | Others | |||||||||||||
Outside India | ||||||||||||||||||||||
23 | API Cuernavaca Plant, Mexico(23) | 2,361,840 | 689,719 | (1) | 3,500(8) | 2,201(8) | Integrated Product Development Center, Bengaluru, India | 29,500 | Global Generics | |||||||||||||
24 | API Mirfield Plant, United Kingdom(23) | 1,785,960 | 653,400 | (20) | (12) | (12) | Integrated Product Development Center, Telangana, India | 103,350 | Global Generics, PSAI and Proprietary | |||||||||||||
Outside India | ||||||||||||||||||||||
25 | API Middleburgh Plant, New York, United States(5)(22) | 292,000 | 26,000 | — | 50-100(16) | N/A | API Cuernavaca Plant, Mexico | 2,361,840 | Global Generics and PSAI | |||||||||||||
26 | Technology Development Centre, Cambridge, United Kingdom(5)(21) | 32,966 | 32,966 | — | N/A | N/A | API Mirfield Plant, United Kingdom | 1,785,960 | Global Generics and PSAI | |||||||||||||
27 | Technology Development Centre, OctoPlus B.V., Leiden, the Netherlands(5)(21) | 56,500 | 18,700 | EUGMP | 2(7)(8) | 0.07(7)(8) | API Middleburgh Plant, New York, United States | 292,000 | Global Generics | |||||||||||||
28 | Formulations Beverley Plant, East Yorkshire, United Kingdom(22) | 81,000 | 32,500 | U.K. MHRA cGMP | 700(6)(14)(15) | 400(6)(15) | ||||||||||||||||
29 | Formulations Shreveport Plant, Louisiana, United States(22) | 1,817,123 | 335,000 | U.S. FDA | 5,875(6)(10) | 3,470(6) | ||||||||||||||||
30 | Formulations Bristol Plant, TN, United States(22) | 1,742,400 | 390,000 | U.S. FDA | 2,460(6)(7) | 20(6) |
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Sl No. | Name/Location | Approximate Area (Square feet) | Segments Which Primarily Use | |||
28 | Technology Development Centre, Cambridge, United Kingdom | 32,966 | Global Generics and PSAI | |||
29 | Technology Development Centre, Leiden, the Netherlands | 56,500 | Global Generics and PSAI | |||
30 | Formulations Beverley Plant, East Yorkshire, United Kingdom(1) | 81,000 | Global Generics | |||
31 | Formulations Shreveport Plant, Louisiana, United States | 2,349,251 | Global Generics | |||
32 | Aurigene Discovery Technologies, Malaysia | 5,672 | Others |
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Except for as indicated in the notes above, we
We generally own allour facilities. However, some of our facilities.sites (primarily office space) are leased. All properties identified above, including leased properties, are either used for manufacturing and packaging of pharmaceutical products or for research and development activities. In addition to the above, we have sales, marketing and administrative offices, some of which are owned and some others are leased properties. We believe that our facilities are optimally utilized.
Global Generics
During the year ended March 31, 2013,2021, we established a facility for Blow-Fill-Seal technology (“BFS”) at “Formulations Vishakhapatnam Plant 2 (SEZ)”. We also completed acquisition of “Formulation Baddi Plant 3” from Wockhardt Limited.
During the year ended March 31, 2019, we expanded our biosimilars facility in Hyderabad, Telangana, India to meet growing demand in emerging markets. We also established a new injectable products manufacturing facility, “Formulations Srikakulam Plant 11”, located at Srikakulam, Andhra Pradesh, India. This facility helps us meet the increasing demand for such injectable products in some of our key markets.
During the year ended March 31, 2014, we set up a new manufacturing facility in a Special Economic Zone in Duvvada, Visakhapatnam, Andhra Pradesh, India for the manufacture of parenteral (injectable form) products. This will help us meet the demand for such products in some of our key markets, including the United States.
During the year ended March 31, 2015,2019, we obtained approvals from the U.S. FDA for products to be manufactured from a recently commissioned oral solid dosage form facility, “Formulations Srikakulam Plant 2 (SEZ)”, in a Special Economic Zonespecial economic zone located in Devunipalavalasa, Srikakulam, Andhra Pradesh, India. The newThis plant, is intended for the manufacture of new molecules, and certain high volumewhich began commercial operations from April 2019, manufactures products of our Global Generics segment. Further, during the year March 31, 2016, we began manufacturing products from this plant.
Pharmaceutical Services and Active Ingredients
During the year ended March 31, 2013, we set up a new manufacturing facility in a Special Economic Zone located in Devunipalavalasa, Srikakulam, Andhra Pradesh, India. We have filed some of our new DMFs from this location. This plant is adjacent to an existing plant, in a newly acquired area of approximately 250 acres under a Pharmaceutical-Sector specific Special Economic Zone for fiscal benefits. This location also houses our Global Generics segment’s recently commissioned oral solid dosage form facility. The formal governmental approval for designating the property as a Special Economic Zone has been obtained.
Material plans to construct, expand and improve facilities
As of March 31, 2016,2021, we had capital work-in-progress of Rs.7,550Rs.9,778 million and capital commitments of Rs.5,065Rs.9,841 million for expansion of our manufacturing and research facilities, primarily relating to facilities located in India, and the United States.States and Mexico. Our current capital work-in-progress and capital commitments primarily consist of projects to enhance the capacity of our formulations injectable facility in Visakhapatnam. We currently intend to finance our additional expansion plans entirely through our operating cash flows and through cash and other investments. A majority of these projects are expected to be completed during the fiscal years ending March 31, 20172022 and March 31, 2018.2023.
Environmental laws and regulations
We are subject to significant national and state environmental laws and regulations which govern the discharge, emission, storage, handling and disposal of a variety of substances that may be used in or result from our operations at the above facilities. Non-compliance with the applicable laws and regulations may subject us to penalties and may also result in the closure of our facilities.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
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ITEM 5.OPERATING5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
We are an integrated global pharmaceutical company committed to providingaccelerating access to affordable and innovative medicines. We derive our revenues from the sale of finished dosage forms, active pharmaceutical ingredients and intermediates, development and manufacturing services provided to innovator pharmaceutical and biotechnology companies, and license fees from marketing authorizations for our products.
The Chief Operating Decision Maker (“CODM”) evaluates our performance and allocates resources based on an analysis of various performance indicators by reportableoperating 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. Our Co-Chairman and Managing Director was previously the CODM of our company. Pursuant to certain organizational changes, effective December 1, 2020, the office of Chief Executive Officer (“CEO”) assumed the authority and responsibility for making decisions about resources to be allocated to various segments and assessing their performance. Consequently, the CEO is currently the CODM of our company.
Our reportable operating segments are as follows:
· | Global Generics; |
Global Generics;
· | Pharmaceutical Services and Active Ingredients; |
· | Proprietary Products; and |
· | Others. |
Pharmaceutical Services and Active Ingredients (“PSAI”); and
Proprietary Products.
Global Generics. This segment consists of our 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 our biologics business.
Pharmaceutical Services and Active Ingredients. This segment includesprimarily consists of our business of manufacturing and marketing active pharmaceutical ingredients and intermediates, also known as “API” or bulk drugs,, 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 our contract research services business and our manufacture and sale of active pharmaceutical ingredients and steroids in accordance with the specific customer requirements.
Proprietary Products. This segment consists of our business that focuses on the research development, and manufacturedevelopment of differentiated formulationsformulations. The segment is expected to earn revenues arising out of monetization of such assets and new chemical entities (“NCEs”). These novel products fall within the dermatology and neurology therapeutic areas and are marketed and sold through Promius™ Pharma, LLC.subsequent royalties, if any.
Others.This includessegment consists of the operations of our 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 and whichinflammation. ADTL works with established pharmaceutical and biotechnology companies in early-stage collaborations, bringing drug candidates from hit generation through Investigational New Drug (“IND”) filing.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 our consolidated financial statements.
Critical Accounting Policies
Critical accounting policies are defined as those that in our view are the most important to the portrayal of our financial condition and results and that require the most exercise of management’s judgment. We consider the policies discussed under the following paragraphs to be critical for an understanding of our financial statements. OurThe basis for preparation of our financial statements, significant accounting policies and application of these are discussed in detail in Notes 2, 3 and 34 to our consolidated financial statements.
Accounting estimates and judgments
While preparing financial statements in conformity with IFRS, we make certain estimates and assumptions that require difficult, subjective and complex judgments. These judgments affect the application of accounting policies and the reported amount of assets, liabilities, income and expenses, disclosure of contingent liabilities at the statement of financial position date and the reported amount of income and expenses for the reporting period. Financial reporting results rely on our estimate of the effect of certain matters that are inherently uncertain.
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Future events rarely develop exactly as forecast and the best estimates require adjustments, as actual results may differ from these estimates under different assumptions or conditions. We continually evaluate these estimates and assumptions based on the most recently available information.
Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements are as below:follows:
Assessment of functional currency;
· | Measurement of recoverable amounts of cash-generating units; |
· | Measurement of transaction price in a revenue transaction (sales returns, rebates and chargeback provisions); |
· | Evaluation of recoverability of deferred tax assets, and estimation of income tax payable and income tax expense in relation to uncertain tax positions; and |
· | Contingencies. |
Financial instruments;
Business combinations;
Useful lives of property, plant and equipment and intangible assets;
Valuation of inventories;
Measurement of recoverable amounts of cash-generating units;
Assets and obligationsAccounting policy relating to employee benefits;Revenue from contract with customers
Our revenue is derived from sales of goods, service income and income from licensing arrangements. Most of such revenue is generated from the sale of goods. We have generally concluded that we are the principal in our revenue arrangements.
Provisions;Accounting policies relating to revenue are as follows:
Sales returns, rebates and chargeback provisions;
Evaluation of recoverability of deferred tax assets; and
Contingencies.
Revenue
Sale of goods
Revenue is recognized when the significant risks and rewardscontrol of ownership havethe goods has been transferred to a third party. This is usually when the buyer, recoverytitle passes to the customer, either upon shipment or upon receipt of goods by the customer. At that point, the customer has full discretion over the channel and price to sell the products, and there are no unfulfilled obligations that could affect the customer’s acceptance of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods and the amount of revenue can be measured reliably. product.
Revenue from the sale of goods includes excise duty and is measured at the fair value oftransaction price, which is the consideration received or receivable, net of returns, sales taxtaxes and applicable trade discounts and allowances. Revenue includes shipping and handling costs billed to the customer.
Revenue from sales of generic products in India is recognized upon delivery of products to distributors by our clearing and forwarding agents. Significant risks and rewards in respect of ownership of generic products are transferred by us when
In arriving at the goods are delivered to distributors from clearing and forwarding agents. Clearing and forwarding agents are generally compensated on a commission basis as a percentage of sales made by them. Revenue from sales of active pharmaceutical ingredients and intermediates in India is recognized on delivery of products to customers (generally formulation manufacturers) from our factories. Revenue from export sales and other sales outside of India is recognized when the significant risks and rewards of ownership of products are transferred to the customers, which occurs upon delivery of the products to the customers unlesstransaction price, we consider the terms of the applicable contract providewith the customer and our customary business practices. The transaction price is the amount of consideration we are entitled to receive in exchange for specific revenue generating activitiestransferring promised goods or services, excluding amounts collected on behalf of third parties. The amount of consideration varies because of estimated rebates, returns and chargebacks, which are considered to be completed, in which case revenuekey estimates. Any amount of variable consideration is recognized once all such activitiesas revenue only to the extent that it is highly probable that a significant reversal will not occur. We estimate the amount of variable consideration using the expected value method.
Presented below are completed.
Particulars | Point of recognition of revenue | |
Sales of generic products in India | Upon delivery of products to distributors by our clearing and forwarding agents. Control over the generic products is transferred by us when the goods are delivered to distributors from clearing and forwarding agents. | |
Sales of active pharmaceutical ingredients and intermediates in India | Upon delivery of products to customers (generally formulation manufacturers) from our factories. | |
Export sales and other sales outside of India | Upon delivery of the products to the customers unless the terms of the applicable contract provide for specific revenue generating activities to be completed, in which case revenue is recognized once all such activities are completed. |
Profit share revenues
From time to time, we enter into marketing arrangements with certain business partners for the sale of our products in certain markets. Under such arrangements, we sell our products to the business partners at a non-refundable base purchase price agreed upon in the arrangement and we are also entitled to a profit share which is over and above the base purchase price. The profit share is typically dependent on the business partner’s ultimate net sale proceeds or net profits, subject to any reductions or adjustments that are required by the terms of the arrangement. Such arrangements typically require the business partner to provide confirmation of units sold and net sales or net profit computations for the products covered under the arrangement.
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Revenue in an amount equal to the base purchasesale price is recognized in these transactions upon delivery of products to the business partners. An additional amount representing the profit share component is recognized as revenue in the period which corresponds to the ultimate sales of the products made by business partners only when the collectability of the profit share becomes probable and a reliable measurement of the profit share is available. Otherwise, recognition is deferred to a subsequent period pending satisfaction of such collectability and measurability requirements. In measuring the amount of profit share revenue to be recognized for each period, we use all available information and evidence, including any confirmations from the business partner of the profit share amount owed to us, to the extent made available beforethat it is highly probable that a significant reversal will not occur.
At the dateend of each reporting period, we update the estimated transaction price (including updating our Boardassessment of Directors authorizeswhether an estimate of variable consideration is constrained) to represent faithfully the issuancecircumstances present at the end of our financial statements for the applicablereporting period and the changes in circumstances during the reporting period.
Milestone
Out licensing arrangements, milestone payments and out licensing arrangementsroyalties
Revenues
Our revenues also include amounts derived from product out-licensing agreements. These arrangements typically consist of an initial up-front payment uponon inception of the license, and subsequent payments dependent on achieving certain milestones in accordance with the terms prescribed in the agreement. Non-refundable
In cases where the transaction has two or more components, we account for the delivered item (for example, the transfer of title to the intangible asset) as a separate unit of accounting and record revenue upon delivery of that component, provided that we can make a reasonable estimate of the fair value of the undelivered component. Otherwise, non-refundable up-front license fees received in connection with product out-licensing agreements are deferred and recognized over the balance period in which we have continuingpending performance obligations.
Milestone payments which are contingent on achieving certain clinical milestones are recognized as revenues either onupon achievement of such milestones if the milestones are considered substantive, or over the performance period, we have continuing performance obligations, ifdepending on the milestones are not considered substantive.terms of the contract. If milestone payments are creditable against future royalty payments, then the milestones are deferred and released over the period in which the royalties are anticipated to be paid.
Royalty income earned through a license is recognized when the underlying sales have occurred.
Provision for chargeback, rebates, sales returns and discounts
In our U.S.North America Generics business, our gross revenues are significantly reduced by chargebacks, rebates, sales returns, discounts, shelf stock adjustments, Medicaid payments and similar “gross-to-net” adjustments. Each of such adjustments are discussed in detail below.
Chargebacks: Chargebacks are issued to wholesalers for the difference between our invoice price to the wholesaler and the contract price through which the product is resold in the retail part of the supply chain. The information that we consider for establishing a chargeback accrual includes the historical average chargeback rate over a period of time, current contract prices with wholesalers and other customers, and estimated inventory holding by the wholesaler. With this methodology, we believe that the results are more realistic and closest to the potential chargeback claims that may be received in the future period relating to inventory on which a claim is yet to be received as at the end of the reporting period. In addition, as part of our book closure process, a chargeback validation is performed in which we track and reconcile the volume of inventory sold for which we should carry an appropriate provision for chargeback. We procure the inventory holding statements and data through an electronic data interface with our wholesalers (representing approximately |
Shelf Stock Adjustments: Shelf stock adjustments are credits issued to customers to reflect decreases in the selling price of products sold by us, and are accrued when the prices of certain products decline as a result of increased competition |
Rebates: Rebates (direct and indirect) are generally provided to customers as an incentive to stock and sell our products. Rebate amounts are based on a customer’s purchases made during an applicable period. Rebates are paid to |
wholesalers, chain drug stores, health maintenance organizations or pharmacy buying groups under a contract with us. We determine our estimates of rebate accruals primarily based on the contracts entered into with our wholesalers and other direct customers and the information received from them for secondary sales made by them. For direct rebates, liability is accrued whenever we invoice to direct customers. For indirect rebates, the accruals are based on a representative weighted average percentage of the contracted rebate amount applied to inventory sold and delivered by us to wholesalers or other direct customers. |
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We have not yet introduced products in a new therapeutic category where the sales returns experience of such products by us or our competitors (as we understand based on industry publications) is not known. The amount of sales returns for our newly launched products have not historically differed significantly from sales returns experience of the then current products marketed by us or our competitors (as we understand based on industry publications). Accordingly, we do not expect sales returns for new products to be significantly different from expected sales returns of current products. We evaluate sales returns of all our products at the end of each reporting period and record necessary adjustments, if any.
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Cash Discounts: We offer cash discounts to our customers, |
We believe our estimation processes are reasonable methods of determining accruals for the “gross-to-net” adjustments. Chargeback accrual accounts for the highest element among the “gross-to-net” adjustments, and constituted approximately 69%82% of such “gross-to-net” adjustments for our U.S.North America Generics business for the year ended March 31, 2016.2021. For the purpose of the following discussion, we are therefore restricting our explanations to this specific element. While chargeback accruals depend on multiple variables, the most pertinent variables are our estimates of inventories on which a chargeback claim is yet to be received and the unit price at which the chargeback will be processed. To determine the chargeback accrual applicable for a reporting period, we perform the following procedures to calculate these two variables:
a) | Estimated inventory—Inventory volumes on which a chargeback claim that is expected to be received in the future are determined using the validation process and methodology described above (see “Chargebacks” above). When such a validation process is performed, we note that the difference represents an immaterial variation. Therefore, we believe that our estimation process in regard to this variable is reasonable. |
b) | Unit pricing |
In view of this, we believe that the calculations are not subject to a level of uncertainty that warrants a probability-based approach. Accordingly, we believe that we have been reasonable in our estimates for future chargeback claims and that the amounts of reversals or adjustments made in the current period pertaining to the previous year’s accruals are immaterial. Further, this data is not determinable except on occurrence of specific instances or events during a period, which warrant an adjustment to be made for such accruals.
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A roll-forward for each major accrual for our U.S.North America Generics operationsbusiness is presented below for our fiscal years ended March 31, 2014, 20152019, 2020 and 2016:2021:
Particulars | Chargebacks | Rebates | Medicaid | Sales Returns | ||||||||||||
(All values in U.S. $millions) | ||||||||||||||||
Beginning Balance: April 1, 2013 | 167 | 113 | 12 | 20 | ||||||||||||
Current provisions relating to sales in current year | 1,029 | 355 | 17 | 24 | ||||||||||||
Provisions and adjustments relating to sales in prior years | * | 2 | 0 | — | ||||||||||||
Credits and payments** | (1,070 | ) | (340 | ) | (14 | ) | (16 | ) | ||||||||
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Ending Balance: March 31, 2014 | 126 | 130 | 15 | 28 | ||||||||||||
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Beginning Balance: April 1, 2014 | 126 | 130 | 15 | 28 | ||||||||||||
Current provisions relating to sales in current year(1) | 1,939 | 635 | 24 | 32 | ||||||||||||
Provisions and adjustments relating to sales in prior years | * | — | 0 | — | ||||||||||||
Credits and payments** | (1,871 | ) | (543 | ) | (22 | ) | (20 | ) | ||||||||
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Ending Balance: March 31, 2015 | 194 | 222 | 17 | 40 | ||||||||||||
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Beginning Balance: April 1, 2015 | 194 | 222 | 17 | 40 | ||||||||||||
Current provisions relating to sales in current year(2) | 2,208 | 767 | 23 | 32 | ||||||||||||
Provisions and adjustments relating to sales in prior years | * | — | — | — | ||||||||||||
Credits and payments** | (2,193 | ) | (732 | ) | (26 | ) | (27 | ) | ||||||||
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Ending Balance: March 31, 2016 | 209 | 257 | 14 | 45 | ||||||||||||
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Particulars | Chargebacks | Rebates | Medicaid | Refund Liability(3) | ||||||||||||
(All values in U.S.$ millions) | ||||||||||||||||
Beginning Balance: April 1, 2018 | 170 | 161 | 12 | 28 | ||||||||||||
Current provisions relating to sales during the year | 1,415 | 461 | 18 | 29 | ||||||||||||
Provisions and adjustments relating to sales in prior years | * | - | - | - | ||||||||||||
Credits and payments** | (1,457 | ) | (530 | ) | (19 | ) | (27 | ) | ||||||||
Ending Balance: March 31, 2019 | 128 | 92 | 11 | 30 | ||||||||||||
Beginning Balance: April 1, 2019 | 128 | 92 | 11 | 30 | ||||||||||||
Current provisions relating to sales during the year(1) | 1,468 | 319 | 20 | 21 | ||||||||||||
Provisions and adjustments relating to sales in prior years | * | - | - | - | ||||||||||||
Credits and payments** | (1,440 | ) | (331 | ) | (20 | ) | (27 | ) | ||||||||
Ending Balance: March 31, 2020 | 156 | 80 | 11 | 24 | ||||||||||||
Beginning Balance: April 1, 2020 | 156 | 80 | 11 | 24 | ||||||||||||
Current provisions relating to sales during the year(2) | 1,702 | 245 | 21 | 15 | ||||||||||||
Provisions and adjustments relating to sales in prior years | * | - | - | - | ||||||||||||
Credits and payments** | (1,656 | ) | (247 | ) | (19 | ) | (20 | ) | ||||||||
Ending Balance: March 31, 2021 | 202 | 78 | 13 | 19 |
* | Currently, we do not separately track provisions and adjustments, in each case to the extent relating to prior years for chargebacks. However, the adjustments are expected to be non-material. The volumes used to calculate the closing balance of chargebacks represent |
** | Currently, we do not separately track the credits and payments, in each case to the extent relating to prior years for chargebacks, rebates, medicaid payments or |
(1) | Chargebacks |
(2) | Chargebacks provisions and payments for the year ended March 31, 2021 were each higher as compared to the year ended March 31, |
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(3) | Our overall refund liability as of March 31, 2021 relating to our North America Generics business was U.S.$19 million, as compared to a liability of U.S.$24 million as of March 31, 2020. This decrease in our liability was primarily attributable to a lower refund liability created for the year ended March 31, 2021 as compared to the year ended March 31, 2020. Such allowance change was primarily due to certain product mix changes and recent trends in actual sales returns, together with our historical experience, and also the |
The estimates of “gross-to-net” adjustments for our operations in India and other countries outside of the U.S.United States relate mainly to sales return allowancesrefund liability in all such operations, and certain rebates to healthcare insurance providers are specific to our
German operations. The pattern of such sales return allowancesrefund liability is generally consistent with our gross sales. In Germany, the rebates to healthcare insurance providers mentioned above are contractually fixed in nature and do not involve significant estimations by us.
Our overall provision for sales returns as at March 31, 2016 was Rs.4,421 million, as compared to a provision of Rs.3,905 million as at March 31, 2015. This increase in our provision was primarily attributable to a higher allowance for returns provision created for the year ended March 31, 2016 due to higher sales recorded for the year ended March 31, 2016 and higher anticipated sales returns, based on our historical experience and recent trends in actual sales returns, in the markets in which we operate. For further information regarding our sales return provisions, refer to Note 21 to our consolidated financial statements.
Services
Revenue from services rendered, which primarily relate to contract research, is recognized in the consolidated income statement as the underlying services are performed. Upfront non-refundable payments received under these arrangements are deferred and recognized as revenue over the expected period over which the related services are expected to be performed.
Financial instruments
Non-derivative financial instrumentsLicense fees
Non-derivative financial instruments
License fees primarily consist of investments in mutual funds, equity securities, tradeincome from the out-licensing of intellectual property, and other receivables, cashlicensing and cash equivalents, loans and borrowings, trade and other payables and certain other assets and liabilities.
Non-derivative financial instruments aresupply arrangements with various parties. Revenue from license fees is recognized initially at fair value plus any directly attributable transaction costs, except for those instruments that are designated as being fair value through profit and loss upon initial recognition. Subsequent to initial recognition, non-derivative financial instruments are measured as described below.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, demand deposits and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to insignificant risk of changes in value. For this purpose, “short-term” means investments having maturity of three months or less from the date of investment. Bank overdrafts that are repayable on demand and form an integral part of our cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
Other investments
Other investments consist of term deposits with original maturities of more than three months, mutual funds and equity securities.
Investments in mutual funds and equity securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses, are recognized in other comprehensive income/(loss) and presented within equity. When an investment is derecognized, the cumulative gain or loss in equity is transferredwhen control transfers to the consolidated income statement.
Trade payables
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payment is expected within one year or within the normal operating cycle of the business.
Trade receivables
Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. Trade receivables are classified as current assets if the collection is expected within one year or within the normal operating cycle of the business.
Debt instrumentsthird party and other financial liabilities
We initially recognize debt instruments issued on the date that they originate. All other financial liabilities are recognized initially on the trade date, which is the date we become a party to the contractual provisions of the instrument. These are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method.
Others
Other non-derivative financial instruments are measured at amortized cost using the effective interest method, less any impairment losses.
Derivative financial instruments
We are exposed to exchange rate risks which arise from our foreign exchange revenues, expenses and borrowings primarily in U.S. dollars, U.K. pounds sterling, Russian roubles, Venezuelan bolivars and Euros, and foreign currency debt in U.S. dollars, Russian roubles and Euros.
We use derivative financial instruments, including foreign exchange forward contracts, option contracts and currency swap contracts, to mitigate our risk of changes in foreign currency exchange rates and interest rates. We also use non-derivative financial instruments as part of our foreign currency exposure risk mitigation strategy.
Hedges of highly probable forecasted transactions
We classify our derivative financial instruments that hedge foreign currency risk associated with highly probable forecasted transactions as cash flow hedges and measure them at fair value. The effective portion of such cash flow hedges is recorded in our hedging reserve, as a component of equity, and re-classified to the consolidated income statement as revenue in the period corresponding to the occurrence of the forecasted transactions. The ineffective portion of such cash flow hedges is recorded in the consolidated income statement as finance costs immediately.
We also designate certain non-derivative financial liabilities, such as foreign currency borrowings from banks, as hedging instruments for hedge of foreign currency risk associated with highly probable forecasted transactions. Accordingly, we apply cash flow hedge accounting to such relationships. Remeasurement gain/loss on such non-derivative financial liabilities is recorded in our hedging reserve, as a component of equity, and reclassified to the consolidated income statement as revenue in the period corresponding to the occurrence of the forecasted transactions.
Upon initial designation of a hedging instrument, we formally document the relationship between the hedging instrument and hedged item, including the risk management objectives and strategy in undertaking the hedge transaction and the hedged risk, together with the methods that will be used to assess the effectiveness of the hedging relationship. We make an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, of whether the hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value or cash flows of the respective hedged items attributable to the hedged risk, and whether the actual results of each hedge are within a range of 80%-125% relative to the gain or loss on the hedged items. For cash flow hedges to be “highly effective”, a forecast transaction that is the subject of the hedge must be highly probable and must present an exposure to variations in cash flows that could ultimately affect profit or loss.
If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in other comprehensive income/(loss), remains there until the forecast transaction occurs. If the forecast transaction is no longer expected to occur, then the balance in other comprehensive income/(loss) is recognized immediately in the consolidated income statement.
Hedges of recognized assets and liabilities
Changes in the fair value of derivative financial instruments (such as forward contracts and option contracts) that economically hedge monetary assets and liabilities in foreign currencies, and for which no hedge accounting is applied, are recognized in the consolidated income statement. The changes in fair value of such derivative financial instruments, as well as the foreign exchange gains and losses relating to the monetary items, are recognized as part of “net finance income/(expense)” in the consolidated income statement.
Hedges of changes in the interest rates
Consistent with our risk management policy, we use interest rate swaps to mitigate the risk of changes in interest rates. We do not use such instruments for trading or speculative purposes.
De-recognition of financial assets and liabilities
We derecognize a financial asset when the contractual right to the cash flows from that asset expires, or we transfer the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. If we retain substantially all the risks and rewards of ownership of a transferred financial asset, we continue to recognize the financial asset and also recognize a collateralized borrowing, at amortized cost, for the proceeds received.
We derecognize a financial liability when its contractualperformance obligations are discharged, cancelled or expired. The difference between the carrying amount of the derecognized financial liability and the consideration paid is recognized as profit or loss.
Offsetting financial assets and liabilities
Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, we have a legal right and ability to offset the amounts and intend either to settle on a net basis or to realize the asset and settle the liability simultaneously.
Foreign currency
Functional currency
The consolidated financial statements are presented in Indian rupees, which is the functional currency of our parent company, DRL. Functional currency of an entity is the currency of the primary economic environment in which the entity operates.
In respect of all non-Indian subsidiaries that operate as marketing arms of our parent company in their respective countries/regions, the functional currency has been determined to be the functional currency of our parent company (i.e., the Indian rupee). The operationssatisfied. Some of these subsidiaries are largely restricted to the import of finished goodsarrangements include certain performance obligations by us. Revenue from our parent company in India, sale of these products in the foreign country and making of import payments to our parent company. The cash flows realized from sale of goods are available for making import payments to our parent company and cashsuch arrangements is paid to our parent company on a regular basis. The costs incurred by these subsidiaries are primarily the cost of goods imported from our parent company. The financing of these subsidiaries is done directly or indirectly by our parent company.
In respect of subsidiaries whose operations are self-contained and integrated within their respective countries/regions, the functional currency has been determined to be the local currency of those countries/regions.
Foreign currency transactions and foreign operations
Transactions in foreign currencies are translated to the respective functional currencies of entities within our company group at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the exchange rate at that date. Non-monetary items that are measured based on historical cost in a foreign currency are translated at the exchange rate at the date of the transaction. Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements are recognized in profit or loss in the period in which they arise.
When several exchange rates are available, the rate used is that at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred at the measurement date. In such circumstances, we considercomplete all the relevant facts and circumstances in determining the most appropriate rate to use for the purpose of translation, including practical difficulties, uncertainties or delays associated with applying a foreign currency at a particular rate.
Foreign exchange gains and losses arising from a monetary item receivable from a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of the net investment in the foreign operation and are recognized in other comprehensive income/(loss) and presented within equity as a part of foreign currency translation reserve (“FCTR”).
In case of foreign operations whose functional currency is different from Indian rupees (our parent company’s functional currency), the assets and liabilities of such foreign operations, including goodwill and fair value adjustments arising upon acquisition, are translated to the reporting currency at exchange rates at the reporting date. The income and expenses of such
foreign operations are translated to the reporting currency at the monthly average exchange rates prevailing during the year. Resulting foreign currency differences are recognized in other comprehensive income/(loss) and presented within equity as part of FCTR. When a foreign operation is disposed of, in part or in full, the relevant amount in the FCTR is transferred to the consolidated income statement.
Business combinations
We use the acquisition method of accounting to account for any business combination that occurred on or after April 1, 2009. A business consists of inputs and processes applied to those inputs that have the ability to create outputs. It is not clear in all circumstances whether the acquired set of activities and assets constitutes a business or not. In such situations, we use our judgment and take into consideration various factors such as the industry, the structure of the entity’s operations and the stage of development, in determining whether the acquired set of activities and assets constitutes a business. Further, determining whether a particular set of assets and activities is a business is based on whether the integrated set is capable of being conducted and managed as a business by a market participant. The acquisition date is the date on which control is transferred to the acquirer. Judgment is applied in determining the acquisition date and determining whether control is transferred from one party to another. Control exists when we are exposed to, or have rights to, variable returns from our involvement with the entity and have the ability to affect, those returns through power over the entity. In assessing control, potential voting rights are considered only if the rights are substantive.
We measure goodwill as of the applicable acquisition date at the fair value of the consideration transferred, including the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount of the identifiable assets acquired and liabilities assumed. When the fair value of the net identifiable assets acquired and liabilities assumed exceeds the consideration transferred, a bargain purchase gain is recognized immediately in the consolidated income statement. Consideration transferred includes the fair values of the assets transferred, liabilities incurred by us to the previous owners of the acquiree, and equity interests issued by us. Consideration transferred also includes the fair value of any contingent consideration. Consideration transferred does not include amounts related to settlement of pre-existing relationships. Any goodwill that arises on account of such business combination is tested annually for impairment.
Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, other contingent consideration is remeasured at fair value at each reporting date, and subsequent changes in the fair value of the contingent consideration are recorded in the consolidated income statement.
A contingent liability of the acquiree is assumed in a business combination only if such a liability represents a present obligation and arises from a past event, and its fair value can be measured reliably. On an acquisition-by-acquisition basis, we recognize any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. Transaction costs incurred by us in connection with a business combination, such as finder’s fees, legal fees, due diligence fees and other professional and consulting fees, are expensed as incurred.
Acquisitions of non-controlling interests are accounted for as transactions with equity holders in their capacity as equity holders. The difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity.
Property, plant and equipment
Recognition and measurement
Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses, if any. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and other costs directly attributable to bringing the asset to a working condition for its intended use. Borrowing costs that are directly attributable to the construction or production of a qualifying asset are capitalized as part of the cost of that asset.
When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.
Gains and losses upon disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognized net within “other (income)/expense, net” in the consolidated income statement.
The cost of replacing part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to us and its cost can be measured reliably. The costs of repairs and maintenance are recognized in the consolidated income statement as incurred.
Items of property, plant and equipment acquired through exchange of non-monetary assets are measured at fair value, unless the exchange transaction lacks commercial substance or the fair value of either the asset received or asset given up is not reliably measurable, in which case the asset exchanged is recorded at the carrying amount of the asset given up.
Depreciation
Depreciation is recognized in the consolidated income statement on a straight line basis over the estimated useful lives of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives. The depreciation expense is included in the costs of the functions using the asset. Land is not depreciated.
Leasehold improvements are depreciated over period of the lease agreement or the useful life, whichever is shorter.
Depreciation methods, useful lives and residual values are reviewed at each reporting date. The estimated useful lives are as follows:
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Software for internal use, which is primarily acquired from third-party vendors and which is an integral part of a tangible asset, including consultancy charges for implementing the software, is capitalized as part of the related tangible asset. Subsequent costs associated with maintaining such software are recognized as expense as incurred. The capitalized costs are amortized over the estimated useful life of the software or the remaining useful life of the tangible fixed asset, whichever is lower.
Advances paid towards the acquisition of property, plant and equipment outstanding at each reporting date and the cost of property, plant and equipment not ready to use before such date are disclosed under capital work-in-progress. Assets not ready for use are not depreciated.
Goodwill and other intangible assets
Goodwill
Goodwill represents the excess of consideration transferred, together with the amount of non-controlling interest in the acquiree, over the fair value of our share of identifiable net assets acquired.
Goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and any impairment loss on such an investment is not allocated to any asset, including goodwill, that forms part of the carrying value of the equity accounted investee.
Other intangible assets
Other intangible assets that are acquired by us, which have finite useful lives, are measured at cost less accumulated amortization and accumulated impairment losses.
Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which they relate.
Research and development
Expenditures on research activities undertaken with the prospect of gaining new scientific or technical knowledge and understanding are recognized in profit or loss when incurred.
Expenditures on development activities involving a plan or design for the production of new or substantially improved products and processes are capitalized only if:performance obligations.
development costs can be measured reliably;
the product or process is technically and commercially feasible;
future economic benefits are probable; and
we intend to and have sufficient resources to complete development and to use or sell the asset.
Our internal drug development expenditures are capitalized only if they meet the recognition criteria as mentioned above. Where regulatory and other uncertainties are such that the criteria are not met, the expenditures are recognized in profit or loss
as incurred. This is almost invariably the case prior to approval of the drug by the relevant regulatory authority. However, where the recognition criteria are met, intangible assets are capitalized and amortized on a straight-line basis over their useful economic lives from product launch. As of March 31, 2016, no internal drug development expenditure amounts have met the recognition criteria. The expenditures to be capitalized include the cost of materials and other costs directly attributable to preparing the asset for its intended use. Other development expenditures are recognized in profit or loss as incurred.
In conducting our research and development activities related to new chemical entities (“NCEs”), we seek to optimize our expenditures and to limit our risk exposures. Most of our current research and development projects related to NCEs are at an early discovery/development phase. These early development stage exploratory projects are numerous and are characterized by uncertainty with respect to timing and cost of completion. At such time as a research and development project related to NCE progresses into the more costly clinical study phases, where the costs can be tracked separately, such project is considered to be significant if:
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Historically, none of our development projects related to NCEs have met the significance thresholds listed above.
A substantial portion of our current research and development activities relates to the development of bio-equivalent products, which do not require full scale clinical trials to be conducted prior to the filing by us of applications with regulatory authorities to allow the marketing and sale of such products. Our total research and development costs for the year ended March 31, 2016 were Rs.17,834 million, which was approximately 12% of our total revenue for the year. The amounts spent on research and development related to our bio-equivalent products for the years ended March 31, 2016, 2015 and 2014 represented approximately 65%, 60%, and 62%, respectively, of our total research and development expenditures.
For each of our bio-equivalent generic product research and development projects, the timing and cost of completion varies depending on numerous factors, including, among others: the intellectual property patented by the innovator for the applicable product; the patent regimes of the countries in which we seek to market the product; our development strategy for such product; the complexity of the molecule for such product; and the time required to address any development challenges that arise during the development process. For any particular bio-equivalent generic product, these factors and other product launch requirements may vary across the numerous geographies in which we seek to market the product. In addition, bio-equivalent research and development projects often may relate to a number of different therapeutic areas. At any particular point of time, we tend to have a very high number of bio-equivalent generic product research and development projects ongoing simultaneously, in various developmental stages, with the exact number of such active projects changing regularly. As a result, we believe it would be impractical for us to state the exact number of ongoing projects and the estimated timing or cost to complete such projects.
Payments to third parties that generally take the form of up-front payments and milestones for in-licensed products, compounds and intellectual property are capitalized. Our criteria for capitalization of such assets are consistent with the guidance given in paragraph 25 of International Accounting Standard 38, “Intangible Assets” (“IAS 38”) (i.e., receipt of economic benefits out of the separately purchased transaction is considered to be probable).
Acquired research and development intangible assets, which are under development and have accordingly not yet obtained marketing approval, are recognized as In-Process Research and Development (“IPR&D”) assets. IPR&D assets are not amortized, but evaluated for potential impairment on an annual basis or when there are indications that the carrying value may not be recoverable. Any impairment charge on such IPR&D assets is recorded in the consolidated income statement under “Research and Development expenses”.
Subsequent expenditure on an in-process research or development project acquired separately or in a business combination, and recognized as an intangible asset, is:
recognized as an expense when incurred, if it is research expenditure;
recognized as an expense when incurred, if it is development expenditure that does not satisfy the criteria for recognition as an intangible asset in paragraph 57 of IAS 38; and
added to the carrying amount of the acquired in-process research or development project, if it is development expenditure that satisfies the recognition criteria in paragraph 57 of IAS 38.
Intangible assets relating to products in development,For other intangible assets not available for use and intangible assets having indefinite useful life are subject to impairment testing at each reporting date. All other intangible assets are tested for impairment when there are indications that the carrying value may not be recoverable. All impairment losses are recognized immediately in the consolidated income statement.
Amortization
Amortization is recognized in the consolidated income statementdetails on a straight-line basis over the estimated useful lives of intangible assets or on any other basis that reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. Intangible assets that are not available for use are amortized from the date they are available for use. In determining the useful life we consider the following factors:
technical, technological, commercial or other types of obsolescence;
expected actions by competitors or potential competitors;
typical product life cycles for the asset and public information on estimates of useful lives of similar assets that are used in a similar way; and
the period of control over the asset and legal or similar limits on the use of the asset.
Impairment
Financial assets
A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows, discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its fair value.
Significant financial assets are tested for impairment on an individual basis.
All impairment losses are recognized in the consolidated income statement. When the fair value of available-for-sale financial assets declines below acquisition cost and there is objective evidence that the asset is impaired, the cumulative loss that has been recognized in other comprehensive income is transferred to the statement of income. An impairment loss may be reversed in subsequent periods if the indicators for the impairment no longer exist. Such reversals are recognized in other comprehensive income.
Non-financial assets
The carrying amounts of our non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, an impairment test is performed each year at March 31.
The recoverable amount of an asset or cash-generating unit (as defined below) is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or the cash-generating unit. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”).
In the circumstances where the asset specific discount rate is not directly available from the market, we use surrogates to estimate the discount rate. For this purpose, we take into consideration the following rates:
the weighted average cost of capital determined using techniques such as the Capital Asset Pricing Model;
our incremental borrowing rate; and
other market borrowing rates.
However, these rates are adjusted:
to reflect the way that the market would assess the specific risks associated with the asset’s estimated cash flows; and
to exclude the risks that are not relevant to the asset’s estimated cash flows or for which the estimated cash flows have been adjusted.
Consideration is given to risks such as country risk, currency risk and price risk.
The goodwill acquired in a business combination is, for the purpose of impairment testing, allocated to cash-generating units that are expected to benefit from the synergies of the combination.
An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in the consolidated income statement. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit on a pro-rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss for an asset other than goodwill is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss for an asset other than goodwill is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Goodwill that forms part of the carrying amount of an investment in an associate is not recognized separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associate is tested for impairment as a single asset when there is objective evidence that the investment in an associate may be impaired.
Income tax
Income tax expense consists of current and deferred tax. Income tax expense is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neithersignificant accounting nor taxable profit; differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and taxable temporary differences arising upon the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
Any deferred tax asset or liability arising from deductible or taxable temporary differences in respect of unrealized inter-company profit or loss on inventories held by us in different tax jurisdictions is recognized using the tax rate of the jurisdiction in which such inventories are held. Withholding tax arising out of payment of dividends to shareholders under the Indian Income tax regulations is not considered as tax expense for us and all such taxes are recognized in the statement of changes in equity as part of the associated dividend payment.
Inventories
Inventories consist of raw materials, stores and spares, work in progress and finished goods, and are measured at the lower of cost and net realizable value. The cost of all categories of inventories is based on the weighted average method. Cost includes expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of finished goods and work in progress, cost includes an appropriate share of overheads based on normal operating capacity. Stores and spares consists of packing materials, engineering spares (such as machinery spare parts) and consumables (such as lubricants, cotton waste and oils) that are used in operating machines or consumed as indirect materials in the manufacturing process.
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.
The factors that we consider in determining the allowance for slow moving, obsolete and other non-saleable inventory includes estimated shelf life, planned product discontinuances, price changes, aging of inventory and introduction of competitive new products, to the extent each of these factors impact our business and markets. We consider all of these factors and adjust the inventory provision to reflect our actual experience on a periodic basis.
Litigations
We are involved in disputes, lawsuits, claims, governmental and/or regulatory inspections, inquiries, investigations and 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. We assess the need to make a provision for a liability for such claims and record a provision when we determine that a loss related to a matter is both probable and reasonably estimable.
Because litigation and other contingencies are inherently unpredictable, our assessment can involve judgments about future events. 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 are difficult to ascertain. 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. We also believe that disclosure of the amount of damages sought by plaintiffs, if that is known, would not be meaningful with respect to those legal proceedings.
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. In such circumstances, we disclose information with respect to the nature and facts of the case.
Other provisions
We recognize a provision if, as a result of a past event, we have a present legal or constructive obligation that can be estimated reliably, and it is probable (i.e., more likely than not) that an outflow of economic benefits will be required to settle the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.
Restructuring
A provision for restructuring is recognized when we have approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided.
Onerous contracts
A provision for onerous contracts is recognized when the expected benefits to be derived by us from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, we recognize any impairment loss on the assets associated with that contract.
Reimbursement rights
Expected reimbursements for expenditures required to settle a provision are recognized only when receipt of such reimbursements is virtually certain. Such reimbursements are recognized as a separate asset in the statement of financial position, with a corresponding credit to the specific expense for which the provision has been made.
Recent Accounting Pronouncements
Referpolicies, please refer to Note 3(s) to3 of our consolidated financial statements.
5.A.Operating results
Income Statement Data
For the year ended March 31, | ||||||||||||||||
2016 | 2016 | 2015 | 2014 | |||||||||||||
(Rs. in millions, U.S.$ in millions) | ||||||||||||||||
Convenience translation into U.S.$ | ||||||||||||||||
Revenues | U.S.$ | 2,335 | Rs. | 154,708 | Rs. | 148,189 | Rs. | 132,170 | ||||||||
Cost of revenues | 942 | 62,427 | 62,786 | 56,369 | ||||||||||||
Gross profit | 1,393 | 92,281 | 85,403 | 75,801 | ||||||||||||
Selling, general and administrative expenses | 690 | 45,702 | 42,585 | 38,783 | ||||||||||||
Research and development expenses | 269 | 17,834 | 17,449 | 12,402 | ||||||||||||
Other (income)/expense, net | (13 | ) | (874 | ) | (917 | ) | (1,416 | ) | ||||||||
Results from operating activities | 447 | 29,619 | 26,286 | 26,032 | ||||||||||||
Finance (expense)/income, net | (41 | ) | (2,708 | ) | 1,682 | 400 | ||||||||||
Share of profit of equity accounted investees, net of tax | 3 | 229 | 195 | 174 | ||||||||||||
Profit before tax | 410 | 27,140 | 28,163 | 26,606 | ||||||||||||
Tax expense | (108 | ) | (7,127 | ) | (5,984 | ) | (5,094 | ) | ||||||||
Profit for the year | U.S.$ | 302 | Rs. | 20,013 | Rs. | 22,179 | Rs. | 21,512 |
For the year ended March 31, | ||||||||||||||||
2021 | 2021 | 2020 | 2019 | |||||||||||||
(Rs. in millions, U.S.$ in millions) | ||||||||||||||||
Convenience translation into U.S.$ | ||||||||||||||||
Revenues | U.S.$ | 2,594 | Rs. | 189,722 | Rs. | 174,600 | Rs. | 153,851 | ||||||||
Cost of revenues | 1,185 | 86,645 | 80,591 | 70,421 | ||||||||||||
Gross profit | 1,409 | 103,077 | 94,009 | 83,430 | ||||||||||||
Selling, general and administrative expenses | 747 | 54,650 | 50,129 | 48,680 | ||||||||||||
Research and development expenses | 226 | 16,541 | 15,410 | 15,607 | ||||||||||||
Impairment of non-current assets | 117 | 8,588 | 16,767 | 210 | ||||||||||||
Other income, net | (13 | ) | (982 | ) | (4,290 | ) | (1,955 | ) | ||||||||
Results from operating activities | 332 | 24,280 | 15,993 | 20,888 | ||||||||||||
Finance income, net | 23 | 1,653 | 1,478 | 1,117 | ||||||||||||
Share of profit of equity accounted investees, net of tax | 7 | 480 | 561 | 438 | ||||||||||||
Profit before tax | 361 | 26,413 | 18,032 | 22,443 | ||||||||||||
Tax expense/(benefit), net | 125 | 9,175 | (1,466 | ) | 3,648 | |||||||||||
Profit for the year | U.S.$ | 236 | Rs. | 17,238 | Rs. | 19,498 | Rs. | 18,795 |
The following table sets forth, for the periods indicated, financial data as percentages of total revenues and the increase (or decrease) by item as a percentage of the amount over the comparable period in the previous years.
Percentage of Sales For the year ended March 31, | Percentage Increase/(Decrease) | |||||||||||||||||||
2016 | 2015 | 2014 | 2015 to 2016 | 2014 to 2015 | ||||||||||||||||
Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 4.4 | % | 12.1 | % | ||||||||||
Gross profit | 59.6 | % | 57.6 | % | 57.4 | % | 8.1 | % | 12.7 | % | ||||||||||
Selling, general, and administrative expenses | 29.5 | % | 28.7 | % | 29.3 | % | 7.3 | % | 9.8 | % | ||||||||||
Research and development expenses | 11.5 | % | 11.8 | % | 9.4 | % | 2.2 | % | 40.7 | % | ||||||||||
Other (income)/expense, net | (0.6 | %) | (0.6 | %) | (1.1 | %) | (4.7 | %) | (35.3 | %) | ||||||||||
Results from operating activities | 19.1 | % | 17.7 | % | 19.8 | % | 12.7 | % | 1.0 | % | ||||||||||
Finance (expense)/income, net | (1.8 | %) | 1.1 | % | 0.3 | % | (261.1 | %) | 320.4 | % | ||||||||||
Share of profit of equity accounted investees, net of tax | 0.1 | % | 0.1 | % | 0.1 | % | 17.7 | % | 12.1 | % | ||||||||||
Profit before taxes | 17.5 | % | 19.0 | % | 20.1 | % | (3.6 | %) | 5.9 | % | ||||||||||
Tax expense | (4.6 | %) | (4.0 | %) | (3.9 | %) | 19.1 | % | 17.5 | % | ||||||||||
Profit for the year | 12.9 | % | 15.0 | % | 16.3 | % | (9.8 | %) | 3.1 | % |
Percentage of Sales | Percentage | |||||||||||||||||||
For the year ended March 31, | Increase/(Decrease) | |||||||||||||||||||
2021 | 2020 | 2019 | 2020 to 2021 | 2019 to 2020 | ||||||||||||||||
Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 8.7 | % | 13.5 | % | ||||||||||
Gross profit | 54.3 | % | 53.8 | % | 54.2 | % | 9.6 | % | 12.7 | % | ||||||||||
Selling, general and administrative expenses | 28.8 | % | 28.7 | % | 31.6 | % | 9.0 | % | 3.0 | % | ||||||||||
Research and development expenses | 8.7 | % | 8.8 | % | 10.1 | % | 7.3 | % | (1.3 | )% | ||||||||||
Impairment of non-current assets | 4.5 | % | 9.6 | % | 0.1 | % | (48.8 | )% | 7884.3 | % | ||||||||||
Other income, net | (0.5 | )% | (2.5 | )% | (1.3 | )% | (77.1 | )% | 119.4 | % | ||||||||||
Results from operating activities | 12.8 | % | 9.2 | % | 13.6 | % | 51.8 | % | (23.4 | )% | ||||||||||
Finance income, net | 0.9 | % | 0.8 | % | 0.7 | % | 11.8 | % | 32.3 | % | ||||||||||
Share of profit of equity accounted investees, net of tax | 0.3 | % | 0.3 | % | 0.3 | % | (14.4 | )% | 28.1 | % | ||||||||||
Profit before tax | 13.9 | % | 10.3 | % | 14.6 | % | 46.5 | % | (19.7 | )% | ||||||||||
Tax expense/(benefit), net | 4.8 | % | (0.8 | )% | 2.4 | % | (725.9 | )% | (140.2 | )% | ||||||||||
Profit for the year | 9.1 | % | 11.2 | % | 12.2 | % | (11.6 | )% | 3.7 | % |
The following table sets forth, for the periods indicated, our consolidated revenues by segment:
For the year ended March 31, | For the year ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2016 | 2015 | 2014 | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||
(Rs. in millions) | (Rs. in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Revenues | Revenues (Segment % of Total) | Revenues | Revenues (Segment % of Total) | Revenues | Revenues (Segment % of Total) | Revenues | % of Segment revenue | Revenues | % of Segment revenue | Revenues | % of Segment revenue | |||||||||||||||||||||||||||||||||||||
Global Generics | Rs. | 128,062 | 83 | % | Rs. | 119,397 | 81 | % | Rs. | 104,483 | 79 | % | Rs. | 154,404 | 81 | % | Rs. | 138,123 | 79 | % | Rs. | 122,903 | 80 | % | ||||||||||||||||||||||||
Pharmaceutical Services and Active Ingredients | 22,379 | 14 | % | 25,456 | 17 | % | 23,974 | 18 | % | |||||||||||||||||||||||||||||||||||||||
PSAI | 31,982 | 17 | % | 25,747 | 15 | % | 24,140 | 16 | % | |||||||||||||||||||||||||||||||||||||||
Proprietary Products | 2,659 | 2 | % | 2,172 | 1 | % | 2,459 | 2 | % | 523 | 0 | % | 7,949 | 5 | % | 4,750 | 3 | % | ||||||||||||||||||||||||||||||
Others | 1,608 | 1 | % | 1,164 | 1 | % | 1,254 | 1 | % | 2,813 | 2 | % | 2,781 | 1 | % | 2,058 | 1 | % | ||||||||||||||||||||||||||||||
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Total | Rs. | 154,708 | 100 | % | Rs. | 148,189 | 100 | % | Rs. | 132,170 | 100 | % | Rs. | 189,722 | 100 | % | Rs. | 174,600 | 100 | % | Rs. | 153,851 | 100 | % | ||||||||||||||||||||||||
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Fiscal Year Ended March 31, 20162021 compared to Fiscal Year Ended March 31, 20152020
Revenues
Our overall consolidated revenues were Rs.154,708Rs.189,722 million for the year ended March 31, 2016,2021, an increase of 4%9% as compared to Rs.148,189Rs.174,600 million for the year ended March 31, 2015. Revenue2020. This revenue growth for the year ended March 31, 20162021 was largely drivenprimarily due to: increased sales volumes of our existing products; new product launches across our businesses; and benefits due to the depreciation of the Indian rupee against the U.S. dollar. The foregoing was partially offset by price erosion, in our Global Generics segment’s operations in theNorth America (the United States India and Canada), Europe marketsand certain other emerging markets. The revenues for the year ended March 31, 2020 included the proceeds from the sale of our U.S. and select territory rights for two of our brands of proprietary products.
The following table sets forth, for the periods indicated, our consolidated revenues by geography:
For the year ended March 31, | ||||||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||
Revenues | % of Total Revenue* | Revenues | % of Total Revenue* | Revenues | % of Total Revenue* | |||||||||||||||||||
(Rs. in millions) | ||||||||||||||||||||||||
Global Generics | Rs. | 128,062 | 83 | % | Rs. | 119,397 | 81 | % | Rs. | 104,483 | 79 | % | ||||||||||||
North America (the United States and Canada) | 75,445 | 59 | % | 63,564 | 53 | % | 54,622 | 52 | % | |||||||||||||||
Europe | 7,732 | 6 | % | 6,481 | 5 | % | 6,110 | 6 | % | |||||||||||||||
India | 21,293 | 17 | % | 17,870 | 15 | % | 15,713 | 15 | % | |||||||||||||||
Russia and other countries of the former Soviet Union | 14,176 | 11 | % | 18,425 | 16 | % | 20,679 | 20 | % | |||||||||||||||
Others | 9,416 | 7 | % | 13,057 | 11 | % | 7,359 | 7 | % | |||||||||||||||
Pharmaceutical Services and Active Ingredients | Rs. | 22,379 | 14 | % | Rs. | 25,456 | 17 | % | Rs. | 23,974 | 18 | % | ||||||||||||
North America (the United States and Canada) | 3,052 | 14 | % | 4,605 | 18 | % | 3,820 | 16 | % | |||||||||||||||
Europe | 9,313 | 42 | % | 10,507 | 41 | % | 9,058 | 38 | % | |||||||||||||||
India | 2,618 | 12 | % | 3,288 | 13 | % | 3,787 | 16 | % | |||||||||||||||
Others | 7,396 | 32 | % | 7,056 | 28 | % | 7,309 | 30 | % | |||||||||||||||
Proprietary Products and Others | Rs. | 4,267 | 3 | % | Rs. | 3,336 | 2 | % | Rs. | 3,713 | 3 | % | ||||||||||||
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Total | Rs. | 154,708 | 100 | % | Rs. | 148,189 | 100 | % | Rs. | 132,170 | 100 | % | ||||||||||||
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For the year ended March 31, | ||||||||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||
Revenues | % of Total Revenue * | Revenues | % of Total Revenue * | Revenues | % of Total Revenue * | |||||||||||||||||||
(Rs. in millions) | ||||||||||||||||||||||||
Global Generics | Rs. | 154,404 | 81 | % | Rs. | 138,123 | 79 | % | Rs. | 122,903 | 80 | % | ||||||||||||
North America (the United States and Canada) | 70,494 | 46 | % | 64,659 | 47 | % | 59,957 | 49 | % | |||||||||||||||
Europe | 15,404 | 10 | % | 11,707 | 8 | % | 7,873 | 6 | % | |||||||||||||||
India | 33,419 | 22 | % | 28,946 | 21 | % | 26,179 | 21 | % | |||||||||||||||
Russia | 15,816 | 10 | % | 16,900 | 12 | % | 15,299 | 13 | % | |||||||||||||||
Other countries of the former Soviet Union and Romania | 7,427 | 5 | % | 6,472 | 5 | % | 5,242 | 4 | % | |||||||||||||||
Others | 11,844 | 7 | % | 9,439 | 7 | % | 8,353 | 7 | % | |||||||||||||||
PSAI | 31,982 | 17 | % | 25,747 | 15 | % | 24,140 | 16 | % | |||||||||||||||
Proprietary Products and Others | 3,336 | 2 | % | 10,730 | 6 | % | 6,808 | 4 | % | |||||||||||||||
Total | 189,722 | 100 | % | 174,600 | 100 | % | 153,851 | 100 | % |
* |
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During
For the year ended March 31, 2016,2021, the average exchange rate of the U.S. dollar and the Euro appreciated by approximately 7% against the Indian rupee, while the Euro4.7% and 9.9%, respectively, and that of the Russian rouble depreciated by approximately 7% and 27%8.3%, respectively against the Indian rupee as compared to the year ended March 31, 2015.2020. These changes in exchange rates on an overall basis increased our reported revenues because of the increase in Indian rupee realization from sales in U.S. dollars, partially offset by the decrease in Indian rupee realization from sales in Euros and Russian roubles. However, our higher realization for the U.S. dollar was offset by net losses realized on cash flow hedges undertaken by us to hedge the foreign currency risk associated with highly probable forecasted sales transactions.
Segment analysis
Global Generics
Revenues from our Global Generics segment were Rs.128,062Rs.154,404 million for the year ended March 31, 2016,2021, an increase of 7%12% as compared to Rs.119,397Rs.138,123 million for the year ended March 31, 2015.2020. The revenue growthincrease was largely led byin all the four business geographies of this segment’s operations in thesegment: North America (the United States and Canada), Europe, India, and Europe.“Emerging Markets” (which is comprised of Russia, other countries of the former Soviet Union, Romania and certain other countries from our “Rest of the World” markets, including South Africa, China, Brazil and Australia).
After taking into account the impact of exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, the foregoing increase in revenues of this segment was attributable to the following factors:
· | an increase of approximately 6% resulting from a net increase in the sales volumes of existing products in this segment; |
· | an increase of approximately 9% resulting from new products launched during the year ended March 31, 2021; and |
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an increase of approximately 4% resulting from the introduction of new products during the year ended March 31, 2016;
· | the foregoing was partially offset by a decrease of approximately 6% resulting from the net impact of changes in sales prices of the products in this segment. |
a decrease of approximately 8% resulting from the net impact of decreases in sales prices of products; and
an increase of approximately 11% resulting from increased sales volumes of existing products (including the annualized impact of products launched during the year ended March 31, 2015).
The following is a discussion of the key markets in our Global Generics segment:
North America (the United States and Canada):Our Global Generics segment’s revenues from North America (the United States and Canada) were Rs.75,445Rs.70,494 million for the year ended March 31, 2016,2021, an increase of 19%9% as compared to Rs.64,659 million for the year ended March 31, 2015.2020. In U.S. dollar absolute currency terms (i.e., U.S. dollars without taking into account the effect of currency exchange rates), such revenues increased by 12%4% for the year ended March 31, 20162021 as compared to the year ended March 31, 2015.2020.
This revenue growthrevenues increase was largely attributable to the following:
revenues from new products launched during the year ended March 31, 2016, such as esomeprazole, memantine and pramiprexole;
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the foregoing was partially offset by lower realization from certain of our existing products due to price decreases.
The following table sets forth products that we launched in the United States during the year ended March 31, 2016:
· | revenues from new products launched during the year ended March 31, 2021, such as ciprofloxacin and dexamethasone otic suspension, over-the-counter diclofenac sodium topical gel, sapropterin dihydrochloride tablets, colchicine tablets and abiraterone acetate tablets; and |
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During the year ended March 31, 2016,2021, we made 14 filings in the United States, including 1320 new ANDA filings and one1 new NDA filing under section 505(b)(2) of the Federal Food, Drug and Cosmetic Act (a “505(b)(2) NDA”).in the United States with the U.S. FDA. As of March 31, 20162021 our cumulative filings in the United States were 236 including 233304, which includes 5 NDA filings under section 505(b)(2) and 299 ANDA filings. These 299 ANDA filings include 8 ANDAs that we acquired from Teva and three 505(b)(2) NDA filings.an affiliate of Allergan plc. As of March 31, 2016,2021, we had 8295 filings pending approval atwith the U.S. FDA including 79 ANDA filings(92 ANDAs and three3 NDAs under 505(b)(2) NDA filings, ofroute including 21 tentative approvals). Of the 92 ANDAs which 52are pending approval, 47 are Paragraph IV filings, and we believe that we are the first to file with respect to 1823 of these filings.
India:
Europe: Our Global Generics segment’s revenues from IndiaEurope (which is comprised of Germany, the United Kingdom and other European countries such as Italy, Spain, France and Austria) were Rs.15,404 million for the year ended March 31, 2016 were Rs.21,293 million,2021, an increase of 19%32% as compared to Rs.11,707 million for the year ended March 31, 2015.2020. This increase was primarily on account of higher sales volumes and sales from new product launches during the year ended March 31, 2021 which was partially offset by a reduction in sales due to price erosion in some of our existing products. Sales growth in Europe was also led by scale up of volumes in our newer markets of Europe, such as Italy, Spain and France.
India: Our Global Generics segment’s revenues from India were Rs.33,419 million for the year ended March 31, 2021, an increase of 15% as compared to Rs.28,946 million for the year ended March 31, 2020. This growth was largely attributable to thean increase in sales volumes acrossand sales prices of our key brands andexisting products, revenues from launches of new brands launchedproducts and contributions from the portfolio of products acquired from Wockhardt Limited during the year ended March 31, 2016. The products that we acquired from UCB accounted for approximately 7% of the revenue growth for our India business. 2021.
According to IMS HealthIQVIA in its Moving Annual Total report for the year ended March 31, 2016,2021, our secondary sales in India grew by 12.2%3.1% during such period, as compared to the IndianIndia pharmaceutical market’s growth of 14.4%4.3% during such period. During the year ended March 31, 2016,2021, we launched 1720 new brands in India.
Emerging Markets: Our Global Generics segment’s revenues from our “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, primarily Venezuela,including South Africa, China, Brazil and Australia) were Rs.35,087 million for the year ended March 31, 2016 were Rs.23,591 million, a decrease2021, an increase of 25%7% as compared to Rs.32,811 million for the year ended March 31, 2015. The reasons for this decrease are set forth below2020. This revenue increase was led by growth in the separate discussions of these geographies.Ukraine, Kazakhstan, Uzbekistan and Romania, including certain tender sales, and scaling up in markets such as China, Vietnam, Myanmar and Jamaica.
Russia:Our Global Generics segment’s revenues from Russia were Rs.10,640Rs.15,816 million for the year ended March 31, 2016,2021, a decrease of 29%6% as compared to Rs.16,900 million for the year ended March 31, 2015.2020. In Russian rouble absolute currency terms (i.e.,
Russian roubles without taking into account the effect of currency exchange rates), such revenues increased by 1% for the year ended March 31, 20162021 as compared to the year ended March 31, 2015.2020. This revenue increase was largely attributable to an increase in the sales price and sales from new product launches during the year ended March 31, 2021, which was partially offset by a reduction in sales due to lower volumes in some of our existing products. Our over-the-counter (“OTC”) division’s revenues from Russia for the year ended March 31, 20162021 were 39%approximately 45% of our total revenues from Russia, and we intend to further strengthen our OTC sales by continuous branding initiatives.Russia.
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According to IMS Health,IQVIA, as per its report for the year ended March 31, 2016,2021, our sales value (in Russian roubles) growth and volume growth from Russia for such period, as compared to the Russian pharmaceutical market sales value (in Russian roubles) growth and volume growth for the year ended March 31, 2016such period, was as follows:
Year ended March 31, 2016 | Year ended March 31, 2021 | |||||||||||||||||||||||||||||||
Dr. Reddy’s | Russian pharmaceutical market | Dr. Reddy's | Russian pharmaceutical market | |||||||||||||||||||||||||||||
Sales value | Volume | Sales value | Volume | Sales value | Volume | Sales value | Volume | |||||||||||||||||||||||||
Prescription (Rx) | 2.61 | % | (4.92 | %) | 10.25 | % | (1.07 | %) | -1.2 | % | -4.8 | % | 2.3 | % | -2.1 | % | ||||||||||||||||
Over-the-counter (OTC) | 10.88 | % | (1.02 | %) | 6.73 | % | (5.09 | %) | -0.6 | % | -7.3 | % | 4.3 | % | -6.6 | % | ||||||||||||||||
Total (Rx + OTC) | 5.60 | % | (3.92 | %) | 8.36 | % | (3.96 | %) | -0.9 | % | -5.7 | % | 3.3 | % | -5.1 | % |
As per the above referenced IMS HealthIQVIA report, our volume-based market shares in Russia for the years ended March 31, 20162021 and 20152020 were as follows:
Year ended March 31, | ||||||||||||||||||||||||
Year ended March 31, | Volume based | Value based | ||||||||||||||||||||||
2016 | 2015 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Prescription (Rx) | 4.50 | % | 4.68 | % | 3.9 | % | 3.9 | % | 1.7 | % | 1.8 | % | ||||||||||||
Over-the-counter (OTC) | 0.66 | % | 0.63 | % | 1.1 | % | 1.2 | % | 1.6 | % | 1.6 | % | ||||||||||||
Total (Rx + OTC) | 1.77 | % | 1.77 | % | 2.1 | % | 2.1 | % | 1.7 | % | 1.7 | % |
Other countries of the former Soviet Union and Romania:Our Global Generics segment’s revenues from other countries of the former Soviet Union and Romania were Rs.7,427 million for the year ended March 31, 2016 were Rs.3,536 million,2021, an increase of 1% over15% as compared to Rs.6,472 million for the year ended March 31, 2015.2020. This increase was largely on account of anattributable to increased revenues from higher sales volumes, increase in sales volumes in Romaniaprices and Ukraine, partially offset by depreciation of the Ukrainian hryvnia against the Indian rupee. Duringrevenues from new products launched during the year ended March 31, 2016, the Ukrainian hryvnia depreciated by approximately 34% as compared to the year ended March 31, 2015.2021.
“Rest of the World Markets:World” Markets: We refer to all markets of this segment, other than North America (the United States and Canada), Europe, Russia and other countries of the former Soviet Union, Romania and India, as our “Rest of the World” markets. Our Global Generics segment’s revenues from our “Rest of the World” markets were Rs.9,416Rs.11,844 million for the year ended March 31, 2016, a decrease2021, an increase of 28%25% as compared to the year ended March 31, 2015. The decrease was largely led by decreased revenues in Venezuela primarily due to reduction in the sales volume of our existing products. Our sales in Venezuela were Rs.4,666Rs.9,439 million for the year ended March 31, 2016, as compared to Rs.8,335 million for the year ended March 31, 2015. This reduction in sales was primarily2020. The growth is largely attributable to the ongoing economic crisis in the countryincreased sales volumes of our existing business and correspondingly, our risk mitigation approach by way of moderating the supply of products to this country.
Europe: Our Global Generics segment’s revenues from Europe were Rs.7,732 million for the year ended March 31, 2016, an increase of 19% as compared to the year ended March 31, 2015. This growth was led by revenues from new products launched during the year ended March 31, 2015.
Pharmaceutical Services and Active Ingredients (“PSAI”)
Our PSAI segment’s revenues were Rs.31,982 million for the year ended March 31, 2016 were Rs.22,379 million, a decrease2021, an increase of 12%24% as compared to Rs.25,747 million for the year ended March 31, 2015.2020. After taking into account the impact of the exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, this decreaseincrease was largely attributable to:
decreased sales of active pharmaceutical ingredients for the year ended March 31, 2016, primarily attributable to decreasedan increase in sales volumes and sales pricesrevenues from launches of existingnew products, which decreasedwas partially offset by a reduction in sales due to price erosion in some of our PSAI segment’s revenues by approximately 13%; andexisting products.
increased customer orders in our pharmaceutical development services for certain products provided to innovator companies, which increased our PSAI segment’s revenues by approximately 1%.
During the year ended March 31, 2016,2021, we filed 50149 Drug Master Files (“DMFs”) worldwide. Cumulatively, our total active worldwide DMFs as of March 31, 20162021 were 768,1,172, including 218223 active DMFs in the United States.
Gross Profit
Our total gross profit was Rs.92,281Proprietary Products
Revenues from our Proprietary Products segment were Rs.523 million for the year ended March 31, 2016, representing 59.6%2021, a decrease of our total revenues for this period,93% as compared to Rs.85,403Rs.7,949 million for year ended March 31, 2020.
Our revenues for the year ended March 31, 2020 included Rs.7,486 million revenue from sale of the U.S. and select territory rights for our neurology product brands ZEMBRACE® SMYTOUCH® (sumatriptan injection 3mg) & TOSYMRA™ (sumatriptan nasal spray 10mg).
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Gross Profit
Our total gross profit was Rs.103,077 million for the year ended March 31, 2015,2021, representing 57.6%54.3% of our total revenues for suchthat period, as compared to Rs.94,009 million for the year ended March 31, 2020, representing 53.8% of our revenues for that period.
The following table sets forth, for the periodsperiod indicated, our gross profit by segment:
For the year ended March 31, | For the year ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2016 | 2015 | 2014 | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||
(Rs. in millions) | (Rs. in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Gross Profit | Gross Profit (% of Segment Revenue) | Gross Profit | Gross Profit (% of Segment Revenue) | Gross Profit | Gross Profit (% of Segment Revenue) | Gross Profit | % of Segment Revenue | Gross Profit | % of Segment Revenue | Gross Profit | % of Segment Revenue | |||||||||||||||||||||||||||||||||||||
Global Generics | Rs. | 84,427 | 66 | % | Rs. | 77,569 | 65 | % | Rs. | 68,544 | 66 | % | 91,111 | 59.0 | % | 78,449 | 56.8 | % | 71,924 | 58.5 | % | |||||||||||||||||||||||||||
Pharmaceutical Services and Active Ingredients | 4,931 | 22 | % | 5,709 | 22 | % | 4,848 | 20 | % | |||||||||||||||||||||||||||||||||||||||
PSAI | 9,426 | 29.5 | % | 6,190 | 24.0 | % | 6,128 | 25.4 | % | |||||||||||||||||||||||||||||||||||||||
Proprietary Products | 2,217 | 83 | % | 1,796 | 83 | % | 2,210 | 90 | % | 482 | 92.2 | % | 7,744 | 97.4 | % | 4,182 | 88.0 | % | ||||||||||||||||||||||||||||||
Others | 706 | 44 | % | 329 | 28 | % | 199 | 16 | % | 2,058 | 73.2 | % | 1,626 | 58.5 | % | 1,196 | 58.1 | % | ||||||||||||||||||||||||||||||
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Total | Rs. | 92,281 | 60 | % | Rs. | 85,403 | 58 | % | Rs. | 75,801 | 57 | % | 103,077 | 54.3 | % | 94,009 | 53.8 | % | 83,430 | 54.2 | % | |||||||||||||||||||||||||||
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After taking into account the impact of the exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, the
The gross profitsprofit from our Global Generics segment increased to 65.9%59.0% for the year ended March 31, 20162021, from 65.0%56.8% for the year ended March 31, 2015.2020. This increase was largely attributable toon account of the impactnet benefit from exchange rate fluctuations of changes in our existing business mix (i.e., an increasemultiple currencies against the Indian rupee, new product launches with higher gross margins, increases in the proportion of sales of certain products with higher gross margin productsmargins and a decreaselower increase in manufacturing overheads as compared to sales. This increase was partially offset by reductions on account of price erosion in certain of our products, primarily in the proportion of salesUnited States, Europe, Australia and Brazil, and also on account of lower gross margin products)export benefits (i.e., tax benefits applicable to exports).
The gross profits from our PSAI segment decreasedincreased to 22.0%29.5% for the year ended March 31, 2016,2021, from 22.4%24.0% for the year ended March 31, 2015.2020. This decreaseincrease was primarily dueon account of the net benefit from exchange rate fluctuations of multiple currencies against the Indian rupee and a lower increase in manufacturing overheads as compared to a decreasesales. This increase was partially offset by reductions on account of price erosion in salescertain of our products with higher gross profit margins during the year ended March 31, 2016.and lower export benefits.
Selling, general and administrative expenses
Our selling, general and administrative expenses were Rs.45,702Rs.54,650 million for the year ended March 31, 2016,2021, an increase of 7%9.0% as compared to Rs.42,585Rs.50,129 million for the year ended March 31, 2015.2020. After taking into account the impact of exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, this increase was largely attributable to the following:
increased costs due to the ongoing remediation activities related to the warning letter received from the U.S. FDA for three of our manufacturing facilities in India, which increased our selling, general and administrative expenses by approximately 5%;
increased personnel costs, due to annual raises and new recruitments, which increased our selling, general and administrative expenses by approximately 3%;
· | an increase of 4% on account of increased freight outward expenses; |
an increase of 3% on account of increased |
for the year ended March 31, 2016 we had recorded impairment losses of Rs.61 million, as compared to impairment losses of Rs.509 million recorded for the year ended March 31, 2015, which resulted in an approximately 1% difference in selling, general and administrative expenses between the two periods; and
· | an increase of 1% on account of increased legal fees; |
· | an increase of 4% on account of increased other expenses; and |
decreased sales and marketing costs, which decreased our selling, general and administrative expenses by approximately 1%.
· | the foregoing was partially offset by a decrease of 3% on account of lower sales and marketing and travel expenses. |
As a proportion of our total revenues, our selling, general and administrative expenses increased to 29.5%28.8% for the year ended March 31, 20162021 from 28.7% for the year ended March 31, 2015.2020.
Research and development expenses
Our research and development expenses were Rs.17,834Rs.16,541 million for the year ended March 31, 2016,2021, an increase of 2%7.3% as compared to Rs.17,449Rs.15,410 million for the year ended March 31, 2015.2020. This increase was in accordance with our strategy to expand our research and development efforts in complex formulations, differentiated formulations and biosimilar compounds. Approximately 65% of our research and development expenses for the year ended March 31, 2016 were incurred for the development of bio-equivalent products, and the other 35% was dedicated to innovative and bio-pharmaceutical research.
Other (income)/expense, net
Our net other income was Rs.874 million for the year ended March 31, 2016, as compared to net other income of Rs.917 million for the year ended March 31, 2015.
Finance (expense)/income, net
Our net finance expense was Rs.2,708 million for the year ended March 31, 2016, as compared to net finance income of Rs.1,682 million for the year ended March 31, 2015. The increase in net finance expense was attributable to:
net foreign exchange gain of Rs.488 million (excluding the impact of our Venezuela operations described below) for the year ended March 31, 2016, as compared to net foreign exchange gain of Rs.1,801 million for the year ended March 31, 2015;
foreign exchange losses related to our Venezuela operations of Rs.4,621 million for the year ended March 31, 2016, as compared to such losses of Rs.843 million for the year ended March 31, 2015. Refer to Note 41 to our consolidated financial statements for further details;
net interest income of Rs.573 million for the year ended March 31, 2016, as compared to net interest expense of Rs.31 million for the year ended March 31, 2015; and
profit on sale of investments of Rs.852 million for the year ended March 31, 2016, as compared to profit on sale of investments of Rs.755 million for the year ended March 31, 2015.
Profit before tax
As a result of the above, profit before taxes was Rs.27,140 million for the year ended March 31, 2016, a decrease of 4% as compared to Rs.28,163 million for the year ended March 31, 2015.
Tax expense
Our consolidated weighted average tax rate for the year ended March 31, 2016 was 26%, as compared to 21% for the year ended March 31, 2015. Income tax expense was Rs.7,127 million for the year ended March 31, 2016, as compared to income tax expense of Rs.5,984 million for the year ended March 31, 2015.
The increase in our effective tax rate for the year ended March 31, 2016 was primarily attributable to the following:
non-deductible losses related to our Venezuela operations, which resulted in an increase in our effective tax rate by approximately 3.8% (refer to Note 41 of our consolidated financial statements for further details);
deferred tax expense on undistributed earnings of a subsidiary outside India, which resulted in an increase in our effective tax rate by approximately 1.9%;
an increase in the effective tax rate by approximately 1.8% due to non-recognition of certain deferred tax assets, as we believe that availability of taxable profits against which the temporary differences can be utilized is not probable;
recognition of a previously unrecognized deferred tax asset pertaining to a jurisdiction outside of India, which resulted in a decrease in our effective tax rate by approximately 1.1%; and
an increase in weighted deduction on eligible research and development expenditure in India during the year ended March 31, 2016, as compared to the year ended March 31, 2015, has resulted in a decrease in the effective tax rate by 1.8%. The rate of weighted deduction on our eligible research and development expenditure was equal to 200% for the years ended March 31, 2016 and 2015, respectively.
Profit for the period
As a result of the above, our net result was a net profit of Rs.20,013 million for the year ended March 31, 2016, as compared to a net profit of Rs.22,179 million for the year ended March 31, 2015.
Fiscal Year Ended March 31, 2015 compared to Fiscal Year Ended March 31, 2014
Revenues
Our overall consolidated revenues were Rs.148,189 million for the year ended March 31, 2015, an increase of 12% as compared to Rs.132,170 million for the year ended March 31, 2014. Revenue growth for the year ended March 31, 2015 was largely driven by our Global Generics segment’s operations in the United States, India and our “Rest of the World” markets (i.e., all markets other than North America, Europe, Russia and other countries of the former Soviet Union, and India), primarily Venezuela.
The following table sets forth, for the periods indicated, our consolidated revenues by geography:
For the year ended March 31, | ||||||||||||||||||||||||
2015 | 2014 | 2013 | ||||||||||||||||||||||
Revenues | % of Total Revenue* | Revenues | % of Total Revenue* | Revenues | % of Total Revenue* | |||||||||||||||||||
(Rs. in millions) | ||||||||||||||||||||||||
Global Generics | Rs. | 119,397 | 81 | % | Rs. | 104,483 | 79 | % | Rs. | 82,516 | 71 | % | ||||||||||||
North America (the United States and Canada) | 63,564 | 53 | % | 54,622 | 52 | % | 37,799 | 46 | % | |||||||||||||||
Europe | 6,481 | 5 | % | 6,110 | 6 | % | 7,011 | 8 | % | |||||||||||||||
India | 17,870 | 15 | % | 15,713 | 15 | % | 14,560 | 18 | % | |||||||||||||||
Russia and other countries of the former Soviet Union | 18,425 | 16 | % | 20,679 | 20 | % | 17,613 | 21 | % | |||||||||||||||
Others | 13,057 | 11 | % | 7,359 | 7 | % | 5,533 | 7 | % | |||||||||||||||
Pharmaceutical Services and Active Ingredients | Rs. | 25,456 | 17 | % | Rs. | 23,974 | 18 | % | Rs. | 30,702 | 26 | % | ||||||||||||
North America (the United States and Canada) | 4,605 | 18 | % | 3,820 | 16 | % | 5,744 | 19 | % | |||||||||||||||
Europe | 10,507 | 41 | % | 9,058 | 38 | % | 12,007 | 39 | % | |||||||||||||||
India | 3,288 | 13 | % | 3,787 | 16 | % | 4,638 | 15 | % | |||||||||||||||
Others | 7,056 | 28 | % | 7,309 | 30 | % | 8,313 | 27 | % | |||||||||||||||
Proprietary Products and Others | Rs. | 3,336 | 2 | % | Rs. | 3,713 | 3 | % | Rs. | 3,048 | 3 | % | ||||||||||||
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Total | Rs. | 148,189 | 100 | % | Rs. | 132,170 | 100 | % | Rs. | 116,266 | 100 | % | ||||||||||||
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During the year ended March 31, 2015, the Indian rupee depreciated by approximately 1.1% against the U.S. dollar, while the Euro and the Russian rouble depreciated by approximately 4.5% and 22.3%, respectively, against the Indian rupee as compared to the year ended March 31, 2014. These changes in exchange rates reduced our reported revenues because of the decrease in Indian rupee realization from sales in Euros and Russian roubles. However, our lower realization for the Russian rouble was partially offset by net gains realized on cash flow hedges undertaken by us to hedge the foreign currency risk associated with highly probable forecasted sales transactions. Accordingly, on a net basis, our realizations of Russian rouble denominated revenues reported in Indian rupees were lower by 19% for the year ended March 31, 2015, as compared to our revenues for the year ended March 31, 2014 adjusted for gains on such cash flow hedges, on account of the depreciation of the Russian rouble.
Segment analysis
Global Generics
Revenues from our Global Generics segment were Rs.119,397 million for the year ended March 31, 2015, an increase of 14% as compared to Rs.104,483 million for the year ended March 31, 2014. The revenue growth was largely led by this segment’s operations in the United States, India and Venezuela.
After taking into account the impact of exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, the foregoing increase in revenues of this segment was attributable to the following factors:
an increase of approximately 7% resulting from the introduction of new products during the year ended March 31, 2015;
a decrease of approximately 13% resulting from the net impact of decreases in sales prices of products; and
an increase of approximately 20% resulting from increased sales volumes of existing products (including the annualized impact of products launched during the year ended March 31, 2014).
The following is a discussion of the key marketshigher developmental expenditures in our Global Generics segment:
North America (the United States and Canada):Our Global Generics segment’s revenues from North America (the United States and Canada) were Rs.63,564 million for the year ended March 31, 2015, an increasebusiness, including development of 16% as compared to the year ended March 31, 2014. In U.S. dollar absolute currency terms (i.e., U.S. dollars without taking into account the effect of currency exchange rates), such revenues increased by 15% for the year ended March 31, 2015 as compared to the year ended March 31, 2014.
This revenue growth was largely attributable to the following:COVID related molecules.
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a gain in market share of certain of our existing products, such as divalproex sodium ER, azacitidine, decitabine, and ziprasidone; and
the foregoing was partially offset by lower realization from certain of our existing products due to price decreases.
The following table sets forth products that we launched in the United States during the year ended March 31, 2015:
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Furthermore, during the year ended March 31, 2015, we acquired from Novartis Consumer Health Inc. the title and rights to its Habitrol® brand (an over-the-counter nicotine replacement therapy transdermal patch) and related U.S. marketing rights, and we began marketing the product in the United States.
During the year ended March 31, 2015, we made 13 new ANDA filings, and as of March 31, 2015 our cumulative ANDA filings were 220. As of March 31, 2015, we had 68 ANDAs pending approval at the U.S. FDA, of which 43 are Paragraph IV filings, and we believe we are the first to file with respect to 13 of these filings.
India: Our revenues from India for the year ended March 31, 2015 were Rs.17,870 million, an increase of 14% as compared to the year ended March 31, 2014. This growth was largely attributable to the increase in sales volumes across our key brands and revenues from new brands launched during the year ended March 31, 2015. According to IMS Health in its Moving Annual Total report for the year ended March 31, 2015, our secondary sales in India grew by 13.1% during such period, as compared to the India pharmaceutical market’s growth of 12.1% during such period. During the year ended March 31, 2015, we launched 18 new brands in India such as DOXT-SLTM, Melgain®, XaliboTM, and Resof™ (sofosbuvir).
Furthermore, in April 2015, we entered into a definitive agreement with UCB India Private Limited and other UCB group companies (together referred to as “UCB”) to acquire a select portfolio of established products business in the territories of India, Nepal, Sri Lanka and Maldives for a total purchase consideration of Rs.8,000 million. The purchased business was acquired on a slump sale basis (an Indian tax law concept which refers to the transfer of a business as a going concern without values being assigned to individual assets and liabilities). The transaction includes approximately 350 employees engaged in the operations of the acquired India business. The acquisition is expected to strengthen our presence in the areas of dermatology, respiratory and pediatric products. The acquired business had revenues of approximately Rs.1,500 million for the year ended December 31, 2014. The transaction was closed on June 16, 2015 and we began marketing of these products.
Emerging Markets: Our revenues from our “Emerging Markets” (which is comprised of Russia, other countries of the former Soviet Union, and certain other countries from our “Rest of the World” markets, primarily Venezuela, South Africa and Australia) for the year ended March 31, 2015 were Rs.31,482 million, an increase of 12% as compared to the year ended March 31, 2014. The reasons for this growth are set forth below in the separate discussions of these geographies.
Russia:Our Global Generics segment’s revenues from Russia were Rs.14,922 million for the year ended March 31, 2015, a decrease of 9% as compared to the year ended March 31, 2014. In Russian rouble absolute currency terms (i.e., Russian roubles without taking into account the effect of currency exchange rates), such revenues increased by 13% for the year ended March 31, 2015 as compared to the year ended March 31, 2014. Our over-the-counter (“OTC”) division’s revenues from Russia for the year ended March 31, 2015 were 36% of our total revenues from Russia, and we intend to further strengthen our OTC sales by continuous branding initiatives.
According to IMS Health, as per its report for the year ended March 31, 2015, 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 for the year ended March 31, 2015 was as follows:
Year ended March 31, 2015 | ||||||||||||||||
Dr. Reddy’s | Russian pharmaceutical market | |||||||||||||||
Sales value | Volume | Sales value | Volume | |||||||||||||
Prescription (Rx) | 6.62 | % | -5.67 | % | 12.29 | % | 0.27 | % | ||||||||
Over-the-counter (OTC) | 16.86 | % | 7.28 | % | 12.30 | % | -1.84 | % | ||||||||
Total (Rx + OTC) | 10.10 | % | -2.66 | % | 12.29 | % | -1.26 | % |
As per the above referenced IMS Health report, our volume-based market shares in Russia for the years ended March 31, 2015 and 2014 were as follows:
Year ended March 31, | ||||||||
2015 | 2014 | |||||||
Prescription (Rx) | 4.68 | % | 4.97 | % | ||||
Over-the-counter (OTC) | 0.63 | % | 0.58 | % | ||||
Total (Rx + OTC) | 1.77 | % | 1.80 | % |
Other countries of the former Soviet Union and Romania:Our revenues from other countries of the former Soviet Union for the year ended March 31, 2015 were Rs.3,504 million, a decrease of 19% over the year ended March 31, 2014. This decline was largely on account of a decrease in sales volumes in Ukraine, primarily on account of the geo-political situation in Ukraine coupled with depreciation of the Ukrainian hryvnia against the Indian rupee. During the year ended March 31, 2015, the Ukrainian hryvnia depreciated by approximately 41% as compared to the year ended March 31, 2014.
Rest of the World Markets:We refer to all markets of this segment other than North America, Europe, Russia and other countries of the former Soviet Union and India as our “Rest of the World” markets. Our revenues from our “Rest of the World” markets were Rs.13,056 million for the year ended March 31, 2015, an increase of 77% as compared to the year ended March 31, 2014. The growth was largely led by increased revenues in Venezuela attributable to new marketing initiatives for prescription products. Our sales in Venezuela were Rs.8,335 million for the year ended March 31, 2015.
Europe: Our Global Generics segment’s revenues from Europe were Rs.6,481 million for the year ended March 31, 2015, an increase of 6% as compared to the year ended March 31, 2014. This growth was led by revenues from new products launched during the year ended March 31, 2015.
Pharmaceutical Services and Active Ingredients (“PSAI”)
Our PSAI segment’s revenues for the year ended March 31, 2015 were Rs.25,456 million, an increase of 6% as compared to the year ended March 31, 2014. After taking into account the impact of the exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, this increase was largely attributable to:
increased sales of active pharmaceutical ingredients for the year ended March 31, 2015, primarily attributable to certain key products such as capecitabine and epoxide, partially offset by the net impact of changes in sales prices of existing products, all of which increased our PSAI segment’s revenues by approximately 5%; and
increased customer orders in our pharmaceutical development services for certain products provided to innovator companies, which increased our PSAI segment’s revenues by approximately 1%.
During the year ended March 31, 2015, we filed 77 Drug Master Files (“DMFs”) worldwide. Cumulatively, our total worldwide DMFs as of March 31, 2015 were 735, including 219 DMFs in the United States.
Gross Profit
Our total gross profit was Rs.85,403 million for the year ended March 31, 2015, representing 57.6% of our total revenues for this period, as compared to Rs.75,801 million for the year ended March 31, 2014, representing 57.4% of our total revenues for such period.
The following table sets forth, for the periods indicated, our gross profit by segment:
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Gross Profit | Gross Profit (% of Segment Revenue) | Gross Profit | Gross Profit (% of Segment Revenue) | Gross Profit | Gross Profit (% of Segment Revenue) | |||||||||||||||||||
Global Generics | Rs. | 77,569 | 65 | % | Rs. | 68,544 | 66 | % | Rs. | 48,687 | 59 | % | ||||||||||||
Pharmaceutical Services and Active Ingredients | 5,709 | 22 | % | 4,848 | 20 | % | 9,970 | 32 | % | |||||||||||||||
Proprietary Products | 1,796 | 83 | % | 2,210 | 90 | % | 1,358 | 90 | % | |||||||||||||||
Others | 329 | 28 | % | 199 | 16 | % | 564 | 37 | % | |||||||||||||||
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Total | Rs. | 85,403 | 58 | % | Rs. | 75,801 | 57 | % | Rs. | 60,579 | 52 | % | ||||||||||||
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After taking into account the impact of the exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, the gross profits from our Global Generics segment decreased to 65.0% for the year ended March 31, 2015 from 65.6% for the year ended March 31, 2014. This decrease was largely attributable to the impact of changes in our existing business mix (i.e., a decrease in the proportion of sales of higher gross margin products and an increase in the proportion of sales of lower gross margin products).
The gross profits from our PSAI segment increased to 22.4% for the year ended March 31, 2015, from 20.2% for the year ended March 31, 2014. This increase was primarily due to an increase in sales of products with higher gross profit margins during the year ended March 31, 2015.
Selling, general and administrative expenses
Our selling, general and administrative expenses were Rs.42,585 million for the year ended March 31, 2015, an increase of 10% as compared to Rs.38,783 million for the year ended March 31, 2014. 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:
increased personnel costs, due to annual raises and new recruitments, which increased our selling, general and administrative expenses by approximately 4%;
for the year ended March 31, 2015 we had recorded impairment losses of Rs.509 million, as compared to a reversal of impairment losses of Rs.497 million recorded for the year ended March 31, 2014, which resulted in an approximately 3% difference in selling, general and administrative expenses between the two periods; and
increased sales and marketing costs, which increased our selling, general and administrative expenses by approximately 1%.
As a proportion of our total revenues, our selling, generalresearch and administrative expenses decreased to 28.7%development expense was at 8.7% for the year ended March 31, 2015 from 29.3%2021 as compared to 8.8% for the year ended March 31, 2014.2020.
Research and development expenses
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Impairment of non-current assets
Our research and development expensesimpairment of non-current assets expense charge were Rs.17,449Rs.8,588 million for year ended March 31, 2021 as compared to a charge of Rs.16,767 million for the year ended March 31, 2015,2020. Please refer to Notes 12, 13 and 14 of our consolidated financial statements for an increase of 41% as compared to Rs.12,402explanation on this charge.
Other income, net
Our net other income was Rs.982 million for the year ended March 31, 2014. This increase was in accordance with our strategy2021, a decrease of 77% as compared to expand our research and development efforts in complex formulations, differentiated formulations and biosimilar compounds. Approximately 60% of our research and development expenses for the year ended March 31, 2015 were spent towards the development of bio-equivalent products and the other 40% was dedicated to innovative and bio-pharmaceutical research.
Furthermore, consequent to our decision to discontinue the further development of certain ‘In-Process Research and Development’ assets pertaining to our Proprietary Products segment, we recorded Rs.95 million as impairment loss for the year ended March 31, 2015 under research and development expenses.
Other (income)/expense, net
Our net other income was Rs.917of Rs.4,290 million for the year ended March 31, 2015, as compared to net other income of Rs.1,416 million for the year ended March 31, 2014. 2020.
Our net other income for the year ended March 31, 2014 included Rs.4152020 includes Rs.3,457 million received from Celgene pursuant to a settlement agreement. Such agreement settled any claim that we or our affiliates may have had for damages under section 8 of the resolutionCanadian Patented Medicines (Notice of litigation associated with the saleCompliance) Regulations in regard to our ANDS for a generic version of one of our generic products in North America.REVLIMID brand capsules (lenalidomide) pending before Health Canada.
Finance (expense)/income, net
Our net finance income was Rs.1,682Rs.1,653 million for the year ended March 31, 2015,2021, as compared to net finance income of Rs.400Rs. 1,478 million for the year ended March 31, 2014. The2020. This increase in net finance income was largely attributable to:
· | fair value changes and profit on sale of units of mutual funds of Rs.557 million for the year ended March 31, 2021, as compared to fair value changes and profit on sale of units of mutual funds of Rs.929 million for the year ended March 31, 2020; |
· | an increase in net foreign exchange gain of Rs.1,240 million for the year ended March 31, 2021, as compared to net foreign exchange gain of Rs. 639 million for the year ended March 31, 2020; and |
· | an increase in net interest expense of Rs.144 million for the year ended March 31, 2021, as compared to net interest expense of Rs.95 million for the year ended March 31, 2020. |
Profit before tax
As a result of Rs.1,801 million (excluding the impact of Venezuela currency exchange loss described below) for the year ended March 31, 2015, as compared to net foreign exchange gain of Rs.372above, our profit before taxes was Rs.26,413 million for the year ended March 31, 2014;
foreign exchange loss2021, an increase of Rs.84346% as compared to Rs.18,032 million for the year ended March 31, 2015 on translation of certain monetary assets and liabilities of our Venezuelan subsidiary. Refer to Note 41 to our2020.
Tax expense
Our consolidated financial statements for further details;
net interest expense of Rs.31 millionweighted average tax rate was 35% for the year ended March 31, 2015,2021, as compared to net interest expense(8%) (benefit of Rs.189 million8%) for the year ended March 31, 2014; and2020.
profit on sale of investments of Rs.755 million for the year ended March 31, 2015, as compared to profit on sale of investments of Rs.213 million for the year ended March 31, 2014.
Profit before tax
As a result of the above, profit before income taxes was Rs.28,163 million for the year ended March 31, 2015, an increase of 6% as compared to Rs.26,606 million for the year ended March 31, 2014.
Tax expense
Our consolidated weighted averageeffective tax rate for the year ended March 31, 20152021 was 21.2%,higher as compared to 19.1% for the year ended March 31, 2014.2020 primarily on account of:
· | de-recognition of deferred tax asset during the year ended March 31, 2021 due to non-availability of depreciation on goodwill pursuant to an amendment to section 2(11) of the Income Tax Act in the Finance Act, 2021; |
· | recognition of a deferred tax asset related to the Minimum Alternate Tax (“MAT”) credits and planned restructuring activity between companies within our group during the year ended March 31, 2020; |
· | weighted deduction on eligible research and development expenditure in Dr. Reddy’s Laboratories Limited, India for the year ended March 31, 2020; and |
· | income from the sale of capital assets during the year ended March 31, 2020, which was set off against the carried forward capital loss. |
As a result, we had a tax expense was Rs.5,984of Rs.9,175 million for the year ended March 31, 2015,2021, as compared to incomea net tax expensebenefit of Rs.5,094Rs.1,466 million for the year ended March 31, 2014. The effective tax rate for the period ended March 31, 2014 was lower primarily as a result of a favorable order from the Income Tax Appellate Tribunal, Hyderabad, India on a previously litigated tax matter relating to the deductibility of share-based payment expenses.2020.
Profit for the periodyear
As a result of the above, our net resultprofit was a net profit of Rs.22,179Rs.17,238 million for the year ended March 31, 2015,2021, representing 9% of our total revenues for such year, as compared to a net profit of Rs.21,512Rs.19,498 million for the year ended March 31, 2014.
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Fiscal Year Ended March 31, 20142020 compared to Fiscal Year Ended March 31, 2013
Revenues2019
Our overall consolidated revenues were Rs.132,170 millionRefer to item 5.A. of our Annual Report on Form 20-F for the fiscal year ended March 31, 2014, an increase of 14% as2020.
Fiscal Year Ended March 31, 2019 compared to Rs.116,266 millionFiscal Year Ended March 31, 2018
Refer to item 5.A. of our Annual Report on Form 20-F for the fiscal year ended March 31, 2013. Revenue growth for the year ended March 31, 2014 was largely driven by our Global Generics segment’s operations in the United States and our “Emerging Markets” (which is comprised of Russia, other countries of the former Soviet Union, and certain other countries from our “Rest of the World” markets, primarily South Africa, Venezuela and Australia).
The following table sets forth, for the periods indicated, our consolidated revenues by geography:2019.
For the year ended March 31, | ||||||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||
Revenues | % of Total Revenue * | Revenues | % of Total Revenue * | Revenues | % of Total Revenue * | |||||||||||||||||||
(Rs. in millions) | ||||||||||||||||||||||||
Global Generics | Rs. | 104,483 | 79 | % | Rs. | 82,516 | 71 | % | Rs. | 70,243 | 72 | % | ||||||||||||
North America (the United States and Canada) | 54,622 | 52 | % | 37,799 | 46 | % | 31,889 | 45 | % | |||||||||||||||
Europe | 6,110 | 6 | % | 7,011 | 8 | % | 7,632 | 11 | % | |||||||||||||||
India | 15,713 | 15 | % | 14,560 | 18 | % | 12,931 | 18 | % | |||||||||||||||
Russia and other countries of the former Soviet Union | 20,679 | 20 | % | 17,613 | 21 | % | 13,887 | 20 | % | |||||||||||||||
Rest of the World | 7,359 | 7 | % | 5,533 | 7 | % | 3,904 | 6 | % | |||||||||||||||
Pharmaceutical Services and Active Ingredients | Rs. | 23,974 | 18 | % | Rs. | 30,702 | 26 | % | Rs. | 23,812 | 25 | % | ||||||||||||
North America (the United States and Canada) | 3,820 | 16 | % | 5,744 | 19 | % | 4,272 | 18 | % | |||||||||||||||
Europe | 9,058 | 38 | % | 12,007 | 39 | % | 8,424 | 35 | % | |||||||||||||||
India | 3,787 | 16 | % | 4,638 | 15 | % | 3,586 | 15 | % | |||||||||||||||
Rest of the World | 7,309 | 30 | % | 8,313 | 27 | % | 7,531 | 32 | % | |||||||||||||||
Proprietary Products and Others | Rs. | 3,713 | 3 | % | Rs. | 3,048 | 3 | % | Rs. | 2,682 | 3 | % | ||||||||||||
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Total | Rs. | 132,170 | 100 | % | Rs. | 116,266 | 100 | % | Rs. | 96,737 | 100 | % | ||||||||||||
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During the year ended March 31, 2014, the Indian rupee depreciated by approximately 10%, 14%, and 4% against the U.S. dollar, the Euro and the Russian rouble, respectively, as compared to the year ended March 31, 2013. This change in the exchange rates resulted in higher reported revenues because of the increase in Indian rupee realization from sales in U.S. dollars, Euros and Russian roubles. However, our higher realization for the U.S. dollar was partially offset by net losses incurred on cash flow hedges undertaken by us to hedge the foreign currency risk associated with highly probable forecasted sales transactions. Accordingly, on a net basis, our realizations of U.S. dollar denominated revenues reported in Indian rupees were higher by 15% for the year ended March 31, 2014, as compared to our revenues for the year ended March 31, 2013 adjusted for losses on such cash flow hedges, on account of depreciation of the Indian rupee.
Our provision for sales returns as at March 31, 2014 was Rs.2,504 million, as compared to a provision of Rs.1,904 million as at March 31, 2013. This increase in our provision was primarily due to higher sales recorded for the year ended March 31, 2014. Consistent with our accounting policy for creating provisions for sales returns (discussed in Note 3(1) of our consolidated financial statements), we periodically assess the adequacy of our allowance for sales returns based on the criteria discussed in our Critical Accounting Policies, as well as sales returns actually processed during the year. For further information regarding our sales return provisions, see Notes 3(1) and 21 to our consolidated financial statements.
Segment analysis
Global Generics
Revenues from our Global Generics segment were Rs.104,483 million for the year ended March 31, 2014, an increase of 27% as compared to Rs.82,516 million for the year ended March 31, 2013. North America (the United States and Canada), India and our “Emerging Markets” (which is comprised of Russia, other countries of the former Soviet Union, and certain other countries from our “Rest of the World” markets, primarily South Africa, Venezuela and Australia), contributed approximately 93% of the revenues of this segment for the year ended March 31, 2014.
After taking into account the favorable impact of depreciation of the Indian rupee against multiple currencies in the markets in which we operate, the foregoing increase in revenues of this segment was attributable to the following factors:
an increase of approximately 20% resulting from the introduction of new products during the year ended March 31, 2014;
an increase of approximately 3% resulting from the net impact of increases in sales prices of products; and
an increase of approximately 4% resulting from increased sales volumes of existing products;
North America (the United States and Canada): Our Global Generics segment’s revenues from North America (the United States and Canada) for the year ended March 31, 2014 were Rs.54,622 million, an increase of 45% as compared to our revenues of Rs.37,799 million for the year ended March 31, 2013. In U.S. dollar absolute currency terms (i.e., U.S. dollars without taking into account the effect of currency exchange rates), this segment’s revenues from such geography grew by 25% in the year ended March 31, 2014 as compared to the year ended March 31, 2013. This growth was largely attributable to the following:
Revenues from 9 new products launched in the year ended March 31, 2014. The following table sets forth, for the year ended March 31, 2014, products that we launched in the United States:
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Market share expansion in our existing key products, such as metoprolol succinate and atorvastatin.
During the year ended March 31, 2014, we made 13 U.S. filings, which includes one NDA filing under section 505(b)(2) and 12 ANDA filings, bringing our cumulative ANDA filings to 209. We now have 62 ANDAs pending approval at the U.S. FDA, out of which 39 are Paragraph IV filings and we believe 9 to have first to file status. We have also received a tentative approval for one of our NDAs filed under section 505(b)(2).
A significant portion of our Global Generics segment’s revenue growth in North America (the United States and Canada) for the year ended March 31, 2014 was on account of sales from launches of new products.
India: Our revenues from India in the year ended March 31, 2014 were Rs.15,713 million, an increase of 8% as compared to the year ended March 31, 2013. During the year ended March 31, 2014, the Government of India released drug price notifications for a majority of the 348 products listed in the National List of Essential Medicines that are subject to price controls under the Drugs (Price Control) Order, 2013. The reduced prices from these price controls adversely impacted the revenues from our India business by approximately 3% (the annualized impact is approximately 4%) for the year ended March 31, 2014.
Despite the adverse impact of the aforesaid reduction in prices, growth was largely driven by an increase in sales volumes across our key brands, as well as revenues from 11 new products launched during the year ended March 31, 2014. According to IMS Health, as per its moving annual total report for the 12 months ended March 31, 2014, our sales value grew by 12.2% for the year ended March 31, 2014. In comparison, the Indian pharmaceutical market grew by 9.9% during such period.
Bio-similar products are one of the key contributors to our revenues from India, and represented approximately 7% of our revenues from India for the year ended March 31, 2014.
Emerging Markets: Our revenues from our “Emerging Markets” (which is comprised of Russia, other countries of the former Soviet Union, and certain other countries from our “Rest of the World” markets, primarily South Africa, Venezuela and Australia), for the year ended March 31, 2014 were Rs.28,038 million, an increase of 21% over the year ended March 31, 2013. The reasons for this growth are set forth below in the separate discussions of these geographies.
Russia:Our revenues from Russia for the year ended March 31, 2014 were Rs.16,333 million, an increase of 16% over the year ended March 31, 2013. In Russian rouble absolute currency terms (i.e., Russian roubles without taking into account the effect of currency exchange rates), such revenues grew by 11% in the year ended March 31, 2014 as compared to the year ended March 31, 2013. The growth was largely driven by an increase in sales across our key brands (such as Nise, Omez, Ketorol, Senade and Cetrine) as well as new product launches. According to IMS Health, as per its moving annual total report for the 12 months ended March 31, 2014, our sales value and volume growths for the year ended March 31, 2014 were 7.7% and 4.1%, respectively, as compared to the Russian pharmaceutical market value growth and volume decrease of 1.9% and 5.0%, respectively. During the same period, our volume market share increased from 1.64% to 1.80%, according to IMS Health. Our sales of OTC products have grown significantly, and accounted for 34% of the total sales made by us in Russia for the year ended March 31, 2014. We intend to further increase our OTC sales by various branding and other marketing initiatives. According to IMS Health, in the year ended March 31, 2014, we have improved our rank by five positions in the OTC segment as compared to the year ended March 31, 2013. As per IMS Health’s moving annual total report for the 12 months ended March 31, 2014, our OTC sales value and volume growths in Russia for the year ended March 31, 2014 were 18.8% and 16.8%, respectively, as compared to the Russian OTC pharmaceutical market value growth and volume decrease of 1.4% and 6.0%, respectively.
Other countries of the former Soviet Union and Romania: Our revenues from other countries of the former Soviet Union for the year ended March 31, 2014 were Rs.4,346 million, an increase of 22% over the year ended March 31, 2013. This growth was largely led by increased revenues resulting from higher prices from sales in Ukraine and increased sales volumes from sales in Uzbekistan, Belarus and Kazakhstan. This growth also benefitted from the depreciation of the Indian rupee against the U.S. dollar and the Ukrainian hryvnia.
Rest of the World Markets: We refer to all markets of this segment other than North America, Europe, Russia and other countries of the former Soviet Union and India as our “Rest of the World” markets. Our revenues from our “Rest of the World” markets were Rs.7,359 million in the year ended March 31, 2014, an increase of 33% as compared to the year ended March 31, 2013. The growth was largely led by increased revenues resulting from higher prices and increased sales volumes from South Africa and Venezuela, and was partially offset by the impact of devaluation of the Venezuelan bolivar from VEF 4.3 per U.S. dollar to VEF 6.3 per U.S. dollar.
Pharmaceutical Services and Active Ingredients (“PSAI”)
Our Pharmaceutical Services and Active Ingredients (“PSAI”) segment’s revenues for the year ended March 31, 2014 were Rs.23,974 million, a decrease of 22% as compared to the year ended March 31, 2013. After taking into account the favorable impact of depreciation of the Indian rupee against multiple currencies in the markets in which we operate, such decrease was largely attributable to:
decreased sales of active pharmaceutical ingredients, as some of our key customers lost market share during the year, coupled with lower sales from “launch molecules” (i.e., API sales to customers to support their generic product launches related to impending patent expirations) to our customers in the year ended March 31, 2014, which decreased our PSAI segment’s revenues by 16%; and
decreased customer orders in our pharmaceutical development services for certain products provided to innovator companies which decreased our PSAI segment’s revenues by 6%.
In the year ended March 31, 2014, our PSAI segment filed 61 Drug Master Files (“DMFs”) worldwide, of which 12 were filed in the United States, 13 were filed in Europe and 36 were filed in other countries. Cumulatively, our total DMFs filed worldwide as of March 31, 2014 were 631, including 196 DMFs filed in the United States.
Gross Profit
Our total gross profit was Rs.75,801 million in the year ended March 31, 2014, representing 57.4% of our total revenues for this period, as compared to Rs.60,579 million in the year ended March 31, 2013, representing 52.1% of our total revenues for this period.
The following table sets forth, for the periods indicated, our gross profit by segment:
For the year ended March 31, | ||||||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||
Gross Profit | % of Segment Revenue | Gross Profit | % of Segment Revenue | Gross Profit | % of Segment Revenue | |||||||||||||||||||
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Global Generics | Rs. | 68,544 | 66 | % | Rs. | 48,687 | 59 | % | Rs. | 44,263 | 63 | % | ||||||||||||
Pharmaceutical Services and Active Ingredients | 4,848 | 20 | % | 9,970 | 32 | % | 7,508 | 32 | % | |||||||||||||||
Proprietary Products | 2,210 | 90 | % | 1,358 | 90 | % | 903 | 84 | % | |||||||||||||||
Others | 199 | 16 | % | 564 | 37 | % | 631 | 39 | % | |||||||||||||||
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Total | Rs. | 75,801 | 57 | % | Rs. | 60,579 | 52 | % | Rs. | 53,305 | 55 | % | ||||||||||||
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After taking into account the favorable impact of depreciation of the Indian rupee against multiple currencies in the markets in which we operate, the gross profits from our Global Generics segment increased from 59.0% in the year ended March 31, 2013 to 65.6% in the year ended March 31, 2014, on account of:
the favorable impact of changes in our existing business mix (i.e., an increase in the proportion of sales of higher gross margin products and a decrease in the proportion of sales of lower gross margin products) primarily attributable to an increased proportion of sales from new product launches with better margins; and
higher price realizations from existing products, primarily due to the favorable impact of the depreciation of the Indian rupee against the U.S. Dollar.
The gross profits from our PSAI segment decreased from 32.5% for the year ended March 31, 2013 to 20.2% for the year ended March 31, 2014, due to the following:
the unfavorable impact of changes in our existing business mix (i.e., a decrease in the proportion of sales of higher gross margin products and an increase in the proportion of sales of lower gross margin products) primarily on account of lower sales from “launch molecules” (i.e., API sales to customers to support their generic product launches related to impending patent expirations) to our customers during the year; and
increased pricing pressures on key products.
Selling, general and administrative expenses
Our selling, general and administrative expenses for the year ended March 31, 2014 were Rs.38,783 million, an increase of 13% as compared to Rs.34,272 million for the year ended March 31, 2013. After taking into account the unfavorable impact of depreciation of the Indian rupee against multiple currencies in the markets in which we operate, this increase was largely attributable to the following:
increased personnel costs, due to annual raises and new recruitments, which increased our selling, general and administrative expenses by 5.2%;
increased sales and marketing costs, due to expenditures towards select brand building activities in “Emerging Markets” (which is comprised of Russia, other countries of the former Soviet Union, and certain other countries from our “Rest of the World” markets, primarily South Africa, Venezuela and Australia), which increased our selling, general and administrative expenses by 4.8%; and
increased legal and professional services cost, which increased our selling, general and administrative expenses by 2.0%.
As a proportion of our total revenues, our selling, general and administrative expenses have marginally decreased from 29.5% for the year ended March 31, 2013 to 29.3% for the year ended March 31, 2014.
Research and development expenses
Our research and development expenses in the year ended March 31, 2014 were Rs.12,402 million, an increase of 62% as compared to Rs.7,674 million in the year ended March 31, 2013. This increase was in accordance with our strategy to expand our research and development efforts in complex formulations, differentiated formulations and biosimilar compounds. Our research and development expenditures accounted for 9.4% of our total revenues in the year ended March 31, 2014, as compared to 6.6% in the year ended March 31, 2013. Approximately 62% of our research and development expenses for the year ended March 31, 2014 were spent towards the development of bio-equivalent products and the other 38% was dedicated to innovative and bio-pharmaceutical research.
Reversal of impairment losses
Consequent to the increase in expected cash flows of some of the products forming part of the product related intangibles pertaining to our Global Generics segment, we estimated the recoverable amount of such intangible assets and assessed that the impairment loss recorded in an earlier period should be reversed. Accordingly, a reversal of impairment loss
of Rs.497 million for such product related intangibles was recorded for the year ended March 31, 2014 under “Selling, general and administrative expenses” in the consolidated income statement. The expected cash flows increased primarily due to various market dynamics, such as reduced competition and favorable pricing position.
Other income, net
Our net other income was Rs.1,416 million for the year ended March 31, 2014, as compared to a net other income of Rs.2,479 million for the year ended March 31, 2013. The decrease in net other income by Rs.1,063 million was largely attributable to the following:
during March 2013, we entered into an agreement with Nordion Inc. (formerly known as MDS Inc.) to settle our ongoing litigation for alleged breach of service obligations by Nordion Inc. during the years 2000 to 2004. As part of the settlement, we received a one-time settlement amount of Rs.1,220 million (U.S.$22.5 million) from Nordion Inc., out of which Rs.108 million (U.S.$2 million) was towards reimbursement of research and development cost and was recorded as reduction in such cost. The balance of Rs.1,112 million (U.S.$20.5 million) was compensation for lost profits and was recorded as part of other income; and
other income for the year ended March 31, 2014 includes Rs.415 million (CAD6.75 million) from the resolution of litigation associated with the sale of one of our generic products in North America.
Finance income, net
Our net finance income was Rs.400 million for the year ended March 31, 2014, as compared to net finance income of Rs.460 million for the year ended March 31, 2013. The decrease in net finance income by Rs.60 million was largely attributable to an increase in our net interest expense, which was Rs.189 million for the year ended March 31, 2014 as compared to Rs.118 million for the year ended March 31, 2013.
Profit before income taxes
As a result of the above, profit before income taxes was Rs.26,606 million for the year ended March 31, 2014, an increase of 23% as compared to Rs.21,676 million for the year ended March 31, 2013.
Income tax expense
Our consolidated weighted average tax rates for the years ended March 31, 2014 and 2013 were 19.1% and 22.6%, respectively. Income tax expense was Rs.5,094 million for the year ended March 31, 2014, as compared to income tax expense of Rs.4,900 million for the year ended March 31, 2013. The decrease in effective tax rate by 3.5% for the year ended March 31, 2014 was primarily attributable to the following:
a decrease in the effective tax rate by approximately 3.2% as a result of a favorable order from the Income Tax Appellate Tribunal, Hyderabad, India over a previously litigated tax matter;
a decrease in the effective tax rate by approximately 0.9% on account of impairment losses and reversal of impairment losses; and
a decrease in the effective tax rate by approximately 1.6% due to increased research and development expenditures which were eligible for weighted tax deduction. This decrease was largely offset by an increase in the effective tax rate on account of unrecognized deferred tax assets, primarily pertaining to OctoPlus N.V., Dr. Reddy’s Laboratories New York, Inc. and Dr. Reddy’s Srl.
Profit for the period
As a result of the above, our net result was a net profit of Rs.21,512 million in the year ended March 31, 2014, as compared to a net profit of Rs.16,776 million in the year ended March 31, 2013.
5.B.Liquidity and capital resources
Liquidity
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 making investments, 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. Through our subsidiary in Switzerland, we borrowed U.S.$220 million during the year ended March 31, 2012, which was required to be repaid in eight quarterly installments beginning December 2014. During the year ended March 31, 2016, we repaid the entire outstanding loan amount (including a prepayment
Summary of U.S.$110 million), and our subsidiary in Switzerland further borrowed U.S.$82.5 millionstatements of new short-term borrowings (refer to Note 18 to our consolidated financial statements for further details). Further, we also borrowed U.S.$150 million during the year ended March 31, 2014, which is to be repaid in five quarterly installments beginning February 2018. These loans were borrowed primarily to repay some of our then existing short term borrowings and to meet anticipated capital expenditures over the near term. As part of our growth strategy, we continue to review opportunities to acquire companies, complementary technologies or product rights.cash flows
The following table summarizes our statements of cash flows for the periodsyears presented:
For the year ended March 31, | ||||||||||||||||||||||||
For the year ended March 31, | 2021 | 2020 | 2019 | |||||||||||||||||||||
2016 | 2015 | 2014 | (Rs. in millions) | |||||||||||||||||||||
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Net cash provided by/(used in): | ||||||||||||||||||||||||
Net cash from/(used in): | ||||||||||||||||||||||||
Operating activities | Rs. | 41,247 | Rs. | 25,033 | Rs. | 19,463 | Rs. | 35,703 | Rs. | 29,841 | Rs. | 28,704 | ||||||||||||
Investing activities | (20,423 | ) | (22,904 | ) | (16,620 | ) | (22,660 | ) | (4,923 | ) | (7,727 | ) | ||||||||||||
Financing activities | (17,001 | ) | (4,118 | ) | (217 | ) | (298 | ) | (25,159 | ) | (21,326 | ) | ||||||||||||
Net increase/(decrease) in cash and cash equivalents | 3,823 | (1,989 | ) | 2,626 | Rs. | 12,745 | Rs. | (241) | Rs. | (349 | ) | |||||||||||||
Effect of exchange rate changes on cash | (4,296 | ) | (1,068 | ) | 771 |
In addition to cash, inventory and our balance of accounts receivable, our unused sourceswe had uncommitted lines of liquidity included Rs.14,771credit of Rs.38,766 million in available credit under revolving credit facilities with banks as of March 31, 2016.2021, from our banks for working capital requirements. We had no other material unused sourcesdraw upon these lines of liquidity as of March 31, 2016.credit based on our working capital requirements.
Cash Flow from Operating Activities
Year ended March 31, 2021 compared to year ended March 31, 2020
The net result of our operating activities was a net cash inflow of Rs.41,247Rs.35,703 million for the year ended March 31, 2016,2021, as compared to a net cash inflow of Rs.25,033Rs.29,841 million for the year ended March 31, 2015, which resulted2020.
The increase in net cash inflow of Rs.5,862 million was primarily due to a decrease in our working capital requirements and an increase in our earnings.
Our average days’ sales outstanding (“DSO”) as of March 31, 2021 and March 31, 2020 were 93 days and 100 days respectively. The decrease in our DSO between March 31, 2021 and 2020 was primarily on account of improved collections from customers in the United States and Europe.
Year ended March 31, 2020 compared to year ended March 31, 2019
The result of operating activities was a net cash inflow by Rs.16,214of Rs.29,841 million duringfor the year ended March 31, 20162020, as compared to a cash inflow of Rs.28,704 million for the year ended March 31, 2015.2019.
Increases in working capital accounted for net cash outflows of Rs.188 million and Rs.15,040 million during the years ended March 31, 2016 and 2015, respectively. This lower increase in working capital requirements during the year ended March 31, 2016, as compared to the year ended March 31, 2015, resulted in a significant increase in our net cash provided by operating activities during the year ended March 31, 2016 as compared to the year ended March 31, 2015.
The increase in working capital requirements during the year ended March 31, 2015net cash inflow of Rs.1,137 million was primarily resulted fromdue to an increase in our trade receivablesearnings, which was partially offset by Rs.10,905 million and an increase in our inventories by Rs.5,447 million.working capital requirements.
Our average days’ sales outstanding (“DSO”) as of March 31, 2020 and March 31, 2019 were 100 days and 90 days respectively. The increase in our trade receivablesDSO between March 31, 2020 and March 31, 2019 was primarily on account of changes in the mix of our receivables, due to an increase in the proportion of sales made to customers with longer credit periods in the United States. The increase inreceivables from our inventories was primarily to support the increased sales of our existing products as well as launches of new products.
For the years ended March 31, 2016 and 2015, our earnings before interest expense/income, profit/loss on sale of investments, tax expense, impairment loss, depreciation and amortization (“Adjusted EBITDA”) were Rs.36,253 million and Rs.36,168 million, respectively.
The net result of our operating activities was a cash inflow of Rs.25,033 million for the year ended March 31, 2015, as compared to a cash inflow of Rs.19,463 million for the year ended March 31, 2014.
The net cash provided by our operating activities increased by Rs.5,570 million for the year ended March 31, 2015, as compared to the year ended March 31, 2014. This increase was primarily due to our improved business performance for the year ended March 31, 2015, resulting in Adjusted EBITDA of Rs.36,168 million, as compared to Rs.33,187 million for the year ended March 31, 2014.
Our days’ sales outstanding (“DSO”) as at March 31, 2016, December 31, 2015, March 31, 2015 and March 31, 2014, computed based on the sales for the three months ended March 31, 2016, December 31, 2015, March 31, 2015 and March 31, 2014, were 99 days, 97 days, 95 days and 86 days, respectively. The increase in our DSO was primarily due to an increase in the proportion of sales made to customers with longer credit periods in the United States.
71 |
Cash Flow from Investing Activities
Year ended March 31, 2021 compared to year ended March 31, 2020
Our investing activities resulted in a net cash outflowoutflows of Rs.20,423Rs.22,660 million and Rs.22,904Rs.4,923 million for the years ended March 31, 20162021 and 2015, respectively. This decrease in net cash outflow of Rs.2,481 million2020, respectively, which was primarily due to:
Rs.7,936 million paid to UCB India Private Limited and other UCB group companies foron account of the acquisition of a select portfolio of products business during the year ended March 31, 2016 (refer to Note 6 to our consolidated financial statements for further details);following:
Rs.1,158 million paid to Alchemia Limited for the purchase of worldwide, exclusive intellectual property rights to fondaparinux sodium during the year ended March 31, 2016 (refer to Note 38 to our consolidated financial statements for further details);
|
our net investments in mutual funds and time deposits having an original maturity of more than three months decreased by Rs.9,311
· | the acquisition of property, plant and equipment, and other intangible assets, net of dispositions, of Rs.12,476 million for
Year ended March 31, 2020 compared to year ended March 31, 2019 Our
Cash Flow from Financing Activities Year ended March 31, 2021 compared to year ended March 31, Our financing activities resulted in net cash outflows of
Year ended March 31, 2020 compared to
Our financing activities resulted in net cash outflows of Rs.25,159 million and Rs.21,326 million for the
Principal obligations The following table summarizes our principal debt obligations (excluding
Annual rate of interest
The following table provides details of annual rates of interest for our principal debt obligations (excluding obligations under leases) outstanding as of March 31, 2021:
The maturities of
Subject to obtaining certain regulatory approvals, there are no legal or economic restrictions on the transfer of funds between us and our subsidiaries or for the transfer of funds in the form of cash dividends, loans or advances. However, transfers of funds from Venezuela are subject to certain exchange control regulations. Cash and cash equivalents are primarily held in Indian rupees, U.S. dollars, U.K. pounds sterling, Euros, As of March 31,
5.C. Research and development, patents and licenses, etc. Research and Development Our research and development activities can be classified into several categories, which run parallel to the activities in our principal areas of operations:
In the years ended March 31, Patents, Trademarks and Licenses We have filed and been issued numerous patents in our principal areas of operations: Global Generics, Pharmaceutical Services and Active Ingredients and Proprietary Products. We expect to continue to file patent applications seeking to protect our innovations and novel processes in several countries, including the United States. Any existing or future patents issued to or licensed by us may not provide us with any competitive advantages for our products or may even be challenged, invalidated or circumvented by our competitors. In addition, such patent rights may not prevent our competitors from developing, using or commercializing products that are similar or functionally equivalent to our products. As of March 31,
In early 2020, COVID-19 spread to many countries in the world and the outbreak was declared a pandemic by the World Health Organization in March 2020. During the year ended March 31, 2021, we experienced certain disruptions relating to this pandemic (including work-from-home policies and other social distancing policies to reduce the risks to the health and safety of employees) and may continue to experience further disruptions that could severely impact our business. See “Item 3D.—Risk Factors— A pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, and the resulting restrictive measures and economic impacts may materially and adversely impact our business and results of our operations.” The COVID-19 situation continues to evolve and is taking differing courses across the multitude of geographies that our company operates in. Our headquarters and a significant proportion of our operations are based out of India, which has in recent months experienced a trend of rising COVID-19 infection rates. The full extent, consequences, and duration of the COVID-19 pandemic and the resulting impact on our business, financial condition and results of operations or the global economy as a whole cannot be predicted on the date of this Annual Report. We will continue to evaluate the impact that the COVID-19 pandemic could have on our business, financial condition and results of operations during the year ending March 31, 2022.
Also, please see “Item 5: Operating and Financial Review and Prospects” and “Item 4. Information on the Company” for additional trend information. 5.E. Off-balance sheet arrangements None. 5.F. Tabular Disclosure of Contractual Obligations The following summarizes our contractual obligations as of March 31,
We have committed to make potential future milestone and royalty payments to third parties under various agreements. Such payments are contingent upon the achievement of certain regulatory milestones and sales targets. Due to the uncertainty of the timing of these payments, they are not included in the above table. See page ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 6. A.Directors and senior management The list of our directors and executive officers and their respective age and position as of March 31,
Executive Officers Our policy is to classify our officers as “executive officers” if they have membership on our Management Council. Our Management Council consists of various business and functional heads and is our senior
Name and Designation Education/Degrees Held Particulars of last employment Dr. KVS Ram Rao Sr. Vice President and Head-PSAI Commercial Organization B.Tech., M.E., Ph. D.(Chem Eng) M.V. Ramana Executive Vice President and Head Branded Markets (India & Emerging Countries) Dr. Raghav Chari Executive Vice President and Head- Proprietary Products Dr. S. Chandrasekhar President and Global Head of Human Resources Samiran Das Executive Vice President and Head- Global Manufacturing Operations Executive Director, PepsiCo India. Saumen Chakraborty President and Chief Financial Officer and Global Head of Information Technology and Business Process Excellence
There was no arrangement or understanding with major shareholders, customers, suppliers or others pursuant to which any director or executive officer referred to above was selected as a director or member of our Management Council. Biographies – Directors Mr. K. Satish Reddyis Mr. G.V. Prasadis a member of our Board of Directors and serves as our Co-Chairman and Managing
Ms. Kalpana Morpariahas been a member of our Board of Directors since 2007. Ms. Morparia is
Dr. Bruce L.A. Carterhas been a member of our Board of Directors since 2008. Dr. Carter was the Chairman of the Board and the former Chief Executive Officer of ZymoGenetics, Inc. in Seattle, Washington, in the United States of America. the Corporate Executive Vice President and Chief Scientific Officer for Novo Nordisk A/S, the
Mr. Sridar Iyengarhas been a member of our Board of Directors since 2011. Mr. Mr. Bharat N. Doshi has been a member of our Board of Directors since 2016. Mr. Doshi is a former Executive Director and Group Chief Financial Officer of Mahindra & Mahindra Limited. He was also the Chairman of Mahindra & Mahindra Financial Services Limited since April 2008, and he stepped down from this position on his nomination as Director, for a period of 4 years, on the Central Board of Directors of the Reserve Bank of India in March 2016. He is the Chairman of the Board of Mahindra Intertrade Limited, a Director on the Board of Mahindra Holdings Limited, a member of the board of governors of each of the Mahindra United World College of India, the Mahindra Foundation (U.S.A), and the Mahindra Foundation (U.K). He is also one of the trustees of Mahindra Foundation, K. C. Mahindra Education Trust and Lalit Doshi Memorial Foundation. He also serves on the Advisory Board of Excellence Enablers, an organization committed to promoting corporate governance in India. He is also a member of the Mr. Prasad R. Menon has been a member of our Board of Directors since 2017. Mr. Menon is a former Managing Director of Tata Chemicals Limited and Tata Power Company Limited. He has over 42 years of diverse experience in some of the premier multinational and Indian companies in the chemical and power industry. Prior to joining Tata, he was Director Technical of Nagarjuna Fertilisers and Chemicals Limited. Mr. Menon is a Director on the Board of Singapore Tourism Board and Sanmar Group Advisory Board. He holds a chemical engineering degree from the Indian Institute of Technology (“IIT”), Kharagpur. Mr. Leo Puri has been a member of our Board of Directors since October 2018. Mr. Puri was the Managing Director of UTI Asset Management Co. Ltd. from August 2013 to August 2018. In his career of more than 30 years, Mr. Puri has previously worked as Director with McKinsey & Company and as Managing Director with Warburg Pincus. Mr. Puri has worked in the U.K., the United States and Asia. Since 1994, he has primarily worked in India. At McKinsey, he has advised leading financial institutions, conglomerates and investment institutions in strategy and operational issues. He has contributed to the development of knowledge and public policy through advice to regulators and government officials. At Warburg Pincus, he was responsible for leading and managing investments across industries in India. He also contributed to financial services investments in the international portfolio as a member of the global partnership. Mr. Puri has held non-executive board positions at Infosys, Bennett Coleman & Co., Max New York Life and Max Bupa Health Insurance. He is also a director on the Board of
Ms. Shikha Sharma has been a member of our Board of Directors since January 2019. Ms. Sharma was the Managing Director and CEO of Axis Bank, India’s third largest private sector bank from June 2009 until December 2018. As a leader adept at managing change, she led the Bank on a transformation journey from being primarily a corporate lender to a bank with a strong retail deposit franchise and a balanced lending book. Ms. Sharma has more than three decades of experience in the financial sector, having begun her career with ICICI Bank Ltd in 1980. During her tenure with the ICICI group, she was instrumental in setting up ICICI Securities. As Managing Director and CEO of ICICI Prudential Life Insurance Company Ltd., she led that company to become the No. 1 private sector life insurance company in India. She was a member of the Reserve Bank of India (“RBI”) Technical Advisory Committee, the RBI’s panel on Financial Inclusion, and the RBI’s Committee on Comprehensive Financial Services for Mr. Allan Oberman has been a member of our Board of Directors since March 2019. Mr. Oberman served as the Chief Executive Officer of Concordia International Corp. from November 2016 until May 2018. In his career of more than 37 years he also served as CEO of Sagent Pharmaceuticals Inc., and as President and CEO of Teva Americas Generics, a subsidiary of Teva Pharmaceutical Industries Ltd. Prior to that, Mr. Oberman served as President of Teva EMIA, where from 2010 to 2012 he was responsible for Eastern Europe, Middle East, Israel and Africa. From 2008 to 2010, he served as the Chief Operating Officer of the Teva International Group, and from 2000 to 2008, he served as the President and CEO of Teva Canada (formerly Novopharm Ltd.) From 1996 to 2000, Mr. Oberman was the President of Best Foods Canada Inc. Mr. Oberman was also Vice Chairman of the Association for Accessible Medicines, and Chairman of the Canadian Generic Pharmaceutical Association. He served on the Associate Board of the Canadian Association of Chain Drug Stores, and was a member of the Board of Directors of the Baycrest Centre Foundation, the Electronic Commerce Council, and the Food and Consumer Products Association of Canada. He holds a MBA from the Schulich School of Business, York University, Toronto and a BA from Western University, London. Mr. Oberman is also Chairman of the Board of RNA Disease Diagnostics, Inc., USA, and a Board Advisor to Havn Life Sciences, Inc., Canada, and Telecure Technologies, Inc., Canada. Biographies - Executive Officers Mr. Mr. Parag Agarwal is the Chief Financial Officer effective as of December 1, 2020. Mr. Agarwal joined our company in 2020 from Reckitt Benckiser PLC, where he was CFO-Health, based in London. In a career spanning over 33 years, he has held several leadership positions, contributing significantly to the financial performance of his organizations. With over 10 years of working experience in several countries outside India, he brings deep global experience in leading business and financial strategy, transforming finance function, as well as in mergers and acquisitions strategy and execution. He has expertise in driving performance management of investments, financial result delivery and driving operating margin improvement through revenue and cost optimization across the value chain. Mr. Agarwal has held leadership positions in diverse cultural contexts and has driven large-scale change management programs in ambiguous and dynamic environments. Prior to his 10 plus year stint at Reckitt Benckiser PLC, he was associated with organizations such as Unilever, GSK Consumer Healthcare and Genpact. Mr. Agarwal is a Chartered Accountant and a Company Secretary.
Mr. Saumen Chakraborty is an advisor effective as of December 1, 2020. Prior to his retirement, he was the President and Chief Financial Officer (“CFO”) of our company.
Mr. M.V. Ramanais the
Mr. Ganadhish Kamat Dr. Anil Namboodiripad is the Global Head of Proprietary Products,
Mr. Sanjay Sharma is the Global Head of
Mr.
Mr. P. Yugandhar is the Global Head of Supply Chain. He has assumed overall responsibility for the Supply Chain function at our company. He joined us in 2001 as our Manager Supply Chain and has since held positions of increasing responsibility, including Head of Demand Planning, Mexico Integration, and Head of Europe Supply Chain and Technology. In the last five years, he has contributed significantly in integrating our Supply Chain globally across Formulations, active pharmaceutical ingredients (“API”), Custom Pharmaceutical Services (“CPS”), external manufacturing and new product launches. Prior to joining our company, Mr. Yugandhar had successful stints in Eli Lilly Ranbaxy, Pharmacia & Upjohn, Max Pharma, Dabur and Hawkins. Mr. Yugandhar holds a Management degree (Master of Management Studies) from BITS, Pilani. Dr. Raymond De Vré was the Global Head of Biologics until he decided to move from our company and resigned effective March 31, 2021. Dr. De Vré joined our company in 2012 as head of Commercial for the Biologics division, being based in the Swiss office of our company. In this role, he was instrumental in building new partnerships and alliances across the world towards further accelerating access to our company’s biosimilars. Over time, he had increasing responsibilities within Biologics, including Commercial, IP, Regulatory, Strategy, Business Development, Portfolio as well as Manufacturing. Prior to joining our company, Dr. De Vré was a partner with the management consulting firm McKinsey and Company. Dr. De Vré worked for 15 years at McKinsey and Company, serving mostly the Generics, Specialty Chemicals, and Biotech industries across the globe, including the United States, Western Europe and India. Dr. De Vré holds a Master’s and Ph.D. degree in Applied Physics from Stanford University, U.S.A and a Master’s degree in Engineering from the Université Libre of Brussels, Belgium. He resigned from the company with effect from March 31, 2021. Mr. Deepak Sapra is the Global Head of Pharmaceutical Services and Active Ingredients (“PSAI”). Mr. Sapra joined our company in 2003 from Indian Institute of Management (“IIM”) Bangalore campus and has worked in various roles in Marketing, Sales, Business Development and Portfolio covering most major markets across the world. He has led important projects on several key organizational initiatives around market opening and building new businesses. He has also worked as the business unit head for the Custom Pharma Services (“CPS”) business and helped contribute significantly towards making it a profitable, sustainable and long-term business. Mr. Sapra’s education is in engineering and management. Prior to joining our company, he also worked in the Indian Railway Services. He has been a Fulbright fellow and a Chevening scholar. His first book was published in 2018. He is also the co-founder of a charitable trust that works for people with disabilities in eastern India. Mr. Marc Kikuchi serves as Chief Executive Officer, North America Generics, and is based in the Princeton, New Jersey, office. He is responsible for leading the North America business and serves as a member of the Board of Dr. Reddy’s Laboratories, Inc. Mr. Kikuchi is an accomplished CEO, senior supply chain management and business development executive. He has more than 20 years’ experience in the Pharmaceutical Industry with extensive knowledge and understanding of Generics. Prior to joining our company, Mr. Kikuchi served as CEO, Americas for Zydus Pharmaceuticals, Inc. He has also held professional leadership roles of increasing responsibility with AmerisourceBergen Corporation, Medrad Inc., PRTM, Johnson & Johnson and Incyte Pharmaceuticals. Mr. Kikuchi earned his Master of Business Administration from Carnegie Mellon University with concentration in Strategy, Marketing, and Operations Management. He has a B.A. in Molecular and Cell Biology with Biochemistry emphasis from the University of California at Berkeley. Mr. Patrick Aghanian serves as Chief Executive Officer, European Generics. Mr. Aghanian joined our company in 2019 from Zentiva in Prague/Czech Republic. Before becoming Head of Zentiva in 2017, he worked for multinational pharmaceutical companies such as Sanofi, GSK and Novartis, where he held various leadership roles in Eurasia, Middle-East and Europe. Patrick earned his Master of Business Administration (MBA) from the UCLA Anderson School of Management/University of California, Los Angeles and holds a Bachelor of Arts from the University of California, Los Angeles.
Mr. Mukesh Rathi serves as Chief Digital and Information Officer. He has global responsibility for Digital Transformation, Process Excellence and Information Technology Management for the organization. Mr. Rathi joined our company in 2012. He has more than 22 years of experience in various roles such as Business Process Consulting, Digital Strategy and leading large transformation programs across the organization. Prior to joining our company, he had many years of consulting experience working with Fast-Moving Consumer Goods, Automotive and Industrial Manufacturing companies. He is a Industrial Engineer from the Indian Institute of Technology (“IIT”), Kharagpur and holds a MBA from the Indian Institute of Management (“IIM”), Lucknow. Directors’ compensation Full-Time Directors: The compensation of our Chairman of the Board
The Chairman of Non-Full Time Directors:In the year ended March 31, For the year ended March 31,
Executive officers’ compensation The initial compensation to all our executive officers is determined through appointment letters issued at the time of employment. The appointment letter provides the initial amount of salary and benefits the executive officer will receive as well as a confidentiality provision and a non-compete provision applicable during the course of the executive officer’s employment with us. We provide salary, certain perquisites, retirement benefits, stock options and variable pay to our executive officers. The Nomination, Governance and Compensation Committee of the Board reviews the compensation of executive officers on a periodic basis.
All of our employees at the managerial and staff levels are eligible to participate in a variable pay program, which consists of performance bonuses based on the performance of their function or business unit, and a profit sharing plan through which part of our profits can be shared with our employees. Our variable pay program is aimed at rewarding the individual based on performance of such individual, their business unit/function and our company as a whole, with significantly higher rewards for superior performances. We also have The stock option schemes are not applicable to promoter directors, promoter employees, non-full time directors (independent directors) and persons holding 2% or more of our outstanding share capital. The Nomination, Governance and Compensation Committee of the Board of Directors awards options pursuant to the stock option schemes based on the employee’s performance appraisal. Some employees have also been granted options upon joining us. Compensation for executive officers who are full time directors is summarized in the table under “Directors’ compensation” above. The following table presents the annual compensation paid or payable to other executive officers for services rendered to us for the year ended March 31, Compensation for Executive Officers
Our Articles of Association require us to have a minimum of three and a maximum of fifteen directors. As of March 31, The Companies Act, 2013 and our Articles of Association require that at least two-thirds of our directors be subject to re-election by our shareholders in rotation and that, at every annual general meeting, one-third of the directors who are subject to re-election must retire from the Board. However, if eligible for re-election, they may be re-elected by our shareholders at the annual general meeting. Due to India’s adoption of the Companies Act, 2013, effective as of April 1, 2014, and amended from time to time, non-full time independent directors are no longer required to retire from the Board by rotation. As a result, at annual general meetings held after April 1, 2014, our non-full time independent directors are excluded from the calculation of the two-thirds directors who are subject to re-election by our shareholders in rotation.
Our non-full time independent directors The terms of each of our directors and their expected expiration dates are provided in the table below:
The directors are not eligible for any termination benefit on the termination of their tenure with us. Our full time directors are subject to retirement by rotation. As a result, Committees of the Board Committees The Committees also make specific recommendations to the Board on various matters from time-to-time. All decisions and recommendations of the Committees are placed before the Board for information, review and/or approval. We had
Audit Committee.
Nomination, Governance and Compensation Committee.
Science, Technology and Operations Committee.
Risk Management Committee.
Stakeholders’ Relationship Committee.
Banking and Authorization Committee (formerly known as the Management
Corporate Social Responsibility Committee.
We have adopted charters for our Audit Committee, Nomination, Governance and Compensation Committee, Science, Technology and Operations Committee, Risk Management Committee, Audit Committee. Our management is primarily responsible for our internal controls and financial reporting process. Our independent registered public accounting firm is responsible for performing independent audits of our financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and for issuing reports based on such audits. The Board of Directors has entrusted the Audit Committee to supervise these processes and thus ensure accurate and timely disclosures that maintain the transparency, integrity and quality of financial controls and reporting. The Audit Committee
Mr. Sridar Iyengar (Chairman);
Ms. Shikha Sharma Mr. Our Company Secretary is the Secretary of the Audit Committee. This Committee met The primary responsibilities of the Audit Committee are inter alia to:
Supervise our financial reporting process;
Review our quarterly and annual financial results, along with related public disclosures and filings, before providing them to the Board;
Review the adequacy of our internal controls, including the plan, scope and performance of our internal audit function;
Discuss with management our major policies with respect to risk assessment and risk management.
Hold discussions with external auditors on the nature, scope and process of audits and any views that they have about our financial control and reporting processes;
Ensure compliance with accounting standards and with listing requirements with respect to the financial statements;
Recommend the appointment and removal of external auditors and their remuneration;
Recommend the appointment of cost auditors;
Review the independence of auditors;
Ensure that adequate safeguards have been taken for legal compliance both for us and for our subsidiaries;
Review the financial statements of our subsidiary companies, in particular investments made by them;
Review and
Review the functioning of whistle blower mechanism;
Review the implementation of applicable provisions of the Sarbanes-Oxley Act, 2002;
Scrutinize our inter-company loans and investments;
Review suspected fraud, if any, committed against our company.
Nomination, Governance and Compensation Committee. The primary functions of the Nomination, Governance and Compensation Committee are inter alia to:
Examine the structure, composition and functioning of the Board, and recommend changes, as necessary, to improve the Board’s effectiveness;
Formulate policies on remuneration of Directors, key managerial personnel and other employees, and on Board
Formulate criteria for evaluation of Independent Directors and the Board;
Assess our policies and processes in key areas of corporate governance, other than those explicitly assigned to other Board Committees, with a view to ensuring that we are at the forefront of good governance practices; and
Regularly examine ways to strengthen our organizational health, by improving the hiring, retention, motivation, development, deployment and behavior of management and other employees. In this context, the Committee also reviews the framework and processes for motivating and rewarding performance at all levels of the organization, reviews the resulting compensation awards, and makes appropriate proposals for Board approval. In particular, it recommends all forms of compensation to be granted to our Directors, executive officers and key managerial personnel. The Nomination, Governance and Compensation Committee also administers our Employee Stock Option Schemes. The Nomination, Governance and Compensation Committee
Mr.
Ms. Kalpana
Mr. The corporate officer heading our Human Resources function serves as the Secretary of the Committee. The Nomination, Governance and Compensation Committee met three times during the year ended March 31, Science, Technology and Operations Committee. The primary functions of the Science, Technology and Operations Committee are inter alia to:
Advise our Board and management on scientific, medical and technical matters and operations involving our development and discovery programs (generic and proprietary), including major internal projects, business development opportunities, interaction with academic and other outside research organizations;
Assist our Board and management in creating valuable intellectual property;
Review the status of non-infringement patent challenges; and
Assist our Board and management in building and nurturing science in our organization in line with our business strategy. The Science, Technology and Operations Committee
Dr. Bruce L.A. Carter (Chairman);
Mr.
Mr. Allan Oberman.
The corporate officers heading our Integrated Product Development Operations, Proprietary Products and Biologics functions serve as the Secretary of the Committee with regard to their respective businesses. The Science, Technology and Operations Committee met four times during the year ended March 31, Risk Management Committee. The primary
Discuss with senior management our enterprise risk management and provide oversight as may be needed;
Ensure that it is apprised of our more significant risks, including certain country risks and cyber security risks, along with the risk
Review risk disclosure statements in any public documents or disclosures, where applicable. The Risk Management Committee
Dr. Bruce L.A. Carter;
Mr. Leo Puri; Mr. Sridar Mr. Allan Oberman Mr. Allan Oberman ceased to be a member of the Committee effective as of April 1, 2021. Our Chief Financial Officer is the Secretary of the Risk Management Committee. This Committee met three times during the year ended March 31, Corporate Social Responsibility (“CSR”) Committee. The primary
Formulate, review and recommend to the Board a corporate social responsibility policy indicating the activities to be undertaken by us as specified in Schedule VII of the Companies Act, 2013.
Recommend the amount of expenditures to be incurred in connection with our corporate social responsibility initiatives;
Provide guidance on our corporate social responsibility initiatives and
Monitor implementation and adherence to our corporate social responsibility policy from time to Recommend the annual action plan delineating the corporate social responsibility projects or programs; and Appoint an independent agency or firm to carry out the impact assessment study, if any. The Corporate Social Responsibility Committee
Mr.
Mr. G.V. Prasad; and
Mr. K. Satish Reddy. Mr. Our corporate officer heading our Corporate Social Responsibility function serves as the Secretary of the Corporate Social Responsibility Committee. This Committee met Stakeholders Relationship Committee. The primary
Review of investor complaints and
Review of queries received from investors;
Review of work done by our share transfer agent; and
Review of corporate actions related to our security holders. The
Ms. Kalpana Morparia (Chairperson); Mr. Bharat Narotam Doshi;
Mr. G.V. Prasad; and
Mr. K. Satish Reddy. Mr. Our Company Secretary is the Secretary of the Stakeholders’ Relationship Committee. This Committee met four times during the year ended March 31, The following table sets forth the number of our employees as
We did not experience any significant work stoppages in the years ended March 31,
The following table sets forth, as of March 31,
Employee Stock Incentive Plans We have adopted a number of stock option incentive plans covering either our ordinary shares or our During the year ended March 31,
The Dr. Reddy’s Employees ESOS Trust was formed to support the DRL 2018 Plan by acquiring, including through secondary market acquisitions, equity shares which are issued to eligible employees upon exercise of stock options thereunder. During the year ended March 31, 2021, we have implemented cashless exercises of stock options under this plan. From the plan’s inception through March 31, 2021, we have granted an aggregate of For the years ended March 31, ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS All of our equity shares have the same voting rights. As of March 31,
Mr.
Mrs. K. Samrajyam Reddy, mother of Mr. K. Satish Reddy, Mr. G. Sharathchandra Reddy, son of Mr. G.V. Prasad, and Mrs. G. Anuradha, wife of Mr. G.V. Prasad (hereafter collectively referred as the “Family Members”);
G.V. Prasad HUF, which is affiliated with Mr. G.V. Prasad (Co-Chairman and Managing Director); and Dr. Reddy’s Holdings Limited (formerly known as Dr. Reddy’s Holdings Private Limited), a company in which the APS Trust owns 83.11% of the equity and the remainder is held by Mr. G.V. Prasad HUF, Mr. K. Satish Reddy
The following table sets forth information regarding the beneficial ownership of our shares by the foregoing persons as of March 31,
In addition, the Deed of Family Settlement of the APS Trust provides for the parties thereto to exercise all rights, including voting rights, with respect to their personally held equity shares in accordance with the directions of the board of trustees of the APS Trust. As a result, each of Mr. K. Satish Reddy and Mr. G.V. Prasad may be deemed to beneficially own all of the equity shares directly held by each other or by any of the other parties to such Deed of Family Settlement. Based on the Amendment No. Note that our Board of Directors and shareholders have approved the merger of Dr. Reddy’s Holdings Limited into Dr. Reddy’s Laboratories Limited, as more particularly described in Note 35 to our consolidated financial statements.
As otherwise stated above and to the best of our knowledge, we are not owned or controlled directly or indirectly by any government or by any other corporation or by any other natural or legal persons. We are not aware of any arrangement, the consummation of which may at a subsequent date result in a change in our control. The following shareholders held more than 5% of our equity shares as of:
As of March 31, 7.B.Related party transactions Refer to Note 7.C.Interests of experts and counsel Not applicable. 8.A.Consolidated statements and other financial information The following financial statements and auditors’ report appear under Item 18 of this Annual Report on Form 20-F and are incorporated herein by reference:
Report of Independent Registered Public Accounting Consolidated Consolidated income Consolidated Consolidated Consolidated Notes to the consolidated financial statements Our financial statements included in this Annual Report on Form 20-F have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. The financial statements included herein are for our three most recent fiscal years. Amount of Export Sales For the year ended March 31, Legal Proceedings Refer to Note Dividend Policy In the years ended March 31, Holders of our ADSs are entitled to receive dividends payable on equity shares represented by such ADSs. Cash dividends on equity shares represented by our ADSs are paid to the depositary in Indian rupees and are converted by the depositary into U.S. dollars and distributed, net of depositary fees, taxes, if any, and expenses, to the holders of such ADSs.
Refer to
See Item 9.C “Markets” below. See also Exhibit 2.2 (“Description of the Securities”) to this Annual Report on Form 20-F.
Not applicable. Markets on Which Our Shares Trade Our equity shares are traded on the BSE Limited (formerly known as the Bombay Stock Exchange Limited) (“BSE”) and National Stock Exchange of India Limited (“NSE”), Not applicable. Not applicable. Not applicable. ITEM 10. ADDITIONAL INFORMATION Not applicable. 10.B.Memorandum and articles of association Dr. Reddy’s Laboratories Limited was incorporated under the Indian Companies Act, 1956. We are registered with the Registrar of Companies, Hyderabad, Telangana, India, with Company Identification No. L85195AP1984PLC004507. Our company’s registration number changed to L85195TG1984PLC004507 effective as of June 2, 2014. Our registered office is located at 8-2-337, Road No. 3, Banjara Hills, Hyderabad, Telangana 500 034, India and the telephone number of our registered office is +91-40-49002900. The summary of our Articles of Association and Memorandum of Association that is included in our registration statement on Form F-1 filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 11, 2001, together with copies of the Articles of Association and Memorandum of Association that are included in our registration statement on Form F-1, are incorporated herein by reference. The Memorandum and Articles of Association were amended at the 17th Annual General Meeting held on September 24, 2001, 18th Annual General Meeting held on August 26, 2002, the 20th Annual General Meeting held on July 28, 2004 and the 22nd Annual General Meeting held on July 28, 2006. A full description of these amendments was given in the Form 20-F filed with the SEC on September 30, 2003, September 30, 2004 and October 2, 2006, which description is incorporated herein by reference. The Memorandum and Articles of Association were amended at the 22nd Annual General Meeting held on July 28, 2006 to increase the authorized share capital in connection with the stock split effected in the form of a stock dividend that occurred on August 30, 2006.
The Memorandum and Articles of Association were further amended in accordance with the terms of an Order of the High Court of Judicature, Andhra Pradesh, dated June 12, 2009 to effect an increase in our The Memorandum and Articles of Association were further amended in accordance with the terms of an Order of the High Court of Judicature, Andhra Pradesh, dated July 19, 2010 to provide for the capitalization or utilization of undistributed profit or retained earnings or security premium account or any other reserve or fund of ours with the approval of our shareholders in connection with our bonus debentures. The Memorandum and Articles of Association were amended by adopting a new set of Articles of Association which replaced and superseded in its entirety For a further discussion of the Memorandum and Articles of Association, see Exhibit 2.2 (“Description of the Securities”) to this Annual Report on Form 20-F. In February 2020, we 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 total consideration of Rs.18,500 million. The BTA was amended by three letter agreements dated April 28, 2020, June 9, 2020 and June 9, 2021. As of March 31, 2020, the acquisition of this Business Undertaking (as defined below) 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. On June 10, 2020, we completed this acquisition. The fair value of consideration transferred was Rs.16,115 million. The acquired 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 transferred to us, along with related sales and marketing teams, the manufacturing plant located in Baddi, Himachal Pradesh and all plant employees (together the “Business Undertaking”). The transaction involved 2,051 employees engaged in operations of the acquired Business Undertaking. The BTA and related amendments have been attached as Exhibits 4.2.1 to 4.2.4 to this report on Form 20-F. Each such document has been included to provide you with information regarding its terms. Except for its status as a contractual document that establishes and governs the legal relations among the parties thereto with respect to the asset sale thereunder, we do not intend for its text to be a source of factual, business or operational information about us. Such agreement contains representations, warranties and covenants that are qualified and limited, including by information in the schedules that the parties delivered in connection with the execution of such documents. Representations and warranties may be used as a tool to allocate risks between the respective parties to such documents, including where the parties do not have complete knowledge of all facts, instead of establishing such matters as facts. Furthermore, the representations and warranties may be subject to different standards of materiality applicable to the contracting parties, which may differ from what may be viewed as material to stockholders. These representations and warranties may or may not have been accurate as of any specific date and do not purport to be accurate as of the date of this report on Form 20-F. You should not rely on its representations, warranties or covenants as characterizations of the actual state of facts or condition of us or any of our affiliates. Other than the foregoing, and other contracts entered into in the ordinary course of business, there are no material contracts to which we or any of our direct and indirect subsidiaries is a party for the two years immediately preceding the date of this report on Form 20-F. Foreign investment in Indian securities, whether in the form of foreign direct investment or in the form of portfolio investment, is governed by the Foreign Exchange Management Act, 1999, as amended (“FEMA”), and the rules, regulations and notifications issued thereunder. Set forth below is a summary of the restrictions on transfers applicable to both foreign direct investments and portfolio investments, including the requirements under Indian law applicable to the issuance and transfer of ADSs.
Foreign Direct Investment
FEMA empowers the Reserve Bank of
As per these
These regulations also contain provisions regarding sector specific guidelines for foreign direct investment and the levels of permitted equity In May 1994, the Government of India announced that purchases by foreign investors of ADSs, as evidenced by ADRs, and foreign currency convertible bonds of Indian companies would be treated as foreign direct investment in the equity issued by Indian companies for such offerings. Therefore, offerings that involve the issuance of equity that results in Foreign Direct Investors holding more than the stipulated percentage of direct foreign investments (which depends on the category of industry) would require approval from the Foreign Investment Promotion Board.
For investments in the pharmaceutical sector, the Foreign Direct Investment limit is 100%. However, unlike Foreign Direct Investments in new pharmaceutical projects (sometimes called “greenfield” investments), Foreign Direct Investments in existing Indian pharmaceutical companies (sometimes called “brownfield” investments) are nonetheless subject to approval by the Foreign Investment Promotion Board in excess of 74% (which can incorporate conditions for its approval at the time of grant). Thus, foreign ownership of The Ministry of Finance abolished the Foreign Investment Promotion Board in May 2017 and the processing of applications for Foreign Direct Investment and approval of the Government thereon under the Policy and FEMA, was transferred to be handled by the concerned Ministries/Departments in consultation with the Department for Promotion of Industry and Internal Trade. Portfolio Investment Scheme Under Indian law, persons or entities residing outside of India cannot acquire securities of an Indian company listed on a stock exchange (“Portfolio Investments”) unless such non-residents are (a) persons of Indian nationality or origin residing outside of India (also known as Non-Resident Indians or “NRIs”) or (b) registered Foreign Institutional Investors (“FIIs”) or Foreign Portfolio Investors (“FPIs”). Portfolio Investments by NRIs A variety of methods for investing in shares of Indian companies are available to NRIs. These methods allow NRIs to make Portfolio Investments in existing shares and other securities of Indian companies on a basis not generally available to other foreign investors. Portfolio Investments by FIIs In September 1992, the Government of India issued guidelines that enable FIIs, including institutions such as pension funds, investment trusts, asset management companies, nominee companies and incorporated/institutional portfolio managers, to invest in all of the securities traded on the primary and secondary markets in India. Under the guidelines, FIIs are required to obtain an initial registration from the Securities and Exchange Board of India (“SEBI”), and a general permission from the RBI to engage in transactions regulated under the Foreign Exchange Management Act. FIIs must also comply with the provisions of the SEBI (Foreign Institutional Investors Regulations) 1995. When it receives the initial registration, the FII also obtains general permission from the RBI to engage in transactions regulated under the Foreign Exchange Management Act. Together, the initial registration and the RBI’s general permission enable the registered FII to: (i) buy (subject to the ownership restrictions discussed below) and sell unrestricted securities issued by Indian companies; (ii) realize capital gains on investments made through the initial amount invested in India; (iii) participate in rights offerings for shares; (iv) appoint a domestic custodian for custody of investments held; and (v) repatriate the capital, capital gains, dividends, interest income and any other compensation received pursuant to rights offerings of shares.
Portfolio Investments by FPIs
The regime permitting Portfolio Investments by FIIs A person which has been registered as a A FPI is defined as any investment made by
The 2019 FPI Regulations have categorized FPIs based on regulatory status and country of residence — that is, whether the entity is from a
A FPI may purchase or sell capital instruments of an Indian company on a
Further, a Ownership restrictions The SEBI and the RBI regulations restrict portfolio investments in Indian companies by FIIs, NRIs The If a No single
As of March 31, In September 2011, the Securities and Exchange Board of India (“SEBI”) enacted the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “2011 Takeover Code”), which replaces the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The 2011 Takeover Code was thereafter amended from time to time. Under the 2011 Takeover Code, upon acquisition of shares or voting rights in a publicly listed Indian company (the “target company”) such that the aggregate shareholding of the acquirer (meaning a person who directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either alone or together with any persons acting in concert), is 5% or more of the shares of the target company, the acquirer is required to, within two working days of such acquisition, disclose the aggregate shareholding and voting rights in the target company to the target company and to the stock exchanges in which the shares of the target company are listed. Furthermore, an acquirer who, together with persons acting in concert with such acquirer, holds shares or voting rights entitling them to 5% or more of the shares or voting rights in a target company must disclose every sale or acquisition of shares representing 2% or more of the shares or voting rights of the target company to the target company and to the stock exchanges in which the shares of the target company are listed within two working days of such acquisition or sale or receipt of intimation of allotment of such shares. Every acquirer, who together with persons acting in concert with such acquirer, holds shares or voting rights entitling such acquirer to exercise 25% or more of the voting rights in a target company, has to disclose to the target company and to stock exchanges in which the shares of the target company are listed, their aggregate shareholding and voting rights as of the thirty-first day of March, in such target company within seven working days from the end of the The acquisition of shares or voting rights that entitles the acquirer to exercise 25% or more of the voting rights in or control over the target company triggers a requirement for the acquirer to make an open offer to acquire additional shares representing at least 26% of the total shares of the target company for an offer price determined as per the provisions of the 2011 Takeover Code. The acquirer is required to make a public announcement for an open offer on the date on which it is agreed to acquire such shares or voting rights. Such open offer shall only be for such number of shares as is required to adhere to the maximum permitted non-public shareholding. Since we are a listed company in India, the provisions of the 2011 Takeover Code will apply to us and to any person acquiring our ADSs, equity shares or voting rights in our company. Pursuant to the 2011 Takeover Code, we must report to the Indian stock exchanges on which our equity shares are listed, any disclosures made to us under 2011 Takeover Code. Holders of ADSs may be required to comply with such notification and disclosure obligations pursuant to the provisions of the Deposit Agreement entered into by such holders, our company and the depositary of our ADRs. Subsequent transfer of shares A person resident outside India holding the shares or debentures of an Indian company may transfer the
In enacting the NDI Rules, the Central Government superseded the Foreign Exchange Management (Transfer or Issue of The NDI Rules give the readers a consolidated view of
ADS guidelines Shares of Indian companies represented by ADSs may be approved for issuance to foreign investors by the Government of India under the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993 (the “1993 Scheme”), as modified from time to time, promulgated by the Government of India. The 1993 Scheme is in addition but without prejudice to the other policies or facilities, as described below, relating to investments in Indian companies by foreign investors. The issuance of ADSs pursuant to the 1993 Scheme also affords to holders of the ADSs the benefits of Section 115AC of the Income Tax Act, 1961 for purpose of the application of Indian tax laws. In March 2001, the RBI issued a notification permitting, subject to certain conditions, two-way fungibility of ADSs. This notification provides that ADSs converted into Indian shares can be converted back into ADSs, subject to compliance with certain requirements and the limits of The Ministry of Finance, Government of India, There are certain relaxations provided under the Depository Receipts Scheme subject to prior approval of the Ministry of Finance. For example, a registered broker is permitted to purchase shares of an Indian company on behalf of a person resident outside of India for the purpose of converting those shares into ADSs. However, such conversion is subject to compliance with the provisions of the Depository Receipts Scheme and the periodic guidelines issued by the regulatory authorities. Therefore depository receipts converted into Indian shares may be converted back into depository receipts, subject to certain limits of sectorial caps. Under the Depository Receipts Scheme, a foreign depository may take instructions from depository receipts holders to exercise the voting rights with respect to the underlying equity securities. Additionally, a domestic custodian has been defined to include a custodian of securities, an Indian depository, a depository participant or a bank having permission from SEBI to provide services as custodian. Further, the Depository Receipts Scheme provides that the aggregate of permissible securities which may be issued or transferred to foreign depositories for issue of depository receipts, along with permissible securities already held by persons resident outside India, shall not exceed the limit on foreign holding of such permissible securities under the Foreign Exchange Management Act, 1999. The SEBI introduced a framework for the issuance of Depository Receipts (“DRs”) by companies listed on stock exchanges in India and for the “permissible securities” underlying any such DR issuance (“DR Framework”), pursuant to its circular dated October 10, 2019. Further, the SEBI issued circulars dated November 28, 2019 and December 18, 2020, on the framework for the issuance of DRs and amended the scope and process for permissible holder of DRs, respectively. The requirements for issuance of DRs set out in the DR Framework are in addition to the requirements under the Companies Act, 2013 and rules thereunder, the 2014 Scheme and the foreign exchange regulations. The key aspects provided under the DR Framework are:
The jurisdictions where DRs may be issued and exchanges where DRs may be listed pursuant to the DR Framework were set forth in a circular dated November 28, 2019. While the DR framework for listed entities has been operationalized, further amendments and requirements may be notified from time to time. Under the DR Framework, “permissible securities” means equity shares and debt securities, which are in a dematerialized form and rank pari passu with the securities issued and listed on a recognized stock exchange. Previously, under the 2014 Depository Receipts Scheme, companies were only required to comply with eligibility requirements pertaining to prohibition from accessing capital markets or dealing in securities. The Department of Economic Affairs, Ministry of Finance made amendments to certain provisions of the Securities Contracts (Regulation) Rules, 1957 Fungibility of ADSs A registered broker in India can purchase shares of an Indian company that issued ADSs, on behalf of a person residing outside India, for the purposes of converting the shares into ADSs. The Depository Receipts Scheme states that the aggregate of permissible securities which may be issued or transferred to foreign depositories for issue of depository receipts, along with permissible securities already held by persons resident outside lndia, shall not exceed the limit on foreign holding of such permissible securities under the Foreign Exchange Management Act, 1999. Transfer of ADSs A person resident outside India may transfer ADSs held in an Indian company to another person resident outside India without any permission. A person resident in India is not permitted to hold ADSs of an Indian company, except in connection with the exercise of stock options. Shareholders resident outside India who intend to sell or otherwise transfer equity shares within India should seek the advice of Indian counsel to understand the requirements applicable at that time.
Indian Taxation General.The following summary is based on the law and practice of the Income-tax Act, 1961 (the “Income-tax Act”), including the special tax regime contained in Sections 115AC and 115ACA of the Income-tax Act read with the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993 (collectively, the “Income-tax Act Scheme”), as amended on January 19, 2000. The Income-tax Act is amended every year by the Finance Act of the relevant year. Some or all of the tax consequences of Sections 115AC and 115ACA may be amended or changed by future amendments to the Income-tax Act. We believe this information is materially complete as of the date hereof. However, this summary is not intended to constitute an authoritative analysis of the individual tax consequences to non-resident holders or employees under Indian law for the acquisition, ownership and sale of ADSs and equity shares. EACH PROSPECTIVE INVESTOR SHOULD CONSULT TAX ADVISORS WITH RESPECT TO TAXATION IN INDIA OR THEIR RESPECTIVE LOCATIONS ON ACQUISITION, OWNERSHIP OR DISPOSING OF EQUITY SHARES OR ADSS.
Residence.For purposes of the Income-tax Act, an individual is considered to be a resident of India during any fiscal year (i.e., April 1 to March 31) if he or she is in India in that year for:
a period or periods of at least 182 days; or
at least 60 days and, within the four preceding fiscal years has been in India for a period or periods amounting to at least 365 days. The period of 60 days referred to above shall be 182 days in case of a citizen of India or a Person of Indian Origin living outside India for the purpose of employment outside India who is visiting India.
The Finance Act 2020 amended section 6 of the Income-tax Act. Pursuant to the amended provision, an individual shall be treated as a resident in India in a given fiscal year if such individual (i) is a citizen or person of Indian origin, (ii) has total income, other than income from foreign sources, exceeding fifteen lakh rupees (Rs.1,500,000) during such fiscal year, and (iii) stays in India for 120 days or more during such fiscal year (rather than 182 days or more as stated above). It also amended Section 6 of the Income–tax Act to deem an Indian citizen to be a resident of India if such individual (i) is not liable to tax in any country or territory by reason of his or her domicile, residence or similar criteria, and (ii) has total income, other than income from foreign sources, that exceeds fifteen lakh rupees (Rs.1,500,000). Any Indian citizen or person of Indian origin becoming a resident of India in view of the above two amendments under the Pursuant to the amended provision of section 6 under the Finance Act 2016, a company is deemed to be a resident in India in any previous year, if (i) it is a company formed under the laws of India; or Individuals and companies that are not residents of India Taxation of Distributions.
Taxation of Capital A non-resident investor transferring our ADS or equity shares outside India to a non-resident investor will not be liable for income taxes arising from capital gains on such ADS or equity shares under the provisions of the Income-tax Act in certain circumstances. Equity shares (including equity shares issuable on the conversion of the ADSs) held by the non-resident investor for a period of more than 12 months are treated as long-term capital assets. If the equity shares are held for a period of less than 12 months from the date of conversion of the ADSs, the capital gains arising on the sale thereof is to be treated as short-term capital gains.
Capital gains are taxed as follows:
gains from a sale of ADSs outside India by a non-resident to another non-resident are not taxable in India;
long-term capital gains realized by a resident and an employee from the transfer of the ADSs will be subject to tax at the rate of 10%, plus the applicable
long-term capital gains realized by a non-resident upon the sale of equity shares obtained from the conversion of ADSs are subject to tax at a rate of 10%, excluding the applicable long-term capital gain realized by a non-resident upon the sale of equity shares obtained from the conversion of ADSs is exempt from tax. However, effective as of April 1, 2018, long-term capital gains on sales of equity shares in excess of Rs.100,000 are subject to tax at a rate of 10% without indexation. However, gains incurred on or prior to January 31, 2018 will be grandfathered. Consequently, the current exemption under Section 10(38) of the Income-tax Act has been withdrawn and As per the Finance Act, 2015, the rate of surcharge for Indian companies having total taxable income exceeding Rs.10,000,000 but not exceeding Rs.100,000,000 is 7% and in the case of Indian companies whose total taxable income is greater than Rs.100,000,000, the applicable surcharge is 12%. For foreign companies, the rate of surcharge is 2% if the total taxable income exceeds Rs.10,000,000 but does not exceed Rs.100,000,000 and it is 5% if the total taxable income of the foreign company exceeds Rs.100,000,000. The Finance Act, 2016 has increased the surcharge for individuals having income exceeding Rs.10,000,000 from 12% to 15%. As per the Finance (No.2) Act, 2019, the rate of surcharge for every individual or HUF or association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, will be calculated as follows:
As per the Taxation laws (Amendment) Ordinance, 2019, the surcharge of 25%/37% introduced by the Finance (No.2) Act, 2019 shall not apply to capital gains arising on the sale of equity shares in a company or units of an equity oriented fund referred to in section 111A or 112A of the Income-tax Act. The enhanced surcharge of 25%/37% shall also not apply to the income of foreign institutional investors (FIIs) from securities referred to in section 115AD of the Income-tax Act. These amendments are applicable for assessments from the financial year beginning from April 1, 2019 and onwards. Further as per finance Act, 2020, surcharge on dividend income shall not exceed 15%. This amendment is applicable from the financial year beginning from April 1, 2020 and onwards. The Finance Act, 2018 replaced the Education Cess, which imposed a 2% income tax, and the Secondary and Higher Education Cess, which imposed a 1% income tax, with a new Health and Education Cess, which imposes a 4% income tax. The Finance Act, 2020, inserted a new provision which provides an option to an individual or HUF to opt for a simplified regime with lower tax rates. However, a taxpayer opting for this simplified tax regime will not be eligible for specified deductions/exemptions. This option may be exercised in the prescribed manner by an individual or HUF having business income on or before the due date specified under Section 139(1) for furnishing the return of income for the year ended March 31, 2020 and such option, once exercised, shall apply to subsequent assessment years. In the case of an individual or HUF having no business income, this option may be exercised along with the income tax return required to be furnished under Section 139(1) every year. All assessees, including individuals, whose advance tax payable is Rs.10,000 or more during the year are required to pay advance tax in four installments as follows:
As per Section 10(38) of the Income-tax Act, As per Section 111A of the Income-tax Act, As per the Finance Act, 2004, as modified by the Finance Act, 2008 and the Finance Act, 2013, in a sale and purchase of securities entered into through a recognized stock exchange, a Securities Transaction Tax (“STT”) may be imposed upon one or both of the parties as follows:
The applicable provisions of the Income Tax Act, in the case of non-residents, may offset the above taxes, except the STT. The capital gains tax is computed by applying the appropriate tax rates to the difference between the sale price and the purchase price of the equity shares or ADSs. Under the Income-tax Scheme, the purchase price of equity shares in an Indian listed company received in exchange for ADSs will be the market price of the underlying shares on the date that the Depositary gives notice to the custodian of the delivery of the equity shares in exchange for the corresponding ADSs, or the “stepped up” basis purchase price. The market price will be the price of the equity shares prevailing on the Stock Exchange, There is no corresponding provision under the Income-tax Act in relation to the “stepped up” basis for the purchase price of equity shares. However, the tax department in India has not denied this benefit. In the event that the tax department denies this benefit, the original purchase price of ADSs would be considered the purchase price for computing the capital gains tax. According to the Income-tax Scheme, a non-resident holder’s holding period for the purposes of determining the applicable Indian capital gains tax rate relating to equity shares received in exchange for ADSs commences on the date of the notice of the redemption by the Depositary to the custodian. However, the Income-tax Scheme does not address this issue in the case of resident employees, and it is therefore unclear as to when the holding period for the purposes of determining capital gains tax commences for such a resident employee. It is unclear as to whether section 115AC of the Income Tax Act and the rest of the Income-tax Scheme are applicable to a non- resident who acquires equity shares outside India from a non-resident holder of equity shares after receipt of the equity shares upon redemption of the ADSs. It is unclear as to whether capital gains derived from the sale of subscription rights or other rights by a non-resident holder not entitled to an exemption under a tax treaty will be subject to Indian capital gains tax. If such subscription rights or other rights are deemed by the Indian tax authorities to be situated within India, the gains realized on the sale of such subscription rights or other rights will be subject to Indian taxation. The capital gains realized on the sale of such subscription rights or other rights, which will generally be in the nature of short-term capital gains, will be subject to tax (i) at variable rates with a maximum rate of 40%, excluding the prevailing surcharge and education cess, in the case of a foreign company and (ii) at the rate of 30% excluding the prevailing surcharge and education cess in the case of resident employees.
Withholding Tax on Capital Gains.Any gain realized by a non-resident or resident employee on the sale of equity shares is subject to Indian capital gains tax, which, in the case of a non-resident is to be withheld at the source by the buyer. However, as per the provisions of Section 196D(2) of the Income-tax Act, no withholding tax is required to be deducted from any income by way of capital gains arising to FIIs (as defined in Section 115AD of the Act) on the transfer of securities (as defined in Section 115AD of the Act). Buy-back of Securities. The Government of India promulgated the Taxation laws (Amendment) ordinance, 2019, which was subsequently enacted to The Taxation Laws (Amendment) Act, 2019. As per the amendment, existing domestic companies have an option to pay tax at a concessional rate of 22% with applicable surcharge and health and education cess. However, the reduced tax rates come with consequential surrender of specified deductions/incentives. This option needs to be exercised before filing the income tax return and, once exercised, such option cannot be withdrawn for the same or subsequent years. For companies opting for this lower rate of tax regime, the minimum alternate tax (MAT) provisions would not be applicable. Companies that do not opt for the concessional tax rates will continue to be subject to MAT liability under section115JB. The former rate of MAT of 18.5% (plus surcharge and health and education cess) was reduced to 15% (plus surcharge and health and education cess). These amendments are applicable from the financial year beginning from April 1, 2020 and onwards. Stamp Duty and Transfer Tax.Upon issuance of the equity shares underlying our ADSs, we are required to pay a stamp duty of Wealth Gift Tax and Estate Duty.Currently, there are no gift taxes or estate duties. These taxes and duties could be restored in future. Non-resident holders are advised to consult their own tax advisors regarding this issue. Goods and Service Material United States Federal The following is intended only as a descriptive summary of the material U.S. federal income and estate tax consequences that may be relevant with respect to the acquisition, ownership and disposition of our equity shares or ADSs and is for general information subject to U.S. federal income taxation regardless of its source, and (iv) trusts having a valid election to be treated as U.S. persons in effect under U.S. Treasury Regulations or for which a U.S. court exercises primary supervision and a U.S. person has the authority to control all substantial decisions.
This summary is limited to U.S. holders who will hold our equity shares or ADSs as capital assets (generally, property held for investment). In addition, this summary is limited to U.S. holders who are not residents in India for purposes of the Convention between the Government of the United States of America and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on This summary does not address tax considerations applicable to holders that may be subject to special tax rules, such as banks, insurance companies, certain financial institutions, regulated investment companies, real estate investment trusts, broker dealers, traders in securities that elect to use the mark–to-market method of accounting, United States expatriates, persons liable for alternative minimum tax, persons holding EACH INVESTOR OR PROSPECTIVE INVESTOR SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISOR WITH RESPECT TO THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF ACQUIRING, OWNING OR DISPOSING OF OUR EQUITY SHARES OR Ownership of ADSs. For U.S. federal income tax purposes, holders of our ADSs will generally be treated as the holders of equity shares represented by such ADSs. Dividends. Subject to the passive foreign investment company rules described below, except for With respect to certain non-corporate U.S. holders, subject to certain limitations, including certain limitations based on taxable income and filing status, qualifying dividends paid to non-corporate U.S. holders, including individuals, may be eligible for a reduced rate of taxation if we are deemed to be a “qualified foreign corporation” for United States federal income tax purposes and certain holding period requirements are met (including the requirement that the non-corporate U.S. holder holds the ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date). A qualified foreign corporation includes a foreign corporation if (1) its shares (or, according to legislative history, its ADSs) are readily tradable on an established securities market in the United States or (2) it is eligible for the benefits under a comprehensive income tax treaty with the United States. In addition, a corporation is not a qualified foreign corporation if it is a passive foreign investment company (as discussed below) for either its taxable year in which the dividend is paid or the preceding taxable year. Our ADSs are traded on the New York Stock Exchange, an established securities market in the United States as identified by Internal Revenue Service guidance. Due to the absence of specific statutory provisions addressing ADSs, however, there can be no assurance that we are a qualified foreign corporation solely as a result of our listing on the New York Stock Exchange. Nonetheless, we may be eligible for benefits under the
Qualifying dividends will generally be taxed at a maximum income tax rate of 15% except for U.S.
Subject to certain conditions and limitations, any Indian withholding tax imposed upon distributions paid to a U.S. holder with respect to If dividends are paid in Indian rupees, the amount of the dividend distribution included in the income of a U.S. holder will be in the U.S. dollar value of the payments made in Indian rupees, determined EACH U.S. HOLDER SHOULD CONSULT HIS, HER OR ITS OWNS TAX ADVISOR REGARDING THE TREATMENT OF DIVIDENDS AND SUCH HOLDER’S ELIGIBILITY FOR REDUCED RATE OF TAXATION UNDER THE LAW IN EFFECT FOR THE YEAR OF THE DIVIDEND. Sale or exchange of our equity shares or ADSs. Subject to the passive foreign investment company rules described below, a U.S. holder generally will recognize gain or loss on the sale or exchange of our equity shares or ADSs equal to the difference between the amount realized on such sale or exchange and the U.S. holder’s adjusted tax basis in Estate taxes. An individual U.S. holder who is a citizen or resident of the United States for U.S. federal estate tax purposes Additional Tax on Investment Income. U.S. holders that are individuals, estates or trusts and whose income exceeds certain thresholds (the lesser of the U.S holder’s net investment income or modified adjusted gross income, to that extent such amount in a taxable year exceeds $200,000.00 or, in the case of taxpayers filing joint tax returns, $250,000.00) will be subject to a 3.8% Medicare contribution tax on Backup withholding tax and information reporting requirements. Any dividends paid on, or proceeds from a sale of, our equity shares or ADSs to or by a U.S. holder may be subject to U.S. information reporting, and a backup withholding tax
Any amount withheld under the backup withholding rules will be allowed as a refund or credit against the holder’s U.S. federal income tax liability, provided that the required information is timely furnished to the Internal Revenue Service. Certain U.S. holders are required to report information with respect to their investment in our equity shares or ADSs not held through a custodial account with a U.S. financial institution on Internal Revenue Service Form 8938, which must be attached to the U.S. holder’s annual income tax return. Investors who fail to report required information could become subject to substantial penalties. In addition, a U.S. holder should consider the possible obligation to file online a FinCEN Form 114 – Foreign Bank and Financial Accounts Report as a result of holding ordinary shares or ADSs. Each U.S. holder should consult his, her or its tax advisor concerning its obligation to file
Passive foreign investment company. A non-U.S. corporation will be classified as a passive foreign investment company for U.S. Federal income tax purposes if either:
75% or more of its gross income for the taxable year is passive income; or
on average for the taxable year, 50% or more of the total value of its assets produce or are held for the production of passive income (as of the end of each quarter of its taxable year). We do not believe that we satisfy either of the tests for passive foreign investment company status for the Further, if we were to be a passive foreign investment company for any taxable year, U.S.
pay an interest charge together with tax calculated at ordinary income rates on “excess
if an election is made to be a “qualified electing fund” (as the term is defined in relevant provisions of the U.S. tax laws), include in their taxable income their pro rata share of undistributed amounts of our income; or
if the equity shares are “marketable” and a mark-to-market election is made, to mark-to-market the equity shares each taxable year and recognize ordinary gain and, to the extent of prior ordinary gain, recognize ordinary loss for the increase or decrease in market value for such taxable year. If we are treated as a passive foreign investment company, we do not plan to provide information necessary for the U.S. In addition, certain information reporting obligations (i.e., filing Internal Revenue Service Form 8621) may apply to U.S THE ABOVE SUMMARY IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO THE OWNERSHIP, ACQUISITION OR DISPOSITION OF OUR EQUITY SHARES OR 10.F.Dividends and paying agents Not applicable. Not applicable. This annual report on Form 20-F and other information filed or to be filed by us Additionally, documents referred to in this Form 20-F may be inspected at our corporate office, which is located at 8-2-337, Road No. 3, Banjara Hills, Hyderabad, Telangana, 500 034, Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss of future earnings or fair values or future cash flows that may result from a change in the price of a financial instrument. The value of a financial instrument may change as a result of changes in the interest rates, foreign currency exchange rates and other market changes that affect market risk sensitive instruments. Market risk is attributable to all market risk sensitive financial instruments including foreign currency receivables and Our Board of Directors and its Audit Committee are responsible for overseeing our risk assessment and management policies. Our major market risks of foreign exchange, interest rate and counter-party risk are managed centrally by our group treasury department, which evaluates and exercises independent control over the entire process of market risk management. We have a written treasury policy, and we do regular reconciliations of our positions with our counter-parties. In addition, internal audits of the treasury function are performed at regular intervals. Components of Market Risk Foreign Exchange Our foreign exchange risk arises from our foreign operations, foreign currency revenues and expenses (primarily in U.S. dollars, Russian roubles, We had the following derivative financial instruments to hedge the foreign exchange rate risk as of March 31,
In respect of our forward For a detailed analysis of our foreign exchange Commodity Rate Risk Our exposure to market risk with respect to commodity prices primarily arises from Interest Rate Risk As of March 31, These loans expose us to risks of changes in interest rates. Our treasury department monitors the interest rate movement and manages the interest rate risk based on its policies, which include entering into interest rate swaps as considered necessary. Interest Rate The interest rate profile of our
The interest rate profile of our long-term
Maturity The aggregate maturities of interest-bearing
Counter-party risk encompasses settlement risk on derivative contracts and credit risk on cash and term deposits (i.e., certificates of deposit). Exposure to these risks is closely monitored and kept within predetermined parameters. Our group treasury department does not expect any losses from non-performance by these counter-parties. For the year ended March 31, 2021, every 10% increase or decrease in the floating interest rate component (i.e., India Treasury Bill and TIIE) applicable to our loans and borrowings would affect our net profit by Rs.37 million. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES A. Debt Securities. Not applicable. B. Warrants and Rights. Not applicable. C. Other Securities. Not applicable. D. American Depositary Shares. Deposit Agreement For a discussion of the Deposit Agreement, see Exhibit 2.2 (“Description of the Securities”) to this Annual Report on Form 20-F. Fees and Charges for Holders of American Depositary Shares J.P. Morgan Chase Bank, N.A., as the U.S. depositary for our ADSs (the “Depositary”), collects fees for the issuance and cancellation of ADSs from the holders of our ADSs, or intermediaries acting on their behalf, against the deposit or withdrawal of ordinary shares in the custodian account. The Depositary also collects the following fees from holders of ADRs or intermediaries acting in their behalf:
As provided in the Deposit Agreement, the Depositary may charge fees for making cash and other distributions to holders by deduction from distributable amounts or by selling a portion of the distributable property. The Depositary may generally refuse to provide services until its fees for those services are paid. Fees paid by Depositary Direct Payments The Depositary has agreed to reimburse certain reasonable expenses related to our ADS program and incurred by us in connection with the program. In the year ended March 31, The table below sets forth the types of expenses that the Depositary has agreed to reimburse us for and the amounts reimbursed during the fiscal year ended March 31,
Indirect Payments As part of its service to us, the Depositary has agreed to waive fees for the standard costs associated with the administration of our ADS program, associated operating expenses and investor relations advice. The Depository has not paid any expenses on our behalf.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS Modification in the rights of security holders None. Use of Proceeds Not applicable.
ITEM 15. CONTROLS AND PROCEDURES (a)Disclosure Controls and Procedures As of the end of the period covered by this Annual Report on Form 20-F, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective, as of March 31, (b)Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board. Our internal control over financial reporting is supported by written policies and procedures, that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of March 31, The effectiveness of our internal control over financial reporting as of March 31,
(c)Attestation Report of the Registered Public Accounting Firm. Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Dr. Reddy’s Laboratories Opinion on Internal Control Over Financial Reporting We have audited Dr. Reddy’s Laboratories We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2021 and 2020, the related consolidated income statements, statements of comprehensive income, changes in equity and cash flows for each of the three years in the period ended March 31 2021, and the related notes and our report dated June 30, 2021 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control We conducted our audit in accordance with the standards of the Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Hyderabad, India June
(d) Changes in internal control over financial reporting There were no changes to our internal control over financial reporting that occurred during the period covered by this Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 16.A. AUDIT COMMITTEE FINANCIAL EXPERT The Audit Committee of our Board of Directors is entirely composed of independent directors and brings in expertise in the fields of finance, economics, human resource development, strategy and management. Please see “Item 6. Directors, Senior Management and Employees” for the experience and qualifications of the members of the Audit Committee of our Board of Directors. Our Board of Directors has determined that Mr. Sridar Iyengar is an audit committee financial expert, as defined in Item 401(h) of Regulation S-K, and is independent pursuant to applicable NYSE rules. We have ITEM 16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES Ernst & Young Associates LLP served as our independent registered public accountant for the years ended March 31, 2021 and 2020 for which audited statements appear in this Annual Report. The following table sets forth
In accordance with the requirement of the charter of the Audit Committee of our Board of Directors, we obtain the prior approval of the Audit Committee on every occasion we engage our principal accountants or their associated entities to provide us any ITEM 16.D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES We have not sought any exemption from the listing standards for audit committees applicable to us as a foreign private issuer.
ITEM 16.E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
On July 27, 2018, pursuant to the special resolution approved by our shareholders at the Annual General Meeting, we formed the Dr. Reddy’s Employees ESOS Trust (the “ESOS Trust”) to support the Dr. Reddy’s Employees Stock Option Scheme, 2018 by acquiring, including through secondary market acquisitions, equity shares which are used for issuance to eligible employees upon exercise of stock options thereunder. Tabulated below are the details of the shares acquired under such plan during year ending March 31, 2021.
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs: The ESOS Trust has purchased an aggregate of 661,601 equity shares up to March 31, 2021 (including 264,501 equity shares purchased during the year ended March 31, Refer to Note 29 of these financial statements for further details on the Dr. Reddy’s Employees Stock Option Scheme, 2018. ITEM 16.F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable. ITEM 16.G. CORPORATE GOVERNANCE Companies listed on the New York Stock Exchange (“NYSE”) must comply with certain standards regarding corporate governance as codified in Section 303A of the NYSE’s Listed Company Manual. Listed companies that are foreign private issuers (as such term is defined in Rule 3b-4 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are permitted to follow home country practice in lieu of the provisions of Section 303A, except that such companies are required to comply with the requirements of Sections 303A.06, 303A.11 and 303A.12(b) and (c), which are as follows:
The following table compares our principal corporate governance practices to those required of U.S. NYSE listed companies.
ITEM 16.H. MINE SAFETY DISCLOSURE Not Applicable.
Not applicable. The following financial statement and auditor’s report for the year ended March 31,
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in millions, except share and per share data) Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Dr. Reddy’s Laboratories Opinion on the Financial Statements We have audited the accompanying consolidated We Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. 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 Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements,
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES CONSOLIDATED (in millions, except share and per share data)
Recoverable amount of
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES CONSOLIDATED (in millions, except share and per share data)
Contingencies, including litigations
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in millions, except share and per share data) Rebates, discounts, chargebacks, and other deductions in Revenue
/s/ Ernst & Young Associates LLP We have served as the Company’s auditor since 2018. Hyderabad, India June 30, 2021
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in millions, except share and per share data)
* Rounded to the nearest million. The accompanying notes form an integral part of these consolidated financial statements.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES CONSOLIDATED INCOME (in millions, except share and per share data)
The accompanying notes form an integral part of these consolidated financial statements.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES CONSOLIDATED (in millions, except share and per share data)
The accompanying notes form an integral part of these consolidated financial statements.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES CONSOLIDATED (in millions, except share and per share
[Continued on next page]
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in millions, except share and [Continued from above table, first column repeated]
* Rounded to the nearest million.
The accompanying notes form an integral part of these consolidated financial statements.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES CONSOLIDATED (in millions, except share and per share
The accompanying notes form an integral part of these consolidated financial statements.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in millions, except share and per share 1. Reporting entity Dr. Reddy’s Laboratories Limited 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, 2. Basis of preparation of financial statements a. Statement of compliance These consolidated financial statements as These consolidated financial statements have been prepared b. Basis of measurement These consolidated financial statements have been prepared on the historical cost convention and on an accrual basis, except for the following material items in the statement of financial position:
These consolidated financial statements have been prepared in Indian rupees. Solely for the convenience of the reader, these consolidated financial statements as of and for the year ended March 31,
The preparation of 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. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements is included in the following notes:
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in millions, except share and per share
2. Basis of preparation of financial statements (continued)
All assets and liabilities have been classified as current or non-current as per the Company’s normal operating cycle and other criteria set out in IAS 1, “Presentation of financial statements”. Assets: An asset is classified as current when it satisfies any of the following criteria:
Liabilities: A liability is classified as current when it satisfies any of the following criteria:
Current assets and liabilities include the current portion of non-current assets and liabilities respectively. All other assets and liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. f. Prior period Prior period amounts have been reclassified to conform to the current year classification. 3. Significant accounting policies New Standards adopted by the Company
The amendments provided a new definition to ‘Information is material The amendments clarify that materiality will depend on the nature or magnitude of information, either individually or in combination with other information, in the context of the An information is considered to be obscured if it is communicated in a way that would have a similar effect for primary users of financial statements to omitting or misstating that information. The amendments provided examples of circumstances that may result in information being obscured. An entity should apply the amendments prospectively for annual periods beginning on or after January 1, 2020.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in millions, except share and per share
3. Significant accounting policies (continued)
The amendments to the definition of material had no impact on the consolidated financial statements of the Company. Amendments to IFRS 3: Definition of a Business The amendments clarified the definition of a business for the A related amendment has been made to the definition of ‘output’ as an element of business. The amendments include an election to use a ‘concentration test’. This is a simplified assessment that would cause an acquisition to qualify as an asset acquisition. The concentration test is met if substantially all of the fair value of the gross assets acquired is concentrated in An entity is required to apply the amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2020, and to asset acquisitions that occur on or after the beginning of that period. This amendment had no impact on the consolidated financial statements of the Company but may impact future periods should the Company enter into any business combinations. Amendments to IFRS 7 and IFRS 9: Interest Rate Benchmark Reform The IASB published “Interest Rate Benchmark Reform – Phase II (Amendments to IFRS 9, IAS 39 and IFRS 7)” representing the finalization of Phase II of the project on August 27, 2020 to address issues that might affect financial reporting when an existing interest rate benchmark is replaced with an alternative benchmark interest rate. The amendments to IFRS 9, “Financial Instruments” provide a number of reliefs, which apply to all hedging relationships that are directly affected by interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainty about the timing and/or amount of benchmark-based cash flows of the hedged item or the hedging instrument. The amendments to IFRS 7, “Financial Instruments: Disclosures” prescribe the disclosures which entities are required to make for hedging relationships to which the reliefs as per the amendments in IFRS 9 are applied. These amendments are applicable for annual periods beginning on or after January 1, 2020. These amendments had no impact on the consolidated financial statements of the Company as it does not have any interest rate hedge relationships. Amendments to IFRS 16: COVID-19 related rent concessions IFRS 16, “Leases” was amended by IASB on May 28, 2020 to provide limited relief to lessees in respect of rent concessions arising due to COVID-19 pandemic. No relief has The amendments provide a practical expedient that lessees may elect to not treat any rent concessions, provided by lessors as a direct consequence of COVID-19 pandemic, as lease modifications. However, to be eligible for this relief:
Lessee should apply the amendments for annual reporting periods beginning on or after January 1, 2020. In case a lessee has not yet approved the financial statements for issue before the issuance of the amendments, then the same may be applied for annual reporting periods beginning on or after the The aforesaid amendments had no impact on the consolidated financial statements of the Company.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in millions, except share and per share data) 3. Significant accounting policies Summary of significant accounting policies a. Basis of consolidation Subsidiaries Subsidiaries are all entities (including special purpose entities) that are controlled by the Company. Control exists when the Company is exposed to, or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through power over the entity. In assessing control, potential voting rights are considered only if the rights are substantive. The financial statements of subsidiaries are included in these consolidated financial statements from the date that control commences until the date that control ceases. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of financial position, respectively. For the purpose of preparing these consolidated financial statements, the accounting policies of subsidiaries have been changed where necessary to align them with the policies adopted by the Company.
Joint arrangements are those arrangements over which the A joint arrangement is either a joint operation or a joint venture. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. With respect to joint operations, the Company recognizes its direct right to the assets, liabilities, revenues and expenses of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. Investments in For the purpose of preparing these consolidated financial statements, the accounting policies of joint ventures have been changed where necessary to align them with the policies adopted by the Company. Furthermore, the financial statements of the joint ventures are prepared for the same reporting period as of the Company. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in full while preparing these consolidated financial statements. Unrealized gains or losses arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Company’s interest in the investee.
Acquisition of some or all of the NCI is accounted for as a transaction with equity holders in their capacity as equity holders. Consequently, the difference arising between the fair value of the purchase consideration paid and the carrying value of the NCI is recorded as an adjustment to retained earnings that is attributable to the parent company. The associated cash flows are classified as financing activities. No goodwill is recognized as a result of such transactions. Loss of Control Upon loss of control, the Company derecognizes the assets and liabilities of the subsidiary, any
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in millions, except share and per share data) 3. Significant accounting policies (continued) b. Foreign currency Functional and presentation currency These consolidated 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. Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of entities within the Company at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the exchange rate at that date. Non-monetary items that are measured based on historical cost in a foreign currency are translated at the exchange rate at the date of the transaction. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was measured. Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements are recognized in the consolidated income statement in the period in which they arise.
When several exchange rates are available, the rate used is that at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred at the measurement date. Foreign operations Foreign exchange gains and losses arising from a monetary item receivable from a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of the net investment in the foreign operation and are recognized in In case of foreign operations whose functional currency is different from the parent company’s functional currency, the assets and liabilities of such foreign operations, including goodwill and fair value adjustments arising upon acquisition, are translated to the reporting currency at exchange rates at the reporting date. The income and expenses of such foreign operations are translated to the reporting currency at the monthly average exchange rates prevailing during the year. Resulting foreign currency differences are recognized in c. Financial instruments
A financial
Financial assets Initial recognition and measurement All financial
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in millions, except share and per share
3. Significant accounting policies (continued)
c. Financial instruments (continued)
Trade receivables are recognized initially at the amount of consideration that is unconditional unless they contain significant financing components, in which case they are recognized at fair value. The Company’s trade receivables do not contain any significant financing component and hence are measured at the transaction price measured under IFRS 15, “Revenue from Contracts with Customers”. Subsequent For purposes of subsequent measurement, financial assets are classified in four categories:
Debt instruments at amortized cost A “debt instrument” is measured at the amortized cost if both the following conditions are met:
After initial measurement, such financial assets are subsequently measured at amortized cost using the effective interest rate method
Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on de-recognition is recognized directly in the consolidated income statement and Debt instrument at FVTOCI A “debt instrument” is classified as at the FVTOCI if both of the following criteria are met:
Debt instruments included within the FVTOCI category are measured initially as well as at each reporting date at fair value. Fair value movements are recognized in the OCI. However, the Company recognizes interest income, impairment losses and reversals and foreign exchange gain or loss in the consolidated income statement. On de-recognition of the asset, cumulative gain or loss previously recognized in OCI is reclassified to the consolidated income statement. Interest earned while holding a FVTOCI debt instrument is reported as interest income using the effective interest rate method. Debt instrument at FVTPL FVTPL is a residual category for debt instruments. Any debt instrument, which does not meet the criteria for categorization as at amortized cost or as FVTOCI, is classified as at FVTPL. In addition, the Company may elect to designate a debt instrument, which otherwise meets amortized cost or FVTOCI criteria, as FVTPL. However, such election is allowed only if doing so reduces or eliminates a measurement or recognition inconsistency (referred to as an “accounting mismatch”). Debt instruments included within the FVTPL category are measured at fair value with all changes recognized in the consolidated income statement. Equity investments All equity investments within the scope of IFRS 9 are measured at fair value. Equity instruments which are held for trading and contingent consideration recognized by an acquirer in a business combination to which IFRS 3 applies, are classified as at FVTPL. For all other equity instruments, the Company may make an irrevocable election to present in OCI subsequent changes in the fair value. The Company If the Company decides to classify an equity instrument as at FVTOCI, then all fair value changes on the instrument, excluding dividends, are recognized in the OCI. There is no recycling of the amounts from OCI to the consolidated income statement, even on sale of investment.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in millions, except share and per share data) 3. Significant accounting policies (continued) c. Financial instruments (continued) However, on sale the Company may transfer the cumulative gain or loss within equity. Equity investments designated as FVTOCI are not subject to impairment assessment. Equity instruments included within the FVTPL category are measured at fair value with all changes recognized in the consolidated income statement. De-recognition A financial asset (or, where applicable, a part of a financial asset
When the Company has transferred its rights to Impairment of trade receivables and other financial assets In accordance with IFRS 9, the Company applies the expected credit loss (“ECL”) model for measurement and recognition of impairment loss on trade receivables or any contractual right to receive cash or another financial asset. For this purpose, the Company follows a “simplified approach” for recognition of impairment loss allowance on the trade receivable balances. The application of this simplified approach does not require the Company to track changes in credit risk. Rather, it recognizes impairment loss allowance based on lifetime ECLs at each reporting date, right from its initial recognition. As a practical expedient, the Company uses a provision matrix to determine impairment loss allowance on portfolio of its trade receivables. The provision matrix is based on its historically observed default rates over the expected life of the trade receivables and is adjusted for forward-looking estimates. At every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analyzed. Financial liabilities Initial recognition and measurement Financial liabilities are classified, at initial recognition, as financial liabilities at FVTPL, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The Company’s financial liabilities include trade and other payables, loans and borrowings including bank overdrafts and derivative financial instruments. Subsequent measurement The measurement of financial liabilities depends on their classification, as described below: Financial liabilities at FVTPL Financial liabilities at FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition as at FVTPL. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also Gains or losses on liabilities held for trading are recognized in the consolidated income statement. Financial liabilities designated upon initial recognition at FVTPL are designated as such at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied. For liabilities designated as FVTPL, fair value gains/ losses attributable to changes in own credit risk are recognized in OCI. These gains or losses are not subsequently transferred to the consolidated income statement.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in millions, except share and per share data) 3. Significant accounting policies (continued) c. Financial instruments (continued) However, the Company may transfer the cumulative gain or loss within equity. All other changes in fair value of such liability are recognized in the consolidated income statement. The Company has not designated any financial liability as FVTPL. Loans and borrowings Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognized in the consolidated income statement over the period of the borrowings using the effective interest method. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The De-recognition A financial liability is derecognized when
Derivative financial instruments 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, The Company uses derivative financial instruments such as foreign exchange forward contracts, option contracts and swap contracts Hedges of highly probable forecasted transactions The Company classifies its derivative financial instruments that hedge foreign currency risk associated with highly probable forecasted transactions as cash flow hedges and measures them at fair value. The effective portion of such cash flow hedges is recorded in the Company’s hedging reserve as a component of equity and re-classified to the consolidated income statement as The Company also designates certain non-derivative financial liabilities, such as foreign currency borrowings from banks, as hedging instruments for hedge of foreign currency risk associated with highly probable forecasted transactions. Accordingly, the Company applies cash flow hedge accounting to such relationships. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in
Hedges of recognized assets and liabilities Changes in the fair value of derivative contracts that economically hedge monetary assets and liabilities in foreign currencies, and for which no hedge accounting is applied, are recognized in the consolidated income statement. The changes in fair value of such derivative contracts, as well as the foreign exchange gains and losses relating to the monetary items, are recognized Hedges of changes in the interest rates Consistent with its risk management policy, the Company uses interest rate swaps to mitigate the risk of changes in interest rates. The Company does not use them for trading or speculative purposes.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in millions, except share and per share data) 3. Significant accounting policies (continued) c. Financial instruments (continued) Cash and cash equivalents Cash and cash equivalents consist of cash on hand, demand deposits and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to insignificant risk of changes in value. For this purpose, “short-term” means investments having original maturities of three months or less from the date of investment. Bank overdrafts that are repayable on demand form an integral part of the Company’s cash management and are included as a component of cash and cash equivalents for the purpose of the consolidated statement of cash flows. d. Business combinations The The Company The consideration transferred fair values of the assets liabilities incurred equity interests issued by the fair value of any
fair value of
The excess of the sum of: the consideration transferred, the amount of any non-controlling the acquisition date fair value of any previous equity interest in the acquired entity, over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognized directly in the consolidated income statement as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Contingent consideration classified as equity is not re-measured and its subsequent settlement is accounted for within equity. Amounts classified as e. Property, plant and equipment Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses, if any. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and other costs directly attributable to bringing the asset to a working condition for its intended use. Borrowing costs that are directly attributable to the construction or production of a qualifying asset are capitalized as part of the cost of that asset.
When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in millions, except share and per share data) 3. Significant accounting policies (continued) e. Property, plant and equipment (continued) Gains and losses upon disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognized net within The cost of replacing part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The costs of repairs and maintenance are recognized in the consolidated income statement as incurred.
Items of property, plant and equipment acquired through exchange of non-monetary assets are measured at fair value, unless the exchange transaction lacks commercial substance or the fair value of either the asset received or asset given up is not reliably measurable, in which case the asset exchanged is recorded at the carrying amount of the asset given up. Depreciation Depreciation is recognized in the consolidated income statement on a straight line basis over the estimated useful lives of property, plant and equipment.
Depreciation methods, useful lives and residual values are reviewed at each reporting
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Software for internal use, which is primarily acquired from third-party vendors and which is an integral part of a tangible asset, including consultancy charges for implementing the software, is capitalized as part of the related tangible asset. Subsequent costs associated with maintaining such software are recognized as expense as incurred. The capitalized costs are amortized over the estimated useful life of the software or the remaining useful life of the tangible fixed asset, whichever is lower.
Advances paid towards the acquisition of property, plant and equipment outstanding at each reporting date and the cost of property, plant and equipment not ready to use before such date are disclosed under capital work-in-progress. Assets not ready for use are not depreciated.depreciated but are tested for impairment.
f. Goodwill and other intangible assets
Goodwill
Recognition and measurement
Goodwill represents the excess of consideration transferred, together with the amount of non-controlling interest in the acquiree, over the fair value of the Company’s share of identifiable net assets acquired.
Goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and any impairment loss on such an investment is not allocated to any asset, including goodwill, that forms part of the carrying value of the equity accounted investee.
Other intangible assets
Other intangible assets that are acquired by the Company and that have finite useful lives are measured at cost less accumulated amortization and accumulated impairment losses.
Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which they relate.
Research and development
Expenditures on research activities undertaken with the prospect of gaining new scientific or technical knowledge and understanding are recognized in the consolidated income statement when incurred.
Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditures are capitalized only if:
Goodwill | Goodwill represents the excess of consideration transferred, together with the amount of non-controlling interest in the acquiree, over the fair value of the Company’s share of identifiable net assets acquired. Goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and any impairment loss on such an investment is not allocated to any asset, including goodwill, that forms part of the carrying value of the equity accounted investee. | |
Other intangible assets | Other intangible assets that are acquired by the Company and that have finite useful lives are measured at cost less accumulated amortization and accumulated impairment losses. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. | |
Research and development | Expenditures on research activities undertaken with the prospect of gaining new scientific or technical knowledge and understanding are recognized in the consolidated income statement when incurred. Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditures are capitalized only if: · development costs can be measured reliably; · the product or process is technically and commercially feasible; · future economic benefits are probable; and · the Company intends to, and has sufficient resources, to complete development and to use or sell the asset. The expenditures to be capitalized include the cost of materials and other costs directly attributable to preparing the asset for its intended use. Other development expenditures are recognized in the consolidated income statement as incurred. As of March 31, 2021, none of the development expenditure amounts has met the aforesaid recognition criteria. |
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the product or process is technically and commercially feasible;
future economic benefits are probable; and
the Company intends to and has sufficient resources to complete development and to use or sell the asset.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
3. Significant accounting policies (continued)
f. Goodwill and other intangible assets (continued)
The expenditures to be capitalized include the cost of materials and other costs directly attributable to preparing the asset for its intended use. Other development expenditures are recognized in the consolidated income statement as incurred.
Payments to third parties that generally take the form of up-front payments and milestones for in-licensed products, compounds and intellectual property are capitalized. The Company’s criteria for capitalization of such assets are consistent with the guidance given in paragraph 25 of International Accounting Standard 38 (“IAS 38”) (i.e., receipt of economic benefits out of the separately purchased transaction is considered to be probable).
Acquired research and development intangible assets that are under development are recognized as In-Process Research and Development assets (“IPR&D”). IPR&D assets are not amortized, but evaluated for potential impairment on an annual basis or when there are indications that the carrying value may not be recoverable. Any impairment charge on such IPR&D assets is recorded in the consolidated income statement under “Research and Development expenses”.
Subsequent expenditure on an in-process research or development project acquired separately or in a business combination and recognized as an intangible asset is:
Separate acquisition of intangible assets | ||
In-Process Research and Development assets | Acquired research and development intangible assets that are under development are recognized as In-Process Research and Development (“IPR&D”) assets. IPR&D assets are not amortized, but evaluated for potential impairment on an annual basis or when there are indications that the carrying value may not be recoverable. Any impairment charge on such IPR&D assets is recorded in the consolidated income statement under “Impairment of non-current assets”. | |
Subsequent expenditure | ||
Other intangible assets | Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which they relate. All other expenditures, including expenditures on internally generated goodwill and brands, is recognized in the consolidated income statement as incurred. | |
IPR&D assets | Subsequent expenditure on an IPR&D project acquired separately or in a business combination and recognized as an intangible asset is: · recognized as an expense when incurred, if it is a research expenditure; |
· recognized as an expense when incurred, if it is a development expenditure that does not satisfy the criteria for recognition as an intangible asset in paragraph 57 of IAS 38; and |
· added to the carrying amount of the acquired |
Amortization
Amortization is recognized in the consolidated income statement on a straight-line basis over the estimated useful lives of intangible assets. The amortization expense is recognized in the income statement in the expense category that is consistent with the function of the intangible asset. Intangible assets that are not available for use are amortized from the date they are available for use.
The estimated useful lives are as follows:
Product related intangibles | 3 – 20 years | |
Other intangibles | 3 - 15 years |
The amortization period and the amortization method for intangible assets with a finite useful life are reviewed at each reporting date. Changes in the expected useful lives or expected pattern of consumption of future economic benefits embodied in the assets are considered to modify the amortization period or method, as appropriate and are treated as change in accounting estimate.
Goodwill, intangible assets relating to products in development, other intangible assets not available for use and intangible assets having indefinite useful life are subject to impairment testing at each reporting date. All other intangible assets are tested for impairment when there are indications that the carrying value may not be recoverable. All impairment losses are recognized immediately in the consolidated income statement.statement under “Impairment of non-current assets”.
Amortization
Amortization is recognized in the consolidated income statement on a straight-line basis over the estimated useful lives of intangible assets or on any other basis that reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. Intangible assets that are not available for use are amortized from the date they are available for use.
The estimated useful lives are as follows:
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The amortization period and the amortization method for intangible assets with a finite useful life are reviewed at each reporting date.
De-recognition of intangible assets
Intangible assets are de-recognized either on their disposal or where no future economic benefits are expected from their use. Losses arising on such de-recognition are recorded in the consolidated income statement, and are measured as the difference between the net disposal proceeds, if any, and the carrying amount of respective intangible assets as onat the date of de-recognition.
g. Leases
Accounting policies relating to leases for periods ending on or after April 1, 2019
The Company's accounting policies relating to leases for periods ending on or after April 1, 2019 are as follows:
The Company assesses at contract inception whether a contract is or contains a lease, which applies if the contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration. The Company recognizes a right-of-use asset at the commencement date of the lease - i.e., the date the underlying asset is available for use. Assets and liabilities arising from a lease are initially measured on a present value basis.
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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
3. Significant accounting policies (continued)
g. Leases (continued)
Lease liabilities include the net present value of the following lease payments to be made over the lease term:
· | fixed payments (including in-substance fixed payments), less any lease incentives receivable; |
· | variable lease payment that are based on an index or a rate, initially measured using the index or rate as at the commencement date; |
· | amounts expected to be payable by the Company under residual value guarantees; |
· | the exercise price of a purchase option if the Company is reasonably certain to exercise that option; and |
· | payments of penalties for terminating the lease, if the lease term reflects the Company exercising that option. |
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Company, then the lessee’s incremental borrowing rate is used. Such borrowing rate is calculated as the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. The Company’s lease liabilities are included in borrowings.
Lease payments are allocated between principal and interest cost. The interest cost is charged to consolidated income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Right-of-use assets are measured at cost less accumulated depreciation and accumulated impairment, comprised of the following:
· | the amount of the initial measurement of lease liability; |
· | any lease payments made at or before the commencement date less any lease incentives received; |
· | any initial direct costs; and |
· | restoration costs. |
Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.
Payments associated with short-term leases of equipment and vehicles and all leases of low-value assets are recognized on a straight-line basis as an expense in the consolidated income statement. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment and small items of office furniture.
The right-of-use assets are initially recognized on the statement of financial position at cost, which is calculated as the amount of the initial measurement of the corresponding lease liability, adjusted for any lease payments made at or prior to the commencement date of the lease, any lease incentive received and any initial direct costs incurred by the Company.
Accounting policies relating to leases for periods ending on or prior to March 31, 2019
The Company’s accounting policies relating to leases for periods ending on or prior to March 31, 2019 are as follows:
At the inception of each lease, the lease arrangement is classified as either a finance lease or an operating lease, based on the substance of the lease arrangement.
Finance leases
A finance lease is recognized as an asset and a liability at the commencement of the lease, at the lower of the fair value of the asset and the present value of the minimum lease payments. Initial direct costs, if any, are also capitalized and, subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding lease liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
3. Significant accounting policies (continued)
g. Leases (continued)
Operating leases
Other leases are operating leases, and the leased assets are not recognized on the Company’s statementsstatement of financial position. Payments made under operating leases are recognized in the consolidated income statement on a straight-line basis over the term of the lease.
Operating lease incentives received from the landlord are recognized as a reduction of rental expense on a straight line basis over the lease term.
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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
3. Significant accounting policies (continued)
h. Inventories
Inventories consist of raw materials, stores and spares, work in progress and finished goods and are measured at the lower of cost and net realizable value. The cost of all categories of inventories is based on the weighted average method. Cost includes expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of finished goods and work in progress, cost includes an appropriate share of overheads based on normal operating capacity. Stores and spares consists of packing materials, engineering spares (such as machinery spare parts) and consumables (such as lubricants, cotton waste and oils), which are used in operating machines or consumed as indirect materials in the manufacturing process.
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.
The factors that the Company considers in determining the allowanceprovision for slow moving, obsolete and other non-saleable inventory include estimated shelf life, planned product discontinuances, price changes, ageingaging of inventory and introduction of competitive new products, to the extent each of these factors impact the Company’s business and markets. The Company considers all these factors and adjusts the inventory provision to reflect its actual experience on a periodic basis.
i. Impairment
Financial assets
A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its fair value.
Significant financial assets are tested for impairment on an individual basis. All impairment losses/(reversals of impairment losses) are recognized in the consolidated income statement.
When the fair value of available-for-sale financial assets declines below acquisition cost and there is objective evidence that the asset is impaired, the cumulative loss that has been recognized in other comprehensive income is transferred to the statement of income. An impairment loss may be reversed in subsequent periods, if the indicators for the impairment no longer exist. Such reversals are recognized in other comprehensive income.
Non-financial assets
The carrying amounts of the Company’s non-financial assets, other than inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, an impairment test is performed each year at March 31.
The recoverable amount of an asset or cash-generating unit (as defined below) is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or the cash-generating unit. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generatesgenerate cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”).
The goodwill acquired in a business combination is, for the purpose of impairment testing, allocated to cash-generating units that are expected to benefit from the synergies of the combination.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
3. Significant accounting policies (continued)
i. Impairment (continued)
An impairment loss is recognized in the consolidated income statement if the estimated recoverable amount of an asset or its cash-generating unit is lower than its carrying amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit on a pro-rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Goodwill that forms part of the carrying amount of an investment in an associatea joint venture is not recognized separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associatea joint venture is tested for impairment as a single asset when there is objective evidence that the investment in an associatea joint venture may be impaired.
An impairment loss in respect of equity accounted investee is measured by comparing the recoverable amount of investment with its carrying amount. An impairment loss is recognized in the consolidated income statement, and reversed if there has been a favorable change in the estimates used to determine the recoverable amount.
j. Employee benefits
Short-term employee benefits
Short-term employee benefits are expensed as the related service is provided. A liability is recognized for the amount expected to be paid if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
Defined contribution plans
The Company’s contributions to defined contribution plans are charged to the consolidated income statement as and when the services are received from the employees.
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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
3. Significant accounting policies (continued)
j. Employee benefits (continued)
Defined benefit plans
The liability in respect of defined benefit plans and other post-employment benefits is calculated using the projected unit credit method consistent with the advice of qualified actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related defined benefit obligation. In countries where there is no deep market in such bonds, the market interest rates on government bonds are used. The current service cost of the defined benefit plan, recognized in the consolidated income statement, in employee benefit expense, reflects the increase in the defined benefit obligation resulting from employee service in the current year, benefit changes, curtailments and settlements. Past service costs are recognized immediately in income.the consolidated income statement. The net interest cost is calculated by applying the discount rate to the net balance of the defined benefit obligation and the fair value of plan assets. This cost is included in employee benefit expense in the consolidated income statement. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions for defined benefit obligation and plan assets are charged or credited to equityrecognized in other comprehensive incomeOCI in the period in which they arise.
When the benefits under a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in the consolidated income statement. The Company recognizes gains or losses on the settlement of a defined benefit plan obligation when the settlement occurs.
Termination benefits
Termination benefits are recognized as an expense in the consolidated income statement when the Company is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense in the consolidated income statement if the Company has made an offer encouraging voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably.
Other long-term employee benefits
The Company’s net obligation in respect of other long termlong-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and previous periods. That benefit is discounted to determine its present value. Re-measurements are recognized in the consolidated income statement of profit and loss in the period in which they arise.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
3. Significant accounting policies (continued)
j. Employee benefits (continued)
Compensated absences
The Company’s current policies permit certain categories of its employees to accumulate and carry forward a portion of their unutilized compensated absences and utilize them in future periods or receive cash in lieu thereof in accordance with the terms of such policies. The Company measures the expected cost of accumulating compensated absences as the additional amount that the Company incurs as a result of the unused entitlement that has accumulated at the statements of financial positionreporting date. Such measurement is based on actuarial valuation as at the statements of financial positionreporting date carried out by a qualified actuary.
Share-basedEquity settled share-based payment transactions
The grant date fair value of options granted to employees is recognized as an employee expense in the consolidated income statement, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the options. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and performance conditions are expected to be met, such that the amount ultimately recognized is based on the number of awards that meet the related service and performance conditions at the vesting date. The expense is recorded for each separately vesting portion of the award as if the award was, in substance, multiple awards. The increase in equity recognized in connection with share basedshare-based payment transaction is presented as a separate component in equity under “share based“share-based payment reserve”. The amount recognized as an expense is adjusted to reflect the actual number of stock options that vest.
Cash settled share-based payment transactions
The fair value of the amount payable to employees in respect of share basedshare-based payment transactions which are settled in cash is recognized as an expense, with a corresponding increase in liabilities, over the period during which the employees become unconditionally entitled to payment. The liability is re-measured at each reporting date and at the settlement date based on the fair value of the share basedshare-based payment transaction. Any changes in the liability are recognized in the consolidated income statement.
k. Provisions
A provision is recognized in the consolidated income statement if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.
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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
3. Significant accounting policies (continued)
k. Provisions (continued)
Restructuring
A provision for restructuring is recognized in the consolidated income statement when the Company has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided.
Onerous contracts
A provision for onerous contracts is recognized in the consolidated income statement when the expected benefits to be derived by the Company from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Company recognizes any impairment loss on the assets associated with that contract.
Reimbursement rights
Expected reimbursements for expenditures required to settle a provision are recognized in the consolidated income statement only when receipt of such reimbursements is virtually certain. Such reimbursements are recognized as a separate asset in the statement of financial position, with a corresponding credit to the specific expense for which the provision has been made.
Contingent liabilities and contingent assets
A disclosure for a contingent liability is made when there is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources. Where there is a possible obligation or a present obligation in respect of which the likelihood of outflow of resources is remote, no provision or disclosure is made.
Contingent assets are not recognized in the financial statements. A contingent asset is disclosed where an inflow of economic benefits is probable. Contingent assets are assessed continually and, if it is virtually certain that an inflow of economic benefits will arise, the asset and related income are recognized in the period in which the change occurs.
l. Revenue
The Company’s revenue is derived from sales of goods, service income and income from licensing arrangements. Most of such revenue is generated from the sale of goods. The Company has generally concluded that it is the principal in its revenue arrangements.
Sale of goods
Revenue is recognized when the significant risks and rewardscontrol of ownership havethe goods has been transferred to a third party. This is usually when the buyer, recoverytitle passes to the customer, either upon shipment or upon receipt of goods by the customer. At that point, the customer has full discretion over the channel and price to sell the products, and there are no unfulfilled obligations that could affect the customer’s acceptance of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods and the amount of revenue can be measured reliably. product.
Revenue from the sale of goods includes excise duty and is measured at the fair value oftransaction price which is the consideration received or receivable, net of returns, sales taxtaxes and applicable trade discounts and allowances. Revenue includes shipping and handling costs billed to the customer.
Revenue from sales
In arriving at the transaction price, the Company considers the terms of generic productsthe contract with the customers and its customary business practices. The transaction price is the amount of consideration the Company is entitled to receive in Indiaexchange for transferring promised goods or services, excluding amounts collected on behalf of third parties. The amount of consideration varies because of estimated rebates, returns and chargebacks, which are considered to be key estimates. Any amount of variable consideration is recognized upon deliveryas revenue only to the extent that it is highly probable that a significant reversal will not occur. The Company estimates the amount of productsvariable consideration using the expected value method.
Presented below are the points of recognition of revenue with respect to distributors by clearing and forwarding agentsthe Company’s sale of the Company. Significant risks and rewards in respect of ownership of generic products are transferred by the Company when the goods are delivered to distributors from clearing and forwarding agents. Clearing and forwarding agents are generally compensated on a commission basis as a percentage of sales made by them. Revenue from sales of active pharmaceutical ingredients and intermediates in India is recognized on delivery of products to customers (generally formulation manufacturers), from the factories of the Company.goods:
Particulars | Point of recognition of revenue | |
Sales of generic products in India | Upon delivery of products to distributors by clearing and forwarding agents of the Company. Control over the generic products is transferred by the Company when the goods are delivered to distributors from clearing and forwarding agents. | |
Sales of active pharmaceutical ingredients and intermediates in India | Upon delivery of products to customers (generally formulation manufacturers), from the factories of the Company. | |
Export sales and other sales outside of India | Upon delivery of the products to the customers unless the terms of the applicable contract provide for specific revenue generating activities to be completed, in which case revenue is recognized once all such activities are completed. |
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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
3. Significant accounting policies (continued)
l. Revenue (continued)
Revenue from export sales and other sales outside of India is recognized when the significant risks and rewards of ownership of products are transferred to the customers, which occurs upon delivery of the products to the customers unless the terms of the applicable contract provide for specific revenue generating activities to be completed, in which case revenue is recognized once all such activities are completed.
Profit share revenues
The Company from time to time enters into marketing arrangements with certain business partners for the sale of its products in certain markets. Under such arrangements, the Company sells its products to the business partners at a non-refundable base purchase price agreed upon in the arrangement and is also entitled to a profit share which is over and above the base purchase price. The profit share is typically dependent on the business partner’s ultimate net sale proceeds or net profits, subject to any reductions or adjustments that are required by the terms of the arrangement. Such arrangements typically require the business partner to provide confirmation of units sold and net sales or net profit computations for the products covered under the arrangement.
Revenue in an amount equal to the base purchasesale price is recognized in these transactions upon delivery of products to the business partners. An additional amount representing the profit share component is recognized as revenue in the period which correspondsonly to the ultimate salesextent that it is highly probable that a significant reversal will not occur.
At the end of the products made by business partners only when the collectability of the profit share becomes probable and a reliable measurement of the profit share is available. Otherwise, recognition is deferred to a subsequent period pending satisfaction of such collectability and measurability requirements. In measuring the amount of profit share revenue to be recognized for each reporting period, the Company uses all available information and evidence, including any confirmations fromupdates the business partnerestimated transaction price (including updating its assessment of whether an estimate of variable consideration is constrained) to represent faithfully the circumstances present at the end of the profit share amount owed toreporting period and the Company, tochanges in circumstances during the extent made available before the date the Company’s Board of Directors authorizes the issuance of its financial statements for the applicablereporting period.
Milestone
Out licensing arrangements, milestone payments and out licensing arrangementsroyalties
Revenues include amounts derived from product out-licensing agreements. These arrangements typically consist of an initial up-front payment on inception of the license and subsequent payments dependent on achieving certain milestones in accordance with the terms prescribed in the agreement. Non-refundableIn cases where the transaction has two or more components, the Company accounts for the delivered item (for example, the transfer of title to the intangible asset) as a separate unit of accounting and record revenue upon delivery of that component, provided that the Company can make a reasonable estimate of the fair value of the undelivered component. Otherwise, non-refundable up-front license fees received in connection with product out-licensing agreements are deferred and recognized over the balance period in which the Company has continuingpending performance obligations. Milestone payments which are contingent on achieving certain clinical milestones are recognized as revenues either on achievement of such milestones, if the milestones are considered substantive, or over the performance period depending on the Company has continuing performance obligations, ifterms of the milestones are not considered substantive.contract. If milestone payments are creditable against future royalty payments, the milestones are deferred and released over the period in which the royalties are anticipated to be paid.
Royalty income earned through a license is recognized when the underlying sales have occurred.
Provision for chargeback, rebates and discounts
Provisions for chargeback, rebates, discounts and Medicaid payments are estimated and provided for in the year of sales and recorded as reduction of revenue. A chargeback claim is a claim made by the wholesaler for the difference between the price at which the product is initially invoiced to the wholesaler and the net price at which it is agreed to be procured from the Company. Provisions for such chargebacks are accrued and estimated based on historical average chargeback rate actually claimed over a period of time, current contract prices with wholesalers/other customers and estimated inventory holding by the wholesaler.
Shelf stock adjustments
Shelf stock adjustments are credits issued to customers to reflect decreases in the selling price of products sold by the Company, and are accrued when the prices of certain products decline as a result of increased competition upon the expiration of limited competition or exclusivity periods.otherwise. These credits are customary in the pharmaceutical industry, and are intended to reduce the customer inventory cost to better reflect the current market prices. The determination to grant a shelf stock adjustment to a customer is based on the terms of the applicable contract, which may or may not specifically limit the age of the stock on which a credit would be offered.
Sales ReturnsRefund Liability
The Company accounts for sales returns accrual by recording an allowance for sales returnsrefund liability concurrent with the recognition of revenue at the time of a product sale. This allowanceliability is based on the Company’s estimate of expected sales returns. The Company deals in various products and operates in various markets. Accordingly, the estimate of sales returns is determined primarily by the Company’s historical experience in the markets in which the Company operates. With respect to established products, the Company considers its historical experience of actual sales returns, levels of inventory in the distribution channel, estimated shelf life, any revision in the shelf life of the product, product discontinuances, price changes of competitive products, and the introduction of competitive new products, to the extent each of these factors impact the Company’s business and markets. With respect to new products introduced by the Company, such products have historically been either extensions of an existing line of product where the Company has historical experience or in therapeutic categories where established products exist and are sold either by the Company or the Company’s competitors. At the time of recognizing the refund liability, the Company also recognizes an asset, (i.e., the right to the returned goods) which is included in inventories for the products expected to be returned. The Company initially measures this asset at the former carrying amount of the inventory, less any expected costs to recover the goods, including any potential decreases in the value of the returned goods.
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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
3. Significant accounting policies (continued)
l. Revenue (continued)
Along with re-measuring the refund liability at the end of each reporting period, the Company updates the measurement of the asset recorded for any revisions to its expected level of returns, as well as any additional decreases in the value of the returned products.
Services
Revenue from services rendered, which primarily relate to contract research, is recognized in the consolidated income statement as the underlying services are performed. Upfront non-refundable payments received under these arrangements are deferred and recognized as revenue over the expected period over which the related services are expected to be performed.
Export entitlementsLicense fees
Export entitlements
License fees primarily consist of income from government authoritiesthe out-licensing of intellectual property, and other licensing and supply arrangements with various parties. Revenue from license fees is recognized when control transfers to the third party and the Company’s performance obligations are satisfied. Some of these arrangements include certain performance obligations by the Company. Revenue from such arrangements is recognized in the consolidated income statement as a reduction from “Cost of Revenues” when the right to receive credit as per the terms of the scheme is establishedperiod in respect of the exports made bywhich the Company and where there is no significant uncertainty regarding the ultimate collection of the relevant export proceeds.completes all its performance obligations.
m. Shipping and handling costs
Shipping and handling costs incurred to transport products to customers, and internal transfer costs incurred to transport the products from the Company’s factories to its various points of sale, are included in selling, general and administrative expenses.
n. Finance income and expense
Finance income consists of interest income on funds invested, (including available-for-sale financial assets), dividend income and gains on the disposal of available-for-sale financial assets. Interest income is recognized in the consolidated income statement as it accrues, using the effective interest method. Dividend income is recognized in the consolidated income statement on the date that the Company’s right to receive payment is established. The associated cash flows are classified as investing activities in the statement of cash flows. Finance expenses consist of interest expense on loans and borrowings.
Borrowing costs are recognized in the consolidated income statement using the effective interest method. The associated cash flows are classified as financing activities in the statement of cash flows.
Foreign currency gains and losses are reported on a net basis within finance income and expense. These primarily include: exchange differences arising on the settlement or translation of monetary items; changes in the fair value of derivative contracts that economically hedge monetary assets and liabilities in foreign currencies and for which no hedge accounting is applied; and the ineffective portion of cash flow hedges.
o. Income tax
Income tax expense consists of current and deferred tax. Income tax expense is recognized in the consolidated income statement except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit; differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and taxable temporary differences arising upon the initial recognition of goodwill.
· | temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit; |
· | temporary differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and |
· | taxable temporary differences arising upon the initial recognition of goodwill. |
Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted byat the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related deferred tax benefitasset will be realized.utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that the future taxable profits will allow the deferred tax assets to be recovered.
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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
3. Significant accounting policies (continued)
o. Income tax (continued)
Any deferred tax asset or liability arising from deductible or taxable temporary differences in respect of unrealized inter-company profit or loss on inventories held by the Company in different tax jurisdictions is recognized using the tax rate of the jurisdiction in which such inventories are held. Withholding tax arising out of payment of dividends to shareholders under the Indian Income tax regulations is not considered as tax expense for the Company and all such taxes are recognized in the statement of changes in equity as part of the associated dividend payment.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Current and deferred tax is recognized in millions,the consolidated income statement, except share and per share data and where otherwise stated)
3. Significant accounting policies (continued)Accruals for uncertain tax positions require management to make judgments of potential exposures. Accruals for uncertain tax positions are measured using either the most likely amount or the expected value amount, depending on which method the entity expects to better predict the resolution of the uncertainty. Tax benefits are not recognized unless the tax positions will probably be accepted by the tax authorities. This is based upon management’s interpretation of applicable laws and regulations and the expectation of how the tax authority will resolve the matter. Once considered probable of not being accepted, management reviews each material tax benefit and reflects the effect of the uncertainty in determining the related taxable amounts.
p. Earnings per share
The Company presents basic and diluted earnings per share (“EPS”) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which includes all stock options granted to employees.
q. Government grants and incentives
The Company recognizes government grants only when there is reasonable assurance that the conditions attached to them will be complied with, and the grants will be received. Government grants received in relation to assets are presented as a reduction to the carrying amount of the related asset. Grants related to income are deducted in reporting the related expense.expense in the consolidated income statement.
Export entitlements from government authorities are recognized in the consolidated income statement as a reduction from “Cost of Revenues” when the right to receive credit as per the terms of the scheme is established in respect of the exports made by the Company, and where there is no significant uncertainty regarding the ultimate collection of the relevant export proceeds.
r. Segment Reportingreporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief executive officerChief Executive Officer of the Company is responsible for allocating resources and assessing performance of the operating segments and accordingly is identified as the chief operating decision maker.
s. Recent accounting pronouncementss. Treasury shares
Standards issued but not yet effective
Own equity instruments that are reacquired (treasury shares) are recognized at cost and not early adopted bydeducted from equity. No gain or loss is recognized in the Company
IFRS 9- Financial instruments
In July 2014,consolidated income statement on the IASB issued the final version of IFRS 9, “Financial instruments”. IFRS 9 significantly differs from IAS 39, “Financial Instruments: Recognition and Measurement”, and includes a logical model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model and a substantially-reformed approach to hedge accounting. IFRS 9 is effective for annual periods beginning onpurchase, sale, issue or after January 1, 2018, with early application permitted. The Company believes that the new Standard will materially impact the classification and measurementcancellation of the Company’s financial instruments, documentation relating to hedging financial exposuresown equity instruments. Any difference between the carrying amount and recognitionthe consideration, if reissued, is recognized in the share premium.
t. Non-currents assets held for sale
The Company classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Non-current assets classified as held for sale are measured at the lower of certaintheir carrying amount and fair value changes.
Amendmentsless costs to IAS 16sell. Costs to sell are the incremental costs directly attributable to the disposal of an asset, excluding finance costs and income tax expense. The criteria for held for sale classification is regarded as met only when the sale is highly probable, and the asset or disposal group is available for immediate sale in its present condition. Property, plant and equipment and IAS 38 Intangible assets
In May 2014, the IASB issued limited-scope amendments to IAS 16, “Property, plant and equipment” and IAS 38, “Intangible assets”, to clarify the use of a revenue-based depreciationare not depreciated or amortization method. With respect to property, plant and equipment, the IASB has clarified that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodiedamortized once classified as held for sale. Assets classified as held for sale are presented separately as current items in the asset. With respect to intangible assets,statement of financial position.
u. Rounding of amounts
All amounts disclosed in the amended standard incorporates a rebuttable presumption that an amortization method based on the revenue generated by an activity that includes the use of an intangible asset is inappropriate. The amendments are effective for annual periods beginning on or after January 1, 2016, with early application permitted. The Company believes that these amendments will not have any material impact on its consolidated financial statements.
IFRS 15, Revenue from Contracts with Customers.
In May 2014,statements and notes have been rounded off to the IASB issued IFRS 15, “Revenue from Contracts with Customers”. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements.nearest million currency units unless otherwise stated.
The new revenue recognition standard was issued with an effective date of January 1, 2017. However, in April 2015, the IASB voted to defer the effective date of the new revenue recognition standard to January 1, 2018. Early application of the new standard is permitted. The Company is in the process of evaluating the impact of the new standard on its consolidated financial statements.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
3. Significant accounting policies (continued)
s. Recent accounting pronouncements (continued)
data)
IFRS 16, Leases
In January 2016, the IASB issued a new standard, IFRS 16, “Leases”. The new standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance leases is retained. IFRS 16 supersedes IAS 17, “Leases”, and related interpretations and is effective for periods beginning on or after January 1, 2019. Earlier adoption of IFRS 16 is permitted if IFRS 15, “Revenue from Contracts with Customers”, has also been applied.
The Company is currently in the process of evaluating the impact of this new accounting standard on its consolidated financial statements.
t. Share capital
Ordinary shares
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and stock options are recognized as a deduction from equity, net of any tax effects.
When shares recognized as equity are repurchased, the amount of consideration paid, which includes costs that are directly attributable, is recognized as a deduction from equity.
4. Determination of fair values
The Company’s accounting policies and disclosures require the determination of fair value, for certain financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Company.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
· | Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities. |
· | Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable. |
· | Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. |
For assets and liabilities that are recognized in the financial statements at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
External valuers are involved for valuation of significant assets, such as assets acquired in a business combination and significant liabilities, such as contingent consideration. Involvement of external valuers is determined by the Management, based on market knowledge, reputation, independence and whether professional standards are maintained.
(i) Property, plant and equipment
Property, plant and equipment, if acquired in a business combination or through an exchange of non-monetary assets, is measured at fair value on the acquisition date. For this purpose, fair value is based on appraised market values and replacement cost.
(ii) Intangible assets
The fair value of brands, technology related intangibles, and patents and trademarks acquired in a business combination is based on the discounted estimated royalty payments that have been avoided as a result of these brands, technology related intangibles, patents or trademarks being owned (the “relief of royalty method”). The fair value of customer related, product related and other intangibles acquired in a business combination has been determined using the multi-period excess earnings method. Under this method, after deductionvalue is estimated as the present value of a fair return on otherthe benefits anticipated from ownership of the intangible assets that are partin excess of creating the related cash flows.returns required or the investment in the contributory assets necessary to realize those benefits.
(iii) Inventories
The fair value of inventories acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories.
(iv) Investments in equity and debt securities and units of mutual funds
The fair value of available-for-sale marketable equity and debt securities is determined by reference to their quoted market price at the reporting date. For debt securities where quoted market prices are not available, fair value is determined using pricing techniques such as discounted cash flow analysis.
In respect of investments in mutual funds, the fair values represent net asset value as stated by the issuers of these mutual fund units in the published statements. Net asset values represent the price at which the issuer will issue further units in the mutual fund and the price at which issuers will redeem such units from the investors.
Accordingly, such net asset values are analogous to fair market value with respect to these investments, as transactions of these mutual funds are carried out at such prices between investors and the issuers of these units of mutual funds.
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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
4. Determination of fair values (continued)
(v) Derivatives
The fair value of foreign exchange forward contracts is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate (based on government bonds). The fair value of foreign currency option and swap contracts and interest rate swap contracts is determined based on the appropriate valuation techniques, considering the terms of the contract.
(vi) Non-derivative financial liabilities
Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases the market rate of interest is determined by reference to similar lease agreements. In respect of the Company’s borrowings that have floating rates of interest, their fair value approximates carrying value.
(vii) Share-based payment transactions
The fair value of employee stock options is measured using the Black-Scholes-Merton valuation model. Measurement inputs include share price on grant date, exercise price of the instrument, expected volatility (based on weighted average historical volatility), expected life of the instrument (based on historical experience), expected dividends, and the risk free interest rate (based on government bonds).
(viii) Contingent consideration
The fair value of the contingent consideration arising out of business combination is estimated by applying the income approach. The fair value measurement is based on significant inputs that are not observable in the market, which IFRS 13, “Fair Value Measurement” refers to as Level 3 inputs.
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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
5. Segment reporting
The Chief Operating Decision Maker (“CODM”) evaluates the Company’s performance and allocates resources based on an analysis of various performance indicators by operating segments. The CODM reviews revenue and gross profit as the performance indicator for all of the operating segments, and does not review the total assets and liabilities of an operating segment. The Co-Chairman and Managing Director was previously the CODM of the Company. Pursuant to certain organizational changes, effective December 1, 2020, the office of Chief Executive Officer (“CEO”) assumed the authority and responsibility for making decisions about resources to be allocated to various segments and assessing their performance. Consequently, the CEO is currently the CODM of the Company.
The Company’s reportable operating segments are as follows:
Global Generics;
Pharmaceutical Services and Active Ingredients (“PSAI”);
Proprietary Products.
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” or bulk drugs,, 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 development, and manufacturedevelopment of differentiated formulationsformulations. The segment is expected to earn revenues arising out of monetization of such assets and new chemical entities (“NCEs”). These novel products fall within the dermatology and neurology therapeutic areas and are marketed and sold through Promius™ Pharma, LLC.subsequent royalties, if any.
Others.This includessegment 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 and whichinflammation. ADTL works with established pharmaceutical and biotechnology companies in early-stage collaborations, bringing drug candidates from hit generation through Investigational New Drug (“IND”) filing.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.
Information about segments: | For the Year Ended March 31, | |||||||||||||||||||||||||||||||||||
Reportable segments | Global Generics | PSAI | Proprietary Products | |||||||||||||||||||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||
Revenue(1) (2) | Rs. | 128,062 | Rs. | 119,397 | Rs. | 104,483 | Rs. | 22,379 | Rs. | 25,456 | Rs. | 23,974 | Rs. | 2,659 | Rs. | 2,172 | Rs. | 2,459 | ||||||||||||||||||
Gross profit | Rs. | 84,427 | Rs. | 77,569 | Rs. | 68,544 | Rs. | 4,931 | Rs. | 5,709 | Rs. | 4,848 | Rs. | 2,217 | Rs. | 1,796 | Rs. | 2,210 | ||||||||||||||||||
Selling, general and administrative expenses | ||||||||||||||||||||||||||||||||||||
Research and development expenses | ||||||||||||||||||||||||||||||||||||
Other (income)/expense, net | ||||||||||||||||||||||||||||||||||||
Results from operating activities | ||||||||||||||||||||||||||||||||||||
Finance (expense)/income, net | ||||||||||||||||||||||||||||||||||||
Share of profit of equity accounted investees, net of tax | ||||||||||||||||||||||||||||||||||||
Profit before tax | ||||||||||||||||||||||||||||||||||||
Tax expense | ||||||||||||||||||||||||||||||||||||
Profit for the year |
Segment information: | For the Year Ended March 31, | |||||||||||||||||||||||||||||||||||
Reportable segments | Global Generics | PSAI | Proprietary Products | |||||||||||||||||||||||||||||||||
2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||
Revenues(1) | Rs. | 154,404 | Rs. | 138,123 | Rs. | 122,903 | Rs. | 31,982 | Rs. | 25,747 | Rs. | 24,140 | Rs. | 523 | Rs. | 7,949 | Rs. | 4,750 | ||||||||||||||||||
Gross profit | Rs. | 91,111 | Rs. | 78,449 | Rs. | 71,924 | Rs. | 9,426 | Rs. | 6,190 | Rs. | 6,128 | Rs. | 482 | Rs. | 7,744 | Rs. | 4,182 | ||||||||||||||||||
Selling, general and administrative expenses | ||||||||||||||||||||||||||||||||||||
Research and development expenses | ||||||||||||||||||||||||||||||||||||
Impairment of non-current assets | ||||||||||||||||||||||||||||||||||||
Other income, net | �� | |||||||||||||||||||||||||||||||||||
Results from operating activities | ||||||||||||||||||||||||||||||||||||
Finance income, net | ||||||||||||||||||||||||||||||||||||
Share of profit of equity accounted investees, net of tax | ||||||||||||||||||||||||||||||||||||
Profit before tax | ||||||||||||||||||||||||||||||||||||
Tax expense/(benefit), net | ||||||||||||||||||||||||||||||||||||
Profit for the year |
[Continued on next page]
F-27
149 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
5. Segment reporting (continued)
[Continued from above table, first column repeated]
Information about segments: | For the Year Ended March 31, | |||||||||||||||||||||||
Reportable segments | Others | Total | ||||||||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||||
Revenue(1) (2) | Rs. | 1,608 | Rs. | 1,164 | Rs. | 1,254 | Rs. | 154,708 | Rs. | 148,189 | Rs. | 132,170 | ||||||||||||
Gross profit | Rs. | 706 | Rs. | 329 | Rs. | 199 | Rs. | 92,281 | Rs. | 85,403 | Rs. | 75,801 | ||||||||||||
Selling, general and administrative expenses | 45,702 | 42,585 | 38,783 | |||||||||||||||||||||
Research and development expenses | 17,834 | 17,449 | 12,402 | |||||||||||||||||||||
Other (income)/expense, net | (874 | ) | (917 | ) | (1,416 | ) | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Results from operating activities | Rs. | 29,619 | Rs. | 26,286 | Rs. | 26,032 | ||||||||||||||||||
Finance (expense)/income, net | (2,708 | ) | 1,682 | 400 | ||||||||||||||||||||
Share of profit of equity accounted investees, net of tax | 229 | 195 | 174 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Profit before tax | Rs. | 27,140 | Rs. | 28,163 | Rs. | 26,606 | ||||||||||||||||||
Tax expense | (7,127 | ) | (5,984 | ) | (5,094 | ) | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Profit for the year | Rs. | 20,013 | Rs. | 22,179 | Rs. | 21,512 | ||||||||||||||||||
|
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|
|
|
|
Segment information: | For the Year Ended March 31, | |||||||||||||||||||||||
Reportable segments | Others | Total | ||||||||||||||||||||||
2021 | 2020 | 2019 | 2021 | 2020 | 2019 | |||||||||||||||||||
Revenues(1) | Rs. | 2,813 | Rs. | 2,781 | Rs. | 2,058 | Rs. | 189,722 | Rs. | 174,600 | Rs. | 153,851 | ||||||||||||
Gross profit | Rs. | 2,058 | Rs. | 1,626 | Rs. | 1,196 | Rs. | 103,077 | Rs. | 94,009 | Rs. | 83,430 | ||||||||||||
Selling, general and administrative expenses | 54,650 | 50,129 | 48,680 | |||||||||||||||||||||
Research and development expenses | 16,541 | 15,410 | 15,607 | |||||||||||||||||||||
Impairment of non-current assets | 8,588 | 16,767 | 210 | |||||||||||||||||||||
Other income, net | (982 | ) | (4,290 | ) | (1,955 | ) | ||||||||||||||||||
Results from operating activities | Rs. | 24,280 | Rs. | 15,993 | Rs. | 20,888 | ||||||||||||||||||
Finance income, net | 1,653 | 1,478 | 1,117 | |||||||||||||||||||||
Share of profit of equity accounted investees, net of tax | 480 | 561 | 438 | |||||||||||||||||||||
Profit before tax | Rs. | 26,413 | Rs. | 18,032 | Rs. | 22,443 | ||||||||||||||||||
Tax expense/(benefit), net | 9,175 | (1,466 | ) | 3,648 | ||||||||||||||||||||
Profit for the year | Rs. | 17,238 | Rs. | 19,498 | Rs. | 18,795 |
(1) |
|
|
Analysis of revenue by geography:
The following table shows the distribution of the Company’s revenues by geography, based on the location of the customers:
For the Year Ended March 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Country | ||||||||||||
India | Rs. | 23,913 | Rs. | 21,158 | Rs. | 19,502 | ||||||
United States | 81,154 | 69,840 | 60,801 | |||||||||
Russia | 10,640 | 14,922 | 16,333 | |||||||||
Others | 39,001 | 42,269 | 35,534 | |||||||||
|
|
|
|
|
| |||||||
Rs. | 154,708 | Rs. | 148,189 | Rs. | 132,170 | |||||||
|
|
|
|
|
|
Analysis of revenue within the Global Generics segment:
An analysis of revenues by therapeutic areas in the Company’s Global Generics segment is given below:
For the Year Ended March 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Gastrointestinal | Rs. | 21,253 | Rs. | 21,524 | Rs. | 20,793 | ||||||
Oncology | 19,410 | 19,459 | 14,970 | |||||||||
Cardiovascular | 19,009 | 17,569 | 14,962 | |||||||||
Pain Management | 16,240 | 16,591 | 15,808 | |||||||||
Central Nervous System | 14,739 | 14,935 | 12,094 | |||||||||
Anti-Infective | 12,711 | 8,393 | 6,310 | |||||||||
Others | 24,700 | 20,926 | 19,546 | |||||||||
|
|
|
|
|
| |||||||
Total | Rs. | 128,062 | Rs. | 119,397 | Rs. | 104,483 | ||||||
|
|
|
|
|
|
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
5. Segment reporting (continued)
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Nervous System | Rs. | 29,040 | Rs. | 26,825 | Rs. | 19,726 | ||||||
Gastrointestinal | 21,132 | 19,394 | 19,250 | |||||||||
Oncology | 16,842 | 18,245 | 18,357 | |||||||||
Cardiovascular | 15,460 | 14,729 | 15,106 | |||||||||
Pain Management | 15,531 | 13,808 | 13,806 | |||||||||
Anti-Infective | 12,906 | 9,402 | 7,073 | |||||||||
Respiratory | 11,089 | 10,433 | 8,130 | |||||||||
Others | 32,404 | 25,287 | 21,455 | |||||||||
Total | Rs. | 154,404 | Rs. | 138,123 | Rs. | 122,903 |
Analysis of revenuerevenues within the PSAI segment:
An analysis of revenues by therapeutic areas in the Company’s PSAI segment is given below:
For the Year Ended March 31, | For the Year Ended March 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2021 | 2020 | 2019 | |||||||||||||||||||
Cardiovascular | Rs. | 5,077 | Rs. | 4,695 | Rs. | 5,126 | Rs. | 9,834 | Rs. | 8,567 | Rs. | 7,019 | ||||||||||||
Pain Management | 4,085 | 3,793 | 4,150 | 4,657 | 5,073 | 3,364 | ||||||||||||||||||
Central Nervous System | 3,021 | 2,800 | 3,686 | |||||||||||||||||||||
Anti-Infective | 4,126 | 2,264 | 1,247 | |||||||||||||||||||||
Nervous System | 2,704 | 2,797 | 2,741 | |||||||||||||||||||||
Oncology | 2,570 | 4,274 | 1,958 | 2,385 | 1,798 | 2,212 | ||||||||||||||||||
Anti-Infective | 2,015 | 2,338 | 3,198 | |||||||||||||||||||||
Gastrointestinal | 1,310 | 1,395 | 1,816 | |||||||||||||||||||||
Dermatology | 768 | 1,370 | 1,622 | |||||||||||||||||||||
Others | 4,301 | 6,161 | 4,040 | 7,508 | 3,878 | 5,935 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total | Rs. | 22,379 | Rs. | 25,456 | Rs. | 23,974 | Rs. | 31,982 | Rs. | 25,747 | Rs. | 24,140 | ||||||||||||
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|
150 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
5. Segment reporting (continued)
Analysis of revenues by geography:
The following table shows the distribution of the Company’s revenues by country, based on the location of the customers:
For the Year Ended March 31, | ||||||||||||
Country | 2021 | 2020 | 2019 | |||||||||
India | Rs. | 36,252 | Rs. | 32,089 | Rs. | 28,804 | ||||||
United States | 76,702 | 76,028 | 69,299 | |||||||||
Russia | 15,816 | 16,900 | 15,299 | |||||||||
Others(1) | 60,952 | 49,583 | 40,449 | |||||||||
Rs. | 189,722 | Rs. | 174,600 | Rs. | 153,851 |
(1) | Others include Germany, the United Kingdom, Ukraine, China, Canada and other countries across the world. |
Analysis of assets by geography:
The following table shows the distribution of the Company’s non-current assets (other than financial instruments and deferred tax assets) by country, based on the location of assets:
As of March 31, | ||||||||||||||||
2016 | 2015 | As of March 31, | ||||||||||||||
Country | 2021 | 2020 | ||||||||||||||
India | Rs. | 54,987 | Rs. | 41,948 | Rs. | 75,284 | Rs. | 55,083 | ||||||||
Switzerland | 11,661 | 18,204 | ||||||||||||||
United States | 7,519 | 7,550 | 7,627 | 7,065 | ||||||||||||
Switzerland | 6,576 | 5,033 | ||||||||||||||
Germany | 4,200 | 4,414 | 1,087 | 1,435 | ||||||||||||
Others | 6,632 | 6,608 | 5,109 | 5,010 | ||||||||||||
|
| Rs. | 100,768 | Rs. | 86,797 | |||||||||||
Rs. | 79,914 | Rs. | 65,553 | |||||||||||||
|
|
The following table shows the distribution of the Company’s property, plant and equipment including capital work in progress and intangible assets acquired during the year (other than goodwill arising on business combination) by country, based on the location of assets:
For the Year Ended March 31, | ||||||||||||||||
2016 | 2015 | For the Year Ended March 31, | ||||||||||||||
Country | 2021 | 2020 | ||||||||||||||
India | Rs. | 19,389 | Rs. | 9,215 | Rs. | 27,882 | Rs. | 5,519 | ||||||||
Switzerland | 2,325 | 5,104 | 3,760 | 1,025 | ||||||||||||
United States | 1,019 | 814 | 2,158 | 241 | ||||||||||||
Others | 586 | 733 | 1,031 | 688 | ||||||||||||
|
| Rs. | 34,831 | Rs. | 7,473 | |||||||||||
Rs. | 23,319 | Rs. | 15,866 | |||||||||||||
|
|
Analysis of depreciation and amortization, included in cost of revenues, by reportable segments:
For the Year Ended March 31, | For the Year Ended March 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2021 | 2020 | 2019 | |||||||||||||||||||
Global Generics | Rs. | 2,742 | Rs. | 2,044 | Rs. | 1,762 | Rs. | 3,435 | Rs. | 3,666 | Rs. | 3,791 | ||||||||||||
PSAI | 2,437 | 2,034 | 1,920 | 2,578 | 2,804 | 2,906 | ||||||||||||||||||
Proprietary Products | — | — | — | - | - | - | ||||||||||||||||||
Others | 62 | 76 | 89 | 48 | 71 | 71 | ||||||||||||||||||
|
|
| Rs. | 6,061 | Rs. | 6,541 | Rs. | 6,768 | ||||||||||||||||
Rs. | 5,241 | Rs. | 4,154 | Rs. | 3,771 | |||||||||||||||||||
|
|
|
Information about major customers
Revenues from two of the customers of the Company’sCompany's Global Generics segment were approximately Rs.21,600Rs.19,341 and Rs.15,998,Rs.9,867, representing approximately 14%10% and 10%5%, respectively, of the Company’s total revenues for the year ended March 31, 2016.2021.
Revenues from one of thetwo customers of the Company’sCompany's Global Generics segment were approximately Rs.17,364,Rs.14,164 and Rs.9,267, representing approximately 12%8% and 5%, respectively, of the Company’s total revenues for the year ended March 31, 2015.2020.
Revenues from two customers of the Company's Global Generics segment were Rs.10,639 and Rs.10,024, each representing approximately 7% of the Company’s total revenues for the year ended March 31, 2019.
151 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
6. Business Transfer Agreement with Wockhardt Limited
In February 2020, the Company entered into a Business Transfer Agreement (“BTA”) with Wockhardt Limited (“Wockhardt”) to acquire select divisions of its branded generics business in India and the territories of Nepal, Sri Lanka, Bhutan and Maldives for a consideration of Rs.18,500.
The business consists of a portfolio of 62 brands in multiple therapy areas, such as respiratory, neurology, venous malformations, dermatology, gastroenterology, pain and vaccines. This entire portfolio was to be transferred to the Company, along with related sales and marketing teams, the manufacturing plant located in Baddi, Himachal Pradesh and all plant employees (together the “Business Undertaking”). The transaction involved 2,051 employees engaged in operations of the acquired Business Undertaking.
As of March 31, 2020, the acquisition of this Business Undertaking was subject to certain closing conditions, such as approval from shareholders and lenders of Wockhardt and other requisite approvals under applicable statutes. Hence, the transaction was not accounted for in the year ended March 31, 2020.
Due to the COVID-19 pandemic and the consequent government restrictions, there was a reduction in the revenue from the sales of the products forming part of the Business Undertaking during March and April 2020. Accordingly, through an amendment to the BTA, the Company and Wockhardt agreed that the consideration would be up to Rs.18,500, to be paid as per the following terms:
a) | an amount of Rs.14,830 to be paid on the date of closing; |
b) | an amount of Rs.670 to be deposited in an escrow account which shall be released subject to adjustments for, inter alia, net working capital, employee liabilities and certain other contractual and statutory liabilities; |
c) | an amount of Rs.3,000 (the “Holdback Amount”) which shall be released as follows: |
· | If the revenue from sales of the products forming part of the Business Undertaking during the twelve (12) months post-closing exceeds Rs.4,800, the Company will be required to pay to Wockhardt an amount equal to two (2) times the amount by which the revenue exceeds Rs.4,800, subject to the maximum of the Holdback Amount. |
The acquisition is in line with the Company's strategic focus on India and has paved a path for accelerated growth and leadership in the domestic Indian market. The Company believes that the acquired Business Undertaking offers to strengthen the Company’s pharmaceutical portfolio and products in the Indian market.
The transaction was completed on June 10, 2020.
The Company has accounted for the transaction under IFRS 3.
As of June 30, 2020, the purchase price allocation was preliminary.
During the three months ended September 30, 2020, the Company completed the purchase price allocation. Tabulated below are the fair values of the assets acquired, including goodwill, and liabilities assumed on the acquisition date:
Particulars | Amount | |||
Cash | Rs. | 14,990 | ||
Payment through Escrow account | 564 | |||
Contingent consideration (Holdback Amount) | 561 | |||
Total consideration | Rs. | 16,115 | ||
Assets acquired | ||||
Goodwill | Rs. | 530 | ||
Property, plant and equipment | 373 | |||
Product related intangibles | 14,888 | |||
Inventories | 466 | |||
Other assets | 245 | |||
Liabilities assumed | ||||
Employee benefits (Gratuity-Rs.70 and Compensated absences- Rs.75) | (145 | ) | ||
Refund liability | (242 | ) | ||
Total net assets | Rs. | 16,115 |
The total goodwill of Rs.530 consists largely of the synergies and economies of scale expected from the acquired business, together with the value of the workforce acquired and has been assigned to the Company’s Global Generics segment. The entire amount of goodwill is not deductible for tax purposes.
Acquisition related costs amounted to Rs.60 and were excluded from the consideration transferred and were recognized as expense under “Selling, general and administrative expenses” in the consolidated income statements for the year ended March 31, 2021.
The fair value of the contingent consideration of Rs.561 was estimated by applying the income approach. The fair value measurement is based on significant inputs that are not observable in the market, which IFRS 13 refers to as Level 3 inputs. The significant unobservable inputs in the valuation is the estimated sales forecast. During the three months ended March 31, 2021, the Company, after taking into account the revenue of the products until twelve months post-closing (June 9, 2021), re-measured the contingent consideration to Rs.420.
152 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
6. Acquisition of select products portfolio of UCB
On April 1, 2015, the Company entered into a definitive agreementBusiness Transfer Agreement with UCB India PrivateWockhardt Limited and other UCB group companies (together referred to as “UCB”) to acquire a select portfolio of products business in the territories of India, Nepal, Sri Lanka and Maldives. The transaction included approximately 350 employees engaged in operations of the acquired India business. The acquisition is expected to strengthen the Company’s presence in the areas of dermatology, respiratory and pediatric products.
The total purchase consideration was Rs.8,000, payable in cash. The acquisition was closed on June 16, 2015. The Company has accounted for the transaction under IFRS 3, “Business Combinations,” and allocated the aggregate purchase consideration as follows:(continued)
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The total goodwill of Rs.323 is attributable primarily to the acquired employee workforce, intangible assets that do not qualify for separate recognition and the expected synergies. The entire amount of goodwill is deductible for tax purposes.
Acquisition related costs of Rs.9 were excluded from the consideration transferred and were recognized as expense under “Selling, general and administrative expenses” in the consolidated income statement for the year ended March 31, 2016.
Current assets, net of current liabilities assumed include trade receivables of Rs.118 which were expected to be fully recoverable.
Out of the total purchase consideration of Rs.8,000, the Company has paid Rs.7,936 to UCB as of March 31, 2016.
The amount of revenue included in the consolidated income statement since June 16, 2015 pertaining to the business acquired from UCB was Rs.1,345statements for the year ended March 31, 2016.
No pro-forma information2021 pertaining to the acquired business since June 10, 2020 is disclosed in these consolidated financial statements, asRs.3,887. The acquired 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 year.
7. Cash and cash equivalents
Cash and cash equivalents consist of this acquisition on these consolidated financial statements is immaterial.the following:
As of March 31, | ||||||||
2021 | 2020 | |||||||
Cash on hand | Rs. | 1 | Rs. | 2 | ||||
Balances with banks | 14,324 | 1,807 | ||||||
Term deposits with banks (original maturities less than 3 months) | 504 | 244 | ||||||
Cash and cash equivalents in the statements of financial position | Rs. | 14,829 | Rs. | 2,053 | ||||
Bank overdrafts used for cash management purposes | 9 | 91 | ||||||
Cash and cash equivalents in the statements of cash flow | Rs. | 14,820 | Rs. | 1,962 | ||||
Restricted cash balances included above | ||||||||
Balance in unclaimed dividend and debenture interest account | Rs. | 106 | Rs. | 111 | ||||
Balances in Escrow account pursuant to the Business Transfer Agreement with Wockhardt Limited (Refer to Note 6 for details) | 40 | - | ||||||
Other restricted cash balances | 82 | 15 |
8. Other investments
Other investments consist of investments in units of mutual funds, equity securities, bonds, market linked debentures, commercial paper, limited liability partnership firm 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 March 31, 2021 and 2020 are as follows:
As of March 31, 2021 | 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. | 13,197 | Rs. | 66 | Rs. | 13,263 | Rs. | 13,686 | Rs. | 146 | Rs. | 13,832 | ||||||||||||
In bonds | 522 | - | 522 | 1,851 | - | 1,851 | ||||||||||||||||||
In commercial paper | - | - | - | 967 | - | 967 | ||||||||||||||||||
In market linked debentures | - | - | - | 2,000 | (7 | ) | 1,993 | |||||||||||||||||
Term deposits with banks | 5,959 | - | 5,959 | 5,044 | - | 5,044 | ||||||||||||||||||
Rs. | 19,678 | Rs. | 66 | Rs. | 19,744 | Rs. | 23,548 | Rs. | 139 | Rs. | 23,687 | |||||||||||||
Non-current portion | ||||||||||||||||||||||||
In equity securities(1) | Rs. | 2,701 | Rs. | 1,832 | Rs. | 4,533 | Rs. | 2,701 | Rs. | (2,397 | ) | Rs. | 304 | |||||||||||
In limited liability partnership firm | 400 | - | 400 | - | - | - | ||||||||||||||||||
Others | 25 | - | 25 | 24 | - | 24 | ||||||||||||||||||
Rs. | 3,126 | Rs. | 1,832 | Rs. | 4,958 | Rs. | 2,725 | Rs. | (2,397 | ) | Rs. | 328 |
(1) | Primarily represents the shares of Curis, Inc. Refer to Note 34 of these consolidated financial statements for further details. |
(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) and fair value through profit and loss | |
Investment in limited liability partnership firm | Fair value through profit and loss |
153 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
7.9. Trade and other receivables
As of March 31, | ||||||||
2021 | 2020 | |||||||
Current | ||||||||
Trade and other receivables, gross | Rs. | 50,937 | Rs. | 51,480 | ||||
Less: Allowance for credit losses | (1,296 | ) | (1,202 | ) | ||||
Trade and other receivables, net | Rs. | 49,641 | Rs. | 50,278 | ||||
Non-current | ||||||||
Trade and other receivables, gross(1) | Rs. | 118 | Rs. | 1,737 | ||||
Less: Allowance for credit losses | - | - | ||||||
Trade and other receivables, net | Rs. | 118 | 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 March 31, 2021 and March 31, 2020, the amount of trade receivables de-recognized pursuant to the aforesaid arrangement was Rs.9,254 and Rs.9,049, respectively.
In accordance with IFRS 9, the Company uses the expected credit loss (“ECL”) model for measurement and recognition of impairment loss on its trade receivables or any contractual right to receive cash or another financial asset that result from transactions that are within the scope of IFRS 15. For this purpose, the Company uses a provision matrix to compute the expected credit loss amount for trade receivables. The provision matrix takes into account external and internal credit risk factors and historical data of credit losses from various customers.
The details of changes in allowance for credit losses during the years ended March 31, 2021 and 2020, are as follows:
For the Year Ended March 31, | ||||||||
2021 | 2020 | |||||||
Balance at the beginning of the year | Rs. | 1,202 | Rs. | 1,172 | ||||
Provision made during the year, net of reversals | 176 | 154 | ||||||
Trade and other receivables written off & exchange differences | (82 | ) | (124 | ) | ||||
Balance at the end of the year | Rs. | 1,296 | Rs. | 1,202 |
10. Inventories
Inventories consist of the following:
As of March 31, | ||||||||
2021 | 2020 | |||||||
Raw materials | Rs. | 12,287 | Rs. | 10,594 | ||||
Work-in-progress | 10,009 | 6,806 | ||||||
Finished goods (includes stock-in-trade) | 19,829 | 15,126 | ||||||
Packing materials, stores and spares | 3,287 | 2,540 | ||||||
Rs. | 45,412 | Rs. | 35,066 |
Details of inventories recognized in the consolidated income statement are as follows:
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Raw materials, consumables and changes in finished goods and work in progress | Rs. | 58,268 | Rs. | 51,892 | Rs. | 40,932 | ||||||
Inventory write-downs(1) | 2,521 | 3,652 | 4,016 |
(1) | Following the Company’s decision to voluntarily recall all of its ranitidine medications sold in United States, due to confirmed contamination with N-Nitrosodimethylamine (“NDMA”) above levels established by the U.S. FDA, the Company recognized Rs.373 as inventory write downs of ranitidine during the year ended March 31, 2020. Furthermore, an amount of Rs.239 was recognized (as a reduction from revenue) as a provision for refund liabilities arising out of the Company’s recall decision. |
154 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
11. Other assets
As of March 31, | ||||||||
2021 | 2020 | |||||||
Current | ||||||||
Balances and receivables from statutory authorities(1) | Rs. | 7,227 | Rs. | 4,445 | ||||
Export benefits receivable(2) | 2,070 | 2,652 | ||||||
Prepaid expenses | 1,141 | 950 | ||||||
Others(3) | 4,071 | 5,755 | ||||||
Rs. | 14,509 | Rs. | 13,802 | |||||
Non-current | ||||||||
Security deposits | Rs. | 666 | Rs. | 613 | ||||
Others | 168 | 231 | ||||||
Rs. | 834 | Rs. | 844 |
(1) | Balances and receivables from statutory authorities primarily consist of amounts recoverable towards the goods and service tax (“GST”), excise duty and value added tax, and from customs authorities of India. |
(2) | Export benefits receivables primarily consist of amounts receivable from various government authorities of India towards incentives on export sales made by the Company. |
(3) | Others primarily includes advances given to vendors and employees, security deposits, interest accrued but not due on investments, and claims receivable. |
12. Property, plant and equipment
The following is a summary of the changes in carrying value of property, plant and equipment.
Particulars | Land | Buildings | Plant and equipment | Computer equipment | Furniture, fixtures and office equipment | Vehicles | Total | |||||||||||||||||||||
Gross carrying value | ||||||||||||||||||||||||||||
Balance as at April 1, 2014 | Rs. | 3,824 | Rs. | 15,319 | Rs. | 39,894 | Rs. | 1,879 | Rs. | 1,989 | Rs. | 539 | Rs. | 63,444 | ||||||||||||||
Acquisitions through business combinations | — | — | 22 | — | 10 | — | 32 | |||||||||||||||||||||
Other additions | 12 | 1,353 | 8,472 | 327 | 216 | 169 | 10,549 | |||||||||||||||||||||
Disposals | — | (37 | ) | (1,069 | ) | (175 | ) | (37 | ) | (79 | ) | (1,397 | ) | |||||||||||||||
Effect of changes in foreign exchange rates | (47 | ) | (130 | ) | (379 | ) | (28 | ) | (30 | ) | (3 | ) | (617 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance as at March 31, 2015 | Rs. | 3,789 | Rs. | 16,505 | Rs. | 46,940 | Rs. | 2,003 | Rs. | 2,148 | Rs. | 626 | Rs. | 72,011 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance as at April 1, 2015 | Rs. | 3,789 | Rs. | 16,505 | Rs. | 46,940 | Rs. | 2,003 | Rs. | 2,148 | Rs. | 626 | Rs. | 72,011 | ||||||||||||||
Acquisitions through business combinations(1) | — | — | — | 6 | — | — | 6 | |||||||||||||||||||||
Other additions | 24 | 2,402 | 7,890 | 372 | 208 | 186 | 11,082 | |||||||||||||||||||||
Disposals | (7 | ) | (3 | ) | (651 | ) | (144 | ) | (105 | ) | (33 | ) | (943 | ) | ||||||||||||||
Effect of changes in foreign exchange rates | 8 | 191 | 214 | 9 | 14 | (2 | ) | 434 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance as at March 31, 2016 | Rs. | 3,814 | Rs. | 19,095 | Rs. | 54,393 | Rs. | 2,246 | Rs. | 2,265 | Rs. | 777 | Rs. | 82,590 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Accumulated Depreciation | ||||||||||||||||||||||||||||
Balance as at April 1, 2014 | Rs. | — | Rs. | 2,831 | Rs. | 19,767 | Rs. | 1,215 | Rs. | 1,610 | Rs. | 272 | Rs. | 25,695 | ||||||||||||||
Depreciation for the year | — | 701 | 4,401 | 272 | 237 | 109 | 5,720 | |||||||||||||||||||||
Disposals | — | (3 | ) | (827 | ) | (156 | ) | (24 | ) | (72 | ) | (1,082 | ) | |||||||||||||||
Effect of changes in foreign exchange rates | — | (57 | ) | (183 | ) | (23 | ) | (27 | ) | (3 | ) | (293 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance as at March 31, 2015 | Rs. | — | Rs. | 3,472 | Rs. | 23,158 | Rs. | 1,308 | Rs. | 1,796 | Rs. | 306 | Rs. | 30,040 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance as at April 1, 2015 | Rs. | — | Rs. | 3,472 | Rs. | 23,158 | Rs. | 1,308 | Rs. | 1,796 | Rs. | 306 | Rs. | 30,040 | ||||||||||||||
Depreciation for the year | — | 763 | 5,341 | 325 | 243 | 108 | 6,780 | |||||||||||||||||||||
Impairment loss(2) | 20 | 46 | 23 | 4 | 1 | 94 | ||||||||||||||||||||||
Disposals | — | (0 | ) | (615 | ) | (108 | ) | (100 | ) | (25 | ) | (848 | ) | |||||||||||||||
Effect of changes in foreign exchange rates | — | 47 | 52 | 5 | 10 | (1 | ) | 113 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance as at March 31, 2016 | Rs. | — | Rs. | 4,302 | Rs. | 27,982 | Rs. | 1,553 | Rs. | 1,953 | Rs. | 389 | Rs. | 36,179 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Net carrying value | ||||||||||||||||||||||||||||
As at April 1, 2014 | Rs. | 3,824 | Rs. | 12,488 | Rs. | 20,127 | Rs. | 664 | Rs. | 379 | Rs. | 267 | Rs. | 37,749 | ||||||||||||||
As at March 31, 2015 | Rs. | 3,789 | Rs. | 13,033 | Rs. | 23,782 | Rs. | 695 | Rs. | 352 | Rs. | 320 | Rs. | 41,971 | ||||||||||||||
Add: Capital-work-in-progress | Rs. | 6,119 | ||||||||||||||||||||||||||
Total as at March 31, 2015 | Rs. | 48,090 | ||||||||||||||||||||||||||
As at March 31, 2016 | Rs. | 3,814 | Rs. | 14,793 | Rs. | 26,411 | Rs. | 693 | Rs. | 312 | Rs. | 388 | Rs. | 46,411 | ||||||||||||||
Add: Capital-work-in-progress | Rs. | 7,550 | ||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Total as at March 31, 2016 | Rs. | 53,961 | ||||||||||||||||||||||||||
|
|
Particulars | Land | Buildings | Plant and equipment | Furniture, fixtures and office equipment | Vehicles | Total | ||||||||||||||||||
Gross carrying value | ||||||||||||||||||||||||
Balance as of April 1, 2019 | Rs. | 4,192 | Rs. | 23,106 | Rs. | 70,940 | Rs. | 5,717 | Rs. | 775 | Rs. | 104,730 | ||||||||||||
Recognition of right-of-use asset on initial application of IFRS 16 | - | 723 | 2 | 28 | 400 | 1,153 | ||||||||||||||||||
Adjusted balance as of April 1, 2019 | Rs. | 4,192 | Rs. | 23,829 | Rs. | 70,942 | Rs. | 5,745 | Rs. | 1,175 | Rs. | 105,883 | ||||||||||||
Additions | 4 | 997 | 4,278 | 497 | 295 | 6,071 | ||||||||||||||||||
Disposals | - | (55 | ) | (706 | ) | (253 | ) | (179 | ) | (1,193 | ) | |||||||||||||
Effect of changes in foreign exchange rates | (73 | ) | 185 | 353 | (24 | ) | (80 | ) | 361 | |||||||||||||||
Balance as of March 31, 2020 | Rs. | 4,123 | Rs. | 24,956 | Rs. | 74,867 | Rs. | 5,965 | Rs. | 1,211 | Rs. | 111,122 | ||||||||||||
Balance as of April 1, 2020 | Rs. | 4,123 | Rs. | 24,956 | Rs. | 74,867 | Rs. | 5,965 | Rs. | 1,211 | Rs. | 111,122 | ||||||||||||
Additions | 13 | 2,720 | 4,544 | 437 | 220 | 7,934 | ||||||||||||||||||
Assets acquired through business combinations(1) | 84 | 113 | 165 | 11 | - | 373 | ||||||||||||||||||
Disposals | - | (35 | ) | (852 | ) | (134 | ) | (182 | ) | (1,203 | ) | |||||||||||||
Assets held for sale | (18 | ) | (245 | ) | (334 | ) | (58 | ) | - | (655 | ) | |||||||||||||
Effect of changes in foreign exchange rates | 26 | 11 | 244 | 31 | 8 | 320 | ||||||||||||||||||
Balance as of March 31, 2021 | Rs. | 4,228 | Rs. | 27,520 | Rs. | 78,634 | Rs. | 6,252 | Rs. | 1,257 | Rs. | 117,891 | ||||||||||||
Accumulated Depreciation | ||||||||||||||||||||||||
Balance as of April 1, 2019 | Rs. | - | Rs. | 6,873 | Rs. | 43,642 | Rs. | 4,603 | Rs. | 442 | Rs. | 55,560 | ||||||||||||
Depreciation for the year | - | 1,306 | 6,404 | 562 | 368 | 8,640 | ||||||||||||||||||
Impairment | - | - | - | - | - | - | ||||||||||||||||||
Disposals | - | (36 | ) | (667 | ) | (251 | ) | (158 | ) | (1,112 | ) | |||||||||||||
Effect of changes in foreign exchange rates | - | 65 | 223 | (11 | ) | (54 | ) | 223 | ||||||||||||||||
Balance as of March 31, 2020 | Rs. | - | Rs. | 8,208 | Rs. | 49,602 | Rs. | 4,903 | Rs. | 598 | Rs. | 63,311 | ||||||||||||
Balance as of April 1, 2020 | Rs. | - | Rs. | 8,208 | Rs. | 49,602 | Rs. | 4,903 | Rs. | 598 | Rs. | 63,311 | ||||||||||||
Depreciation for the year | - | 1,697 | 5,935 | 554 | 341 | 8,527 | ||||||||||||||||||
Impairment | 4 | 32 | 9 | 1 | - | 46 | ||||||||||||||||||
Disposals | - | (29 | ) | (773 | ) | (125 | ) | (136 | ) | (1,063 | ) | |||||||||||||
Assets held for sale | (4 | ) | (140 | ) | (306 | ) | (54 | ) | - | (504 | ) | |||||||||||||
Effect of changes in foreign exchange rates | - | 22 | 194 | 24 | 1 | 241 | ||||||||||||||||||
Balance as of March 31, 2021 | Rs. | - | Rs. | 9,790 | Rs. | 54,661 | Rs. | 5,303 | Rs. | 804 | Rs. | 70,558 |
155 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
12. Property, plant and equipment (continued)
Particulars | Land | Buildings | Plant and equipment | Furniture, fixtures and office equipment | Vehicles | Total | ||||||||||||||||||
Net carrying value | ||||||||||||||||||||||||
As of April 1, 2019 | Rs. | 4,192 | Rs. | 16,233 | Rs. | 27,298 | Rs. | 1,114 | Rs. | 333 | Rs. | 49,170 | ||||||||||||
As of March 31, 2020 | Rs. | 4,123 | Rs. | 16,748 | Rs. | 25,265 | Rs. | 1,062 | Rs. | 613 | Rs. | 47,811 | ||||||||||||
Add: Capital-work-in-progress | Rs. | 4,521 | ||||||||||||||||||||||
Total as of March 31, 2020 | Rs. | 52,332 | ||||||||||||||||||||||
As of March 31, 2021 | Rs. | 4,228 | Rs. | 17,730 | Rs. | 23,973 | Rs. | 949 | Rs. | 453 | Rs. | 47,333 | ||||||||||||
Add: Capital-work-in-progress | Rs. | 9,778 | ||||||||||||||||||||||
Total as of March 31, 2021 | Rs. | 57,111 |
(1) |
|
Leases
The Company has lease contracts for various items of plant and equipment, vehicles and other equipment used in its operations. Below are the carrying amounts of right-of-use assets recognized and the movements during the year included in the above property, plant and equipment.
Particulars | Land | Buildings | Plant and equipment | Furniture, fixtures and office equipment | Vehicles | Total | ||||||||||||||||||
Gross carrying value | ||||||||||||||||||||||||
Balance as of April 1, 2019 | Rs. | 73 | Rs. | 840 | Rs. | 12 | Rs. | - | Rs. | 37 | Rs. | 962 | ||||||||||||
Recognition of right-of-use asset on initial application of IFRS 16 | - | 723 | 2 | 28 | 400 | 1,153 | ||||||||||||||||||
Adjusted balance as of April 1, 2019 | Rs. | 73 | Rs. | 1,563 | Rs. | 14 | Rs. | 28 | Rs. | 437 | Rs. | 2,115 | ||||||||||||
Additions | - | 87 | 3 | 17 | 146 | 253 | ||||||||||||||||||
Disposals | - | (1 | ) | - | - | (56 | ) | (57 | ) | |||||||||||||||
Effect of changes in foreign exchange rates | 5 | 39 | 1 | - | 3 | 48 | ||||||||||||||||||
Balance as of March 31, 2020 | Rs. | 78 | Rs. | 1,688 | Rs. | 18 | Rs. | 45 | Rs. | 530 | Rs. | 2,359 | ||||||||||||
Balance as of April 1, 2020 | Rs. | 78 | Rs. | 1,688 | Rs. | 18 | Rs. | 45 | Rs. | 530 | Rs. | 2,359 | ||||||||||||
Additions(1) | - | 2,212 | - | 7 | 194 | 2,413 | ||||||||||||||||||
Disposals | - | - | - | (1 | ) | (120 | ) | (121 | ) | |||||||||||||||
Effect of changes in foreign exchange rates | 3 | (14 | ) | - | - | - | (11 | ) | ||||||||||||||||
Balance as of March 31, 2021 | Rs. | 81 | Rs. | 3,886 | Rs. | 18 | Rs. | 51 | Rs. | 604 | Rs. | 4,640 | ||||||||||||
Accumulated Depreciation | ||||||||||||||||||||||||
Balance as of April 1, 2019 | Rs. | - | Rs. | 454 | Rs. | 12 | Rs. | - | Rs. | 33 | Rs. | 499 | ||||||||||||
Depreciation for the year | - | 267 | 1 | 13 | 210 | 491 | ||||||||||||||||||
Disposals | - | (1 | ) | - | - | (41 | ) | (42 | ) | |||||||||||||||
Effect of changes in foreign exchange rates | - | 24 | 1 | - | (3 | ) | 22 | |||||||||||||||||
Balance as of March 31, 2020 | Rs. | - | Rs. | 744 | Rs. | 14 | Rs. | 13 | Rs. | 199 | Rs. | 970 | ||||||||||||
Balance as of April 1, 2020 | Rs. | - | Rs. | 744 | Rs. | 14 | Rs. | 13 | Rs. | 199 | Rs. | 970 | ||||||||||||
Depreciation for the year | - | 616 | 1 | 12 | 202 | 831 | ||||||||||||||||||
Disposals | - | - | - | - | (78 | ) | (78 | ) | ||||||||||||||||
Effect of changes in foreign exchange rates | - | (25 | ) | - | - | (2 | ) | (27 | ) | |||||||||||||||
Balance as of March 31, 2021 | Rs. | - | Rs. | 1,335 | Rs. | 15 | Rs. | 25 | Rs. | 321 | Rs. | 1,696 | ||||||||||||
Net carrying value | ||||||||||||||||||||||||
As of March 31, 2020 | Rs. | 78 | Rs. | 944 | Rs. | 4 | Rs. | 32 | Rs. | 331 | Rs. | 1,389 | ||||||||||||
As of March 31, 2021 | Rs. | 81 | Rs. | 2,551 | Rs. | 3 | Rs. | 26 | Rs. | 283 | Rs. | 2,944 |
| Additions for the year ended March 31, 2021 include recognition of a right-of-use asset of Rs.1,852 relating to a warehousing services agreement in the |
156 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
12. Property, plant and equipment (continued)
The following are the amounts recognized in income statement:
For the Year Ended March 31, | ||||||||
2021 | 2020 | |||||||
Depreciation expense of right-of-use assets | Rs. | 831 | Rs. | 491 | ||||
Interest expense on lease liabilities | 227 | 230 |
The Company had total cash outflows for leases of Rs.1,252 and Rs.972 during the years ended March 31, 2021 and 2020, respectively. The maturity analysis of lease liabilities are disclosed in Note 17 of these consolidated financial statements.
Capital commitments
As of March 31, 20162021 and 2015,2020, the Company was committed to spend Rs.5,065Rs.9,841 and Rs.4,173,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.
Interest capitalization
During the years ended March 31, 20162021 and 2015,2020, the Company capitalized interest cost of Rs.51Rs.149 and Rs.31,Rs.52, respectively, with respect to qualifying assets. The rate for capitalization of interest cost for the years ended March 31, 20162021 and 20152020 was approximately 2.07%4.25% and 2.32%4.22%, respectively.
Assets acquired under finance leases
Property, plant and equipment include Rs.637 and Rs.739 of assets acquired (net of accumulated depreciation) under finance leases as of March 31, 2016 and 2015, respectively.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
8. Goodwill
Goodwill arising upon business acquisitionscombinations is not amortized but 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 the changes in goodwill during the years ended March 31, 20162021 and 2015:2020:
As of March 31, | ||||||||
2016 | 2015 | |||||||
Opening balance, gross(1) | Rs. | 19,654 | Rs. | 19,702 | ||||
Goodwill arising on business combinations during the year(2)(3) | 323 | 203 | ||||||
Effect of translation adjustments | 145 | (251 | ) | |||||
Impairment loss(4) | (16,274 | ) | (16,274 | ) | ||||
|
|
|
| |||||
Closing balance(1) | Rs. | 3,848 | Rs. | 3,380 | ||||
|
|
|
|
As of March 31, | ||||||||
2021 | 2020 | |||||||
Opening balance, gross | Rs. | 20,278 | Rs. | 20,176 | ||||
Goodwill arising on business combinations(1) | 530 | - | ||||||
Effect of translation adjustments | 44 | 102 | ||||||
Impairment loss(2) | (16,284 | ) | (16,284 | ) | ||||
Closing balance | Rs. | 4,568 | Rs. | 3,994 |
(1) |
|
|
|
The impairment loss of |
For the purpose of impairment testing, goodwill is allocated to a cash generating unit, representing the lowest level within the Company at which goodwill is monitored for internal management purposes and which is not higher than the Company’s operating segment.
The carrying amount of goodwill (other than those arising upon investment in an associate)a joint venture) was allocated to the cash generating units as follows:
As of March 31, | ||||||||
2016 | 2015 | |||||||
PSAI- Active Pharmaceutical Operations | Rs. | 997 | Rs. | 997 | ||||
Global Generics- Complex Injectables(1) | 1,249 | 1,113 | ||||||
Global Generics- North America Operations | 998 | 989 | ||||||
Global Generics- Branded Formulations(2) | 491 | 168 | ||||||
Others | 113 | 113 | ||||||
|
|
|
| |||||
Rs. | 3,848 | Rs. | 3,380 | |||||
|
|
|
|
As of March 31, | ||||||||
2021 | 2020 | |||||||
PSAI-Active Pharmaceutical Operations | Rs. | 997 | Rs. | 997 | ||||
Global Generics-Complex Injectables | 1,421 | 1,372 | ||||||
Global Generics-North America Operations | 1,015 | 1,021 | ||||||
Global Generics-Branded Formulations | 1,021 | 491 | ||||||
Others | 114 | 113 | ||||||
Rs. | 4,568 | Rs. | 3,994 |
|
|
The recoverable amounts of the above cash generating units have been assessed using a value-in-use model. Value in use is generally calculated as the net present value of the projected post-tax cash flows plus a terminal value of the cash generating unit to which the goodwill is allocated. Initially, a post-tax discount rate is applied to calculate the net present value of the post-tax cash flows. Key assumptions onupon which the Company has based its determinations of value-in-use include:
a) | Estimated cash flows for five years, based on management’s |
b) |
|
157 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
8.13. Goodwill (continued)
c) | The |
d) |
|
The Company believes that any reasonably possible change in the key assumptions on which a recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the cash-generating unit.
9.
14. Other intangible assets
The following is a summary of changes in the carrying value of intangible assets:
Trademarks with finite useful life | Product related intangibles | Technology related intangibles | Customer related intangibles | Others | Total | |||||||||||||||||||
Gross carrying amount | ||||||||||||||||||||||||
Balance as at April 1, 2014 | Rs. | 11,049 | Rs. | 25,229 | Rs. | 1,717 | Rs. | 1,215 | Rs. | 700 | Rs. | 39,910 | ||||||||||||
Acquisitions through business combinations | — | 60 | — | — | — | 60 | ||||||||||||||||||
Other additions(1) | — | 5,454 | 54 | — | 272 | 5,780 | ||||||||||||||||||
Deletions | — | — | — | — | — | — | ||||||||||||||||||
Effect of changes in foreign exchange rates | (1,700 | ) | (3,120 | ) | (178 | ) | (50 | ) | (20 | ) | (5,068 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance as at March 31, 2015 | Rs. | 9,349 | Rs. | 27,623 | Rs. | 1,593 | Rs. | 1,165 | Rs. | 952 | Rs. | 40,682 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance as at April 1, 2015 | Rs. | 9,349 | Rs. | 27,623 | Rs. | 1,593 | Rs. | 1,165 | Rs. | 952 | Rs. | 40,682 | ||||||||||||
Acquisitions through business combinations(2) | — | 6,734 | — | — | 743 | 7,477 | ||||||||||||||||||
Other additions | — | 1,554 | 1,158 | — | 596 | 3,308 | ||||||||||||||||||
Deletions | — | — | — | (132 | ) | — | (132 | ) | ||||||||||||||||
Effect of changes in foreign exchange rates | 829 | 1,829 | 96 | 67 | 4 | 2,825 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance as at March 31, 2016 | Rs. | 10,178 | Rs. | 37,740 | Rs. | 2,847 | Rs. | 1,100 | Rs. | 2,295 | Rs. | 54,160 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Amortization/impairment loss | ||||||||||||||||||||||||
Balance as at April 1, 2014 | Rs. | 7,080 | Rs. | 19,477 | Rs. | 800 | Rs. | 856 | Rs. | 428 | Rs. | 28,641 | ||||||||||||
Amortization for the year | 541 | 1,610 | 152 | 33 | 45 | 2,381 | ||||||||||||||||||
Impairment loss | — | 285 | 95 | 249 | — | 629 | ||||||||||||||||||
Deletions | — | — | — | — | — | — | ||||||||||||||||||
Effect of changes in foreign exchange rates | (933 | ) | (2,959 | ) | (87 | ) | (20 | ) | (20 | ) | (4,019 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance as at March 31, 2015 | Rs. | 6,688 | Rs. | 18,413 | Rs. | 960 | Rs. | 1,118 | Rs. | 453 | Rs. | 27,632 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance as at April 1, 2015 | Rs. | 6,688 | Rs. | 18,413 | Rs. | 960 | Rs. | 1,118 | Rs. | 453 | Rs. | 27,632 | ||||||||||||
Amortization for the year | 504 | 2,414 | 254 | 11 | 287 | 3,470 | ||||||||||||||||||
Impairment loss | — | 174 | — | 20 | — | 194 | ||||||||||||||||||
Deletions | — | — | — | (132 | ) | — | (132 | ) | ||||||||||||||||
Effect of changes in foreign exchange rates | 494 | 1,598 | 39 | 68 | 1 | 2,200 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance as at March 31, 2016 | Rs. | 7,686 | Rs. | 22,599 | Rs. | 1,253 | Rs. | 1,085 | Rs. | 741 | Rs. | 33,364 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net carrying amount | ||||||||||||||||||||||||
As at April 1, 2014 | Rs. | 3,969 | Rs. | 5,752 | Rs. | 917 | Rs. | 359 | Rs. | 272 | Rs. | 11,269 | ||||||||||||
As at March 31, 2015 | Rs. | 2,661 | Rs. | 9,210 | Rs. | 633 | Rs. | 47 | Rs. | 499 | Rs. | 13,050 | ||||||||||||
As at March 31, 2016 | Rs. | 2,492 | Rs. | 15,141 | Rs. | 1,594 | Rs. | 15 | Rs. | 1,554 | Rs. | 20,796 |
Product related intangibles | Others | Total | ||||||||||
Gross carrying value | ||||||||||||
Balance as of April 1, 2019 | Rs. | 81,971 | Rs. | 3,600 | Rs. | 85,571 | ||||||
Additions | 1,641 | 165 | 1,806 | |||||||||
Disposals/De-recognitions | (814 | ) | (1 | ) | (815 | ) | ||||||
Effect of changes in foreign exchange rates | 4,532 | 2 | 4,534 | |||||||||
Balance as of March 31, 2020 | Rs. | 87,330 | Rs. | 3,766 | Rs. | 91,096 | ||||||
Balance as of April 1, 2020 | Rs. | 87,330 | Rs. | 3,766 | Rs. | 91,096 | ||||||
Additions(1) | 6,107 | 304 | 6,411 | |||||||||
Assets acquired through business combinations(2) | 14,888 | - | 14,888 | |||||||||
Disposals/De-recognitions | (192 | ) | - | (192 | ) | |||||||
Effect of changes in foreign exchange rates | (900 | ) | - | (900 | ) | |||||||
Balance as of March 31, 2021 | Rs. | 107,233 | Rs. | 4,070 | Rs. | 111,303 | ||||||
Amortization/impairment loss | ||||||||||||
Balance as of April 1, 2019 | Rs. | 39,577 | Rs. | 1,627 | Rs. | 41,204 | ||||||
Amortization for the year | 3,554 | 278 | 3,832 | |||||||||
Impairment loss | 16,757 | - | 16,757 | |||||||||
Disposals/De-recognitions | (749 | ) | (1 | ) | (750 | ) | ||||||
Effect of changes in foreign exchange rates | 2,392 | 2 | 2,394 | |||||||||
Balance as of March 31, 2020 | Rs. | 61,531 | Rs. | 1,906 | Rs. | 63,437 | ||||||
Balance as of April 1, 2020 | Rs. | 61,531 | Rs. | 1,906 | Rs. | 63,437 | ||||||
Amortization for the year | 3,972 | 297 | 4,269 | |||||||||
Impairment loss | 8,542 | - | 8,542 | |||||||||
Disposals/De-recognitions | (192 | ) | - | (192 | ) | |||||||
Effect of changes in foreign exchange rates | (401 | ) | - | (401 | ) | |||||||
Balance as of March 31, 2021 | Rs. | 73,452 | Rs. | 2,203 | Rs. | 75,655 | ||||||
Net carrying value | ||||||||||||
As of April 1, 2019 | Rs. | 42,394 | Rs. | 1,973 | Rs. | 44,367 | ||||||
As of March 31, 2020 | Rs. | 25,799 | Rs. | 1,860 | Rs. | 27,659 | ||||||
As of March 31, 2021 | Rs. | 33,781 | Rs. | 1,867 | Rs. | 35,648 |
(1) |
|
(2) |
|
The selling, general and administrative expenses included Rs.3,262, Rs.2,326 and Rs.2,301 of amortization of other intangible assets and Rs.61, Rs.509 and Rs.(497) of impairment loss/(reversal of impairment loss) on other intangible assets for the years ended March 31, 2016, 2015 and 2014, respectively. Research and development expenses included Rs.98, Rs.55 and Rs.0 of amortization of other intangible assets and Rs.133, Rs.120 and Rs.0 of impairment loss on other intangible assets for the years ended March 31, 2016, 2015 and 2014, respectively. Cost of revenues included Rs.110, Rs.0 and Rs.0 of amortization of other intangible assets for the years ended March 31, 2016, 2015 and 2014, respectively.
158 |
The weighted average remaining useful life of intangibles was approximately 8.5 years as at March 31, 2016.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
9.14. Other intangible assets (continued)
In-process research and development assets (“IPR&D”)
Tabulated below is the reconciliation of amounts relating to in-process research and development assets as at the beginning and at the end of the year:
As of March 31, | ||||||||
2021 | 2020 | |||||||
Opening balance | Rs. | 10,987 | Rs. | 24,610 | ||||
Add: Additions during the year(1) | 3,557 | 950 | ||||||
Less: Capitalizations during the year(2) | - | (2,530 | ) | |||||
Less: Impairments during the year | (8,099 | ) | (13,379 | ) | ||||
Effect of changes in exchange rates | (332 | ) | 1,336 | |||||
Closing balance | Rs. | 6,113 | Rs. | 10,987 |
(1) | During the year ended March 31, 2021, the additions include Rs.3,291 representing the expenditure for purchase of intellectual property rights relating to Xeglyze® forming part of the Company’s Proprietary Products segment. |
During the year ended March 31, 2020, 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. The Company recognized these ANDAs acquired as product related intangibles.
(2) | During the year ended March 31, 2020, the product ramelteon was available for use and are subject to amortization. Accordingly, the Company reclassified the amount from IPR&D to product related intangibles. |
Interest capitalization
During the years ended March 31, 2021 and 2020, the Company capitalized interest cost of Rs.266 and Rs.674, respectively, with respect to certain qualifying assets. The rate for capitalization of interest cost for the years ended March 31, 2021 and 2020 ranged from 3.95% to 4.74% and from 2.04% to 4.60% respectively.
Impairment losses recorded for the year ended March 31, 20162021
In-process research
Total impairment charges for the year ended March 31, 2021 were Rs.8,542 which were recorded in impairment of non-current assets in the consolidated income statement, of which Rs.3,180 was attributable to impairment of gNuvaring, Rs.3,291 was attributable to impairment of Xeglyze® and development (“IPR&D”) intangiblesthe balance of Rs.2,071 was attributable to other product related intangibles.
As a result
Impairment of gNuvaring
During the year ended March 31, 2021, there were significant changes to the generics market for Ethinyl estradiol/Ethenogestral vaginal ring (a generic equivalent to Nuvaring®), one of the 8 ANDAs acquired from Teva in June 2016. The changes include the launch by a competitor of a generic version of the product in January 2021. Due to these adverse market developments, the Company tested the carrying value of this product at the product cash generating unit (“CGU”) level, being the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount was determined by reference to the product’s value-in-use or fair value less costs to sell, whichever is higher. This resulted in the value-in-use being the recoverable value of the product. Accordingly, the Company recorded an impairment loss of Rs.3,180 for the year ended March 31, 2021. This impairment loss pertained to the Company’s decisionGlobal Generics segment. With this impairment, the carrying value of the asset has been reduced to discontinue further developmentRs.Nil.
Impairment of certain IPR&D assets pertainingXeglyze®
Consequent to itsthe decline in the market potential of the product Xeglyze® forming part of the Company's Proprietary Products segment, and Global Generics segment, Rs.100 and Rs.33, respectively, wasthe Company recorded an amount of Rs.3,291 as impairment loss for the year ended March 31, 2021.
Other intangible assets
With respect to the saxagliptin/metformin (generic version of Kombiglyze®-XR) and phentermine and topiramate (generic version of Qsymia®), two of the 8 ANDAs acquired from Teva in June 2016, under research and development expensesthere has been a significant decrease in the Company’s consolidated income statement.
Others
The balance impairment lossmarket potential of Rs.61 pertainsthese products, primarily due to a write down of certain customer and product related intangibles forming part of the Company’s Global Generics segment, which was recorded under “Selling, general and administrative expenses” in the Company’s consolidated income statement.
Impairment losses recorded for the year ended March 31, 2015
For the year ended March 31, 2015,higher than expected value erosion. Accordingly, the Company recorded impairment losses of Rs.629 in the consolidated income statement, primarily relating to the following:
Customer related intangibles
Since its acquisition during the year ended March 31, 2013, OctoPlus B.V., a wholly owned subsidiary of the Company, has been engaged in the Company’s internal drug development projects as well as providing pharmaceutical development services to external customers.
During the year ended March 31, 2015, the Company decided to significantly increase the utilization of OctoPlus B.V.’s technical know-how, its time and effort on internal drug development projects and scale-down its external pharmaceutical development services. As a result of such decision, the Company reassessedassessed the recoverable amounts of associated customer related intangiblesamount by revisiting market volume, share and determined that the carryingprice assumptions for these two products and recorded an amount of such customer related intangibles was higher than their recoverable amount. Accordingly, Rs.249 was recorded as an impairment loss for the year ended March 31, 2015 under “Selling, general and administrative expenses” in the Company’s consolidated income statement.
The above impairment loss relate to the Company’s PSAI segment. As at March 31, 2015, the carrying amount of such customer related intangibles after impairment loss was Rs.0.
Product related intangibles
Based on the performance of and expected cash flows from some of the Company’s product related intangibles pertaining to its Global Generics segment, the Company reassessed the recoverable amounts of such product related intangibles and determined that the carrying amount of such product-related intangibles was higher than their recoverable amount. Accordingly, Rs.201 was recorded as an impairment loss for the year ended March 31, 2015 under “Selling, general and administrative expenses” in the Company’s consolidated income statement. As at March 31, 2015, the carrying amount of such product related intangibles after impairment loss was Rs.0.
In-process research and development (“IPR&D”) intangibles
Due to the Company’s decision to discontinue further development of certain IPR&D assets pertaining to its Proprietary Products segment, Rs.95 was recordedRs.1,587 as impairment loss for the year ended March 31, 2015 under research and development expenses2021. This impairment loss pertained to the Company’s Global Generics segment.
In view of the specific triggers occurring in the Company’s consolidated income statement.
Reversalyear with respect to some other product related intangible assets forming part of the Company's Global Generics segment, the Company determined that there was a decrease in the market potential of these products primarily due to higher than expected price erosion and increased competition leading to lower volumes. Consequently, the Company recorded an amount of Rs.484 as impairment losses recordedloss for the year ended March 31, 20142021.
As a result of the increase in expected cash flows of some of the products forming part of the product related intangibles pertaining to the Company’s Global Generics segment, the Company, following the guidance under IAS 36 “Impairment of assets”, estimated the recoverable amount of such intangible asset and assessed that the impairment loss recorded in an earlier period should be reversed. Accordingly, a reversal of impairment loss of Rs.497 for such product related intangibles was recorded for the year ended March 31, 2014 under “Selling, general and administrative expenses” in the consolidated income statement. The expected cash flows increased primarily due to various market dynamics, such as reduced competition and favorable pricing position.
159 |
The above reversal of impairment losses relate to the Company’s Global Generics segment. The pre-tax cash flows have been discounted based on a pre-tax discount rate of 5.68%. As at March 31, 2014, the carrying amount of such product related intangibles after reversal of impairment loss was Rs.1,287.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
10.14. Other intangible assets (continued)
The Company used the discounted cash flow approach to calculate the value-in-use which considered assumptions such as revenue projections, rate of generic penetration, estimated price erosion, the useful life of the asset and the net cash flows have been discounted based on post tax discount rate.
Impairment losses recorded for the year ended March 31, 2020
Total impairment charges for the year ended March 31, 2020 were Rs.16,757 which were recorded in impairment of non-current assets in the consolidated income statement, of which Rs.11,137 was attributable to impairment of gNuvaring and the balance of Rs.5,620 was attributable to other product related intangibles.
Impairment of gNuvaring
During the year ended March 31, 2020, there were significant changes to the generics market for Ethinyl estradiol / Ethenogestral vaginal ring (a generic equivalent to Nuvaring®), one of the 8 ANDAs acquired from Teva in June 2016. The changes include the launches by competitors of both generic and authorized generic versions of the product in December 2019. Due to these adverse market developments, as at December 31, 2019, the Company tested the carrying value of this product at the product cash generating unit (“CGU”) level, being the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount was determined by reference to the product’s value-in-use or fair value less costs to sell, whichever is higher. This resulted in the value-in-use being the recoverable value of the product. Accordingly, the Company recorded an impairment loss of Rs.11,137 for the year ended March 31, 2020. This impairment loss pertained to the Company’s Global Generics segment. The carrying value of the asset after the impairment was Rs.3,269.
The Company used the discounted cash flow approach to calculate the value in use, with the assistance of independent appraisers. The key assumptions considered in the calculation are as follows:
a. | Weighted average of probability adjusted revenue projections, which take into consideration different scenarios such as the base case, the upside case and the downside case; |
b. | Rate of generic penetration and estimated price erosion throughout the period; |
c. | Estimate of useful life over which the product is expected to generate cash flows; and |
d. | the net cash flows have been discounted based on a post-tax discounting tax rate of 8%. |
Other intangible assets
In June 2019, the Company launched tobramycin inhalation solution, USP, a therapeutic equivalent generic version of TOBI® (tobramycin) Inhalation Solution, and in July 2019 the Company launched ramelteon tablets, 8 mg, a therapeutically equivalent generic version of Rozerem® (ramelteon, 8 mg) Tablets. Subsequent to their respective launches, both products experienced adverse market conditions, such as increased competition and reduced selling prices by competitors. As a result, the performance of the products was significantly lower than the Company’s prior estimates. Furthermore, the Company decided to drop the launch of its planned imiquimod cream product. Accordingly, the Company assessed the recoverable amount of intangible assets associated with these three products, and recognized an impairment loss of Rs.4,385 for the year ended March 31, 2020. These impairment losses pertained to the Company’s Global Generics segment.
In view of the specific triggers occurring in the year with respect to some other product related intangible assets forming part of the Company's Global Generics and Proprietary Products segments, the Company determined that there was a decrease in the market potential of these products primarily due to higher than expected price erosion and increased competition leading to lower volumes. Consequently, the Company recorded an amount of Rs.1,235 as impairment loss for the year ended March 31, 2020.
Impairment losses recorded for the year ended March 31, 2019
As a result of the Company’s decision to discontinue a few products pertaining to its Global Generics segment, product related intangibles of Rs.116 was recorded as impairment loss for the year ended March 31, 2019 in the consolidated income statement.
Consequent to the materiality of the amount involved, these impairment amounts have been disclosed separately in the consolidated income statements.
Significant separately acquired intangible assets
Details of significant separately acquired intangible assets as of March 31, 2021 are as follows:
Particulars of the asset | Acquired from | Carrying cost | ||||
Select portfolio of branded generics business | Wockhardt Limited | Rs. | 14,241 | |||
Select portfolio of dermatology, respiratory and pediatric assets | UCB India Private Limited and affiliates | 4,568 | ||||
Intellectual property rights relating to PPC-06 (tepilamide fumarate) | Xenoport, Inc. | 4,036 | ||||
Various ANDAs | Teva and an affiliate of Allergan | 4,000 | ||||
Commercialization rights for an anti-cancer biologic agent | Eisai Company Limited | 1,840 | ||||
Select Anti-Allergy brands | Glenmark Pharmaceuticals Limited | 1,487 | ||||
Habitrol® brand | Novartis Consumer Health Inc. | 1,181 |
160 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
15. Investment in equity accounted investees
As of March 31, | ||||||||
2021 | 2020 | |||||||
Equity shares held in Kunshan Rotam Reddy Pharmaceutical Company Limited, China | Rs. | 3,307 | Rs. | 2,714 | ||||
Equity shares held in DRES Energy Private Limited, India | 68 | 49 | ||||||
Rs. | 3,375 | Rs. | 2,763 |
Details of the Company’s investment in Kunshan Rotam Reddy Pharmaceuticals Co.Company Limited:
Kunshan Rotam Reddy Pharmaceuticals Company Limited (“Reddy Kunshan”) is engaged in manufacturing and marketing of formulationsfinished dosages in China. The Company’s interest in Reddy Kunshan was 51.3% as of March 31, 20162021 and 2015. Three2020. Four directors of the Company are on the board of directors of Reddy Kunshan, which consists of seveneight directors. Under the terms of the joint venture agreement, all major decisions with respect to operating activities, significant financing and other activities are taken by the approval of at least five of the seveneight directors of Reddy Kunshan’s board. As the Company does not control Reddy Kunshan’s board and the other partners have significant participatingparticipation rights, the Company’s interest in Reddy Kunshan has been accounted for under the equity method of accounting under IFRS 11.accounting.
Summary financial information of Reddy Kunshan, as translated into the reporting currency of the Company and not adjusted for the percentage ownership held by the Company, is as follows:
As of/for the Year Ended March 31, | As of/for the Year Ended March 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2021 | 2020 | 2019 | |||||||||||||||||||
Ownership | 51.3 | % | 51.3 | % | 51.3 | % | 51.3 | % | 51.3 | % | 51.3 | % | ||||||||||||
Total current assets | Rs. | 2,876 | Rs. | 2,090 | Rs. | 1,768 | Rs. | 8,778 | Rs. | 6,925 | Rs. | 6,195 | ||||||||||||
Total non-current assets | 377 | 389 | 346 | 892 | 732 | 374 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total assets | Rs. | 3,253 | Rs. | 2,479 | Rs. | 2,114 | Rs. | 9,670 | Rs. | 7,657 | Rs. | 6,569 | ||||||||||||
|
|
| ||||||||||||||||||||||
Equity | Rs. | 2,129 | Rs. | 1,656 | Rs. | 1,213 | Rs. | 6,088 | Rs. | 4,931 | Rs. | 4,448 | ||||||||||||
Total current liabilities | 1,124 | 823 | 901 | 3,582 | 2,726 | 2,121 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total equity and liabilities | Rs. | 3,253 | Rs. | 2,479 | Rs. | 2,114 | Rs. | 9,670 | Rs. | 7,657 | Rs. | 6,569 | ||||||||||||
|
|
| ||||||||||||||||||||||
Revenues | Rs. | 4,246 | Rs. | 3,377 | Rs. | 2,794 | Rs. | 9,017 | Rs. | 7,679 | Rs. | 7,436 | ||||||||||||
Expenses | 3,800 | 2,998 | 2,455 | 8,117 | 6,554 | 6,558 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Profit for the year | Rs. | 446 | Rs. | 379 | Rs. | 339 | Rs. | 900 | Rs. | 1,125 | Rs. | 878 | ||||||||||||
|
|
| ||||||||||||||||||||||
Company’s share of profits for the year | Rs. | 461 | Rs. | 577 | Rs. | 449 | ||||||||||||||||||
Carrying value of the Company’s investment(1) | Rs. | 3,307 | Rs. | 2,714 | Rs. | 2,464 | ||||||||||||||||||
Translation adjustment arising out of translation of foreign currency balances | Rs. | 438 | Rs. | 306 | Rs. | 241 |
The Company’s share of profits in Reddy Kunshan for
(1) | Includes Rs.181 representing the goodwill on acquisition of investment. |
During the yearsyear ended March 31 2016, 2015 and 2014 was Rs.229, Rs.195 and Rs.174, respectively.2020, the Company recognized an amount of Rs.392, representing its share of dividend declared by the equity accounted investee, Reddy Kunshan. The amount of dividend is adjusted against the carrying valueamount of investment in the consolidated statement of financial position.
Details of the Company’s investment in Reddy Kunshan as of March 31, 2016DRES Energy Private Limited:
As of/for the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Carrying value of the Company’s investment | Rs. | 68 | Rs. | 49 | Rs. | 65 | ||||||
Company’s share of profits for the year | 19 | (16 | ) | (11 | ) |
16. Trade and 2015 was Rs.1,309other payables
Trade and Rs.1,033, respectively. The translation adjustment arising out of translation of foreign currency balances amounted to Rs.239 and Rs.192 as of March 31, 2016 and 2015, respectively.
11. Other investments
Other investmentsother payables consist of investments in units of mutual funds, equity securities and term deposits (i.e., certificates of deposit having an original maturity period exceeding 3 months) with banks. The details of such investments as of March 31, 2016 are as follows:the following:
Cost | Gain recognized directly in equity | Fair value | ||||||||||
Investment in units of mutual funds | Rs. | 21,335 | Rs. | 1,223 | Rs. | 22,558 | ||||||
Investment in equity securities(1) | 1,458 | 293 | 1,751 | |||||||||
Term deposits with banks | 12,713 | — | 12,713 | |||||||||
|
|
|
|
|
| |||||||
Rs. | 35,506 | Rs. | 1,516 | Rs. | 37,022 | |||||||
|
|
|
|
|
| |||||||
Current portion | ||||||||||||
Investment in units of mutual funds | Rs. | 21,122 | Rs. | 1,199 | Rs. | 22,321 | ||||||
Term deposits with banks | 12,713 | — | 12,713 | |||||||||
|
|
|
|
|
| |||||||
Rs. | 33,835 | Rs. | 1,199 | Rs. | 35,034 | |||||||
|
|
|
|
|
| |||||||
Non-current portion | ||||||||||||
Investment in units of mutual funds | Rs. | 213 | Rs. | 24 | Rs. | 237 | ||||||
Investment in equity securities(1) | 1,458 | 293 | 1,751 | |||||||||
|
|
|
|
|
| |||||||
Rs. | 1,671 | Rs. | 317 | Rs. | 1,988 | |||||||
|
|
|
|
|
|
As of March 31, | ||||||||
2021 | 2020 | |||||||
Trade payables | Rs. | 12,696 | Rs. | 10,745 | ||||
Due to creditors for expenses | 5,413 | 4,503 | ||||||
Due to capital creditors | 5,635 | 1,411 | ||||||
Rs. | 23,744 | Rs. | 16,659 |
For details regarding the Company’s exposure to currency and liquidity risks, see Note 32 of these consolidated financial statements under “Liquidity risk”.
161 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
11. Other investments (continued)17. Loans and borrowings
Short-term borrowings
AsShort-term borrowings primarily consist of March 31, 2015,“pre-shipment credit” drawn by the detailsparent company and other unsecured loans drawn by parent company and certain of such investments were as follows:its subsidiaries in Russia, Brazil, Mexico, Ukraine, Switzerland, the United States and South Africa which are repayable within 6 to 12 months from the date of drawdown.
Cost | Gain recognized directly in equity | Fair value | ||||||||||
Investment in units of mutual funds | Rs. | 21,237 | Rs. | 404 | Rs. | 21,641 | ||||||
Investment in equity securities(1) | 1,456 | 1,131 | 2,587 | |||||||||
Term deposits with banks | 12,848 | — | 12,848 | |||||||||
|
|
|
|
|
| |||||||
Rs. | 35,541 | Rs. | 1,535 | Rs. | 37,076 | |||||||
|
|
|
|
|
| |||||||
Current portion | ||||||||||||
Investment in units of mutual funds | Rs. | 21,024 | Rs. | 398 | Rs. | 21,422 | ||||||
Term deposits with banks | 12,837 | — | 12,837 | |||||||||
|
|
|
|
|
| |||||||
Rs. | 33,861 | Rs. | 398 | Rs. | 34,259 | |||||||
|
|
|
|
|
| |||||||
Non-current portion | ||||||||||||
Investment in units of mutual funds | Rs. | 213 | Rs. | 6 | Rs. | 219 | ||||||
Investment in equity securities(1) | 1,456 | 1,131 | 2,587 | |||||||||
Term deposits with banks | 11 | — | 11 | |||||||||
|
|
|
|
|
| |||||||
Rs. | 1,680 | Rs. | 1,137 | Rs. | 2,817 | |||||||
|
|
|
|
|
|
|
12. Inventories
InventoriesShort-term borrowings consist of the following:
As of March 31, | ||||||||
2016 | 2015 | |||||||
Raw materials | Rs. | 5,769 | Rs. | 6,753 | ||||
Packing materials, stores and spares | 2,057 | 1,981 | ||||||
Work-in-progress | 7,049 | 6,769 | ||||||
Finished goods | 10,703 | 10,026 | ||||||
|
|
|
| |||||
Rs. | 25,578 | Rs. | 25,529 | |||||
|
|
|
|
As of March 31, | ||||||||
2021 | 2020 | |||||||
Pre-shipment credit | Rs. | 10,300 | Rs. | 10,432 | ||||
Other working capital borrowings | 12,836 | 6,009 | ||||||
Rs. | 23,136 | Rs. | 16,441 |
The above table includes inventoriesinterest rate profile of Rs.730 and Rs.901, which were carried at fair value less cost to sell as at March 31, 2016 and 2015, respectively.short-term borrowings from banks is given below:
As of March 31, | |||||
2021 | 2020 | ||||
Currency(1) | Interest Rate(2) | Currency(1) | Interest Rate(2) | ||
Pre-shipment credit | INR | 3 Months T-bill + 30 bps | INR | 1 Month T-bill + 60 bps | |
INR | 5.75% | - | - | ||
- | - | U.S.$ | 1 Month LIBOR + 12.5 to 16 bps | ||
Other working capital borrowings | U.S.$ | (2.2)% to (1.8)% | U.S.$ | 1Month/3 Months LIBOR + 55 to 78 bps | |
RUB | 3.00% to 3.40% and 5.55% | RUB | 7.05% | ||
MXN | TIIE + 1.20% | MXN | TIIE + 1.25% | ||
INR | 4.00% | INR | 7.75% | ||
BRL | 4.00% | BRL | 7.25% | ||
UAH | 4.75% | - | - | ||
- | - | ZAR | 1Month JIBAR+120 bps |
(1) | “INR” means Indian rupees, “U.S.$” means United States Dollars, “RUB” means Russian roubles, “MXN” means Mexican pesos, “UAH” means Ukrainian hryvnia, “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 and “T-bill” means India Treasury Bill. |
Long-term borrowings
Long-term borrowings consist of the following:
As of March 31, 2021 | As of March 31, 2020 | |||||||||||||||
Non-current | Current | Non-current | Current | |||||||||||||
Foreign currency borrowing by the parent company | Rs. | - | Rs. | - | Rs. | - | Rs. | 3,783 | ||||||||
Non-convertible debentures by the APSL subsidiary(1) | 3,800 | - | - | - | ||||||||||||
Obligations under leases(2) | 2,499 | 864 | 1,304 | 483 | ||||||||||||
Rs. | 6,299 | Rs. | 864 | Rs. | 1,304 | Rs. | 4,266 |
(1) | “APSL subsidiary” refers to Aurigene Pharmaceutical Services Limited. |
(2) | Additions for the year ended March 31, 2021 include right-of-use liability of Rs.1,878 relating to a warehousing services agreement in the United States. |
During the yearsyear ended March 31, 2016, 2015 and 2014,2021, the Company recorded inventory write-downsAPSL 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 Rs.2,746, Rs.3,635 and Rs.1,941, respectively. These adjustments were included in costissue.
The interest rate profiles of revenues.
Costlong-term borrowings (other than obligations under leases) as of revenues for the years ended March 31, 2016, 20152021 and 2014 includes raw materials, consumables and changes in finished goods and work in progress recognized in the income statement of Rs.33,051, Rs.36,806 and Rs.31,711, respectively. Cost of revenues for the years ended March 31, 2016, 2015 and 2014 includes other expenditures recognized in the income statement of Rs.29,376, Rs.25,980 and Rs.24,658, respectively.
13. Trade and other receivables2020 were as follows:
As of March 31, | ||||||||
2016 | 2015 | |||||||
Trade and other receivables, gross | Rs. | 42,095 | Rs. | 41,422 | ||||
Less: Allowance for doubtful trade and other receivables | (789 | ) | (667 | ) | ||||
|
|
|
| |||||
Trade and other receivables, net | Rs. | 41,306 | Rs. | 40,755 | ||||
|
|
|
|
As of March 31, | |||||
2021 | 2020 | ||||
Currency(1) | Interest Rate(2) | Currency(1) | Interest Rate(2) | ||
Foreign currency borrowings | - | - | 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. |
162 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share datadata)
17. Loans and where otherwise stated)
13. Trade and other receivablesborrowings (continued)
The Company maintains an allowance for impairmentaggregate maturities of doubtful accountslong-term loans and borrowings, based on financial condition of the customer, aging of the customer accounts receivable and historical experience of collections from customers. The activity in the allowance for impairment of trade account receivables is given below:
For the Year Ended March 31, | ||||||||
2016 | 2015 | |||||||
Balance at the beginning of the year | Rs. | 667 | Rs. | 683 | ||||
Provision for doubtful trade and other receivables, net | 137 | 168 | ||||||
Trade and other receivables written off and exchange differences | (15 | ) | (184 | ) | ||||
|
|
|
| |||||
Balance at the end of the year | Rs. | 789 | Rs. | 667 | ||||
|
|
|
|
14. Other assets
Other assets consist of the following:
As of March 31, | ||||||||
2016 | 2015 | |||||||
Current | ||||||||
Balances and receivables from statutory authorities(1) | Rs. | 4,059 | Rs. | 5,268 | ||||
Export benefits receivable(2) | 3,239 | 2,572 | ||||||
Prepaid expenses | 679 | 695 | ||||||
Others | 3,033 | 2,747 | ||||||
|
|
|
| |||||
Rs. | 11,010 | Rs. | 11,282 | |||||
|
|
|
| |||||
Non-current | ||||||||
Deposits | Rs. | 620 | Rs. | 536 | ||||
Others | 443 | 226 | ||||||
|
|
|
| |||||
Rs. | 1,063 | Rs. | 762 | |||||
|
|
|
|
|
|
15. Cash and cash equivalents
Cash and cash equivalents consist of the following:
As of March 31, | ||||||||
2016 | 2015 | |||||||
Cash balances | Rs. | 2 | Rs. | 3 | ||||
Balances with banks | 1,642 | 3,939 | ||||||
Term deposits with banks (original maturities up to 3 months) | 3,277 | 1,452 | ||||||
|
|
|
| |||||
Cash and cash equivalents in the statement of financial position | 4,921 | 5,394 | ||||||
Bank overdrafts used for cash management purposes | — | — | ||||||
|
|
|
| |||||
Cash and cash equivalents in the statement of cash flow | Rs. | 4,921 | Rs. | 5,394 | ||||
|
|
|
|
Cash and cash equivalents included restricted cash of Rs.257 and Rs.1,971, respectively,contractual maturities, as of March 31, 2016 and March 31, 2015, which consisted of:2021 were as follows:
Maturing in the year ending March 31, | Non- convertible debentures | Obligations under leases | Total | |||||||||
2022 | Rs. | - | Rs. | 864 | Rs. | 864 | ||||||
2023 | - | 802 | 802 | |||||||||
2024 | 3,800 | 745 | 4,545 | |||||||||
2025 | - | 734 | 734 | |||||||||
2026 | - | 118 | 118 | |||||||||
Thereafter | - | 100 | 100 | |||||||||
Rs. | 3,800 | Rs. | 3,363 | Rs. | 7,163 |
Rs.62
The aggregate maturities of long-term loans and borrowings, based on contractual maturities, as of March 31, 20162020 were as follows:
Maturing in the year ending March 31,(1) | Foreign currency loan | Obligations under leases | Total | |||||||||
2021 | Rs. | 3,783 | Rs. | 483 | Rs. | 4,226 | ||||||
2022 | - | 359 | 359 | |||||||||
2023 | - | 267 | 267 | |||||||||
2024 | - | 249 | 249 | |||||||||
2025 | - | 286 | 286 | |||||||||
Thereafter | - | 143 | 143 | |||||||||
Rs. | 3,783 | Rs. | 1,787 | Rs. | 5,570 |
(1) | Long-term debt obligations disclosed in the above table do not reflect any netting of transaction costs. |
Uncommitted lines of credit from banks
The Company had uncommitted lines of credit of Rs.38,766 and Rs.57Rs.39,374 as of March 31, 2015, representing amounts in2021 and 2020, respectively, from its banks for working capital requirements. The Company draw upon these lines of credit based on its working capital requirements.
Reconciliation of liabilities arising from financing activities during the Company’s unclaimed dividend and debenture interest accounts;year ended March 31, 2021:
Particulars | Long-term borrowings(1) | Short-term borrowings | Total | |||||||||
Opening balance | Rs. | 5,570 | Rs. | 16,441 | Rs. | 22,011 | ||||||
Recognition of right-of-use liability during the year | 2,393 | - | 2,393 | |||||||||
Payment of principal portion of lease liabilities | (754 | ) | - | (754 | ) | |||||||
Borrowings made during the year | 3,800 | 44,469 | 48,269 | |||||||||
Borrowings repaid during the year | (3,743 | ) | (37,678 | ) | (41,421 | ) | ||||||
Effect of changes in foreign exchange rates | (103 | ) | (96 | ) | (199 | ) | ||||||
Closing balance | Rs. | 7,163 | Rs. | 23,136 | Rs. | 30,299 |
Reconciliation of liabilities arising from financing activities during the year ended March 31, 2020:
Particulars | Long-term borrowing(1) | Short-term borrowings | Total | |||||||||
Opening balance | Rs. | 26,256 | Rs. | 12,125 | Rs. | 38,381 | ||||||
Recognition of right-of-use liability on initial application of IFRS 16 | 1,335 | - | 1,335 | |||||||||
Recognition of right-of-use liability during the year | 238 | - | 238 | |||||||||
Payment of principal portion of lease liabilities | (482 | ) | - | (482 | ) | |||||||
Borrowings made during the year | - | 29,831 | 29,831 | |||||||||
Borrowings repaid during the year | (22,918 | ) | (25,596 | ) | (48,514 | ) | ||||||
Effect of changes in foreign exchange rates | 1,051 | 81 | 1,132 | |||||||||
Others | 90 | - | 90 | |||||||||
Closing balance | Rs. | 5,570 | Rs. | 16,441 | Rs. | 22,011 |
(1) | Includes current portion. |
163 |
Rs.124 as of March 31, 2016 and Rs.1,796 as of March 31, 2015, representing cash and cash equivalents of the Company’s subsidiary in Venezuela, which are subject to foreign exchange controls (Refer to Note 41 of these consolidated financial statements for further details);
Rs.0 as of March 31, 2016 and Rs.107 as of March 31, 2015, representing amounts deposited as security for a bond executed for an environmental liability relating to the Company’s site in Mirfield, United Kingdom; and
Rs.71 as of March 31, 2016 and Rs.11 as of March 31, 2015, representing other restricted cash amounts.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
16. Equity18. Provisions
For the Year Ended March 31, | ||||||||
2016 | 2015 | |||||||
Par value per share | Rs. | 5 | Rs. | 5 | ||||
Authorized share capital | 1,200 | 1,200 | ||||||
Fully paid up share capital | ||||||||
As at April 1 | Rs. | 852 | Rs. | 851 | ||||
Add: Shares issued on exercise of stock options | 1 | 1 | ||||||
|
|
|
| |||||
As at March 31 | Rs. | 853 | Rs. | 852 | ||||
|
|
|
|
The details of changes in provisions during the year ended March 31, 2021 are as follows:
Particulars | Refund Liability(1) | Environmental liability(2) | Legal and others(3) | Total | ||||||||||||
Balance as at beginning of the year | Rs. | 3,252 | Rs. | 54 | Rs. | 548 | Rs. | 3,854 | ||||||||
Provision made during the year, net of reversals | 2,934 | - | 63 | 2,997 | ||||||||||||
Provision used during the year | (3,309 | ) | - | - | (3,309 | ) | ||||||||||
Effect of changes in foreign exchange rates | (53 | ) | 4 | - | (49 | ) | ||||||||||
Balance as at end of the year | Rs. | 2,824 | Rs. | 58 | Rs. | 611 | Rs. | 3,493 | ||||||||
Current | Rs. | 2,824 | Rs. | - | Rs. | 611 | Rs. | 3,435 | ||||||||
Non-current | - | 58 | - | 58 | ||||||||||||
Rs. | 2,824 | Rs. | 58 | Rs. | 611 | Rs. | 3,493 |
(1) | Refund liability is accounted for by recording a provision based on the Company’s estimate of expected sales returns. See Note 3(l) of these consolidated financial statements for the Company’s accounting policy on refund liability. |
(2) | As a result of the acquisition of a unit of The Dow Chemical Company in April 2008, the Company assumed a liability for contamination of the Mirfield site acquired of Rs.39 (carrying value Rs.58). The seller is required to indemnify the Company for this liability. Accordingly, a corresponding asset has also been recorded in the consolidated statements of financial position. |
(3) | Primarily consists of provision recorded towards the potential liability arising out of a litigation relating to cardiovascular and anti-diabetic formulations. Refer to Note 33 (Contingencies) of these consolidated financial statements under “Product and patent related matters - Matters relating to National Pharmaceutical Pricing Authority - Litigation relating to Cardiovascular and Anti-diabetic formulations” for further details. |
19. Other liabilities
Other liabilities consist of the following:
As of March 31, | ||||||||
2021 | 2020 | |||||||
Current | ||||||||
Accrued expenses | Rs. | 17,821 | Rs. | 18,025 | ||||
Employee benefits payable | 5,607 | 4,944 | ||||||
Statutory dues payable | 2,968 | 980 | ||||||
Deferred revenue(1) | 1,052 | 1,242 | ||||||
Advance from customers | 981 | 668 | ||||||
Others | 2,059 | 3,523 | ||||||
Rs. | 30,488 | Rs. | 29,382 | |||||
Non-current | ||||||||
Deferred revenue(1) | Rs. | 1,531 | Rs. | 1,956 | ||||
Others | 812 | 850 | ||||||
Rs. | 2,343 | Rs. | 2,806 |
(1) | Refer to Note 22 for details of deferred revenue. |
20. Share Capital
For the Year Ended March 31, 2021 | For the Year Ended March 31, 2020 | |||||||||||||||
Number | Amount | Number | Amount | |||||||||||||
Authorized share capital | 240,000,000 | Rs. | 1,200 | 240,000,000 | Rs. | 1,200 | ||||||||||
Fully paid up share capital | ||||||||||||||||
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 plan(1) | 129,149 | 1 | 106,134 | 1 | ||||||||||||
Closing number of equity shares/share capital | 166,301,231 | Rs. | 832 | 166,172,082 | Rs. | 831 | ||||||||||
Treasury shares(2) | 575,201 | Rs. | 1,967 | 395,950 | Rs. | 1,006 |
(1) | During the years ended March 31, 2021 and 2020, equity shares were issued as a result of the exercise of vested options granted to employees pursuant to the Dr. Reddy’s Employees Stock Option Scheme, 2002 and the Dr. Reddy’s Employees Stock Option Scheme, 2007. The options exercised had an exercise price of Rs.5, Rs.2,607 or 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 consolidated statements of changes in equity. |
164 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
20. Share Capital (continued)
(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 years ended March 31, 2021 and 2020, an aggregate of 85,250 and 1,150 equity shares, respectively were issued as a result of the exercise of vested options granted to employees pursuant to the Dr. Reddy’s Employees Stock Option Scheme, 2018. The options exercised had an exercise price of Rs.2,607 or 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 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 of March 31, 2021 and 2020, the ESOS Trust had outstanding 575,201 and 395,950 shares, respectively, which it purchased from the secondary market for an aggregate consideration of Rs.1,967 and Rs.1,006, respectively. Refer to Note 29 of these consolidated financial statements for further details on the Dr. Reddy’s Employees Stock Option Scheme, 2018. |
The Company presently has only one class of equity shares.shares having a par value of Rs.5 per share. For all matters submitted to vote in a shareholders meeting of the Company, every holder of an equity share, as reflected in the records of the Company as on the record date ofset for the shareholders meeting, shall have one vote in respect of each share held.
Should the Company declare and pay any dividends, such dividends will be paid in Indian rupees to each holder of equity shares in proportion to the number of shares held to the total equity shares outstanding as on that date. Indian law on foreign exchange governs the remittance of dividends outside India.
In the event of liquidation of the Company, all preferential amounts, if any, shall be discharged by the Company. The remaining assets of the Company shall be distributed to the holders of equity shares in proportion to the number of shares held to the total equity shares outstanding as on that date.
Final dividends on equity shares (including dividend tax on distribution of such dividends)dividends, if any) are recorded as a liability on the date of their approval by the shareholders and interim dividends are recorded as a liability on the date of declaration by the Company’s Board of Directors. The details of dividends paid by the Company paid dividends of Rs.3,411, Rs.3,067 and Rs.2,552 andare as follows:
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Dividend per share (in absolute Rs.) | Rs. | 25 | Rs. | 20 | Rs. | 20 | ||||||
Dividend distribution tax on the dividend paid | - | 602 | 682 | |||||||||
Dividend paid during the year | 4,147 | 3,314 | 3,320 |
Proposed dividend distribution tax thereon of Rs.695, Rs.520 and Rs.433 during the years ended March 31, 2016, 2015 and 2014, respectively. The dividend paid per share was Rs.20, Rs.18 and Rs.15 during the years ended March 31, 2016, 2015 and 2014, respectively.
At the Company’s Board of Directors’ meeting held on May 12, 2016,14, 2021, the Board proposed a dividend of Rs.20Rs.25 per share and aggregating to Rs.3,405Rs.4,158, which is subject to the approval of the Company’s shareholders and the number of shares that are bought back by the Company pursuant to the share buyback scheme commenced on April 18, 2016 (refer to Note 45 of these consolidated financial statements for further details). Upon such approval, there will be an additional cash outflow of Rs.693 for payment of dividend distribution tax thereon.shareholders.
17.
21. Earnings per share
The calculation of basic and diluted earnings per share for the years ended March 31, 2016, 20152021, 2020 and 20142019 was based on the profit attributable to equity shareholders of Rs.20,013, Rs.22,179the Company, being Rs.17,238, Rs.19,498 and Rs.21,515,Rs.18,795, respectively.
The weighted average number of equity shares outstanding, used for calculating the basic earnings per share, are as follows:
For the Year Ended March 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Issued equity shares as on April 1 | 170,381,174 | 170,108,868 | 169,836,475 | |||||||||
Effect of shares issued on exercise of stock options | 166,469 | 205,638 | 208,043 | |||||||||
Weighted average number of equity shares at March 31 | 170,547,643 | 170,314,506 | 170,044,518 | |||||||||
Earnings per share – Basic | Rs. | 117.34 | Rs. | 130.22 | Rs. | 126.52 |
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Number of equity shares at the beginning of the year (excluding treasury shares) | 165,776,132 | 165,847,972 | 165,910,907 | |||||||||
Effect of treasury shares held during the year | (56,014 | ) | (154,020 | ) | (100,672 | ) | ||||||
Effect of equity shares issued on exercise of stock options | 124,222 | 64,432 | 103,801 | |||||||||
Weighted average number of equity shares – Basic | 165,844,340 | 165,758,384 | 165,914,036 | |||||||||
Earnings per share of par value Rs.5 – Basic | Rs. | 103.94 | Rs. | 117.63 | Rs. | 113.28 |
The weighted average number of equity shares outstanding, used for calculating the diluted earnings per share, are as follows:
For the Year Ended March 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Weighted average number of equity shares (Basic) | 170,547,643 | 170,314,506 | 170,044,518 | |||||||||
Dilutive effect of stock options outstanding | 525,137 | 618,927 | 650,499 | |||||||||
Weighted average number of equity shares (Diluted) | 171,072,780 | 170,933,433 | 170,695,017 | |||||||||
Earnings per share – Diluted | Rs. | 116.98 | Rs. | 129.75 | Rs. | 126.04 |
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Weighted average number of equity shares – Basic | 165,844,340 | 165,758,384 | 165,914,036 | |||||||||
Dilutive effect of stock options outstanding(1) | 471,701 | 323,601 | 278,718 | |||||||||
Weighted average number of equity shares – Diluted | 166,316,041 | 166,081,985 | 166,192,754 | |||||||||
Earnings per share of par value Rs.5 – Diluted | Rs. | 103.65 | Rs. | 117.40 | Rs. | 113.09 |
(1) | As of March 31, 2021 and 2020, 235,460 and 475,575 options, respectively, were excluded from the diluted weighted average number of equity shares calculation because their effect would have been anti-dilutive. The average market value of the Company’s shares for the purpose of calculating the dilutive effect of stock options was based on quoted market prices for the year during which the options were outstanding. |
165 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
22. Revenue from contracts with customers and trade receivables
Revenue from contracts with customers:
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Sales | Rs. | 184,202 | Rs. | 163,574 | Rs. | 148,706 | ||||||
Service income | 4,105 | 2,409 | 2,129 | |||||||||
License fees(1)(2) | 1,415 | 8,617 | 3,016 | |||||||||
Rs. | 189,722 | Rs. | 174,600 | Rs. | 153,851 |
(1) | During the year ended March 31, 2020, the Company entered into a definitive agreement with Upsher-Smith Laboratories, LLC for the sale of its U.S. and select territory rights for ZEMBRACE® SYMTOUCH® (sumatriptan injection) 3 mg and TOSYMRA® (sumatriptan nasal spray) 10 mg (formerly referred to as “DFN-02”), which formed part of its Proprietary Products segment. License fees includes an amount of Rs.7,486 towards the aforesaid sale transaction. |
(2) | License fees for the year ended March 31, 2019 primarily includes out-licensing revenue of Rs.1,807 from Encore Dermatology Inc. |
Analysis of revenues by segments:
For the Year Ended March 31, | ||||||||||||
Segment | 2021 | 2020 | 2019 | |||||||||
Global Generics | Rs. | 154,404 | Rs. | 138,123 | Rs. | 122,903 | ||||||
PSAI | 31,982 | 25,747 | 24,140 | |||||||||
Proprietary products | 523 | 7,949 | 4,750 | |||||||||
Others | 2,813 | 2,781 | 2,058 | |||||||||
Rs. | 189,722 | Rs. | 174,600 | Rs. | 153,851 |
Analysis of revenues within the Global Generics segment:
An analysis of revenues by therapeutic areas in the Company’s Global Generics segment is given below:
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Nervous System | Rs. | 29,040 | Rs. | 26,825 | Rs. | 19,726 | ||||||
Gastrointestinal | 21,132 | 19,394 | 19,250 | |||||||||
Oncology | 16,842 | 18,245 | 18,357 | |||||||||
Cardiovascular | 15,460 | 14,729 | 15,106 | |||||||||
Pain Management | 15,531 | 13,808 | 13,806 | |||||||||
Anti-Infective | 12,906 | 9,402 | 7,073 | |||||||||
Respiratory | 11,089 | 10,433 | 8,130 | |||||||||
Others | 32,404 | 25,287 | 21,455 | |||||||||
Total | Rs. | 154,404 | Rs. | 138,123 | Rs. | 122,903 |
Analysis of revenues within the PSAI segment:
An analysis of revenues by therapeutic areas in the Company’s PSAI segment is given below:
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Cardiovascular | Rs. | 9,834 | Rs. | 8,567 | Rs. | 7,019 | ||||||
Pain Management | 4,657 | 5,073 | 3,364 | |||||||||
Anti-Infective | 4,126 | 2,264 | 1,247 | |||||||||
Nervous System | 2,704 | 2,797 | 2,741 | |||||||||
Oncology | 2,385 | 1,798 | 2,212 | |||||||||
Dermatology | 768 | 1,370 | 1,622 | |||||||||
Others | 7,508 | 3,878 | 5,935 | |||||||||
Total | Rs. | 31,982 | Rs. | 25,747 | Rs. | 24,140 |
166 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
22. Revenue from contracts with customers and trade receivables (continued)
Analysis of revenues by geography:
The following table shows the distribution of the Company’s revenues by country, based on the location of the customers:
For the Year Ended March 31, | ||||||||||||
Country | 2021 | 2020 | 2019 | |||||||||
India | Rs. | 36,252 | Rs. | 32,089 | Rs. | 28,804 | ||||||
United States | 76,702 | 76,028 | 69,299 | |||||||||
Russia | 15,816 | 16,900 | 15,299 | |||||||||
Others(1) | 60,952 | 49,583 | 40,449 | |||||||||
Rs. | 189,722 | Rs. | 174,600 | Rs. | 153,851 |
(1) | Others include Germany, the United Kingdom, Ukraine, China, Canada and other countries across the world. |
Information about major customers
Revenues from two customers of the Company's Global Generics segment were Rs.19,341 and Rs.9,867, representing approximately 10% and 5%, respectively, of the Company’s total revenues for the year ended March 31, 2021.
Revenues from two customers of the Company's Global Generics segment were Rs.14,164 and Rs.9,267, representing approximately 8% and 5%, respectively, of the Company’s total revenues for the year ended March 31, 2020.
Revenues from two customers of the Company's Global Generics segment were Rs.10,639 and Rs.10,024, each representing approximately 7% of the Company’s total revenues for the year ended March 31, 2019.
Details of deferred revenue:
Tabulated below is the reconciliation of deferred revenue for the years ended March 31, 2021 and 2020.
For the Year Ended March 31, | ||||||||
2021 | 2020 | |||||||
Balance as of April 1 | Rs. | 3,198 | Rs. | 2,592 | ||||
Revenue recognized during the year | (1,089 | ) | (1,250 | ) | ||||
Milestone payment received during the year | 474 | 1,856 | ||||||
Balance as of March 31 | Rs. | 2,583 | Rs. | 3,198 | ||||
Current | 1,052 | 1,242 | ||||||
Non-current | 1,531 | 1,956 |
Details of significant gross to net adjustments relating to Company’s North America Generics business (amounts in U.S.$ millions)
A roll-forward for each major accrual for the Company’s North America Generics business for the fiscal years ended March 31, 2019, 2020 and 2021 is as follows:
Particulars | Chargebacks | Rebates | Medicaid | Refund Liability(3) | ||||||||||||
(All values in U.S.$ millions) | ||||||||||||||||
Beginning Balance: April 1, 2018 | 170 | 161 | 12 | 28 | ||||||||||||
Current provisions relating to sales during the year | 1,415 | 461 | 18 | 29 | ||||||||||||
Provisions and adjustments relating to sales in prior years | * | - | - | - | ||||||||||||
Credits and payments** | (1,457 | ) | (530 | ) | (19 | ) | (27 | ) | ||||||||
Ending Balance: March 31, 2019 | 128 | 92 | 11 | 30 | ||||||||||||
Beginning Balance: April 1, 2019 | 128 | 92 | 11 | 30 | ||||||||||||
Current provisions relating to sales during the year (1) | 1,468 | 319 | 20 | 21 | ||||||||||||
Provisions and adjustments relating to sales in prior years | * | - | - | - | ||||||||||||
Credits and payments** | (1,440 | ) | (331 | ) | (20 | ) | (27 | ) | ||||||||
Ending Balance: March 31, 2020 | 156 | 80 | 11 | 24 | ||||||||||||
Beginning Balance: April 1, 2020 | 156 | 80 | 11 | 24 | ||||||||||||
Current provisions relating to sales during the year (2) | 1,702 | 245 | 21 | 15 | ||||||||||||
Provisions and adjustments relating to sales in prior years | * | - | - | - | ||||||||||||
Credits and payments** | (1,656 | ) | (247 | ) | (19 | ) | (20 | ) | ||||||||
Ending Balance: March 31, 2021 | 202 | 78 | 13 | 19 |
167 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
22. Revenue from contracts with customers and trade receivables (continued)
* | Currently, the Company does not separately track provisions and adjustments, in each case to the extent relating to prior years for chargebacks. However, the adjustments are expected to be non-material. The volumes used to calculate the closing balance of chargebacks represent approximately 1.3 months equivalent of sales, which corresponds to the pending chargeback claims yet to be processed. |
** | Currently, the Company does not separately track the credits and payments, in each case to the extent relating to prior years for chargebacks, rebates, medicaid payments or refund liability. |
(1) | Chargebacks provisions for the year ended March 31, 2020 were higher compared to the year ended March 31, 2019, primarily as a result of higher sales volumes, which were partially offset due to a lower pricing rates per unit for chargebacks. Such lower pricing was primarily on account of a reduction in the invoice price to wholesalers for certain of the Company’s products. The chargebacks payments for the year ended March 31, 2020 were lower compared to the year ended March 31, 2019, primarily as a result of higher pending chargebacks claims at March 31, 2020 as compared to March 31, 2019. The rebates provisions and the payments for the year ended March 31, 2020 were each lower as compared to the year ended March 31, 2019, primarily as a result of lower pricing rates per unit for rebates, due to a reduction in the invoice price to wholesalers for certain of the Company’s products, which were partially offset by higher sales volumes during the year ended March 31, 2020 as compared to the year ended March 31, 2019. |
(2) | Chargebacks provisions and payments for the year ended March 31, 2021 were each higher as compared to the year ended March 31, 2020, primarily as a result of higher sales volumes and also due to higher pricing rates per unit for chargebacks, due to reduction in the contract prices through which the product is resold in the retail part of the supply chain for certain of the Company’s products. The rebates provisions and payments for the year ended March 31, 2021 were each lower as compared to the year ended March 31, 2020, primarily as a result of lower pricing rates per unit for rebates, due to a reduction in the invoice price to wholesalers for certain of the Company’s products and also due to reduction in the contract prices through which the product is resold in the retail part of the supply chain for certain of the Company’s products, which were partially off-set by higher sales volumes during the year ended March 31, 2021 as compared to the year ended March 31, 2020. |
(3) | The Company’s overall refund liability as of March 31, 2021 relating to its North America Generics business was U.S.$19, as compared to a liability of U.S.$24 as of March 31, 2020. This decrease in the Company’s liability was primarily attributable to a lower refund liability allowance for the year ended March 31, 2021 as compared to the year ended March 31, 2020. Such allowance change was primarily due to certain product mix changes and recent trends in actual sales returns, together with the Company’s historical experience and also the price reduction for certain products resulting into lower refund liability to be carried. |
The estimates of “gross-to-net” adjustments for the Company’s operations in India and other countries outside of the United States relate mainly to refund liability in all such operations, and certain rebates to healthcare insurance providers are specific to the Company’s German operations. The pattern of such refund liability is generally consistent with the Company’s gross sales. In Germany, the rebates to healthcare insurance providers mentioned above are contractually fixed in nature and do not involve significant estimations by the Company.
Details of refund liabilities:
For the Year Ended March 31, | ||||||||
2021 | 2020 | |||||||
Balance at the beginning of the year | Rs. | 3,252 | Rs. | 3,581 | ||||
Provision made during the year, net of reversals | 2,934 | 2,675 | ||||||
Provision used during the year | (3,309 | ) | (3,224 | ) | ||||
Effect of changes in foreign exchange rates | (53 | ) | 220 | |||||
Balance at the closing of the year | Rs. | 2,824 | Rs. | 3,252 | ||||
Current | Rs. | 2,824 | Rs. | 3,252 | ||||
Non-current | - | - |
Details of contract asset:
As mentioned in the accounting policies for refund liability set forth in Note 3.l. of these consolidated financial statements, the Company recognizes an asset (i.e., the right to the returned goods), which is included in inventories, for the products expected to be returned. The Company initially measures this asset at the former carrying amount of the inventory, less any expected costs to recover the goods, including any potential decreases in the value of the returned goods. Along with re-measuring the refund liability at the end of each reporting period, the Company updates the measurement of the asset recorded for any revisions to its expected level of returns, as well as any additional decreases in the value of the returned products.
As of March 31, 2021 and 2020, the Company had Rs.37 and Rs.23, respectively, as contract assets representing the right to returned goods.
Details of contract liabilities
As of March 31, | ||||||||
2021 | 2020 | |||||||
Advance from customers | Rs. | 981 | Rs. | 668 | ||||
Rs. | 981 | Rs. | 668 |
168 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
23. Other income, net
Other income, net consists of the following:
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Loss/(gain) on sale/disposal of non-current assets, net(1) | Rs. | 42 | Rs. | 10 | Rs. | (1,264 | ) | |||||
Sale of spent chemicals | (270 | ) | (306 | ) | (356 | ) | ||||||
Scrap sales | (142 | ) | (167 | ) | (179 | ) | ||||||
Miscellaneous income, net(2) | (612 | ) | (3,827 | ) | (156 | ) | ||||||
Rs. | (982 | ) | Rs. | (4,290 | ) | Rs. | (1,955 | ) |
(1) | Gain on disposal of assets for the year ended March 31, 2019 includes: |
a) | an amount of Rs.582 representing the profit on sale of intangible assets forming part of the Company’s Proprietary Products segment after adjusting associated cost; |
b) | an amount of Rs.423 representing the profit on sale of an API manufacturing business unit located in Jeedimetla, Hyderabad; and |
c) | an amount of Rs.110 representing the profit on sale of all the membership interests in Dr. Reddy’s Laboratories Tennessee, LLC. |
(2) | Miscellaneous income, net includes Rs.3,457 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. |
24. | Finance income, net |
Finance income, net consists of the following:
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Interest income | Rs. | 826 | Rs. | 888 | Rs. | 770 | ||||||
Fair value changes and profit on sale of units of mutual funds, net | 557 | 929 | 773 | |||||||||
Foreign exchange gain | 1,240 | 639 | 737 | |||||||||
Miscellaneous income, net | - | * | 5 | - | ||||||||
Finance income (A) | Rs. | 2,623 | Rs. | 2,461 | Rs. | 2,280 | ||||||
Interest expense | Rs. | (970 | ) | Rs. | (983 | ) | Rs. | (889 | ) | |||
Foreign exchange loss | - | - | (274 | ) | ||||||||
Finance expense (B) | Rs. | (970 | ) | Rs. | (983 | ) | Rs. | (1,163 | ) | |||
Finance income, net [(A)+(B)] | Rs. | 1,653 | Rs. | 1,478 | Rs. | 1,117 |
* Rounded to the nearest million.
25. Income taxes
a.Income tax expense/(benefit) recognized in the consolidated income statement
Income tax expense/(benefit) recognized in the consolidated income statement consists of the following:
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Current taxes | ||||||||||||
Domestic | Rs. | 5,849 | Rs. | 5,157 | Rs. | 3,003 | ||||||
Foreign | 2,323 | 1,459 | 1,707 | |||||||||
Rs. | 8,172 | Rs. | 6,616 | Rs. | 4,710 | |||||||
Deferred taxes | ||||||||||||
Domestic | Rs. | 2,736 | Rs. | (6,580 | ) | Rs. | 244 | |||||
Foreign | (1,733 | ) | (1,502 | ) | (1,306 | ) | ||||||
Rs. | 1,003 | Rs. | (8,082 | ) | Rs. | (1,062 | ) | |||||
Tax expense/(benefit), net | Rs. | 9,175 | Rs. | (1,466 | ) | Rs. | 3,648 |
169 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
25. Income taxes (continued)
b.Income tax expense/(benefit) recognized directly in equity
Income tax expense/(benefit) recognized directly in equity consists of the following:
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Tax effect on changes in fair value of other investments | Rs. | 293 | Rs. | - | Rs. | 411 | ||||||
Tax effect on foreign currency translation differences | - | - | (14 | ) | ||||||||
Tax effect on effective portion of change in fair value of cash flow hedges | 319 | (232 | ) | 69 | ||||||||
Tax effect on actuarial gains/losses on defined benefit obligations | (73 | ) | 22 | 3 | ||||||||
Rs. | 539 | Rs. | (210 | ) | Rs. | 469 |
c.Reconciliation of effective tax rate
The following is a reconciliation of the Company’s effective tax rates for the years ended March 31, 2021, 2020 and 2019:
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Profit before income taxes | Rs. | 26,413 | Rs. | 18,032 | Rs. | 22,443 | ||||||
Enacted tax rate in India | 34.94 | % | 34.94 | % | 34.94 | % | ||||||
Computed expected tax expense | Rs. | 9,229 | Rs. | 6,301 | Rs. | 7,842 | ||||||
Effect of: | ||||||||||||
Differences between Indian and foreign tax rates | Rs. | 810 | Rs. | 3,385 | Rs. | (734 | ) | |||||
Unrecognized deferred tax assets/(recognition of previously unrecognized deferred tax assets, net) | 1,220 | (6,478 | ) | 482 | ||||||||
Expenses not deductible for tax purposes | 230 | 155 | 340 | |||||||||
Reversal of earlier years’ tax provisions | - | - | (282 | ) | ||||||||
Income exempt from income taxes | (1,807 | ) | (1,029 | ) | (1,282 | ) | ||||||
Foreign exchange differences | (18 | ) | (64 | ) | (470 | ) | ||||||
Incremental deduction allowed for research and development costs(1) | - | (1,241 | ) | (1,134 | ) | |||||||
Tax expense on distributed/undistributed earnings of subsidiary outside India | - | 254 | - | |||||||||
Write off of accounts receivables | - | - | (1,294 | ) | ||||||||
Income from sale of capital assets | - | (2,620 | ) | - | ||||||||
Effect of change in tax rate | (333 | ) | (37 | ) | 3 | |||||||
Others | (156 | ) | (92 | ) | 177 | |||||||
Income tax expense/(benefit) | Rs. | 9,175 | Rs. | (1,466 | ) | Rs. | 3,648 | |||||
Effective tax rate | 35 | % | (8 | )% | 16 | % |
(1) | India’s Finance Act, 2016 incorporated an amendment that reduces the weighted deduction on eligible research and development expenditure in a phased manner from 200% to 150% commencing from April 1, 2017 and from 150% to 100% effective April 1, 2020. |
The Company’s effective tax rate for the year ended March 31, 2021 was higher as compared to the year ended March 31, 2020 primarily on account of:
· | de-recognition of deferred tax asset during the year ended March 31, 2021 due to non-availability of depreciation on goodwill pursuant to an amendment to section 2(11) of the Income Tax Act in the Finance Act, 2021; |
· | recognition of a deferred tax asset related to the Minimum Alternate Tax (“MAT”) credits and planned restructuring activity between companies of our group during the year ended March 31, 2020; |
· | weighted deduction on eligible research and development expenditure in Dr. Reddy’s Laboratories Limited, India for the year ended March 31, 2020; and |
· | income from sale of capital assets during the year ended March 31, 2020, which was set off against the carried forward capital loss. |
d.Unrecognized deferred tax assets
The details of unrecognized deferred tax assets are summarized below:
As of March 31, | ||||||||
2021 | 2020 | |||||||
Deductible temporary differences, net | Rs. | 738 | Rs. | 394 | ||||
Operating tax loss carry-forward | 4,742 | 3,926 | ||||||
Rs. | 5,480 | Rs. | 4,320 |
170 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
25. Income taxes (continued)
During the year ended March 31, 2021, the Company recognized deferred tax assets on operating tax losses pertaining primarily to Dr. Reddy’s Laboratories New York, Inc. as the Company believes that it is probable that there will be available taxable profits against which such tax losses can be utilized.
During the year ended March 31, 2021, the Company did not recognize deferred tax assets on operating tax losses and other deductible temporary differences pertaining primarily to Dr. Reddy’s Laboratories SA, Switzerland and Dr. Reddy’s Research and Development B.V., Netherlands.
Deferred income taxes are not provided on undistributed earnings of Rs.19,543 and Rs.22,988 as of March 31, 2021 and 2020, respectively of subsidiaries, where it is expected that earnings of the subsidiaries will not be distributed in the foreseeable future. Generally, the Company indefinitely reinvests all of the accumulated undistributed earnings of subsidiaries, and accordingly, has not recorded any deferred taxes in relation to such undistributed earnings of its subsidiaries.
e.Deferred tax assets and liabilities
The tax effects of significant temporary differences that resulted in deferred tax assets and liabilities and a description of the items that created these differences is given below:
As of March 31, | ||||||||
2021 | 2020 | |||||||
Deferred tax assets/(liabilities): | ||||||||
Inventory | Rs. | 3,997 | Rs. | 3,216 | ||||
Minimum Alternate Tax* | 4,748 | 6,246 | ||||||
Trade and other receivables | 569 | 369 | ||||||
Operating/other tax loss carry-forward | 2,593 | 3,399 | ||||||
Other current assets and other current liabilities, net | 1,404 | 1,448 | ||||||
Property, plant and equipment | (2,547 | ) | (2,361 | ) | ||||
Other intangible assets | (283 | ) | (477 | ) | ||||
Others | (189 | ) | 99 | |||||
Net deferred tax assets | Rs. | 10,292 | Rs. | 11,939 |
* | As per Indian tax laws, companies are liable for a Minimum Alternate Tax (“MAT”) when current tax, as computed under the provisions of the Income Tax Act, 1961 (“Tax Act”), is determined to be below the MAT computed under section 115JB of the Tax Act. If in any year the Company pays a MAT, then it is entitled to claim credit of the MAT paid over and above the normal tax liability in the subsequent years. The MAT credit is eligible to be carried forward and set-off in the future against the current tax liabilities over a period of 15 years starting from the succeeding fiscal year in which such credit was generated. |
In assessing whether the deferred income tax assets will be realized, management considers whether some portion or all of the deferred income tax assets will not be realized. The ultimate realization of the deferred income tax assets and tax loss carry-forwards is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategy in making this assessment. Based on the level of historical taxable income and projections of future taxable income over the periods in which the deferred tax assets are deductible, management believes that the Company will realize the benefits of those recognized deductible differences and tax loss carry-forwards. Recoverability of deferred tax assets is based on estimates of future taxable income. Any changes in such future taxable income would impact the recoverability of deferred tax assets.
Operating loss carry-forward consists of business losses, unabsorbed depreciation and unabsorbed interest carry-forwards. A portion of this total loss can be carried indefinitely and the remaining amounts expire at various dates ranging from 2022 through 2037.
f.Movement in deferred tax assets and liabilities during the years ended March 31, 2021 and 2020.
As of March 31, 2020 | Recognized in income statement | Recognized in equity | As of March 31, 2021 | |||||||||||||
Deferred tax assets/(liabilities): | ||||||||||||||||
Inventory | Rs. | 3,216 | Rs. | 781 | Rs. | - | Rs. | 3,997 | ||||||||
Minimum Alternate Tax | 6,246 | (1,498 | ) | - | 4,748 | |||||||||||
Trade and other receivables | 369 | 200 | - | 569 | ||||||||||||
Operating/other tax loss carry-forward | 3,399 | (806 | ) | - | 2,593 | |||||||||||
Other current assets and other current liabilities, net | 1,448 | (44 | ) | - | 1,404 | |||||||||||
Property, plant and equipment | (2,361 | ) | (187 | ) | - | (2,548 | ) | |||||||||
Other intangible assets | (477 | ) | 194 | - | (283 | ) | ||||||||||
Others | 99 | 252 | (539 | ) | (188 | ) | ||||||||||
Net deferred tax assets | Rs. | 11,939 | Rs. | (1,108 | ) | Rs. | (539 | ) | Rs. | 10,292 |
171 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
25. Income taxes (continued)
The details of movement in deferred tax assets and liabilities are summarized below:
As of March 31, 2019 | Recognized in income statement | Recognized in equity | As of March 31, 2020 | |||||||||||||
Deferred tax assets/(liabilities): | ||||||||||||||||
Inventory | Rs. | 3,285 | Rs. | (69 | ) | Rs. | - | Rs. | 3,216 | |||||||
Minimum Alternate Tax | 1,630 | 4,616 | - | 6,246 | ||||||||||||
Trade and other receivables: | 316 | 53 | - | 369 | ||||||||||||
Operating/other tax loss carry-forward | 297 | 3,102 | - | 3,399 | ||||||||||||
Other current assets and other current liabilities, net | 1,315 | 133 | - | 1,448 | ||||||||||||
Property, plant and equipment | (2,665 | ) | 304 | - | (2,361 | ) | ||||||||||
Other intangible assets | (662 | ) | 185 | - | (477 | ) | ||||||||||
Others | 42 | (153 | ) | 210 | 99 | |||||||||||
Net deferred tax assets | Rs. | 3,558 | Rs. | 8,171 | Rs. | 210 | Rs. | 11,939 |
The amounts recognized in the consolidated income statement for the years ended March 31, 2021 and 2020 include Rs.(105) and Rs.89, respectively, which represent exchange differences arising due to foreign currency translations.
g.Uncertain tax positions
The Company is contesting various disallowances by the Indian Income Tax authorities. The associated tax impact for disallowances being more likely than not to be accepted by Tax authorities is Rs.2,291, and accordingly, no provision is made in these consolidated financial statements as of March 31, 2021.
During the years ended March 31, 2014, 2015 and 2016, Industrias Quimicas Falcon de Mexico, S.A. de CV, a wholly-owned subsidiary of the Company in Mexico, received a notice from Mexico's Tax Administration Service, Servicio de Administracion Tributaria (“SAT”), with respect to disallowance on account of transfer pricing adjustments pertaining to the calendar years ended December 31, 2006, December 31, 2007 and December 31, 2008. The associated tax impact is Rs.801 (MXN 224) and profit share impact is Rs.89 (MXN 25). The Company filed administrative appeals with the SAT by challenging these disallowances and, during February and March 2017, the Company received orders of the SAT confirming these disallowances by dismissing its administrative appeals. The Company disagrees with the SAT’s disallowances and filed an appeal with the Tribunal Federal de Justicia Administrativa (Federal Tax and Administrative Court of Mexico) in March and April 2017. The Company believes that it is more likely than not that it would prevail over the SAT in this litigation. Accordingly, no provision has been made in these consolidated financial statements as of March 31, 2021.
26. Nature of Expense
The following table shows supplemental information related to certain “nature of expense” items for the years ended March 31, 2021, 2020 and 2019:
For the Year Ended March 31, | ||||||||||||
Employee benefits | 2021 | 2020 | 2019 | |||||||||
Cost of revenues | Rs. | 11,529 | Rs. | 10,643 | Rs. | 10,644 | ||||||
Selling, general and administrative expenses | 20,052 | 18,658 | 18,291 | |||||||||
Research and development expenses | 4,718 | 4,501 | 4,627 | |||||||||
Rs. | 36,299 | Rs. | 33,802 | Rs. | 33,562 |
For the Year Ended March 31, | ||||||||||||
Depreciation | 2021 | 2020 | 2019 | |||||||||
Cost of revenues | Rs. | 6,061 | Rs. | 6,366 | Rs. | 6,484 | ||||||
Selling, general and administrative expenses | 1,491 | 1,294 | 801 | |||||||||
Research and development expenses | 975 | 980 | 1,077 | |||||||||
Rs. | 8,527 | Rs. | 8,640 | Rs. | 8,362 |
For the Year Ended March 31, | ||||||||||||
Amortization | 2021 | 2020 | 2019 | |||||||||
Cost of revenues | Rs. | - | Rs. | 175 | Rs. | 284 | ||||||
Selling, general and administrative expenses | 4,171 | 3,547 | 3,421 | |||||||||
Research and development expenses | 98 | 110 | 123 | |||||||||
Rs. | 4,269 | Rs. | 3,832 | Rs. | 3,828 |
In addition, for details relating to costs of material consumed, refer to Note 10 of these consolidated financial statements.
172 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
18. Loans and borrowings27. Operating leases
Short term borrowings
The Company had net short term borrowingshas leased offices and vehicles under various operating lease agreements that are renewable on a periodic basis at the option of Rs.22,718 as of March 31, 2016, as compared to Rs.21,857 as of March 31, 2015. The borrowings primarily consist of “packing credit” and other rupee loans drawn byboth the parent company and other foreign currency unsecured loan drawn by Dr. Reddy’s Laboratories SA (one of the Company’s subsidiaries in Switzerland).
Short term borrowings consist of the following:
As at March 31, | ||||||||
2016 | 2015 | |||||||
Packing credit borrowings | Rs. | 20,896 | Rs. | 20,857 | ||||
Other foreign currency borrowings | 1,822 | — | ||||||
Other rupee borrowings | — | 1,000 | ||||||
|
|
|
| |||||
Rs. | 22,718 | Rs. | 21,857 | |||||
|
|
|
|
The interest rate profile of short term borrowings from banks is given below:
As at March 31, | ||||||||||||
2016 | 2015 | |||||||||||
Currency | Interest Rate | Currency | Interest Rate | |||||||||
Packing credit borrowings | USD | LIBOR + (5) to 15 bps | USD | LIBOR + 10 to 40 bps | ||||||||
EURO | LIBOR + 5 to 7.5 bps | EURO | LIBOR + 7.5 to 20 bps | |||||||||
RUB | 10.65% to 11.57% | RUB | 9.80% to 22.30% | |||||||||
Other foreign currency borrowings | USD | LIBOR + 40 bps | — | — | ||||||||
Other rupee borrowings | — | — | INR | 10% |
Long term borrowings
Long term borrowings, measured at amortized cost, consist of the following:
As at March 31 | ||||||||
2016 | 2015 | |||||||
Foreign currency borrowing by the Company’s Swiss subsidiary(1) | Rs. | — | Rs. | 10,292 | ||||
Foreign currency borrowing by the parent company | 9,938 | 9,375 | ||||||
Foreign currency borrowing by the Company’s U.K. subsidiary(1) | — | 740 | ||||||
Obligations under finance leases | 857 | 862 | ||||||
|
|
|
| |||||
Rs. | 10,795 | Rs. | 21,269 | |||||
|
|
|
| |||||
Current portion | ||||||||
Foreign currency borrowing by the Company’s Swiss subsidiary(1) | Rs. | — | Rs. | 6,875 | ||||
Obligations under finance leases | 110 | 87 | ||||||
|
|
|
| |||||
Rs. | 110 | Rs. | 6,962 | |||||
|
|
|
| |||||
Non-current portion | ||||||||
Foreign currency borrowing by the Company’s Swiss subsidiary(1) | Rs. | — | Rs. | 3,417 | ||||
Foreign currency borrowing by the parent company | 9,938 | 9,375 | ||||||
Foreign currency borrowing by the Company’s U.K. subsidiary(1) | — | 740 | ||||||
Obligations under finance leases | 747 | 775 | ||||||
|
|
|
| |||||
Rs. | 10,685 | Rs. | 14,307 | |||||
|
|
|
|
|
In the above table, the term “Swiss subsidiary” refers to Dr. Reddy’s Laboratories, SAlessor and the term “U.K. Subsidiary” refers to Dr. Reddy’s Laboratories (EU) Limited.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
18. Loans and borrowings (continued)
Long term borrowings (continued)
Long-term bank loan of Swiss Subsidiary
Duringlessee. Rental expense under these leases was Rs.905 for the year ended March 31, 2012, Dr. Reddy’s Laboratories, SA (one2019.
The schedule of future minimum rental payments in respect of non-cancellable operating leases is set out below:
As of March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Less than one year | Rs. | - | Rs. | - | Rs. | 405 | ||||||
Between one and five years | - | - | 797 | |||||||||
More than five years | - | - | 89 | |||||||||
Rs. | - | Rs. | - | Rs. | 1,291 |
Commencing April 1, 2019, upon adoption of IFRS 16, majority of leases for which the Company is a lessee are recognized as a lease liability with corresponding right-of-use assets recognized in the statement of financial position.
Upon adoption of the Company’s subsidiaries in Switzerland) (the “Swiss Subsidiary”) borrowed U.S.$220 from certain institutional lenders. The Swiss Subsidiary was required to repay the loan in eight equal quarterly installments commencing at the endnew standard, a portion of the 39th month and continuing until the end of the 60th month from September 30, 2011. The parent company had guaranteed all obligations of the Swiss Subsidiary under the loan agreement.annual operating lease costs, which was previously fully recognized as a functional expense, is recorded as interest expense.
As part of this arrangement, the Company
28. Employee benefits
Total employee benefit expenses, including share-based payments, incurred U.S.$3.73 in arrangement fees and other administrative charges. The Company accounted for these costs as transaction costs under IAS 39 and they were amortized over the term of the loan using the effective interest method.
The carrying amount of the foregoing loan, measured at amortized cost using the effective interest rate method, as on March 31, 2015 was Rs.10,292 (U.S.$165).
Repayments during the year
Tabulated below are the details of repayment of the loan taken by the Swiss Subsidiary during the yearyears ended March 31, 2016:
Particulars | Amount in U.S.$ | Amount in Rs. | ||||||
During the quarter ended June 30, 2015 | U.S.$ | 27.5 | Rs. | 1,750 | ||||
During the quarter ended September 30, 2015 (including the prepayment of U.S.$110) | 137.5 | 9,018 | ||||||
|
|
|
| |||||
Total | U.S.$ | 165.0 | Rs. | 10,768 | ||||
|
|
|
|
As a result of the above repayment, the unamortized portion of arrangement fees2021, 2020 and other administrative charges of U.S.$0.26 was recognized as finance cost during the year ended March 31, 2016.
New loans taken during the year
Further, during the three months ended September 30, 2015, a short-term borrowing of U.S.$82.52019 amounted to Rs.36,299, Rs.33,802 and a packing credit borrowing of U.S.$27.5 were taken by the Swiss Subsidiary and by the parent company, respectively. As both of these loans are repayable within a period of 12 months, they are disclosed as part of short-term borrowings. During the six months ended March 31, 2016, the Company repaid U.S.$55 of the short-term borrowings taken by the Swiss Subsidiary.
Long-term bank loan of the parent company
During the year ended March 31, 2014, the Company borrowed the sum of U.S.$150. The Company is required to repay the loan in five equal quarterly installments commencing at the end of the 54th month and continuing until the end of the 66th month from August 12, 2013.
The loan agreement imposes various financial covenants on the Company. As of March 31, 2016, the Company was in compliance with such financial covenants.
Undrawn lines of credit from bankers
The Company has undrawn lines of credit of Rs.14,771 and Rs.10,438 as of March 31, 2016 and 2015, 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.
Non-derivative financial liabilities designated as cash flow hedges
The Company has designated some of its foreign currency borrowings from banks (non-derivative financial liabilities) as hedging instruments for hedge of foreign currency risk associated with highly probable forecasted transactions and, accordingly, applies cash flow hedge accounting for such relationships. Re-measurement gain/loss on such non-derivative financial liabilities is recorded in the Company’s hedging reserve as a component of equity and re-classified to the income statement as revenue in the period corresponding to the occurrence of the forecasted transactions. The carrying value of such non-derivative financial liabilities as of March 31, 2016 and March 31, 2015 was Rs.3,644 and Rs.10,313,Rs.33,562, respectively.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
18. Loans and borrowings (continued)
Long term borrowings (continued)
The interest rate profile of long-term borrowings (other than obligations under finance leases) is given below:
As at March 31, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
Currency | Interest Rate | Currency | Interest Rate | |||||||||||||
Foreign currency borrowings | USD | LIBOR + 125 bps | USD | LIBOR + 100 to 125 bps | ||||||||||||
— | — | GBP | LIBOR+130 bps |
The aggregate maturities of long term loans and borrowings, based on contractual maturities, as of March 31, 2016 were as follows:
Maturing in the year ending March 31, | Foreign currency loan | Obligations under finance leases | Total | |||||||||
2017 | Rs. | — | Rs. | 110 | Rs. | 110 | ||||||
2018 | 1,988 | 101 | 2,089 | |||||||||
2019 | 7,950 | 59 | 8,009 | |||||||||
2020 | — | 54 | 54 | |||||||||
2021 | — | 58 | 58 | |||||||||
Thereafter | — | 475 | 475 | |||||||||
|
|
|
|
|
| |||||||
Rs. | 9,938 | Rs. | 857 | Rs. | 10,795 | |||||||
|
|
|
|
|
|
The aggregate maturities of long term loans and borrowings, based on contractual maturities, as of March 31, 2015 were as follows:
Maturing in the year ending March 31, | Foreign currency loan | Obligations under finance leases | Total | |||||||||
2016 | Rs. | 6,875 | Rs. | 87 | Rs. | 6,962 | ||||||
2017 | 4,177 | 89 | 4,266 | |||||||||
2018 | 1,875 | 82 | 1,957 | |||||||||
2019 | 7,500 | 48 | 7,548 | |||||||||
2020 | — | 44 | 44 | |||||||||
Thereafter | — | 512 | 512 | |||||||||
|
|
|
|
|
| |||||||
Rs. | 20,427 | Rs. | 862 | Rs. | 21,289 | |||||||
|
|
|
|
|
|
Obligations under finance leases
The Company has leased buildings, plant and machinery and vehicles under finance leases. Future minimum lease payments under finance leases as at March 31, 2016 were as follows:
Particulars | Present value of minimum lease payments | Interest | Future minimum lease payments | |||||||||
Not later than one year | Rs. | 110 | Rs. | 106 | Rs. | 216 | ||||||
Between one and five years | 272 | 203 | 475 | |||||||||
More than five years | 475 | 125 | 600 | |||||||||
|
|
|
|
|
| |||||||
Rs. | 857 | Rs. | 434 | Rs. | 1,291 | |||||||
|
|
|
|
|
|
Future minimum lease payments under finance leases as at March 31, 2015 were as follows:
Particulars | Present value of minimum lease payments | Interest | Future minimum lease payments | |||||||||
Not later than one year | Rs. | 87 | Rs. | 117 | Rs. | 204 | ||||||
Between one and five years | 263 | 249 | 512 | |||||||||
More than five years | 512 | 185 | 697 | |||||||||
|
|
|
|
|
| |||||||
Rs. | 862 | Rs. | 551 | Rs. | 1,413 | |||||||
|
|
|
|
|
|
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
19. Employee benefits
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 primarily invested in Indian government bonds issued by the Government of India and corporatein debt securities. A small portion of the fund is also invested insecurities and equity securities of Indian companies.
The components of gratuity cost recognized in the income statement for the years ended March 31, 2016, 20152021, 2020 and 20142019 consist of the following:
For the Year Ended March 31, | For the Year Ended March 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2021 | 2020 | 2019 | |||||||||||||||||||
Current service cost | Rs. | 177 | Rs. | 148 | Rs. | 126 | Rs. | 281 | Rs. | 276 | Rs. | 265 | ||||||||||||
Interest on net defined benefit liability/(asset) | 2 | 7 | 9 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Interest on defined benefit liability | 8 | (4 | ) | (2 | ) | |||||||||||||||||||
Gratuity cost recognized in income statement | Rs. | 179 | Rs. | 155 | Rs. | 135 | Rs. | 289 | Rs. | 272 | Rs. | 263 | ||||||||||||
|
|
|
Details of the employee benefits obligations and plan assets are provided below:
As of March 31, | As of March 31, | |||||||||||||||
2016 | 2015 | 2021 | 2020 | |||||||||||||
Present value of funded obligations | Rs. | 1,540 | Rs. | 1,236 | Rs. | 2,628 | Rs. | 2,349 | ||||||||
Fair value of plan assets | (1,303 | ) | (1,157 | ) | (1,997 | ) | (2,160 | ) | ||||||||
|
| |||||||||||||||
Net defined benefit liability recognized | Rs. | 237 | Rs. | 79 | Rs. | 631 | Rs. | 189 | ||||||||
|
|
Details of changes in the present value of defined benefit obligations are as follows:
As of March 31, | ||||||||
2016 | 2015 | |||||||
Defined benefit obligations at the beginning of the year | Rs. | 1,236 | Rs. | 1,040 | ||||
Current service cost | 177 | 148 | ||||||
Interest on defined obligations | 93 | 87 | ||||||
Re-measurements due to: | ||||||||
Actuarial loss/(gain) due to change in financial assumptions | 35 | 12 | ||||||
Actuarial loss/(gain) due to demographic assumptions | 11 | 6 | ||||||
Actuarial loss/(gain) due to experience changes | 106 | 27 | ||||||
Benefits paid | (118 | ) | (84 | ) | ||||
|
|
|
| |||||
Defined benefit obligations at the end of the year | Rs. | 1,540 | Rs. | 1,236 | ||||
|
|
|
|
Details of changes in the fair value of plan assets are as follows:
As of March 31, | ||||||||
2021 | 2020 | |||||||
Defined benefit obligations at the beginning of the year | Rs. | 2,349 | Rs. | 2,200 | ||||
Current service cost | 281 | 276 | ||||||
Interest on defined obligations | 140 | 152 | ||||||
Re-measurements due to: | ||||||||
Actuarial loss/(gain) due to change in financial assumptions | 153 | (96 | ) | |||||
Actuarial loss/(gain) due to demographic assumptions | (26 | ) | (48 | ) | ||||
Actuarial loss/(gain) due to experience changes | 51 | 59 | ||||||
Benefits paid | (345 | ) | (194 | ) | ||||
Liabilities assumed/(transferred)(1) | 25 | - | ||||||
Defined benefit obligations at the end of the year | Rs. | 2,628 | Rs. | 2,349 |
As of March 31, | ||||||||
2016 | 2015 | |||||||
Fair value of plan assets at the beginning of the year | Rs. | 1,157 | Rs. | 909 | ||||
Employer contributions | 190 | 209 | ||||||
Interest on plan assets | 91 | 80 | ||||||
Re-measurements due to: | ||||||||
Return on plan assets excluding interest on plan assets | (17 | ) | 43 | |||||
Benefits paid | (118 | ) | (84 | ) | ||||
|
|
|
| |||||
Plan assets at the end of the year | Rs. | 1,303 | Rs. | 1,157 | ||||
|
|
|
|
173 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
19.28. Employee benefits (continued)
(1) Liabilities assumed/transferred of Rs.25 is comprised of:
a) | Rs.70 increase in liabilities on account of the acquisition of employees pursuant to the Business Transfer Agreement with Wockhardt Limited. Refer to Note 6 of these consolidated financial statements for further details. |
b) | Rs.45 transfer of liabilities on account of a restructuring of the pharmaceutical services business between the parent company and its subsidiary. |
Details of changes in the fair value of plan assets are as follows:
As of March 31, | ||||||||
2021 | 2020 | |||||||
Fair value of plan assets at the beginning of the year | Rs. | 2,160 | Rs. | 2,174 | ||||
Employer contributions | 25 | 14 | ||||||
Interest on plan assets | 132 | 156 | ||||||
Re-measurements due to: | ||||||||
Return on plan assets excluding interest on plan assets | (1 | ) | 10 | |||||
Benefits paid | (345 | ) | (194 | ) | ||||
Assets acquired/(transferred)(1) | 26 | - | ||||||
Plan assets at the end of the year | Rs. | 1,997 | Rs. | 2,160 |
(1) Assets acquired/transferred of Rs.26 is comprised of:
a) | Rs.70 increase in assets on account of the acquisition of employees pursuant to the Business Transfer Agreement with Wockhardt Limited. Refer to Note 6 of these consolidated financial statements for further details. |
b) | Rs.44 transfer of assets on account of a restructuring of the pharmaceutical services business between the parent company and its subsidiary. |
Sensitivity Analysis:
As of | ||||
Defined benefit obligation without effect of projected salary growth | Rs. | |||
Add: Effect of salary growth | ||||
Defined benefit obligation with projected salary growth | ||||
Defined benefit obligation, using discount rate minus 50 basis points | ||||
Defined benefit obligation, using discount rate plus 50 basis points | 2,559 | |||
Defined benefit obligation, using salary growth rate plus 50 basis points | ||||
Defined benefit obligation, using salary growth rate minus 50 basis points | 2,560 |
Summary of the actuarial assumptions:The actuarial assumptions used in accounting for the Gratuity Planplan are as follows:
The assumptions used to determine benefit obligations:
For the Year Ended March 31, | For the Year Ended March 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2021 | 2020 | 2019 | |||||||||||||||||||
Discount rate | 7.80 | % | 8.00 | % | 9.00 | % | 6.00 | % | 6.65 | % | 7.45 | % | ||||||||||||
Rate of compensation increase | | 10% per annum for first 2 years and 9% per annum thereafter | | | 10% per annum for first 2 years and 9% per annum thereafter | | | 11% per annum for first 2 years and 10% per annum thereafter | | 8.00 | % | 7.50 | % | 8% per annum for the first year and 9% per annum thereafter |
The assumptions used to determine gratuity cost:
For the Year Ended March 31, | For the Year Ended March 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2021 | 2020 | 2019 | |||||||||||||||||||
Discount rate | 8.00 | % | 9.00 | % | 7.95 | % | 6.65 | % | 7.45 | % | 7.75 | % | ||||||||||||
Rate of compensation increase | | 10% per annum for first 2 years and 9% per annum thereafter | | | 11% per annum for first 2 years and 10% per annum thereafter | | | 10% per annum for first 2 years and 9% per annum thereafter | | 7.50 | % | 8% per annum for the first year and 9% per annum thereafter | 7% per annum for the first year and 9% per annum thereafter |
Contributions:The Company expects to contribute Rs.237Rs.317 to the Gratuity Plan during the year ending March 31, 2017.2022.
Disaggregation of plan assets:The Gratuity Plan’s weighted-average asset allocation atas of March 31, 20162021 and 2015,2020, by asset category, was as follows:
As of March 31, | ||||||||
2016 | 2015 | |||||||
Funds managed by insurers | 99 | % | 99 | % | ||||
Others | 1 | % | 1 | % |
The expected future cash flows in respect of gratuity as at March 31, 2016 were as follows:
As of March 31, | ||||||||
2021 | 2020 | |||||||
Funds managed by insurers | 100 | % | 99 | % | ||||
Others | - | 1 | % |
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
|
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
19.28. Employee benefits (continued)
The expected future cash flows in respect of gratuity as of March 31, 2021 were as follows:
Expected contribution | Amount | |||
During the year ended March 31, 2022 (estimated) | Rs. | 317 | ||
Expected future benefit payments | ||||
March 31, 2022 | 452 | |||
March 31, 2023 | 390 | |||
March 31, 2024 | 361 | |||
March 31, 2025 | 339 | |||
March 31, 2026 | 308 | |||
Thereafter | 1,971 |
Pension plan of the Company’s subsidiary, Industrias Quimicas Falcon de Mexico
All employees of the Company’s Mexican subsidiary, Industrias Quimicas Falcon de Mexico (“Falcon”), are entitled to a pension benefit in the form of a defined benefit pension plan. The Falcon pension plan provides for payment to vested employees at retirement or termination of employment. Liabilities in respect of the pension plan are determined by an actuarial valuation, based on which the Company makes contributions to the pension plan fund. This fund is administered by a third party, who is provided guidance by a technical committee formed by senior employees of Falcon.
The components of net pension cost recognized in the income statement for the years ended March 31, 2016, 20152021, 2020 and 20142019 consist of the following:
For the Year Ended March 31, | For the Year Ended March 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2021 | 2020 | 2019 | |||||||||||||||||||
Current service cost | Rs. | 14 | Rs. | 13 | Rs. | 18 | Rs. | 13 | Rs. | 11 | Rs. | 13 | ||||||||||||
Interest on net defined benefit liability/(asset) | 11 | 9 | 11 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Interest on defined benefit liability | 8 | 16 | 15 | |||||||||||||||||||||
Total cost recognized in income statement | Rs. | 25 | Rs. | 22 | Rs. | 29 | Rs. | 21 | Rs. | 27 | Rs. | 28 | ||||||||||||
|
|
|
Details of the employee benefits obligationobligations and plan assets are provided below:
As of March 31, | As of March 31, | |||||||||||||||
2016 | 2015 | 2021 | 2020 | |||||||||||||
Present value of funded obligations | Rs. | 249 | Rs. | 252 | Rs. | 307 | Rs. | 234 | ||||||||
Fair value of plan assets | (61 | ) | (68 | ) | (169 | ) | (128 | ) | ||||||||
|
| |||||||||||||||
Net defined benefit liability recognized | Rs. | 188 | Rs. | 184 | Rs. | 138 | Rs. | 106 | ||||||||
|
|
Details of changes in the present value of defined benefit obligations are as follows:
As of March 31, | As of March 31, | |||||||||||||||
2016 | 2015 | 2021 | 2020 | |||||||||||||
Defined benefit obligations at the beginning of the year | Rs. | 252 | Rs. | 252 | Rs. | 234 | Rs. | 223 | ||||||||
Current service cost | 14 | 13 | 13 | 11 | ||||||||||||
Interest on defined obligations | 17 | 18 | 21 | 25 | ||||||||||||
Re-measurements due to: | ||||||||||||||||
Actuarial loss/(gain) due to change in financial assumptions | (7 | ) | 13 | 24 | 50 | |||||||||||
Actuarial loss/(gain) due to demographic assumptions | 7 | 0 | ||||||||||||||
Actuarial loss/(gain) due to experience changes | 3 | 25 | 19 | (8 | ) | |||||||||||
Benefits paid | (22 | ) | (42 | ) | (32 | ) | (41 | ) | ||||||||
Foreign exchange differences | (15 | ) | (27 | ) | ||||||||||||
|
| |||||||||||||||
Foreign exchanges differences | 28 | (26 | ) | |||||||||||||
Defined benefit obligations at the end of the year | Rs. | 249 | Rs. | 252 | Rs. | 307 | Rs. | 234 | ||||||||
|
|
Details of changes in the fair value of plan assets are as follows:
As of March 31, | As of March 31, | |||||||||||||||
2016 | 2015 | 2021 | 2020 | |||||||||||||
Fair value of plan assets at the beginning of the year | Rs. | 68 | Rs. | 110 | Rs. | 128 | Rs. | 70 | ||||||||
Employer contributions | 16 | 3 | 32 | 113 | ||||||||||||
Interest on plan assets | 6 | 9 | 13 | 9 | ||||||||||||
Re-measurements due to: | ||||||||||||||||
Return on plan assets excluding interest on plan assets | (2 | ) | (2 | ) | 12 | (7 | ) | |||||||||
Benefits paid | (22 | ) | (42 | ) | (32 | ) | (41 | ) | ||||||||
Foreign exchange differences | (5 | ) | (11 | ) | ||||||||||||
|
| |||||||||||||||
Foreign exchanges differences | 16 | (16 | ) | |||||||||||||
Plan assets at the end of the year | Rs. | 61 | Rs. | 68 | Rs. | 169 | Rs. | 128 | ||||||||
|
|
175 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
19.28. Employee benefits (continued)
Sensitivity Analysis:
As of March 31, | ||||
Defined benefit obligation without effect of projected salary growth | Rs. | |||
| ||||
Defined benefit obligation with projected salary growth | ||||
Defined benefit obligation, using discount rate minus 50 basis points | ||||
Defined benefit obligation, using discount rate plus 50 basis points | 294 | |||
Defined benefit obligation, using salary growth rate plus 50 basis points | ||||
Defined benefit obligation, using salary growth rate minus 50 basis points | 294 |
Contributions:The Company expects to contribute Rs.38 to the Falcon defined benefit plans during the year ending March 31, 2017.
Summary of the actuarial assumptions:The actuarial assumptions used in accounting for the Falcon defined benefit plans are as follows:
Assumptions
The assumptions used to determine defined benefit obligations:
Year Ended March 31, | For the Year Ended March 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2021 | 2020 | 2019 | |||||||||||||||||||
Discount rate | 7.75 | % | 7.50 | % | 8.00 | % | 7.75 | % | 8.75 | % | 11.25 | % | ||||||||||||
Rate of compensation increase | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % |
Assumptions
The assumptions used to determine defined benefit cost:
For the Year Ended March 31, | For the Year Ended March 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2021 | 2020 | 2019 | |||||||||||||||||||
Discount rate | 7.50 | % | 8.00 | % | 6.50 | % | 8.75 | % | 11.25 | % | 9.00 | % | ||||||||||||
Rate of compensation increase | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % |
Plan
Contributions: The Company expects to contribute Rs.36 to Falcon defined benefit plans during the year ending March 31, 2022.
Disaggregation of plan assets:The Falcon pension plan’s weighted-average asset allocation atas of March 31, 20162021 and 2015,2020, by asset category, iswas as follows:
As of March 31, | ||||||||||||||||
As of March 31, | 2021 | 2020 | ||||||||||||||
2016 | 2015 | |||||||||||||||
Corporate bonds | 51 | % | 51 | % | ||||||||||||
Funds managed by insurers | 51 | % | 51 | % | ||||||||||||
Others | 49 | % | 49 | % | 49 | % | 49 | % |
The expected future cash flows in respect of post-employment benefit plans in Mexico as atof March 31, 20162021 were as follows:
Expected contribution | Amount | |||
During the year ended March 31, | Rs. | |||
| ||||
| ||||
| ||||
March 31, | ||||
March 31, | ||||
March 31, | ||||
| ||||
March 31, 2026 | 21 | |||
Thereafter | 608 |
Provident fund benefits
Certain categories of employees of the Company receive benefits from a provident fund, a defined contribution plan. Both the employee and employer each make monthly contributions to a government administered fund equal to 12% of the covered employee’s qualifying salary. The Company has no further obligations under the plan beyond its monthly contributions. The Company contributed Rs.574, Rs.492Rs.906, Rs.812 and Rs.411Rs.740 to the provident fund plan during the years ended March 31, 2016, 20152021, 2020 and 2014,2019, respectively.
Superannuation benefits
Certain categories of employees of the Company participate in superannuation, a defined contribution plan administered by the Life Insurance Corporation of India. The Company makes annualmonthly contributions based on a specified percentage of each covered employee’s salary. The Company has no further obligations under the plan beyond its annualmonthly contributions. The Company contributed Rs.71, Rs.68Rs.84, Rs.82 and Rs.63Rs.84 to the superannuation plan during the years ended March 31, 2016, 20152021, 2020 and 2014,2019, respectively.
176 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
19.28. Employee benefits (continued)
Other contribution plans
In the United States, the Company sponsors a defined contribution 401(k) retirement savings plan for all eligible employees who meet minimum age and service requirements. The Company contributed Rs.204, Rs.195Rs.139, Rs.177 and Rs.162Rs.213 to the 401(k) retirement savings plan during the years ended March 31, 2016, 20152021, 2020 and 2014,2019, respectively. The Company has no further obligations under the plan beyond its annualmonthly matching contributions.
In the United Kingdom, certain social security benefits (such as pension, unemployment and disability) are funded by employers and employees through mandatory National Insurance contributions. The contribution amounts are determined based upon the employee’s salary. The Company has no further obligations under the plan beyond its monthly contributions. The Company contributed Rs.156, Rs.151Rs.143, Rs.135 and Rs.151Rs.148 to the National Insurance during the years ended March 31, 2016, 20152021, 2020 and 2014,2019, 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 itthem 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.792Rs.1,130 and Rs.616 as at March 31, 2016 and 2015, respectively.
Long term incentive plan
Certain senior management employees of the Company participate in a long term incentive plan which is aimed at rewarding the individual, based on performance of such individual, their business unit/function and the Company as a whole, with significantly higher rewards for superior performances. The total liability recorded by the Company towards this benefit was Rs.881Rs.1,161 as of March 31, 2016.
Total employee benefit expenses, including share based payments, incurred during the years ended March 31, 2016, 20152021 and 2014 amounted to Rs.31,174, Rs.28,967 and Rs.24,937,2020, respectively.
20.
29. Employee stock incentive plans
Dr. Reddy’s Employees Stock Option Plan -2002Scheme, 2002 (the “DRL 2002 Plan”):
The Company instituted the DRL 2002 Plan for all eligible employees pursuant to the special resolution approved by the shareholders in the Annual General Meeting held on September 24, 2001. The DRL 2002 Plan covers all employees of DRL and its subsidiaries and directors (excluding promoter directors) of DRLthe parent company and its subsidiaries (collectively, “eligible employees”). The Nomination, Governance and Compensation Committee of the Board of DRLthe parent company (the “Committee”) administers the DRL 2002 Plan and grants stock options to eligible employees. The Committee determines which eligible employees will receive options, the number of options to be granted, the exercise price, the vesting period and the exercise period. The vesting period is determined for all options issued on the date of grant. The options issued under the DRL 2002 Plan vest in periods ranging between one and four years and generally have a maximum contractual term of five years.
The DRL 2002 Plan, as amended at annual general meetings of shareholders held on July 28, 2004 and on July 27, 2005, provides for stock option grants in two categories:
Category A: 300,000 stock options out of the total of 2,295,478 options reserved for grant having an exercise price equal to the fair market value of the underlying equity shares on the date of grant; and
Category B: 1,995,478 stock options out of the total of 2,295,478 options reserved for grant having an exercise price equal to the par value of the underlying equity shares (i.e., Rs.5 per option).
Under the DRL 2002 Plan, the exercise price of the fair market value options granted under Category A above is determined based on the average closing price for 30 days prior to the grant in the stock exchange where there is highest trading volume during that period. Notwithstanding the foregoing, the Committee may, after obtaining the approval of the shareholders in the annual general meeting, grant options with a per share exercise price other than fair market value and par value of the equity shares.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
20. Employee stock incentive plans (continued)
Dr. Reddy’s Employees Stock Option Plan -2002 (the “DRL 2002 Plan”) (continued)
After the stock split effected in the form of a stock dividend issued by the Company in August 2006, the DRL 2002 Plan provides for stock option grants in the above two categories as follows:
Particulars | Number of options reserved under category A | Number of options reserved under category B | Total | |||||||||
Options reserved under original Plan | 300,000 | 1,995,478 | 2,295,478 | |||||||||
Options exercised prior to stock dividend date (A) | 94,061 | 147,793 | 241,854 | |||||||||
Balance of shares that can be allotted on exercise of options (B) | 205,939 | 1,847,685 | 2,053,624 | |||||||||
Options arising from stock dividend (C) | 205,939 | 1,847,685 | 2,053,624 | |||||||||
Options reserved after stock dividend (A+B+C) | 505,939 | 3,843,163 | 4,349,102 |
Stock option activity under the DRL 2002 Plan for the two categories of options during the years ended March 31, 2016 and 2015 is as follows:
Category A — Fair Market Value Options: There was no stock options activity under this category during the year March 31, 2016 and there were no options outstanding under this category as of March 31, 2016.
Particulars | Number of options reserved under category A | Number of options reserved under category B | Total | |||||||||
Options reserved under original Plan | 300,000 | 1,995,478 | 2,295,478 | |||||||||
Options exercised prior to stock dividend date (A) | 94,061 | 147,793 | 241,854 | |||||||||
Balance of shares that can be allotted on exercise of options (B) | 205,939 | 1,847,685 | 2,053,624 | |||||||||
Options arising from stock dividend (C) | 205,939 | 1,847,685 | 2,053,624 | |||||||||
Options reserved after stock dividend (A+B+C) | 505,939 | 3,843,163 | 4,349,102 |
For the Year Ended March 31, 2016 | ||||||||||||||||
Category B — Par Value Options | Shares arising out of options | Range of exercise prices | Weighted average exercise price | Weighted average remaining useful life (months) | ||||||||||||
Outstanding at the beginning of the period | 585,454 | Rs. | 5.00 | Rs. | 5.00 | 71 | ||||||||||
Granted during the period | 102,224 | 5.00 | 5.00 | 90 | ||||||||||||
Expired/forfeited during the period | (66,319 | ) | 5.00 | 5.00 | — | |||||||||||
Exercised during the period | (194,011 | ) | 5.00 | 5.00 | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Outstanding at the end of the period | 427,348 | Rs. | 5.00 | Rs. | 5.00 | 72 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Exercisable at the end of the period | 53,801 | Rs. | 5.00 | Rs. | 5.00 | 42 | ||||||||||
|
|
|
|
|
|
|
|
For the Year Ended March 31, 2015 | ||||||||||||||||
Category A — Fair Market Value Options | Shares arising out of options | Range of exercise prices | Weighted average exercise price | Weighted average remaining useful life (months) | ||||||||||||
Outstanding at the beginning of the period | 10,000 | Rs. | 448 | Rs. | 448 | 44 | ||||||||||
Granted during the period | — | — | — | — | ||||||||||||
Expired/forfeited during the period | — | — | — | — | ||||||||||||
Exercised during the period | (10,000 | ) | Rs. | 448 | Rs. | 448 | — | |||||||||
|
|
|
|
|
|
|
| |||||||||
Outstanding at the end of the period | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Exercisable at the end of the period | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
20. Employee stock incentive plans (continued)
Dr. Reddy’s Employees Stock Option Plan -2002 (the “DRL 2002 Plan”) (continued)
For the Year Ended March 31, 2015 | ||||||||||||||||
Category B — Par Value Options | Shares arising out of options | Range of exercise prices | Weighted average exercise price | Weighted average remaining useful life (months) | ||||||||||||
Outstanding at the beginning of the period | 641,674 | Rs. | 5.00 | Rs. | 5.00 | 78 | ||||||||||
Granted during the period | 230,840 | 5.00 | 5.00 | 90 | ||||||||||||
Expired/forfeited during the period | (59,148 | ) | 5.00 | 5.00 | — | |||||||||||
Exercised during the period | (227,912 | ) | 5.00 | 5.00 | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Outstanding at the end of the period | 585,454 | Rs. | 5.00 | Rs. | 5.00 | 71 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Exercisable at the end of the period | 43,425 | Rs. | 5.00 | Rs. | 5.00 | 40 | ||||||||||
|
|
|
|
|
|
|
|
The weighted average grant date fair value of par value options granted under category B above of the DRL 2002 Plan during the years ended March 31, 2016 and 2015 was Rs.3,350 and Rs.2,318 per option, respectively. The weighted average share price on the date of exercise of options during the years ended March 31, 2016 and 2015 was Rs.3,504 and Rs.2,525 per share, respectively.
The aggregate intrinsic value of options exercised under the DRL 2002 Plan (both category A and B) during the years ended March 31, 2016 and 2015 was Rs.679 and Rs.595, respectively. As of March 31, 2016, options outstanding under the DRL 2002 Plan (both category A and B) had an aggregate intrinsic value of Rs.1,295 and options exercisable under the DRL 2002 Plan (both category A and B) had an aggregate intrinsic value of Rs.163.
The term of the DRL 2002 plan was extended for a period of 10 years effective as of January 29, 2012 by the shareholders at the Company’s Annual General Meeting held on July 20, 2012.
Stock option activity under the DRL 2002 Plan for the two categories of options during the years ended March 31, 2021 and 2020 is as follows:
Category A — Fair Market Value Options: There was no stock activity under this category during the years ended March 31, 2021 and 2020, and there were no stock options outstanding under this category as of March 31, 2021 and 2020.
177 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
29. Employee stock incentive plans (continued)
Category B — Par Value Options: Stock options activity under this category during the years ended March 31, 2021 and 2020 was as set forth in the below table.
For the Year Ended March 31, 2021 | ||||||||||||||||
Category B — Par Value Options | Shares arising out of options | Range of exercise prices | Weighted average exercise price | Weighted average remaining useful life (months) | ||||||||||||
Outstanding at the beginning of the year | 232,837 | Rs. | 5.00 | Rs. | 5.00 | 69 | ||||||||||
Granted during the year | 92,092 | 5.00 | 5.00 | 93 | ||||||||||||
Expired/forfeited during the year | (35,646 | ) | 5.00 | 5.00 | - | |||||||||||
Exercised during the year | (72,030 | ) | 5.00 | 5.00 | - | |||||||||||
Outstanding at the end of the year | 217,253 | Rs. | 5.00 | Rs. | 5.00 | 69 | ||||||||||
Exercisable at the end of the year | 46,130 | Rs. | 5.00 | Rs. | 5.00 | 44 |
For the Year Ended March 31, 2020 | ||||||||||||||||
Category B — Par Value Options | Shares arising out of options | Range of exercise prices | Weighted average exercise price | Weighted average remaining useful life (months) | ||||||||||||
Outstanding at the beginning of the year | 270,141 | Rs. | 5.00 | Rs. | 5.00 | 73 | ||||||||||
Granted during the year | 49,796 | 5.00 | 5.00 | 90 | ||||||||||||
Expired/forfeited during the year | (14,934 | ) | 5.00 | 5.00 | - | |||||||||||
Exercised during the year | (72,166 | ) | 5.00 | 5.00 | - | |||||||||||
Outstanding at the end of the year | 232,837 | Rs. | 5.00 | Rs. | 5.00 | 69 | ||||||||||
Exercisable at the end of the year | 40,548 | Rs. | 5.00 | Rs. | 5.00 | 43 |
The weighted average grant date fair value of options granted during the years ended March 31, 2021 and 2020 was Rs.3,677 and Rs.2,746 per option, respectively. The weighted average share price on the date of exercise of options during the years ended March 31, 2021 and 2020 was Rs.4,565 and Rs.2,681 per share, respectively.
The aggregate intrinsic value of options exercised during the years ended March 31, 2021 and 2020 was Rs.328 and Rs.193, respectively. As of March 31, 2021, options outstanding had an aggregate intrinsic value of Rs.980 and options exercisable had an aggregate intrinsic value of Rs.208.
Dr. Reddy’s Employees ADR Stock Option Plan,Scheme, 2007 (the “DRL 2007 Plan”)
The Company instituted the DRL 2007 Plan for all eligible employees in pursuance of the special resolution approved by the shareholders in the Annual General Meeting held on July 27, 2005. The DRL 2007 Plan became effective upon its approval by the Board of Directors on January 22, 2007. The DRL 2007 Plan covers all employees and directors (excluding promoter directors) of DRL and its subsidiaries (collectively, “eligible employees”). The Committee administers the DRL 2007 Plan and grants stock options to eligible employees. The Committee determines which eligible employees will receive the options, the number of options to be granted, the exercise price, the vesting period and the exercise period. The vesting period is determined for all options issued on the date of grant. The options issued under the DRL 2007 Plan vest in periods ranging between one and four years and generally have a maximum contractual term of five years.
The DRL 2007 Plan provides for option grants in two categories:
Category A: 382,695 stock options out of the total of 1,530,779 stock options reserved for grant having an exercise price equal to the fair market value of the underlying equity shares on the date of grant; and
Category B: 1,148,084 stock options out of the total of 1,530,779 stock options reserved for grant having an exercise price equal to the par value of the underlying equity shares (i.e., Rs.5 per option).
No options have been granted under Category A as of March 31, 2016. Stock options activity for category B options under the DRL 2007 Plan during the years ended March 31, 2016 and 2015 is as follows:
178 |
For the Year Ended March 31, 2016 | ||||||||||||||||
Category B — Par Value Options | Shares arising out of options | Range of exercise prices | Weighted average exercise price | Weighted average remaining useful life (months) | ||||||||||||
Outstanding at the beginning of the period | 98,350 | Rs. | 5.00 | Rs. | 5.00 | 72 | ||||||||||
Granted during the period | 40,184 | 5.00 | 5.00 | 90 | ||||||||||||
Expired/forfeited during the period | (14,023 | ) | 5.00 | 5.00 | — | |||||||||||
Exercised during the period | (32,468 | ) | 5.00 | 5.00 | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Outstanding at the end of the period | 92,043 | Rs. | 5.00 | Rs. | 5.00 | 79 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Exercisable at the end of the period | 7,141 | Rs. | 5.00 | Rs. | 5.00 | 45 | ||||||||||
|
|
|
|
|
|
|
|
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
20.29. Employee stock incentive plans (continued)
Dr. Reddy’s Employees ADR Stock Option Plan, 2007 (the “DRL 2007 Plan”) (continued)
Stock options activity under the DRL 2007 Plan for the above two categories of options during the years ended March 31, 2021 and 2020 was as follows:
For the Year Ended March 31, 2015 | ||||||||||||||||
Category B — Par Value Options | Shares arising out of options | Range of exercise prices | Weighted average exercise price | Weighted average remaining useful life (months) | ||||||||||||
Outstanding at the beginning of the period | 97,463 | Rs. | 5.00 | Rs. | 5.00 | 79 | ||||||||||
Granted during the period | 45,796 | 5.00 | 5.00 | 90 | ||||||||||||
Expired/forfeited during the period | (10,515 | ) | 5.00 | 5.00 | — | |||||||||||
Exercised during the period | (34,394 | ) | 5.00 | 5.00 | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Outstanding at the end of the period | 98,350 | Rs. | 5.00 | Rs. | 5.00 | 72 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Exercisable at the end of the period | 6,730 | Rs. | 5.00 | Rs. | 5.00 | 42 | ||||||||||
|
|
|
|
|
|
|
|
For the Year Ended March 31, 2021 | ||||||||||||||
Category A — Fair Market Value Options | Shares arising out of options | Range of exercise prices | Weighted average exercise price | Weighted average remaining useful life (months) | ||||||||||
Outstanding at the beginning of the year | 202,760 | Rs.1,982.00 to Rs.2,814.00 | Rs.2,353.62 | 72 | ||||||||||
Granted during the year | 96,080 | 3,679.00 | 3,679.00 | 90 | ||||||||||
Expired/forfeited during the year | (13,348 | ) | 2,607.00/ 2,814.00 | 2,678.03 | - | |||||||||
Exercised during the year | (15,152 | ) | 2,607.00/ 2,814.00 | 2,643.48 | - | |||||||||
Outstanding at the end of the year | 270,340 | Rs.1,982.00 to Rs.3,679.00 | Rs.2,791.65 | 67 | ||||||||||
Exercisable at the end of the year | 69,530 | Rs.1,982.00 to Rs.2,814.00 | Rs.2,182.21 | 45 |
For the Year Ended March 31, 2020 | ||||||||||||||||
Category A — Fair Market Value Options | Shares arising out of options | Range of exercise prices | Weighted average exercise price | Weighted average remaining useful life (months) | ||||||||||||
Outstanding at the beginning of the year | 146,060 | Rs.1,982.00/ Rs.2,607.00 | Rs.2,166.00 | 81 | ||||||||||||
Granted during the year | 61,700 | 2,814.00 | 2,814.00 | 90 | ||||||||||||
Expired/forfeited during the year | (5,000 | ) | 2,607.00 | 2,607.00 | - | |||||||||||
Exercised during the year | - | - | - | - | ||||||||||||
Outstanding at the end of the year | 202,760 | Rs.1,982.00 to Rs.2,814.00 | Rs.2,353.62 | 72 | ||||||||||||
Exercisable at the end of the year | 35,265 | Rs.1,982.00/ Rs.2,607.00 | Rs.2,150.81 | 51 |
The weighted average grant date fair value of par value options granted under category B of the DRL 2007 Plan during the years ended March 31, 20162021 and 20152020 was Rs.3,465Rs.1,255 and Rs.2,283,Rs.993 per option, respectively. The weighted average share price on the date of exercise of options during the year ended March 31, 2021 was Rs.4,506 per share..
The aggregate intrinsic value of options exercised during the year ended March 31, 2021 was Rs.28. As of March 31, 2021, options outstanding had an aggregate intrinsic value of Rs.466 and options exercisable had an aggregate intrinsic value of Rs.120.
For the Year Ended March 31, 2021 | ||||||||||||||||
Category B — Par Value Options | Shares arising out of options | Range of exercise prices | Weighted average exercise price | Weighted average remaining useful life (months) | ||||||||||||
Outstanding at the beginning of the year | 151,583 | Rs. | 5.00 | Rs. | 5.00 | 73 | ||||||||||
Granted during the year | 52,316 | 5.00 | 5.00 | 89 | ||||||||||||
Expired/forfeited during the year | (19,933 | ) | 5.00 | 5.00 | - | |||||||||||
Exercised during the year | (41,967 | ) | 5.00 | 5.00 | - | |||||||||||
Outstanding at the end of the year | 141,999 | Rs. | 5.00 | Rs. | 5.00 | 71 | ||||||||||
Exercisable at the end of the year | 15,393 | Rs. | 5.00 | Rs. | 5.00 | 41 |
179 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
29. Employee stock incentive plans (continued)
For the Year Ended March 31, 2020 | ||||||||||||||||
Category B — Par Value Options | Shares arising out of options | Range of exercise prices | Weighted average exercise price | Weighted average remaining useful life (months) | ||||||||||||
Outstanding at the beginning of the year | 115,155 | Rs. | 5.00 | Rs. | 5.00 | 73 | ||||||||||
Granted during the year | 89,282 | 5.00 | 5.00 | 90 | ||||||||||||
Expired/forfeited during the year | (18,886 | ) | 5.00 | 5.00 | - | |||||||||||
Exercised during the year | (33,968 | ) | 5.00 | 5.00 | - | |||||||||||
Outstanding at the end of the year | 151,583 | Rs. | 5.00 | Rs. | 5.00 | 73 | ||||||||||
Exercisable at the end of the year | 14,166 | Rs. | 5.00 | Rs. | 5.00 | 44 |
The weighted average grant date fair value of options granted during the years ended March 31, 2021 and 2020 was Rs.3,631 and Rs.2,747, respectively. The weighted average share price on the date of exercise of options during the years ended March 31, 20162021 and 20152020 was Rs.3,575Rs.4,334 and Rs.2,604,Rs.2,757, respectively.
The aggregate intrinsic value of options exercised under the DRL 2007 Plan during the years ended March 31, 20162021 and 20152020 was Rs.116Rs.182 and Rs.89,Rs.93, respectively. As of March 31, 2016,2021, options outstanding under the DRL 2007 Plan had an aggregate intrinsic value of Rs.279Rs.641 and options exercisable under the DRL 2007 Plan had an aggregate intrinsic value of Rs.22.Rs.69.
During
Dr. Reddy’s Employees Stock Option Scheme, 2018 (the “DRL 2018 Plan”)
The Company instituted the year ended March 31, 2015,DRL 2018 Plan for all eligible employees pursuant to the special resolution approved by the shareholders at the Annual General Meeting held on July 27, 2018. The DRL 2018 Plan covers all employees and directors (excluding independent and promoter directors) of the parent company and its subsidiaries (collectively, “eligible employees”). Upon the exercise of options granted under the DRL 2018 Plan, the applicable equity shares may be issued directly by the Company adopted a new program to grant performance linkedthe eligible employee or may be transferred from the Dr. Reddy’s Employees ESOS Trust (the “ESOS Trust”) to the eligible employee. The ESOS Trust may acquire such equity shares through primary issuances by the Company and/or by way of secondary market acquisitions funded through loans from the Company. The Nomination, Governance and Compensation Committee of the Board of the parent company (the “Compensation Committee”) administers the DRL 2018 Plan and grants stock options to certaineligible employees, but may delegate functions and powers relating to the administration of the DRL 2018 Plan to the ESOS Trust. The Compensation Committee determines which eligible employees will receive the options, the number of options to be granted, the exercise price, the vesting period and the exercise period. The vesting period is determined for all options issued on the date of grant. The options issued under the DRL 20022018 Plan vest in periods ranging between the end of one and the DRL 2007 Plan. Under this program, performance targets are measured each year against pre-defined interim targets over the three year period ending on March 31, 2017five years, and eligible employees are granted stock options upon meeting such targets. The stock options so granted are ultimately vested with the employees who meet subsequent service vesting conditions which range from 1 to 4 years. After vesting, such stock options generally have a maximum contractual term of five years.
The DRL 2018 Plan provides for option grants having an exercise price equal to the fair market value of the underlying equity shares on the date of grant as follows:
Particulars | Number of securities to be acquired from secondary market | Number of securities to be issued by the Company | Total | |||||||||
Options reserved against equity shares | 2,500,000 | 1,500,000 | 4,000,000 | |||||||||
Options reserved against ADRs | - | 1,000,000 | 1,000,000 | |||||||||
Total | 2,500,000 | 2,500,000 | 5,000,000 |
As of March 31, 2021, the outstanding shares purchased from secondary market are 575,201 shares for an aggregate consideration of Rs.1,967.
180 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
29. Employee stock incentive plans (continued)
Stock option activity under the DRL 2018 Plan during the years ended March 31, 2021 and 2020 was as follows:
For the Year Ended March 31, 2021 | ||||||||||||||||
Fair Market Value Options | Shares arising out of options | Range of exercise prices | Weighted average exercise price | Weighted average remaining useful life (months) | ||||||||||||
Outstanding at the beginning of the year | 375,775 | Rs.2,607.00/ Rs.2,814.00 | Rs.2,697.12 | 75 | ||||||||||||
Granted during the year | 150,740 | 3,679.00 | 3,679.00 | 90 | ||||||||||||
Expired/forfeited during the year | (55,335 | ) | 2,607.00 to 3,679.00 | 2,904.51 | - | |||||||||||
Exercised during the year | (85,250 | ) | 2,607.00/ 2,814.00 | 2,671.71 | - | |||||||||||
Outstanding at the end of the year | 385,930 | Rs.2,607.00 to Rs.3,679.00 | Rs.3,056.51 | 71 | ||||||||||||
Exercisable at the end of the year | 71,225 | Rs.2,607.00/ Rs.2,814.00 | Rs.2,665.63 | 51 |
For the Year Ended March 31, 2020 | ||||||||||||||
Fair Market Value Options | Shares arising out of options | Range of exercise prices | Weighted average exercise price | Weighted average remaining useful life (months) | ||||||||||
Outstanding at the beginning of the year | 229,600 | Rs.2,607.00 | Rs.2,607.00 | 84 | ||||||||||
Granted during the year | 169,900 | 2,814.00/ 3,031.00 | 2,817.07 | 90 | ||||||||||
Expired/forfeited during the year | (22,575 | ) | 2,607.00 to 3,031.00 | 2,687.84 | - | |||||||||
Exercised during the year | (1,150 | ) | 2,607.00 | 2,607.00 | - | |||||||||
Outstanding at the end of the year | 375,775 | Rs.2,607.00/ Rs.2814.00 | Rs.2,697.12 | 75 | ||||||||||
Exercisable at the end of the year | 53,100 | Rs.2,607.00 | Rs.2,607.00 | 53 |
The weighted average grant date fair value of options granted during the years ended March 31, 2021 and 2020 was Rs.1,255 and Rs.994 per option, respectively. The weighted average share price on the date of exercise of options during the years ended March 31, 2021 and 2020 was Rs.4,609 and Rs.2,914 per share, respectively.
The aggregate intrinsic value of options exercised during the years ended March 31, 2021 and 2020 was Rs.165 and Rs.0.35, respectively. As of March 31, 2021, options outstanding had an aggregate intrinsic value of Rs.563 and options exercisable had an aggregate intrinsic value of Rs.104.
Valuation of stock options:
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 granted under the DRL 2002 Plan, DRL 2007 Plan and the DRL 20072018 Plan has been measured using the Black–Scholes-Merton model at the date of the grant.
The Black-Scholes-Merton model includes assumptions regarding dividend yields, expected volatility, expected terms and risk free interest rates. In respect of par value options granted, under category B, the expected term of an option (or “option life”) is estimated based on the vesting term and contractual term, as well as the expected exercise behavior of the employees receiving the option. In respect of fair market value options granted, under category A, the option life is estimated based on the simplified method. Expected volatility of the option is based on historical volatility, during a period equivalent to the option life, of the observed market prices of the Company’s publicly traded equity shares. Dividend yield of the options is based on recent dividend activity. Risk-free interest rates are based on the government securities yield in effect at the time of the grant. These assumptions reflect management’s best estimates, but these assumptions involve inherent market uncertainties based on market conditions generally outside of the Company’s control.
181 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
29. Employee stock incentive plans (continued)
As a result, if other assumptions had been used in the current period, stock-based compensation expense could have been materially impacted. Further, if management uses different assumptions in future periods, stock based compensation expense could be materially impacted in future years.
The estimated fair value of stock options is charged torecognized in the consolidated income statement on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance,in substance, multiple awards.
The weighted average inputs used in computing the fair value of options granted were as follows:
Grants made on | Grants made on | |||||||||||||||||||||||||||
May 11, 2015 | July 14, 2014 | June 15, 2014 | May 25, 2014 | October 27, 2020 | May 19, 2020 | May 19, 2020 | ||||||||||||||||||||||
Expected volatility | 25.98 | % | 23.20 | % | 23.15 | % | 22.52 | % | 30.81 | % | 29.12 | % | 30.47 | % | ||||||||||||||
Exercise price | Rs. | 5.00 | Rs. | 5.00 | Rs. | 5.00 | Rs. | 5.00 | Rs. | 5.00 | Rs. | 3,679.00 | Rs. | 5.00 | ||||||||||||||
Option life | 2.5 Years | 2.5 Years | 2.5 Years | 2.5 Years | 2.5 Years | 5.0 Years | 2.5 Years | |||||||||||||||||||||
Risk-free interest rate | 7.87 | % | 8.55 | % | 8.38 | % | 8.50 | % | 4.36 | % | 5.67 | % | 4.62 | % | ||||||||||||||
Expected dividends | 0.60 | % | 0.67 | % | 0.74 | % | 0.78 | % | 0.49 | % | 0.68 | % | 0.68 | % | ||||||||||||||
Grant date share price | Rs. | 3,359.70 | Rs. | 2,695.00 | Rs. | 2,445.15 | Rs. | 2,308.70 | Rs. | 5,009.00 | Rs. | 3,700.00 | Rs. | 3,700.00 |
Grants made on | ||||||||||||||||
January 26, 2020 | October 31, 2019 | May 16, 2019 | May 16, 2019 | |||||||||||||
Expected volatility | 27.00 | % | 27.10 | % | 28.25 | % | 29.29 | % | ||||||||
Exercise price | Rs. | 3,031.00 | Rs. | 5.00 | Rs. | 2,814.00 | Rs. | 5.00 | ||||||||
Option life | 5.00 Years | 2.5 Years | 5.0 Years | 2.5 Years | ||||||||||||
Risk-free interest rate | 6.61 | % | 5.72 | % | 7.14 | % | 6.76 | % | ||||||||
Expected dividends | 0.66 | % | 0.72 | % | 0.71 | % | 0.71 | % | ||||||||
Grant date share price | Rs. | 3,031.00 | Rs. | 2,783.20 | Rs. | 2,801.00 | Rs. | 2,801.00 |
Share-based payment expense
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Equity settled share-based payment expense(1) | Rs. | 584 | Rs. | 521 | Rs. | 389 | ||||||
Cash settled share-based payment expense(2) | 157 | 94 | 85 | |||||||||
Rs. | 741 | Rs. | 615 | Rs. | 474 |
(1) | As of March 31, 2021 and 2020, there was Rs.612 and Rs.515, respectively, of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of 1.95 years and 1.93 years, respectively. |
(2) | Certain of the Company’s employees are eligible for share-based payment awards that are settled in cash. These awards entitle the employees to a cash payment, on the exercise date, subject to vesting upon satisfaction of certain service conditions which range from 1 to 4 years. The amount of cash payment is determined based on the price of the Company’s ADSs at the time of vesting. As of March 31, 2021 and 2020, there was Rs.126 and Rs.97, respectively of total unrecognized compensation cost related to unvested awards. This cost is expected to be recognized over a weighted-average period of 1.88 years and 1.93 years, respectively. This scheme does not involve dealing in or subscribing to or purchasing securities of the Company, directly or indirectly. |
30. Related parties
The Company has entered into transactions with the following related parties:
· | Green Park Hotel and Resorts Limited for hotel services; |
· | Green Park Hospitality Services Private Limited for catering and other services; |
· | Dr. Reddy’s Foundation towards contributions for social development; |
· | Kunshan Rotam Reddy Pharmaceuticals Company Limited for sales of goods and for research and development services; |
· | Pudami Educational Society towards contributions for social development; |
· | Indus Projects Private Limited for engineering services relating to civil works; |
· | CERG Advisory Private Limited for professional consulting services; |
· | Dr. Reddy’s Institute of Life Sciences for research and development services; |
· | AverQ Inc. for professional consulting services; |
· | Shravya Publications Private Limited for professional consulting services; |
· | Samarjita Management Consultancy Private Limited for professional consulting services; |
· | Cancelled Plans LLP for the sale of scrap materials; |
182 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
20. Employee stock incentive plans (continued)
Valuation of stock options (continued)
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.
Share-based payment expense
For the years ended March 31, 2016, 2015 and 2014, the Company recorded employee share based payment expense of Rs.471, Rs.498 and Rs.436, respectively. As of March 31, 2016, there was approximately Rs.437 of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of 3.10 years.
21. Provisions
The details of changes in provisions during the year ended March 31, 2016 are as follows:
Particulars | Allowance for sales return(1) | Environmental liability(2) | Legal and others | Total | ||||||||||||
Balance as at April 1, 2015 | Rs. | 3,905 | Rs. | 53 | Rs. | 326 | Rs. | 4,284 | ||||||||
Provision made during the year | 3,272 | — | 12 | 3,284 | ||||||||||||
Provision used or reversed during the year | (2,937 | ) | — | — | (2,937 | ) | ||||||||||
Effect of changes in foreign exchange rates | 181 | 2 | — | 183 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance as at March 31, 2016 | Rs. | 4,421 | Rs. | 55 | Rs. | 338 | Rs. | 4,814 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Current | Rs. | 4,421 | Rs. | — | Rs. | 338 | Rs. | 4,759 | ||||||||
Non-current | — | 55 | — | 55 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Rs. | 4,421 | Rs. | 55 | Rs. | 338 | Rs. | 4,814 | |||||||||
|
|
|
|
|
|
|
|
|
|
22. Trade and other payables
Trade and other payables consist of the following:
As at March 31, | ||||||||
2016 | 2015 | |||||||
Due to related parties | Rs. | 0 | Rs. | 4 | ||||
Others | 12,300 | 10,656 | ||||||
|
|
|
| |||||
Rs. | 12,300 | Rs. | 10,660 | |||||
|
|
|
|
23. Other liabilities
Other liabilities consist of the following:
As at March 31, | ||||||||
2016 | 2015 | |||||||
Current | ||||||||
Advance from customers | Rs. | 335 | Rs. | 280 | ||||
Statutory dues payable | 535 | 596 | ||||||
Accrued expenses(1) | 16,658 | 12,529 | ||||||
Deferred revenue | 324 | 776 | ||||||
Others | 4,218 | 3,136 | ||||||
|
|
|
| |||||
Rs. | 22,070 | Rs. | 17,317 | |||||
|
|
|
| |||||
Non-current | ||||||||
Statutory dues payable | Rs. | 5 | Rs. | 8 | ||||
Deferred revenue | 1,528 | 2,112 | ||||||
Others | 1,628 | 1,206 | ||||||
|
|
|
| |||||
Rs. | 3,161 | Rs. | 3,326 | |||||
|
|
|
|
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
23. Other liabilities30. Related parties (continued)
| Araku Originals Private Limited for the |
24. Revenue
Revenue consists of the following:
For the Year Ended March 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Sales | Rs. | 152,476 | Rs. | 146,131 | Rs. | 130,287 | ||||||
Services | 1,466 | 1,689 | 1,632 | |||||||||
License fees | 766 | 369 | 251 | |||||||||
|
|
|
|
|
| |||||||
Rs. | 154,708 | Rs. | 148,189 | Rs. | 132,170 | |||||||
|
|
|
|
|
|
Revenue includes excise duties of Rs.842, Rs.829 and Rs.820 for the years ended March 31, 2016, 2015 and 2014, respectively.
25. Other (income)/expense, net
Other (income)/expense, net consists of the following:
For the Year Ended March 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Loss/(profit) on sale/disposal of property, plant and equipment and other intangibles, net | Rs. | 112 | Rs. | 144 | Rs. | (53 | ) | |||||
Sale of spent chemical | (271 | ) | (521 | ) | (481 | ) | ||||||
Miscellaneous income, net(1) | (715 | ) | (540 | ) | (882 | ) | ||||||
|
|
|
|
|
| |||||||
Rs. | (874 | ) | Rs. | (917 | ) | Rs. | (1,416 | ) | ||||
|
|
|
|
|
|
|
26. Finance (expense)/income, net
Finance (expense)/income, net consists of the following:
For the Year Ended March 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Interest income | Rs. | 1,399 | Rs. | 1,061 | Rs. | 1,085 | ||||||
Dividend and profit on sale of other investments(1) | 852 | 755 | 217 | |||||||||
Foreign exchange gain/(loss), net(2) | (4,133 | ) | 958 | 372 | ||||||||
Interest expense | (826 | ) | (1,092 | ) | (1,274 | ) | ||||||
|
|
|
|
|
| |||||||
Rs. | (2,708 | ) | Rs. | 1,682 | Rs. | 400 | ||||||
|
|
|
|
|
|
|
| DRES Energy Private Limited for the |
· | Stamlo Industries Limited for |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
27. Income taxes
a. Income tax (expense)/benefit recognized in the income statement
Income tax (expense)/benefit recognized in the income statement consists of the following:
For the Year Ended March 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Current taxes | ||||||||||||
Domestic | Rs. | (4,331 | ) | Rs. | (4,461 | ) | Rs. | (5,090 | ) | |||
Foreign | (3,046 | ) | (2,545 | ) | (1,472 | ) | ||||||
|
|
|
|
|
| |||||||
Rs. | (7,377 | ) | Rs. | (7,006 | ) | Rs. | (6,562 | ) | ||||
|
|
|
|
|
| |||||||
Deferred taxes (expense)/benefit | ||||||||||||
Domestic | Rs. | 132 | Rs. | 637 | Rs. | (294 | ) | |||||
Foreign | 118 | 385 | 1,762 | |||||||||
|
|
|
|
|
| |||||||
Rs. | 250 | Rs. | 1,022 | Rs. | 1,468 | |||||||
|
|
|
|
|
| |||||||
Total income tax expense recognized in the income statement | Rs. | (7,127 | ) | Rs. | (5,984 | ) | Rs. | (5,094 | ) | |||
|
|
|
|
|
|
b. Income tax (expense)/benefit recognized directly in equity
Income tax (expense)/benefit recognized directly in equity consist of the following:
For the Year Ended March 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Tax effect on changes in fair value of other investments | Rs. | (88 | ) | Rs. | (366 | ) | Rs. | (14 | ) | |||
Tax effect on foreign currency translation differences | (62 | ) | 174 | (2 | ) | |||||||
Tax effect on effective portion of change in fair value of cash flow hedges | (23 | ) | 96 | 80 | ||||||||
Tax effect on actuarial gains/losses on defined benefit obligations | 64 | 16 | (20 | ) | ||||||||
|
|
|
|
|
| |||||||
Rs. | (109 | ) | Rs. | (80 | ) | Rs. | 44 | |||||
|
|
|
|
|
|
c.Reconciliation of effective tax rate
The following is a reconciliation of the Company’s effective tax rates for the years ended March 31, 2016, 2015 and 2014:
For the Year Ended March 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Profit before income taxes | Rs. | 27,140 | Rs. | 28,163 | Rs. | 26,606 | ||||||
Enacted tax rate in India | 34.61 | % | 33.99 | % | 33.99 | % | ||||||
Computed expected tax benefit/(expense) | Rs. | (9,393 | ) | Rs. | (9,572 | ) | Rs. | (9,043 | ) | |||
Effect of: | ||||||||||||
Differences between Indian and foreign tax rates | Rs.1,122 | Rs.566 | Rs.1,003 | |||||||||
Impairment of product related intangibles and goodwill | — | — | 169 | |||||||||
(Unrecognized deferred tax assets) / recognition of previously unrecognized deferred tax assets, net | (1,600 | ) | 18 | (687 | ) | |||||||
Expenses not deductible for tax purposes | (138 | ) | (110 | ) | (117 | ) | ||||||
Share-based payment expense | — | — | 684 | |||||||||
Income exempt from income taxes | 731 | 794 | 661 | |||||||||
Foreign exchange differences | (836 | ) | (380 | ) | 230 | |||||||
Incremental deduction allowed for research and development costs | 2,782 | 2,265 | 2,026 | |||||||||
Deferred tax expense on undistributed earnings of subsidiary outside India | (519 | ) | — | — | ||||||||
Qualified domestic production activities deduction in the United States | 38 | 4 | 9 | |||||||||
Effect of change in tax rate | (30 | ) | (25 | ) | — | |||||||
Investment allowance deduction | 177 | 251 | 67 | |||||||||
Others | 539 | 205 | (96 | ) | ||||||||
|
|
|
|
|
| |||||||
Income tax benefit/(expense) | Rs. | (7,127 | ) | Rs. | (5,984 | ) | Rs. | (5,094 | ) | |||
|
|
|
|
|
| |||||||
Effective tax rate | 26 | % | 21 | % | 19 | % | ||||||
|
|
|
|
|
|
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
27. Income taxes (continued)
The Company’s consolidated weighted average tax rates for the years ended March 31, 2016 and 2015 were 26% and 21%, respectively. Income tax expense was Rs.7,127 for the year ended March 31, 2016, as compared to income tax expense of Rs.5,984 for the year ended March 31, 2015.
The increase in the Company’s effective tax rate for the year ended March 31, 2016 was primarily attributable to the following:
non-deductible losses related to the Company’s Venezuela operations, which resulted in an increase in the effective tax rate by approximately 3.80% (Refer to Note 41 of these consolidated financial statements for further details);
deferred tax expense on undistributed earnings of a subsidiary outside of India, which resulted in an increase in the effective tax rate by approximately 1.9%;
an increase in the effective tax rate by approximately 1.8% due to non-recognition of certain deferred tax assets, as the Company believes that availability of taxable profits against which the temporary differences can be utilized is not probable;
recognition of a previously unrecognized deferred tax asset pertaining to a jurisdiction outside of India, which resulted in a decrease in effective tax rate by approximately 1.1%; and
an increase in weighted deduction on eligible research and development expenditure in India during the year ended March 31, 2016, as compared to the year ended March 31, 2015, has resulted in a decrease in the effective tax rate by 1.8%. The rate of weighted deduction on the Company’s eligible research and development expenditure was equal to 200% for the years ended March 31, 2016 and 2015, respectively.
d. Unrecognized deferred tax assets and liabilities
The details of unrecognized deferred tax assets and liabilities are summarized below:
As at March 31, | ||||||||
2016 | 2015 | |||||||
Deductible temporary differences, net | Rs. | 1,157 | Rs. | 590 | ||||
Operating tax loss carry forward | 3,166 | 2,391 | ||||||
|
|
|
| |||||
Rs. | 4,323 | Rs. | 2,981 | |||||
|
|
|
|
During the year ended March 31, 2016, the Company, based on probable future taxable profit, has recognized previously unrecognized deferred tax assets of Rs.267 pertaining primarily to interest loss carry forward in Reddy Holding GmbH, Germany.
During the year ended March 31, 2016, the Company did not recognize deferred tax assets of Rs.775 on operating tax losses pertaining primarily to Dr. Reddy’s Venezuela, C.A., Dr. Reddy’s Laboratories New York, Inc. and certain other subsidiaries of the Company. The above tax losses expire at various dates ranging from 2017 through 2037. During the year ended March 31, 2016, the Company did not recognize deferred tax assets of Rs.567 on certain deductible temporary differences, as the Company believes that availability of taxable profits against which such temporary differences can be utilized is not probable.
Deferred income taxes are not provided on undistributed earnings of Rs.30,997 as at March 31, 2016, of subsidiaries outside India, where it is expected that earnings of the subsidiaries will not be distributed in the foreseeable future. Generally, the Company indefinitely reinvests all the accumulated undistributed earnings of foreign subsidiaries, and accordingly, has not recorded any deferred taxes in relation to such undistributed earnings of its foreign subsidiaries. It is impracticable to determine the taxes payable when these earnings are remitted. However, the Company intends to repatriate a portion of undistributed earnings from one of its overseas subsidiaries on a one-time basis and, accordingly, deferred tax liability has been recognized on such portion intended to be repatriated.
e. Deferred tax assets and liabilities
The tax effects of significant temporary differences that resulted in deferred tax assets and liabilities and a description of the items that created these differences is given below:
For the Year Ended March 31, | ||||||||
2016 | 2015 | |||||||
Deferred tax assets/(liabilities): | ||||||||
Inventory | Rs. | 2,579 | Rs. | 3,477 | ||||
Minimum Alternate Tax* | 1,614 | 644 | ||||||
Trade and other receivables | 412 | 316 | ||||||
Operating tax loss and interest loss carry-forward | 548 | 810 | ||||||
Other current assets and other current liabilities, net | 2,026 | 1,267 | ||||||
Property, plant and equipment | (1,745 | ) | (1,230 | ) | ||||
Other intangible assets | (482 | ) | (1,145 | ) | ||||
Others | (722 | ) | (126 | ) | ||||
|
|
|
| |||||
Net deferred tax assets | Rs. | 4,230 | Rs. | 4,013 | ||||
|
|
|
|
|
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
27. Income taxes (continued)
In assessing whether the deferred income tax assets will be realized, management considers whether some portion or all of the deferred income tax assets will not be realized. The ultimate realization of the deferred income tax assets and tax loss carry forwards is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategy in making this assessment. Based on the level of historical taxable income and projections of future taxable income over the periods in which the deferred tax assets are deductible, management believes that the Company will realize the benefits of those recognized deductible differences and tax loss carry forwards. Recoverability of deferred tax assets is based on estimates of future taxable income. Any changes in such future taxable income would impact the recoverability of deferred tax assets.
Operating loss carry forward consists of business losses, unabsorbed depreciation and unabsorbed interest carry-forwards. A portion of this total loss can be carried indefinitely and the remaining amounts expire at various dates ranging from 2017 through 2037.
f. Movement in deferred tax assets and liabilities during the years ended March 31, 2016 and 2015.
As at March 31, 2014 | Recognized in income statement | Recognized in equity | Acquired in business combination | As at March 31, 2015 | ||||||||||||||||
Deferred tax assets/(liabilities) | ||||||||||||||||||||
Inventory | Rs. | 3,875 | Rs. | (398 | ) | Rs. | — | Rs. | — | Rs. | 3,477 | |||||||||
Minimum Alternate Tax | — | 644 | — | — | 644 | |||||||||||||||
Trade and other receivables | 265 | 51 | — | — | 316 | |||||||||||||||
Operating tax loss and interest loss carry-forward | 909 | (99 | ) | — | — | 810 | ||||||||||||||
Other current assets and other current liabilities, net | 942 | 433 | (108 | ) | — | 1,267 | ||||||||||||||
Property, plant and equipment | (1,141 | ) | (89 | ) | — | — | (1,230 | ) | ||||||||||||
Intangible assets | (1,717 | ) | 572 | — | — | (1,145 | ) | |||||||||||||
Others | 177 | (40 | ) | (263 | ) | — | (126 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net deferred tax assets/(liabilities) | Rs. | 3,310 | Rs. | 1,074 | Rs. | (371 | ) | Rs. | — | Rs. | 4,013 | |||||||||
|
|
|
|
|
|
|
|
|
|
[Continued from above table, first column(s) repeated]
As at March 31, 2015 | Recognized in income statement | Recognized in equity | Acquired in business combination | As at March 31, 2016 | ||||||||||||||||
Deferred tax assets/(liabilities) | ||||||||||||||||||||
Inventory | Rs. | 3,477 | Rs. | (898 | ) | Rs. | — | Rs. | — | Rs. | 2,579 | |||||||||
Minimum Alternate Tax | 644 | 970 | — | — | 1,614 | |||||||||||||||
Trade and other receivables | 316 | 96 | — | — | 412 | |||||||||||||||
Operating tax loss and interest loss carry-forward | 810 | (262 | ) | — | — | 548 | ||||||||||||||
Other current assets and other current liabilities, net | 1,267 | 1,036 | (277 | ) | — | 2,026 | ||||||||||||||
Property, plant and equipment | (1,230 | ) | (515 | ) | — | — | (1,745 | ) | ||||||||||||
Intangible assets | (1,145 | ) | 663 | — | — | (482 | ) | |||||||||||||
Others | (126 | ) | (872 | ) | 276 | — | (722 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net deferred tax assets/(liabilities) | Rs. | 4,013 | Rs. | 218 | Rs. | (1 | ) | Rs. | — | Rs. | 4,230 | |||||||||
|
|
|
|
|
|
|
|
|
|
The amounts recognized in the income statement during the years ended March 31, 2016 and 2015 include Rs.(32) and Rs.52, respectively, which represent exchange differences arising due to foreign currency translations.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
28. Operating leases
The Company has leased offices and vehicles under various operating lease agreements that are renewable on a periodic basis at the option of both the lessor and the lessee. Rental expense under these leases was Rs.819, Rs.822 and Rs.749 for the years ended March 31, 2016, 2015 and 2014, respectively.
The schedule of future minimum rental payments in respect of non-cancellable operating leases is set out below:
As of March 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Less than one year | Rs. | 396 | Rs. | 384 | Rs. | 359 | ||||||
Between one and five years | 1,185 | 1,259 | 1,007 | |||||||||
More than five years | 663 | 852 | 937 | |||||||||
|
|
|
|
|
| |||||||
Rs. | 2,244 | Rs. | 2,495 | Rs. | 2,303 | |||||||
|
|
|
|
|
|
During the year ended March 31, 2014, the Company entered into a non-cancellable operating lease for an office and laboratory facility in the United States. The future minimum rental payments in respect of this lease are Rs.1,394 (U.S.$21), Rs.1,458 (U.S.$23) and Rs.1,556 (U.S.$26) as of March 31, 2016, 2015 and 2014, respectively.
29. Related parties
The Company has entered into transactions with the following related parties:
Green Park Hotel and Resorts Limited for hotel services;
Dr. Reddy’s Foundation towards contributions for social development;
Pudami Educational Society towards contributions for social development;
Dr. Reddy’s Institute of Life Sciences for research and development services;and
Stamlo Hotels 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 relatives.families.
Further, the Company contributes to the Dr. Reddy’s Laboratories Gratuity Fund, which maintains the plan assets of the Company’s Gratuity Plan for the benefit of its employees. See Note 1928 of these consolidated financial statements for information on transactions between the Company and the Gratuity Fund.
The following is a summary of significant related party transactions:
For the Year Ended March 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Purchases of raw materials | Rs. | — | Rs. | 5 | Rs. | 91 | ||||||
Purchases of assets(1) | — | — | 1,264 | |||||||||
Sales of raw materials | — | — | 49 | |||||||||
Sales of assets | — | — | 14 | |||||||||
Research and development services received | 102 | 92 | 141 | |||||||||
Contributions towards social development | 249 | 237 | 170 | |||||||||
Hotel expenses paid | 51 | 41 | 31 | |||||||||
Lease rentals paid under cancellable operating leases to key management personnel and their relatives | 37 | 36 | 36 |
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Research and development services received | Rs. | 105 | Rs. | 105 | Rs. | 97 | ||||||
Sale of goods | 22 | 14 | 23 | |||||||||
Lease rentals received | 1 | 1 | - | |||||||||
Research and development services provided | 93 | 58 | 103 | |||||||||
Lease rentals paid | 37 | 35 | 35 | |||||||||
Catering expenses paid | 301 | 344 | 270 | |||||||||
Hotel expenses paid | 8 | 22 | 26 | |||||||||
Facility management services paid | 36 | 24 | - | |||||||||
Purchase of solar power | 127 | 108 | - | |||||||||
Civil works | 55 | 101 | 106 | |||||||||
Professional consultancy services paid | 30 | 4 | 1 | |||||||||
Contributions towards social development | 232 | 233 | 220 | |||||||||
Salaries to relatives of key management personnel | 8 | 7 | 5 | |||||||||
Others | - | - | * | - |
* Rounded to the nearest million.
|
The Company hashad the following amounts due from related parties:
As at March 31, | ||||||||
2016 | 2015 | |||||||
Key management personnel (towards rent deposits) | Rs. | 8 | Rs. 8 | |||||
Other related parties | 1 | — |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
29. Related parties (continued)
As of March 31, | ||||||||
2021 | 2020 | |||||||
Key management personnel and close members of their families | Rs. | 8 | Rs. | 8 | ||||
Other related parties | 72 | 68 |
The Company hashad the following amounts due to related parties:
As at March 31, | ||||||||
2016 | 2015 | |||||||
Due to related parties | Rs. | 0 | Rs. | 4 |
As of March 31, | ||||||||
2021 | 2020 | |||||||
Due to related parties | Rs. | 93 | Rs. | 91 |
The following table describes the components of compensation paid or payable to key management personnel for the services rendered during the applicable year ended:
For the Year Ended March 31, | ||||||||||||||||||||||||
Year Ended March 31, | 2021 | 2020 | 2019 | |||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||
Salaries and other benefits(1) | Rs. | 336 | Rs. | 300 | Rs. | 261 | ||||||||||||||||||
Salaries and other benefits | Rs. | 803 | Rs. | 684 | Rs. | 668 | ||||||||||||||||||
Contributions to defined contribution plans | 19 | 16 | 15 | 34 | 34 | 35 | ||||||||||||||||||
Commission to directors | 263 | 285 | 280 | 301 | 298 | 243 | ||||||||||||||||||
Share-based payments expense | 76 | 72 | 64 | 259 | 165 | 99 | ||||||||||||||||||
|
|
| Rs. | 1,397 | Rs. | 1,181 | Rs. | 1,045 | ||||||||||||||||
Total | Rs. | 694 | Rs. | 673 | Rs. | 620 | ||||||||||||||||||
|
|
|
|
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.
30. Financial instruments
Financial instruments by category
The carrying value and fair value of financial instruments by each category as at March 31, 2016 were as follows:
183 |
Note | Loans and receivables | Available for sale | Other financial liabilities | Derivative financial instruments | Total carrying value | Total fair value | ||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||
Cash and cash equivalents | 15 | Rs. | 4,921 | Rs. | — | Rs. | — | Rs. | — | Rs. | 4,921 | Rs. | 4,921 | |||||||||||||
Other investments | 11 | 12,713 | 24,309 | — | — | 37,022 | 37,022 | |||||||||||||||||||
Trade and other receivables | 13 | 41,306 | — | — | — | 41,306 | 41,306 | |||||||||||||||||||
Derivative financial instruments | — | — | — | 175 | 175 | 175 | ||||||||||||||||||||
Other assets(1) | 14 | 2,270 | — | — | — | 2,270 | 2,270 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | Rs. | 61,210 | Rs. | 24,309 | Rs. | — | Rs. | 175 | Rs. | 85,694 | Rs. | 85,694 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Liabilities: | ||||||||||||||||||||||||||
Trade and other payables | 22 | Rs. | — | Rs. | — | Rs. | 12,300 | Rs. | — | Rs. | 12,300 | Rs. | 12,300 | |||||||||||||
Derivative financial instruments | — | — | — | 108 | 108 | 108 | ||||||||||||||||||||
Long-term borrowings | 18 | — | — | 10,795 | — | 10,795 | 10,795 | |||||||||||||||||||
Short-term borrowings | 18 | — | — | 22,718 | — | 22,718 | 22,718 | |||||||||||||||||||
Other liabilities and provisions(2) | 21 & 23 | — | — | 25,387 | — | 25,387 | 25,387 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | Rs. | — | Rs. | — | Rs. | 71,200 | Rs. | 108 | Rs. | 71,308 | Rs. | 71,308 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
30.
31. Financial instruments (continued)
Financial instruments by category
The carrying value and fair value of financial instruments by each category as atof March 31, 20152021 and 2020, respectively were as follows:
As of March 31, 2021 | As of March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
Note | Loans and receivables | Available for sale | Other financial liabilities | Derivative financial instruments | Total carrying value | Total fair value | Total carrying value | Total fair value | Total carrying value | Total fair value | ||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | 15 | Rs. | 5,394 | Rs. | — | Rs. | — | Rs. | — | Rs. | 5,394 | Rs. | 5,394 | Rs. | 14,829 | Rs. | 14,829 | Rs. | 2,053 | Rs. | 2,053 | |||||||||||||||||||||
Other investments | 11 | 12,848 | 24,228 | — | — | 37,076 | 37,076 | 24,702 | 24,702 | 24,015 | 24,015 | |||||||||||||||||||||||||||||||
Trade and other receivables | 13 | 40,755 | — | — | — | 40,755 | 40,755 | 49,759 | 49,759 | 52,015 | 52,015 | |||||||||||||||||||||||||||||||
Derivative financial instruments | — | — | — | 800 | 800 | 800 | 1,218 | 1,218 | 1,105 | 1,105 | ||||||||||||||||||||||||||||||||
Other assets | 14 | 1,585 | — | — | — | 1,585 | 1,585 | 2,626 | 2,626 | 4,170 | 4,170 | |||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total | Rs. | 60,582 | Rs. | 24,228 | Rs. | — | Rs. | 800 | Rs. | 85,610 | Rs. | 85,610 | Rs. | 93,134 | Rs. | 93,134 | Rs. | 83,358 | Rs. | 83,358 | ||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||||
Trade and other payables | 22 | Rs. | — | Rs. | — | Rs. | 10,660 | Rs. | — | Rs. | 10,660 | Rs. | 10,660 | Rs. | 23,744 | Rs. | 23,744 | Rs. | 16,659 | Rs. | 16,659 | |||||||||||||||||||||
Derivative financial instruments | — | — | — | 462 | 462 | 462 | 326 | 326 | 1,602 | 1,602 | ||||||||||||||||||||||||||||||||
Long-term borrowings | 18 | — | — | 21,289 | — | 21,289 | 21,289 | 7,163 | 7,163 | 5,570 | 5,570 | |||||||||||||||||||||||||||||||
Short-term borrowings | 18 | — | — | 21,857 | — | 21,857 | 21,857 | 23,136 | 23,136 | 16,441 | 16,441 | |||||||||||||||||||||||||||||||
Other liabilities and provisions(2) | 21 & 23 | — | — | 19,440 | — | 19,440 | 19,440 | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Bank overdraft | 9 | 9 | 91 | 91 | ||||||||||||||||||||||||||||||||||||||
Other liabilities and provisions(3) | 23,233 | 23,233 | 25,317 | 25,317 | ||||||||||||||||||||||||||||||||||||||
Total | Rs. | — | Rs. | — | Rs. | 73,246 | Rs. | 462 | Rs. | 73,708 | Rs. | 73,708 | Rs. | 77,611 | Rs. | 77,611 | 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 |
(3) | Amounts as of March 31, |
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.13,091 and Rs.10,725 as of March 31, 2021 and 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 March 31, 2016:2021:
Particulars | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Available for sale - Financial asset - Investments in units of mutual funds | Rs. | 22,558 | Rs. | — | Rs. | — | Rs. | 22,558 | ||||||||
Available for sale - Financial asset - Investment in equity securities | 1,751 | — | — | 1,751 | ||||||||||||
Derivative financial instruments - gain/(loss) on outstanding foreign exchange forward, option and swap contracts and interest rate swap contracts(1) | — | 67 | — | 67 |
Particulars | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
FVTPL - Financial asset - Investments in units of mutual funds | Rs. | 13,263 | Rs. | - | Rs. | - | Rs. | 13,263 | ||||||||
FVTPL - Financial asset - Investment in limited liability partnership firm | - | - | 400 | 400 | ||||||||||||
FVTPL - Financial asset - Investments in equity securities | - | - | 1 | 1 | ||||||||||||
FVTOCI - Financial asset - Investments in equity securities | 4,532 | - | - | 4,532 | ||||||||||||
Derivative financial instruments – net gain/(loss) on outstanding foreign exchange forward, option and swap contracts and interest rate swap contracts(1) | - | 892 | - | 892 | ||||||||||||
FVTPL- Contingent consideration pursuant to the Business Transfer Agreement with Wockhardt Limited (Refer to Note 6 for details) | - | - | 420 | 420 |
The following table presents the fair value hierarchy of assets and liabilities measured at fair value on a recurring basis as of March 31, 2015:2020:
Particulars | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Available for sale - Financial asset - Investments in units of mutual funds | Rs. | 21,641 | Rs. | — | Rs. | — | Rs. | 21,641 | ||||||||
Available for sale - Financial asset - Investment in equity securities | 2,587 | — | — | 2,587 | ||||||||||||
Derivative financial instruments - gain/(loss) on outstanding foreign exchange forward, option and swap contracts and interest rate swap contracts(1) | — | 338 | — | 338 |
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 | ||||||||
FVTPL - Financial asset - Investments in equity securities | - | - | 1 | 1 | ||||||||||||
FVTOCI - Financial asset - Investments in equity securities | 303 | - | - | 303 | ||||||||||||
FVTOCI - Financial asset - Investments in market linked debentures | 1,993 | - | - | 1,993 | ||||||||||||
Derivative financial instruments – net gain/(loss) on outstanding foreign exchange forward, option and swap contracts and interest rate swap contracts(1) | - | (497 | ) | - | (497 | ) |
184 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
31. 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. |
The models incorporate various inputs including foreign exchange spot and forward rates, interest rate curves and forward rate curves.
As atof March 31, 2016,2021 and 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.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
30. Financial instruments (continued)
Derivative financial instruments
The Company is exposed to exchange rate risk that arises from its foreign exchange revenues and expenses, primarily in U.S. dollars, U.K. pounds sterling, Russian roubles, Venezuelan bolivars and Euros, and foreign currency debt in U.S. dollars, Russian roubles and Euros. The Company uses forward contracts, option contracts and currency swap contracts (collectively, “derivatives”) to mitigate its risk of changes in foreign currency exchange rates.
The counterparty for these contracts is generally a bank or a financial institution. The Company had a derivative financial asset and derivative financial liability of Rs.175Rs.1,218 and Rs.108,Rs.326, respectively, as of March 31, 20162021, as compared to derivative financial asset and derivative financial liability of Rs.800Rs.1,105 and Rs.462,Rs.1,602, respectively, as of March 31, 20152020, towards these derivative financial instruments.
Further,
Details of gain/(loss) recognized in respect of these foreign exchange derivative contracts the Company has recorded, as part of finance costs, a net gain of Rs.231, a net gain of Rs.2,226 and a net loss of Rs.426, for the years ended March 31, 2016, 2015, and 2014, respectively.
Hedges of highly probable forecasted transactions
The Company classifies its derivative contracts that hedge foreign exchange risk associated with its highly probable forecasted transactions as cash flow hedges and measures them at fair value. The effective portion of such cash flow hedges is recorded as a component of equity within the Company’s “hedging reserve”, and re-classifiedfollowing table presents details in the income statement as revenue in the period corresponding to the occurrence of the forecasted transactions. The ineffective portion of such cash flow hedges is immediately recorded in the income statement as a finance cost.
The Company also designates certain non-derivative financial liabilities, such as foreign currency borrowings from banks, as hedging instruments for the hedge of foreign exchange risk associated with highly probable forecasted transactions and, accordingly, applies cash flow hedge accounting for such relationships. Re-measurement gain/loss on such non-derivative financial liabilities is recorded as a component of equity within the Company’s “hedging reserve”, and re-classified in the income statement as revenue in the period corresponding to the occurrence of the forecasted transactions.
In respect of the aforesaid hedgesgain/(loss) recognized in respect of highly probable forecasted transactions, the Company recorded, as a component of equity, a net gain of Rs.966, a net gain of Rs.99 and a net loss of Rs.1,650 for the years ended March 31, 2016, 2015 and 2014, respectively.
The Company also recorded, as a component of revenue, a net loss of Rs.1,172, a net gain of Rs.300 and a net loss of Rs.1,093derivative contracts during the years ended March 31, 2016, 2015 and 2014, respectively.applicable year ended:
For the Year Ended March 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Net gain/(loss) recognized in finance costs in respect of foreign exchange derivative contracts and cross currency interest rate swaps contracts | Rs. | 2,619 | Rs. | 155 | Rs. | (257 | ) | |||||
Net gain/(loss) recognized in equity in respect of hedges of highly probable forecast transactions, net of amounts reclassified from equity and recognized as component of revenue | 1,123 | (951 | ) | 180 | ||||||||
Net gain/(loss) reclassified from equity and recognized as component of revenue occurrence of forecasted transaction | 340 | (50 | ) | (524 | ) |
The net carrying amount of the Company’s “hedging reserve” as a component of equity before adjusting for tax impact was a lossgain of Rs.839Rs.401 as atof March 31, 2016,2021, as compared to a loss of Rs.1,805Rs.722 as atof March 31, 2015.2020.
Hedges of recognized assets and liabilities
Changes in the fair value of forward contracts and option contracts that economically hedge monetary assets and liabilities in foreign currencies, and for which no hedge accounting is applied, are recognized in the income statement. The changes in fair value of the forward contracts and option contracts, as well as the foreign exchange gains and losses relating to the monetary items, are recognized as part of “net finance costs”.
Outstanding foreign exchange derivative contracts
The following table gives details in respect of the notional amount of outstanding foreign exchange derivative contracts as of March 31, 2016.
2021.
Category | Instrument | Currency(1) | Cross Currency(1) | Amounts | Buy/Sell | |||||||
Hedges of recognized assets and liabilities | Forward contract | AUD | INR | AUD 7 | Sell | |||||||
Forward contract | CHF | INR | CHF 200 | Sell | ||||||||
Forward contract | GBP | INR | GBP 8 | Sell | ||||||||
Forward contract | RUB | INR | RUB 2,799 | Sell | ||||||||
Forward contract | U.S.$ | INR | U.S.$ | 353 | Sell | |||||||
Forward contract | U.S.$ | MXN | U.S.$ 10 | Buy | ||||||||
Forward contract | U.S.$ | UAH | U.S.$ 14 | Buy | ||||||||
Forward contract | ZAR | INR | ZAR 111 | Sell | ||||||||
Forward contract | U.S.$ | RUB | U.S.$ 2 | Buy | ||||||||
Forward contract | U.S.$ | RON | U.S.$ | 12 | Buy | |||||||
Forward contract | U.S.$ | U.S.$ | 3 | Buy | ||||||||
Forward contract | GBP | U.S.$ | GBP 48 | Buy | ||||||||
Forward contract | EUR | GBP | EUR 1 | Sell | ||||||||
Forward contract | EUR | U.S.$ | EUR | Buy | ||||||||
Forward contract | CHF | U.S.$ | CHF200 | Buy | ||||||||
Forward contract | U.S.$ | KZT | U.S.$ 4 | Buy | ||||||||
Forward contract | U.S.$ | CLP | U.S.$ 3 | Buy | ||||||||
Forward contract | U.S.$ | COP | U.S.$ 4 | Buy | ||||||||
Forward contract | U.S.$ | BRL | U.S.$ 4 | Buy | ||||||||
Forward contract | U.S.$ | KZT | U.S.$ 9 | Buy | ||||||||
Hedges of highly probable forecast transactions | Forward contract | AUD | INR | AUD 10 | Sell | |||||||
Forward contract | RUB | INR | RUB 6,850 | Sell | ||||||||
Option contract | U.S.$ | INR | U.S.$ | 645 | Sell - Risk Reversal | |||||||
| Forward contract | INR | ||||||||||
ZAR 148 | Sell |
|
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
30.31. Financial instruments (continued)
The following table gives details in respect of the notional amount of outstanding foreign exchange derivative contracts as of March 31, 2015.2020.
Category | Instrument | Currency(1) | Cross Currency(1) | Amounts | Buy/Sell | |||||||
Hedges of recognized assets and liabilities | Forward contract | U.S.$ | INR | U.S.$ 148 | Sell | |||||||
Forward contract | RUB | INR | RUB 5,968 | Sell | ||||||||
Forward contract | GBP | INR | GBP 9 | Sell | ||||||||
Forward contract | AUD | INR | AUD 4 | Sell | ||||||||
Forward contract | CHF | INR | CHF 200 | Sell | ||||||||
Forward contract | ZAR | INR | ZAR 71 | Sell | ||||||||
Forward contract | CHF | U.S.$ | CHF 200 | Buy | ||||||||
Forward contract | EUR | GBP | EUR 3 | Sell | ||||||||
Forward contract | EUR | U.S.$ | EUR 6 | Buy | ||||||||
Forward contract | GBP | U.S.$ | GBP 38 | Buy | ||||||||
Forward contract | U.S.$ | AUD | U.S.$ 5 | Buy | ||||||||
Forward contract | U.S.$ | BRL | U.S.$ 6 | Buy | ||||||||
Forward contract | U.S.$ | CLP | U.S.$ 4 | Buy | ||||||||
Forward contract | U.S.$ | COP | U.S.$ 4 | Buy | ||||||||
Forward contract | U.S.$ | KZT | U.S.$ 11 | Buy | ||||||||
Forward contract | U.S.$ | MXN | U.S.$ 2 | Buy | ||||||||
Forward contract | U.S.$ | RON | U.S.$ | 7 | Buy | |||||||
Forward contract | U.S.$ | RUB | U.S.$ 6 | Buy | ||||||||
Forward contract | U.S.$ | UAH | U.S.$ 19 | Buy | ||||||||
Forward contract | U.S.$ | INR | U.S.$ | 140 | Sell | |||||||
Hedges of highly probable forecast transactions |
| |||||||||||
| ||||||||||||
| ||||||||||||
| ||||||||||||
Option contract | U.S.$ | INR | U.S.$ | |||||||||
|
| |||||||||||
| ||||||||||||
| 270 | Sell |
(1) | “INR” means Indian rupees, “U.S.$” means United States dollars, “RON” means Romanian new leus, “GBP” means U.K. pounds sterling, “AUD” means Australian dollars, “CHF” means Swiss francs, “ZAR” means South African rands, “EUR” means Euros, “BRL” means Brazilian reals, “CLP” means Chilean pesos, “COP” means Colombian pesos, “KZT” means Kazakhstan tenges, “MXN” means Mexican pesos, “UAH” means Ukrainian hryvnias and “RUB” means Russian roubles. |
The table below summarizes the periods when the cash flows associated with highly probable forecastedforecast transactions that are classified as cash flow hedges are expected to occur:
As of March 31, | ||||||||||||||||
As of March 31, | 2021 | 2020 | ||||||||||||||
2016 | 2015 | |||||||||||||||
Cash flows in U.S. Dollars | ||||||||||||||||
Not later than one month | Rs. | 2,816 | Rs. | 2,969 | ||||||||||||
Later than one month and not later than three months | 5,300 | 5,625 | ||||||||||||||
Later than three months and not later than six months | 7,123 | 8,594 | ||||||||||||||
Later than six months and not later than one year | 3,975 | 7,188 | ||||||||||||||
Later than one year | — | 3,438 | ||||||||||||||
|
| |||||||||||||||
Rs. | 19,214 | Rs. | 27,814 | |||||||||||||
|
| |||||||||||||||
Cash flows in Roubles | ||||||||||||||||
Cash flows in U.S dollars | ||||||||||||||||
Not later than one month | Rs. | 123 | Rs. | 27 | Rs. | 3,656 | Rs. | 2,648 | ||||||||
Later than one month and not later than three months | 246 | 54 | 7,311 | 5,297 | ||||||||||||
Later than three months and not later than six months | 222 | 81 | 12,063 | 7,945 | ||||||||||||
Later than six months and not later than one year | — | 161 | 24,126 | 4,540 | ||||||||||||
|
| Rs. | 47,156 | Rs. | 20,430 | |||||||||||
Rs. | 591 | Rs. | 323 | |||||||||||||
|
| |||||||||||||||
Cash flows in Euros | ||||||||||||||||
Cash flows in Russian roubles | ||||||||||||||||
Not later than one month | Rs. | 38 | Rs. | — | Rs. | 437 | Rs. | - | ||||||||
Later than one month and not later than three months | 75 | — | 874 | - | ||||||||||||
Later than three months and not later than six months | 113 | — | 1,748 | - | ||||||||||||
Later than six months and not later than one year | 226 | — | 3,593 | - | ||||||||||||
|
| Rs. | 6,651 | Rs. | - | |||||||||||
Cash flows in Australian dollars | ||||||||||||||||
Not later than one month | Rs. | 46 | Rs. | - | ||||||||||||
Later than one month and not later than three months | 92 | - | ||||||||||||||
Later than three months and not later than six months | 139 | - | ||||||||||||||
Later than six months and not later than one year | 277 | - | ||||||||||||||
Rs. | 452 | Rs. | — | Rs. | 555 | Rs. | - | |||||||||
Cash flows in South African rands | ||||||||||||||||
Not later than one month | Rs. | 61 | Rs. | - | ||||||||||||
Later than one month and not later than three months | 121 | - | ||||||||||||||
Later than three months and not later than six months | 182 | - | ||||||||||||||
Later than six months and not later than one year | 364 | - | ||||||||||||||
|
| Rs. | 728 | Rs. | - |
186 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
31. Financial instruments (continued)
Hedges of changes in the interest rates:
Consistent with its risk management policy, the Company uses interest rate swaps (including cross currency interest rate swaps) to mitigate the risk of changes in interest rates. The Company does not use them for trading or speculative purposes.
The
A net gain/(loss) of Rs.Nil for each of the years ended March 31, 2021, 2020 and 2019, representing the changes in the fair value of interest rate swaps used as hedging instrument in a cash flow hedge is recognized in the statement of comprehensive income. For balance interest rate swaps, the changes in fair value of such interest rate swaps (including cross currency interest rate swaps) are recognized as part of the finance cost.costs. Accordingly the Company has recorded, as part of finance cost, a net gain of Rs.164, a net gain of Rs.33 and a net loss of Rs.0 and Rs.10Rs.-* for the years ended March 31, 20162021, 2020 and 2015,2019 respectively.
As on
The Company had outstanding cross currency swap against INR borrowing of Rs.7,240 and Rs.Nil as of March 31, 2016,2021 and 2020, respectively. The swap hedges the Company had no outstanding interest rate swap arrangements.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except shareprincipal repayment of underlying INR liability and per share data and where otherwise stated)
31.* Rounded to nearest million.
32. Financial risk management
The Company’s activities expose it to a variety of financial risks, including market risk, credit risk and liquidity risk. The Company’s primary risk management focus is to minimize potential adverse effects of market risk on its financial performance. The Company’s risk management assessment and policies and processes are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor such risks and compliance with the same. Risk assessment and management policies and processes are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Board of Directors and the Audit Committee is responsible for overseeing the Company’s risk assessment and management policies and processes.
a. Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s receivables from customers and investment securities. Credit risk is managed through credit approvals, establishing credit limits and continuously monitoring the creditworthiness of customers to which the Company grants credit terms in the normal course of business. The Company establishes an allowance for doubtful debts and impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments.
Trade and other receivables
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the customer, including the default risk of the industry and country in which the customer operates, also has an influence on credit risk assessment. Credit risk is managed through credit approvals, establishing credit limits and continuously monitoring the creditworthiness of customers to which the Company grants credit terms in the normal course of business.
Investments
The Company limits its exposure to credit risk by generally investing in liquid securities and only with counterparties that have a good credit rating. The Company does not expect any losses from non-performance by these counter-parties, and does not have any significant concentration of exposures to specific industry sectors or specific country risks.
Financial assets that are neither past due nor impaired
None of the Company’s cash equivalents, including term deposits (i.e., certificates of deposit) with banks, were past due or impaired as at March 31, 2016. Of the total trade and other receivables, Rs.34,840 as at March 31, 2016 and Rs.33,226 as at March 31, 2015 consisted of customer balances that were neither past due nor impaired.
Financial assets that are past due but not impaired
The Company’s credit period for customers generally ranges from 20 - 180 days. The aging of trade and other receivables that are past due but not impaired is given below:
As of March 31, | ||||||||
Period (in days) | 2016 | 2015 | ||||||
1 – 90 | Rs. | 5,151 | Rs. | 6,229 | ||||
90 – 180 | 577 | 766 | ||||||
More than 180 | 738 | 534 | ||||||
|
|
|
| |||||
Total | Rs. | 6,466 | Rs. | 7,529 | ||||
|
|
|
|
See Note 13 of these consolidated financial statements for the activity in the allowance for impairment of trade and other receivables.
Other than trade and other receivables, the Company has no significant class of financial assets that is past due but not impaired.
a. |
|
Market risk is the risk of loss of future earnings, fair values or future cash flows that may result from adverse changes in market rates and prices (such as interest rates, foreign currency exchange rates and commodity prices) or in the price of market risk-sensitive instruments as a result of such adverse changes in market rates and prices. Market risk is attributable to all market risk-sensitive financial instruments, all foreign currency receivables and payables and all short termshort-term and long-term debt. The Company is exposed to market risk primarily related to foreign exchange rate risk, interest rate risk and the market value of its investments. Thus, the Company’s exposure to market risk is a function of investing and borrowing activities and revenue generating and operating activities in foreign currencies.
Foreign exchange risk
The Company’s foreignCompany is exposed to exchange rate risk which arises from its foreign operations, foreign currencyexchange revenues and expenses, (primarilyprimarily in U.S. dollars, U.K. pounds sterling, Russian roubles, Brazilian reals, Swiss francs, South African rands, Kazakhstan tenges, Romanian new leus, Australian dollars and Euros, and foreign currency debt in U.S. dollars, Russian roubles, U.K. pounds sterling, Venezuelan bolivarsSouth African rands, Mexican pesos, Ukrainian hryvnias and Euros) and foreign currency borrowings (in U.S. dollars, Russian roubles and Euros).Brazilian reals. A significant portion of the Company’s revenues are in these foreign currencies, while a significant portion of its costs are in Indian rupees. As a result, if the value of the Indian rupee appreciates relative to these foreign currencies, the Company’s revenues measured in Indian rupees may decrease. The exchange rate between the Indian rupee and these foreign currencies has changed substantially in recent periods and may continue to fluctuate substantially in the future. Consequently, the Company uses both derivative and non-derivative financial instruments, such as foreign exchange forward contracts, option contracts, currency swap contracts and foreign currency financial liabilities, to mitigate the risk of changes in foreign currency exchange rates in respect of its highly probable forecastedforecast transactions and recognized assets and liabilities.
The details in respect of the outstanding foreign exchange forward and option contracts are given in Note 30 above.31 to these consolidated financial statements.
In respect of the Company’s forward contracts,and option contracts and currency swap contracts, a 10% decrease/increase in the respective exchange rates of each of the currencies underlying such contracts would have resulted in:
an approximately Rs.1,511/(424)a Rs.4,824/(4,195) increase/(decrease) in the Company’s hedging reserve and an approximately Rs.1,277/(1,707)a Rs.2,658/(2,658) increase/(decrease) in the Company’s net profit from such contracts, as atof March 31, 2016;
an approximately Rs.1,308/(631)a Rs.1,203/(1,740) increase/(decrease) in the Company’s hedging reserve and an approximately Rs.1,598/(1,790)a Rs.2,070/(1,745) increase/(decrease) in the Company’s net profit from such contracts, as atof March 31, 2015;2020; and
an approximately Rs.1,254/(945)a Rs.1,872/(1,349) increase/(decrease) in the Company’s hedging reserve and an approximately Rs.3,863/(4,011)a Rs.1,789/(1,873) increase/(decrease) in the Company’s net profit from such contracts, as atof March 31, 2014.2019.
187 |
In respect of the Company’s foreign currency borrowings designated in a cash flow hedge relationship, a 10% decrease/increase in the respective exchange rates of each of the currencies underlying such borrowings would have resulted in an approximately Rs.364, Rs.1,031 and Rs.1,318 increase/decrease in the Company’s hedging reserve as at March 31, 2016, 2015 and 2014, respectively.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
31.32. Financial risk management (continued)
c. Market risk (continued)
The following table analyzes foreign currency risk from non-derivative financial instruments as atof March 31, 2016:2021:
U.S. dollars | Euro | Russian roubles | Others(1) | Total | U.S. dollars | Euro | Russian roubles | Others(1) | Total | |||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | Rs. | 1,378 | Rs. | 93 | Rs. | 258 | Rs. | 614 | Rs. | 2,343 | Rs. | 12,643 | Rs. | 129 | Rs. | 30 | Rs | 92 | Rs. | 12,894 | ||||||||||||||||||||
Other investments | 832 | — | — | — | 832 | 24 | - | - | - | 24 | ||||||||||||||||||||||||||||||
Trade and other receivables | 30,518 | 891 | 4,125 | 1,816 | 37,350 | 30,247 | 841 | 721 | 101 | 31,910 | ||||||||||||||||||||||||||||||
Other assets | 190 | — | 76 | 320 | 586 | 184 | 20 | 3 | 16 | 223 | ||||||||||||||||||||||||||||||
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Total | Rs. | 32,918 | Rs. | 984 | Rs. | 4,459 | Rs. | 2,750 | Rs. | 41,111 | Rs. | 43,098 | Rs. | 990 | Rs. | 754 | Rs. | 209 | Rs. | 45,051 | ||||||||||||||||||||
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Liabilities: | ||||||||||||||||||||||||||||||||||||||||
Trade and other payables | Rs. | 2,681 | Rs. | 875 | Rs. | — | Rs. | 369 | Rs. | 3,925 | Rs. | 4,207 | Rs. | 1,270 | Rs. | - | * | Rs. | 210 | Rs. | 5,687 | |||||||||||||||||||
Long-term borrowings | 9,946 | — | 113 | — | 10,059 | 2,216 | 52 | 18 | 43 | 2,329 | ||||||||||||||||||||||||||||||
Short-term borrowings | 13,846 | 5,768 | 3,104 | — | 22,718 | 3,657 | - | 3,717 | - | 7,374 | ||||||||||||||||||||||||||||||
Other liabilities and provisions | 9,880 | 99 | 1,448 | 867 | 12,294 | 4,665 | 65 | 81 | 292 | 5,103 | ||||||||||||||||||||||||||||||
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Total | Rs. | 36,353 | Rs. | 6,742 | Rs. | 4,665 | Rs. | 1,236 | Rs. | 48,996 | Rs. | 14,745 | Rs. | 1,387 | Rs. | 3,816 | Rs. | 545 | Rs. | 20,493 | ||||||||||||||||||||
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The following table analyzes foreign currency risk from non-derivative financial instruments as atof March 31, 2015:2020:
U.S. dollars | Euro | Russian roubles | Others(1) | Total | U.S. dollars | Euro | Russian roubles | Others(1) | Total | |||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | Rs. | 513 | Rs. | 410 | Rs. | 249 | Rs. | 2,462 | Rs. | 3,634 | Rs. | 365 | Rs. | 43 | Rs. | 4 | Rs. | 135 | Rs. | 547 | ||||||||||||||||||||
Other investments | 3,063 | — | — | — | 3,063 | 24 | - | - | - | 24 | ||||||||||||||||||||||||||||||
Trade and other receivables | 26,214 | 1,369 | 4,376 | 3,780 | 35,739 | 31,931 | 705 | 989 | 317 | 33,942 | ||||||||||||||||||||||||||||||
Other assets | 91 | 1 | 62 | 180 | 334 | 921 | 15 | 3 | 153 | 1,092 | ||||||||||||||||||||||||||||||
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Total | Rs. | 29,881 | Rs. | 1,780 | Rs. | 4,687 | Rs. | 6,422 | Rs. | 42,770 | Rs. | 33,241 | Rs. | 763 | Rs. | 996 | Rs. | 605 | Rs. | 35,605 | ||||||||||||||||||||
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Liabilities: | ||||||||||||||||||||||||||||||||||||||||
Trade and other payables | Rs. | 2,397 | Rs. | 438 | Rs. | 66 | Rs. | 642 | Rs. | 3,543 | Rs. | 1,857 | Rs. | 525 | Rs. | - | * | Rs. | 73 | Rs. | 2,455 | |||||||||||||||||||
Long-term borrowings | 19,701 | — | 140 | — | 19,841 | 4,401 | 2 | 3 | 77 | 4,483 | ||||||||||||||||||||||||||||||
Short-term borrowings | 14,875 | 2,116 | 3,866 | — | 20,857 | 7,316 | - | - | - | 7,316 | ||||||||||||||||||||||||||||||
Other liabilities and provisions | 7,645 | 163 | 1,598 | 854 | 10,260 | 5,534 | 60 | 52 | 400 | 6,046 | ||||||||||||||||||||||||||||||
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Total | Rs. | 44,618 | Rs. | 2,717 | Rs. | 5,670 | Rs. | 1,496 | Rs. | 54,501 | Rs. | 19,108 | Rs. | 587 | Rs. | 55 | Rs. | 550 | Rs. | 20,300 | ||||||||||||||||||||
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* Rounded to the nearest million.
(1) | Others |
For the years ended March 31, 20162021 and 2015,2020, every 10% depreciation/appreciation in the exchange rate between the Indian rupee and the respective currencies for the above mentioned financial assets/liabilities would affect the Company’s net profit by approximately Rs.789Rs.2,456 and Rs.1,173,Rs.1,531, respectively.
Further, in February 2016, the Venezuelan government announced changes to its foreign currency exchange mechanisms, including the devaluation of its official exchange rate. Refer to Note 41 of these consolidated financial statements for further details.
Interest rate risk
As of March 31, 2016 and March 31, 2015,2021, the Company had Rs.29,552loans with floating interest rates as follows: Rs.8,800 of foreign currency loans carrying a floating interest rate of LIBOR minus 5 bps to LIBORthe 3 Months India Treasury Bill plus 12530 bps and Rs.37,419Rs.1,896 of foreign currency loans carrying a floating interest rate of TIIE+1.20%.
As of March 31, 2020, the Company had loans with floating interest rates as follows: Rs.10,971 of loans carrying a floating interest rate ranging from 1 Month LIBOR plus 7.5-13012.5 bps respectively. Theseto 1 Month LIBOR plus 82.7 bps; Rs.4,000 of loans expose the Company to risk of changes in interest rates. The Company’s treasury department monitors thecarrying a floating interest rate movement and manages theof 1 Month India Treasury Bill plus 60 bps; Rs.1,627 of loans carrying a floating interest rate risk based on its policies, which include entering intoof 3 Month LIBOR plus 55 bps; Rs.1,579 of loans carrying a floating interest rate swaps as considered necessary.of TIIE+1.25%; and Rs.63 of loans carrying a floating interest rate of 1 Month JIBAR plus 120 bps.
For details of the Company’s short-term and long termlong-term loans and borrowings, including interest rate profiles, refer to Note 1817 of these consolidated financial statements.
For the years ended March 31, 2016, 20152021, 2020 and 2014,2019, every 10% increase or decrease in the floating interest rate component (i.e., LIBOR)LIBOR, JIBAR, Indian Treasury Bill and TIIE) applicable to its loans and borrowings would affect the Company’s net profit by approximately Rs.12, Rs.6Rs.37, Rs.41 and Rs.13,Rs.93, respectively.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
31. Financial risk management (continued)
c. Market risk (continued)The carrying value of the Company’s borrowings, interest component of which was designated in a cash flow hedge, was Rs.Nil as of March 31, 2021 and 2020.
The Company’s investments in term deposits (i.e., certificates of deposit) with banks and short-term liquid mutual funds are for short durations, and therefore do not expose the Company to significant interest rates risk.
188 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
32. Financial risk management (continued)
Commodity rate risk
Exposure to market risk with respect to commodity prices primarily arises from the Company’s purchases and sales of active pharmaceutical ingredients, including the raw material components for such active pharmaceutical ingredients. These are commodity products, whose prices may fluctuate significantly over short periods of time. The prices of the Company’s raw materials generally fluctuate in line with commodity cycles, although the prices of raw materials used in the Company’s active pharmaceutical ingredients business are generally more volatile. Cost of raw materials forms the largest portion of the Company’s cost of revenues. Commodity price risk exposure is evaluated and managed through operating procedures and sourcing policies. As of March 31, 2016,2021, the Company had not entered into any material derivative contracts to hedge exposure to fluctuations in commodity prices.
32. Assets acquisition from Ecologic Chemicals Limited
On September 13, 2013, the Company entered into an asset purchase agreement with Ecologic Chemicals Limited, an entity in which two directors of the Company have equity interests. The Company paid Rs.1,264 (U.S.$20), excluding taxes and duties, for the purchase of certain non-current and current assets relating to the manufacture of intermediates and API. The acquisition of these assets will help to augment the Company’s manufacturing capacity and assist it in meeting the future business requirements of its PSAI segment.
The acquisition has been accounted for as a purchase of assets. The total purchase consideration has been allocated to the acquired assets as of September 13, 2013 based on a fair valuation carried out by the Company’s management as tabulated below:
b. | Credit risk |
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s receivables from customers and investment securities. The Company establishes an allowance for doubtful debts and impairment that represents its estimate of expected losses in respect of trade and other receivables and investments.
Trade and other receivables
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the customer, including the default risk of the industry and country in which the customer operates, also has an influence on credit risk assessment. Credit risk is managed through credit approvals, establishing credit limits and continuously monitoring the creditworthiness of customers to which the Company grants credit terms in the normal course of business.
Investments
The Company limits its exposure to credit risk by generally investing in liquid securities and only with counterparties that have a good credit rating. The Company does not expect any losses from non-performance by these counter-parties, and does not have any significant concentration of exposures to specific industry sectors or specific country risks.
Details of financial assets – not due, past due and impaired
None of the Company’s cash equivalents, including term deposits (i.e., certificates of deposit) with banks, were past due or impaired as of March 31, 2021. The Company’s credit period for trade and other receivables payable by its customers generally ranges from 20 - 180 days.
The aging of trade and other receivables is given below:
As of March 31, | ||||||||
Particulars | 2021 | 2020 | ||||||
Neither past due nor impaired | Rs. | 41,350 | Rs. | 45,864 | ||||
Past due but not impaired | ||||||||
Less than 365 days | 8,598 | 6,305 | ||||||
More than 365 days | 1,107 | 1,048 | ||||||
Rs. | 51,055 | Rs. | 53,217 | |||||
Less : Allowance for credit losses | (1,296 | ) | (1,202 | ) | ||||
Total | Rs. | 49,759 | Rs. | 52,015 |
See Note 9 of these consolidated financial statements for the activity in the allowance for credit losses on trade and other receivables.
Other than trade and other receivables, the Company has no significant class of financial assets that is past due but not impaired.
c. | Liquidity risk |
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages its liquidity risk by ensuring, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risk to the Company’s reputation.
As of March 31, 2021 and 2020, the Company had uncommitted lines of credit from banks of Rs.38,766 and Rs.39,374, respectively.
As of March 31, 2021, the Company had working capital of Rs.66,626 (excluding assets held for sale of Rs.151), including cash and cash equivalents of Rs.14,829, investments in term deposits with banks and bonds of Rs.6,481 and investments in units of mutual funds of Rs.13,263.
As of March 31, 2020, the Company had working capital of Rs.57,556, including cash and cash equivalents of Rs.2,053, investments in term deposits with banks, bonds and commercial paper of Rs.7,862, investments in marked linked debentures of Rs.1,993 and investments in units of mutual funds of Rs.13,832.
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189 |
Buildings and plant and machinery are depreciated over the remaining useful life of the respective assets.
33. Bonus Debentures
On March 24, 2011, the Company issued to its shareholders “in-kind” (i.e., for no cash consideration) 9.25% unsecured, non-convertible, redeemable debentures (sometimes referred to as “bonus debentures”), effected by way of capitalization of its retained earnings. These bonus debentures matured on March 24, 2014 and were redeemed by the Company for cash in an amount equal to their face value of Rs.5 each, along with the third and final interest payment thereon. The aggregate amount of principal payment for all such bonus debentures on March 24, 2014 was Rs.5,078.
34. Collaboration agreement with Curis, Inc.
On January 18, 2015, Aurigene Discovery Technologies Limited (“Aurigene”), a wholly owned subsidiary of the parent company, entered into a Collaboration, License and Option Agreement (the “Collaboration Agreement”) with Curis, Inc. (“Curis”) to discover, develop and commercialize small molecule antagonists for immuno-oncology and precision oncology targets.
Under the Collaboration Agreement, Aurigene has the responsibility for conducting all discovery and preclinical activities, including Investigational New Drug (“IND”) enabling studies and providing Phase 1 clinical trial supply, and Curis is responsible for all clinical development, regulatory and commercialization efforts worldwide, excluding India and Russia. The Collaboration Agreement provides that the parties will collaborate exclusively in immuno-oncology for an initial period of approximately two years, with the option for Curis to extend the broad immuno-oncology exclusivity.
As partial consideration for the collaboration, pursuant to a Stock Purchase Agreement dated January 18, 2015, Curis issued to Aurigene 17.1 million shares of its common stock, representing 19.9% of its outstanding common stock immediately prior to the transaction (approximately 16.6% of its outstanding common stock immediately after the transaction). The shares issued to Aurigene are subject to a lock-up agreement until January 18, 2017, with the shares being released from such lock-up in 25% increments on each of July 18, 2015, January 18, 2016, July 18, 2016 and January 18, 2017, subject to acceleration of release of all the shares in connection with a change of control of Curis. During the year ended March 31, 2016, lock-up restrictions were released on 8.55 million shares of common stock, representing 50% of the shares which Aurigene received from Curis. In connection with the issuance of such shares, Curis and Aurigene entered into a Registration Rights Agreement dated January 18, 2015 which provides for certain registration rights with respect to resale of the shares. The common stock of Curis is listed for quotation on the NASDAQ Global Market.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
34. Collaboration agreement with Curis, Inc.32. Financial risk management (continued)
The fair valuetable below provides details regarding the contractual maturities of the shares of common stock on the date of the Stock Purchase Agreement was Rs.1,452 (U.S.$23.5). These shares are classified as available-for-salesignificant financial instrumentsliabilities (other than long-term borrowings and are re-measured at fair value at every reporting date. Accordingly, Rs.272, representing the gain arising from changesobligations under leases, which have been disclosed in the fair value of such shares of common stock, was recorded in other comprehensive incomeNote 17 to these consolidated financial statements) as of March 31, 2016.
Revenues under the Collaboration Agreement consist of upfront consideration (including the shares of common stock) and the development and commercial milestone payments described below, which are deferred and recognized as revenue over the period for which Aurigene has continuing performance obligations.
Under the Collaboration Agreement, Aurigene is entitled to development and commercial milestone payments as follows:2021:
for the first two programs: up to U.S.$52.5 per program, including U.S.$42.5 for approval and commercial milestones, plus pre-specified approval milestone payments for additional indications, if any;
for the third and fourth programs: up to U.S.$50 per program, including U.S.$42.5 for approval and commercial milestones, plus pre-specified approval milestone payments for additional indications, if any; and
for any program thereafter: up to U.S.$140.5 per program, including U.S.$87.5 for approval and commercial milestones, plus pre-specified approval milestone payments for additional indications, if any.
In addition, Curis has agreed to pay Aurigene royalties, ranging between high single digits to 10%, on its net sales in territories where it commercializes products. Furthermore, Aurigene is entitled to receive a share of Curis’ revenues from sublicenses, which share varies based upon specified factors such as the sublicensed territory, whether the sublicense revenue is royalty based or non-royalty based and, in some cases, the stage of the applicable molecule and product at the time the sublicense is granted.
This arrangement is accounted for as a joint operation under IFRS 11.
35. Agreement with Merck Serono
On June 6, 2012, the Company and the biosimilars division of Merck KGaA, Darmstadt, Germany, formerly known as Merck Serono (hereinafter, “Merck KGaA”), entered into a collaboration agreement to co-develop a portfolio of biosimilar compounds in oncology, primarily focused on monoclonal antibodies. The arrangement covers co-development, manufacturing and commercialization of the compounds around the globe, with some specific country exceptions. During the year ended March 31, 2016, the collaboration agreement was amended to rearrange and realign the development of compounds, territory rights and royalty payments. Both parties will undertake commercialization based on their respective regional rights as defined in the agreement. The Company will lead and support early product development towards or including Phase I development. Merck KGaA will carry out manufacturing of the compounds and will lead further development for its territories. In its exclusive and co-exclusive territories, the Company will carry out its own development, wherever applicable, for commercialization. As before, the Company will continue to receive royalty payments upon commercialization by Merck KGaA in its territories.
During the three months ended December 31, 2015, the Company received from Merck KGaA certain amounts relating to its share of development costs and other amounts linked to the achievement of milestones for the development of compounds under the collaboration agreement, as amended.
36. Agreement with Pierre Fabre
On February 11, 2014, Aurigene entered into a collaborative license, development and commercialization agreement with Pierre Fabre, the third largest French pharmaceutical company. This agreement granted Pierre Fabre global worldwide rights (excluding India) to a new immune checkpoint modulator, AUNP-12. AUNP-12 will be in development for numerous cancer indications.
Under the terms of this agreement, Aurigene received a non-refundable upfront payment from Pierre Fabre, which was deferred and recognized as revenue over the period in which Aurigene had continuing performance obligations.
During the three months ended September 30, 2015, Aurigene entered into another agreement with Pierre Fabre to transfer back to Aurigene the rights earlier out-licensed for the development and commercialization of AUNP-12. As a result of such arrangement, Aurigene paid to Pierre Fabre a portion of the upfront consideration received and retained and recognized the remaining upfront consideration as revenue, as there are no pending performance obligations.
37. Asset purchase agreement with Hatchtech Pty Limited
On September 7, 2015, the Company entered into an asset purchase agreement with Hatchtech Pty Limited (“Hatchtech”) for the purchase of intellectual property rights to an innovative prescription head lice product, Xeglyze™ Lotion. The exclusive rights for this product are applicable for the territories of the United States, Canada, India, Russia and other countries of the former Soviet Union, Australia, New Zealand and Venezuela.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
Particulars | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||
Trade and other payables | Rs. | 23,744 | Rs. | - | Rs. | - | Rs. | - | Rs. | - | Rs. | 23,744 | ||||||||||||
Bank overdraft, short-term borrowings | 23,145 | - | - | - | - | 23,145 | ||||||||||||||||||
Derivative financial instruments | 326 | - | - | - | - | 326 | ||||||||||||||||||
Other liabilities and provisions | 22,507 | - | - | - | 726 | 23,233 |
37. Asset purchase agreement with Hatchtech Pty Limited (continued)
As partial consideration forThe table below provides details regarding the purchasecontractual maturities of these assets, the Company paid Hatchtech an upfront amount of Rs.606 (U.S.$9.25). In addition to the foregoing payments, the Company is also required to pay certain developmentsignificant financial liabilities (other than long-term borrowings and commercial milestones related payments to Hatchtech for purchase of these assets.
During the three months ended December 31, 2015, the Company paid Hatchtech development milestone payments of Rs.341 (U.S.$5).
The transaction was recorded as an acquisition of product related intangible asset. As the intangible asset is not yet available for use, it is not subject to amortization.
The carrying amount of the intangible asset as on March 31, 2016 was Rs.947 (U.S.$14.25).
38. Asset purchase agreement with Alchemia
In November 2015, the Company entered into an asset purchase agreement with Alchemia Limited (“Alchemia”) for the purchase of worldwide, exclusive intellectual property rights to fondaparinux sodium. The closing conditions for the transaction included the approval of Alchemia’s shareholdersobligations under leases, which was obtained on November 10, 2015. As per the terms of the agreement, the Company paid net consideration of Rs.1,158 (U.S.$17.5) upon the closing of the transaction in exchange for the acquired intellectual property rights.
Prior to this asset purchase agreement, the Company had worldwide, exclusive rights from Alchemia to market fondaparinux sodium in all territories in exchange for Alchemia’s right to an agreed share of the net profits generated from sales in those territories. As a result of the closing of the asset purchase agreement, Alchemia is not entitled to receive any further profit share revenues from fondaparinux sales on or after July 1, 2015.
The transaction was recorded as an acquisition of technology related intangible asset with an estimated useful life of 4 years.
39. Agreement with Novartis Consumer Health Inc.
On October 18, 2014, the Company, through its wholly owned subsidiary Dr. Reddy’s Laboratories SA, entered into an asset purchase agreement with Novartis Consumer Health Inc. to acquire the title and rights to its Habitrol® brand (an over-the-counter nicotine replacement therapy transdermal patch) and to market the product in the United States.
After obtaining the necessary approvals from the U.S. Federal Trade Commission, the Company completed the acquisition of Habitrol® on December 17, 2014. The total purchase consideration was Rs.5,097 (U.S.$80).
The transaction has been recorded as an acquisition of a product related intangible asset with a useful life of 8 years. The carrying amount of the asset as at March 31, 2016 was Rs.4,265.
40. Receipt of warning letter from the U.S. FDA
The Company received a warning letter dated November 5, 2015 from the U.S. FDA relating to cGMP deviations at its 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 previously raised in Form 483 observations following inspections of these sites by the U.S. FDA in November 2014, January 2015 and February-March 2015, respectively.
The warning letter does not restrict production or shipment of the Company’s products from these facilities. However, unless and until the Company is able to correct outstanding issues to the U.S. FDA’s satisfaction, the U.S. FDA may withhold approval of new products and new drug applications of the Company, refuse admission of products manufactured at the facilities noted in the warning letter into the United States, and/or take additional regulatory or legal action against the Company. Any such further action could have a material and negative impact on the Company’s ongoing business and operations.
The Company submitted its response to the warning letter on December 7, 2015. Further, the Company provided updates on the progress of its corrective actions to the U.S. FDA in January 2016, March 2016 and May 2016.
The Company believes that it can resolve the issues raised by the U.S. FDA satisfactorily in a timely manner. The Company takes the matters identified by U.S. FDA in the warning letter seriously, and will continue to work diligently to address the observations identified in the warning letter, and is concurrently continuing to develop and implement its corrective action plans relating to the warning letter.
41. Venezuela operations
Dr. Reddy’s Venezuela, C.A., a wholly owned subsidiary of the Company, is primarily engaged in the import of pharmaceutical products from the parent company and other subsidiaries of the Company and the sale of such products in Venezuela. During the years ended March 31, 2016 and 2015, the Company’s revenues from Venezuela were Rs.4,666 (Venezuelan bolivar (“VEF”) 457) and Rs.8,335 (VEF 813) respectively.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
41. Venezuela operations (continued)
In February 2015, the Venezuelan government launched an overhaul of the exchange rate system and introduced a new exchange rate mechanism. The Marginal Currency System (known as “SIMADI”) is the third mechanism in the new three-tier exchange rate regime and allows for legal trading of the Venezuelan bolivar for foreign currency with fewer restrictions than other mechanisms in Venezuela (CENCOEX and SICAD).
The new second tier, SICAD, is a combination of the former second and third tiers, SICAD I and SICAD II, with an initial rate of approximately 12 VEF per U.S.$1.00. The first tier, the official exchange rate, is unchanged and sells dollars at 6.3 VEF per U.S.$1.00 for preferential goods.
Nine months ended December 31, 2015
For the nine months ended December 31, 2015, all the monetary assets and liabilities that were eligible for exchange at the CENCOEX preferential rate of 6.3 VEF per U.S.$1.00 and were pending for approval have been translated at such rate. The balance of the Company’s Venezuelan monetary assets and liabilities for the nine months ended December 31, 2015, which the Company believes may not qualify for the CENCOEX preferential rate of 6.3 VEF per U.S.$1.00, have been translated using the SIMADI rate. Consequently, foreign exchange loss of Rs.776 and Rs.843 on translation of such monetary assets and liabilities at the SIMADI rate was recorded under “finance expenses” for the nine months ended December 31, 2015 and the year ended March 31, 2015, respectively.
During the nine months ended December 31, 2015, the Company received approvals for only U.S.$4 from the CENCOEX for remittance towards the importation of pharmaceutical products at the CENCOEX preferential rate.
Update during the three months ended March 31, 2016
The economic conditionsdisclosed in Venezuela continuedNote 17 to deteriorate further during the three months ended March 31, 2016. In February 2016, the Venezuelan government announced changes to its foreign currency exchange mechanisms, including the devaluation of its official exchange rate. The following changes became effective as of March 10, 2016:
The CENCOEX preferential rate was replaced with a new “DIPRO” rate. The DIPRO rate is only available for purchases and sales of essential items. Further, the preferential exchange rate was devalued from 6.3 VEF per U.S.$1.00 to 10 VEF per U.S.$1.00.
The SICAD exchange rate mechanism, which last auctioned USD for approximately 13 VEF per U.S.$1.00, was eliminated.
The SIMADI exchange rate mechanism was replaced with a new “DICOM” rate, which governs all transactions not subject to the DIPRO exchange rate and will fluctuate according to market supply and demand. As of March 31, 2016, the DICOM exchange rate was 272.5 VEF per U.S.$1.00.
The Company has not yet received approvals from the Venezuelan government to repatriate any amount at preferential rates beyond the U.S.$4 already approved and received during the year ended March 31, 2016. The Company fully considered all the aforesaid developments, facts and circumstances and, following the guidance available in IAS 21, believes that it is appropriate to use the DICOM rate (i.e. 272.5 VEF per U.S.$1.00) for translating the monetary assets and liabilities of the Venezuelan subsidiary as at March 31, 2016.
Tabulated below is the impact of the foregoing on thethese consolidated financial statements of the Company:
Particulars | Year ended March 31, 2015 | Nine months ended December 31, 2015 | Three months ended March 31, 2016 | Year ended March 31, 2016 | ||||||||||||
Foreign exchange loss on account of currency devaluation and translation of monetary assets and liabilities using SIMADI / DICOM rate recorded under finance expense | Rs. | 843 | Rs. | 776 | Rs. | 3,845 | Rs. | 4,621 | ||||||||
Impact of inventory write down and reversal of export incentives recorded under cost of revenues | — | — | 341 | 341 | ||||||||||||
Impairment of property, plant and equipment recorded under selling, general and administrative expenses | — | — | 123 | 123 | ||||||||||||
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|
|
|
|
|
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Total | Rs. | 843 | Rs. | 776 | Rs. | 4,309 | Rs. | 5,085 | ||||||||
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|
|
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|
|
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Including the foreign exchange loss of Rs.843 recognized during the year ended March 31, 2015, total loss recognized on account of operations in Venezuela was Rs.5,928statements) as of March 31, 2016.
Notwithstanding the ongoing uncertainty, the Company continues to actively engage with the Venezuelan Government and seek approval to repatriate funds at preferential rates.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
42. License agreement with Xenoport
On March 28, 2016, the Company and XenoPort, Inc. (“XenoPort”) entered into a license agreement pursuant to which the Company was granted exclusive U.S. rights for the development and commercialization of XenoPort’s clinical stage oral new chemical entity. The Company plans to develop the in-licensed compound as a potential treatment for moderate-to-severe chronic plaque psoriasis and for relapsing forms of multiple sclerosis.
The transaction was subject to satisfaction of certain customary closing conditions, including among other things the expiration or early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), following the Company’s premerger notification filing under the HSR Act with the applicable governmental authorities regarding its intention to acquire these rights.
Upon the completion of all closing conditions, in May 2016, the Company paid a U.S.$47.5 up-front payment and an additional U.S.$2.5 for the transfer of certain clinical trial materials as per the terms of the agreement.
In addition to the up-front payment, XenoPort will also be eligible to receive up to U.S.$190 upon the achievement by the Company of certain regulatory milestones, which could be achieved over a period of several years. In addition, XenoPort will be eligible to receive up to U.S.$250 upon the achievement by the Company of certain commercial milestones, and up to mid-teens percentage rate royalty payments based on the Company’s net sales of the product in the United States.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
Particulars | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | ||||||||||||||||||
Trade and other payables | Rs. | 16,659 | Rs. | - | Rs. | - | Rs. | - | Rs. | - | Rs. | 16,659 | ||||||||||||
Bank overdraft, short-term borrowings | 16,532 | - | - | - | - | 16,532 | ||||||||||||||||||
Derivative financial instruments | 1,602 | - | - | - | - | 1,602 | ||||||||||||||||||
Other liabilities and provisions | 24,566 | - | - | - | 751 | 25,317 |
43.33. Contingencies
The Company is involved in disputes, lawsuits, claims, governmental and/or regulatory inspections, inquiries, investigations and proceedings, including patent and commercial matters that arise from time to time in the ordinary course of business. The more significant matters are discussed below. 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 based on internal and external legal advice 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 or investigations 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 possibilitythe likelihood of loss in excess of amounts accrued (if any) is not probable. However, if one or more of such proceedings were to result in judgments against the Company, such judgments could be material to its results of operations in a given period.
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.
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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
33. Contingencies (continued)
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 filed a motion requesting that the New Jersey District Court enter partial final judgment in the Company’s favor relating to the allegations of infringement of U.S. patent number 9,931,305, which the District Court denied without prejudice on August 24, 2020, pending resolution of Indivior’s allegations relating to U.S. patent number 9,687,454.
On November 11, 2019, a Magistrate Judge in the District of New Jersey granted the Company leave to file a counterclaim against Indivior that alleges that Indivior engaged in anticompetitive conduct by making false or misleading statements to the New Jersey District Court during the preliminary injunction proceedings in violation of federal antitrust laws. Indivior appealed the Magistrate Judge’s ruling to the District Court Judge and, on August 24, 2020, the District Court Judge denied Indivior’s appeal. The District Court did grant Indivior’s motion to bifurcate the patent claims and the antitrust claims into two separate trials. Fact discovery closed on January 29, 2021. No trial date has been set and expert discovery on both the patent and antitrust claims is ongoing. Opening expert reports were submitted on March 24, 2021. Expert discovery is scheduled to close on or around September 1, 2021.
In addition to the District Court proceeding, on November 13, 2018, the Company filed two petitions for inter-partes review challenging the validity of certain claims of U.S. patent number 9,687,454 before the Patent Trial and Appeal Board (“PTAB”). On June 13, 2019, the PTAB agreed to institute inter-partes review on one of the two petitions filed by the Company. The PTAB heard oral argument in the pending inter-partes review challenge on March 3, 2020.
On June 2, 2020, the PTAB issued a final written decision in the Company’s favor finding that the Company had demonstrated that claims 1–5, 7, and 9–14 of U.S. patent number 9,687,454 were unpatentable. The PTAB upheld the validity of only one of the challenged claims, claim 8. Additionally, claim 6 was not at issue in the inter-partes review and therefore not subject to the final written decision. Claims 6 and 8 remain asserted against the Company in the New Jersey District Court litigation. Indivior filed a timely notice of appeal of the PTAB’s Final Written Decision (“ FWD”) for claims 1-5, 7, and 9-14, and the Company cross appealed the PTAB’s FWD on claim 8. In the PTAB appeal, Indivior submitted its principal appeal brief on December 9, 2020. Indivior did not challenge the Board’s decision on claims 5 and 12 in its appeal brief. The Company submitted its opening and response brief on February 18, 2021 and Indivior submitted its response and reply brief on March 30, 2021. The Company’s reply brief was submitted on April 20, 2021. The court of appeals has not yet scheduled oral arguments in the appeal.
The Company intends to vigorously defend its positions and pursue a claim for damages caused by the preliminary injunction. Any liability that may arise on account of this litigation is unascertainable. Accordingly, no provision was made in these consolidated financial statements of the Company.
Matters relating to National Pharmaceutical Pricing Authority
Norfloxacin, India litigation
The Company manufactures and distributes Norfloxacin, a formulations product, and in limited quantities, the active pharmaceutical ingredient norfloxacin. Under the Drugs Prices Control(Prices Control) Order (the “DPCO”), the National Pharmaceutical Pricing Authority (the “NPPA”) established by the Government of India had the authority to designate a pharmaceutical product as a “specified product” and fix the maximum selling price for such product. In 1995, the NPPA issued a notification and designated Norfloxacin as a “specified product” and fixed the maximum selling price. In 1996, the Company filed a statutory Form III before the NPPA for the upward revision of the maximum selling price and a writ petition in the Andhra Pradesh High Court (the “High Court”) challenging the validity of the designation on the grounds that the applicable rules of the DPCO were not complied with while fixing the maximum selling price. The High Court had previously granted an interim order in favor of the Company; however it subsequently dismissed the case in April 2004.
The Company filed a review petition in the High Court in April 2004 which was also dismissed by the High Court in October 2004. Subsequently, the Company appealed to the Supreme Court of India, New Delhi (the “Supreme Court”) by filing a Special Leave Petition, which is currently pending.Petition.
During the year ended March 31, 2006, the Company received a notice from the NPPA demanding the recovery of the price charged by the Company for sales of Norfloxacin in excess of the maximum selling price fixed by the NPPA, which was Rs.285 including interest.
The Company filed a writ petition in the High Court challenging this demand order. The High Court admitted the writ petition and granted an interim order, directing the Company to deposit 50% of the principal amount claimed by the NPPA, which was Rs.77. The Company deposited this amount with the NPPA in November 2005. In February 2008, the High Court directed the Company to deposit an additional amount of Rs.30, which was deposited by the Company in March 2008. In November 2010, the High Court allowed the Company’s application to include additional legal grounds that the Company believes will strengthenbelieved strengthened its defense against the demand.
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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
33. Contingencies (continued)
For example, the Company has added as grounds that trade margins should not be included in the computation of amounts overcharged, and that it iswas necessary for the NPPA to set the active pharmaceutical ingredient price before the process of determining the ceiling on the formulation price. In October 2013, the Company filed an additional writ petition before the Supreme Court challenging the inclusion of Norfloxacin as a “specified product” under the DPCO, which is currently pending.DPCO. In January 2015, the NPPA filed a counter affidavit stating that the inclusion of Norfloxacin was based upon the recommendation of a committee consisting of experts in the field. On July 20, 2016, the Supreme Court remanded the matters concerning the inclusion of Norfloxacin as a “specified product” under the DPCO back to the High Court for further proceedings. During the three months ended September 30, 2016, the Supreme Court dismissed the Special Leave Petition pertaining to the fixing of prices for Norfloxacin formulations.
During the three months ended December 31, 2016, a writ petition pertaining to Norfloxacin was filed by the Company with the Delhi High Court. The matter has been adjourned to July 29, 2021 for hearing.
Based on its best estimate, the Company has recorded a provision for the potential liability related tofor sale proceeds in excess of the allegedly overcharged amountnotified selling prices, including the interest thereon, and believes that possibilitythe likelihood of any further liability that may arise on account of penalties pursuant to this litigation is not probable.
Litigation relating to Cardiovascular and Anti-diabetic formulations
In July 2014, the eventNPPA, pursuant to the guidelines issued in May 2014 and the powers granted by the Government of India under the Drugs (Price Control) Order, 2013, issued certain notifications regulating the prices for 108 formulations in the cardiovascular and antidiabetic therapeutic areas. The Indian Pharmaceutical Alliance (“IPA”), in which the Company is a member, filed a writ petition in the Bombay High Court challenging the notifications issued by the NPPA on the grounds that they were ultra vires, ex facie and ab initio void. The Bombay High Court issued an order to stay the writ in July 2014. On September 26, 2016, the Bombay High Court dismissed the writ petition filed by the IPA and upheld the validity of the notifications/orders passed by the NPPA in July 2014. Further, on October 25, 2016, the IPA filed a Special Leave Petition with the Supreme Court, which was dismissed by the Supreme Court.
During the three months ended December 31, 2016, the NPPA issued show-cause notices relating to allegations that the Company exceeded the notified maximum prices for 11 of its products. The Company has responded to these notices.
On March 20, 2017, the IPA filed an application before the Bombay High Court for the recall of the judgment of the Bombay High Court dated September 26, 2016. This recall application filed by the IPA was dismissed by the Bombay High Court on October 4, 2017. Further, on December 13, 2017, the IPA filed a Special Leave Petition with the Supreme Court for the recall of the judgment of the Bombay High Court dated October 4, 2017, which was dismissed by Supreme Court on January 10, 2018.
During the three months ended March 31, 2017, the NPPA issued notices to the Company demanding payments relating to the foregoing products for the allegedly overcharged amounts, along with interest. On July 13, 2017, in response to a writ petition which the Company had filed, the Delhi High Court set aside all the demand notices of the NPPA and directed the NPPA to provide a personal hearing to the Company and pass a speaking order. A personal hearing in this regard was held on July 21, 2017. On July 27, 2017, the NPPA passed a speaking order along with the demand notice directing the Company to pay an amount of Rs.776. On August 3, 2017, the Company filed a writ petition challenging the speaking order and the demand notice. Upon hearing the matter on August 8, 2017, the Delhi High Court stayed the operation of the demand order and directed the Company to deposit Rs.100 and furnish a bank guarantee for Rs.676. Pursuant to the order, the Company deposited Rs.100 on September 13, 2017 and submitted a bank guarantee of Rs.676 dated September 15, 2017 to the Registrar General, Delhi High Court. On November 22, 2017, the Delhi High Court directed the Union of India to file a final counter affidavit within six weeks, subsequent to which the Company could file a rejoinder. On May 10, 2018, the counter affidavit was filed by the Union of India. The Company subsequently filed a rejoinder and both were taken on record by the Delhi High Court. The matter has been adjourned to August 3, 2021 for hearing.
Based on its best estimate, the Company has recorded a provision of Rs.310 under “Selling, general and administrative expenses” as a potential liability for sale proceeds in excess of the notified selling prices, including the interest thereon, and believes that the likelihood of any further liability that may arise on account of penalties pursuant to this litigation is not probable.
However, if the Company is unsuccessful in thissuch litigation, in the Supreme Court, it will be required to remit the sale proceeds in excess of the notified selling prices to the Government of India with interest and includingcould potentially include penalties, if any, which amounts are not readily ascertainable.
Nexium United States litigations
Five federal antitrust class action lawsuits were brought on behalf of direct purchasers of Nexium®, and ten federal class action lawsuits were brought under both state and federal law on behalf of end-payors of Nexium®. These actions were filed against various generic manufacturers, including the Company and its U.S. subsidiary Dr. Reddy’s Laboratories, Inc. These actions were consolidated in the United States District Court for the District of Massachusetts.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
43. Contingencies (continued)
ProductOther product and patent related matters (continued)
The complaints alleged that AstraZeneca and the involved generic manufacturers settled patent litigation related to Nexium® capsules in ways that violated antitrust laws. The Company consistently maintained that its conduct complied with all applicable laws and that the complaints were without merit. In response to a motion for summary judgment made by the Company, the Court granted the motion in part and denied it in part, finding that the plaintiffs had failed to demonstrate that the Company’s settlement of patent litigation with AstraZeneca included any large or unjustified reverse payment, but preserving other claims for trial.
On October 20, 2014, the Company reached a settlement with all plaintiffs who had cases pending in the District of Massachusetts. The settlements with the class plaintiffs were subject to the Court’s approval. Under the terms of the settlement, the Company made no payment to the class plaintiffs. The remaining defendants went to trial and prevailed, and that matter is on appeal.
The Court granted preliminary approval of the Company’s settlements with the class plaintiffs on January 28, 2015, and granted final approval of such settlements on September 29, 2015.
In addition, two complaints, similar in nature to those referenced above, were filed in the Court of Common Pleas in Philadelphia, Pennsylvania by plaintiffs who chose to opt out of the class action lawsuit. No dispositive motions have been filed in these actions.
Reclast and Zometa United States litigation
In January 2013, Novartis AG (“Novartis”) brought patent infringement actions against the Company and a number of other generic companies in the United States District Court for the District of New Jersey. Novartis asserted that the Company’s ANDA referencing Reclast® would infringe Novartis’ U.S. Patent No. 8,052,987 and that the Company’s ANDA referencing Zometa® would infringe Novartis’ U.S. Patent No. 8,324,189. In February 2013, Novartis sought a temporary restraining order and a preliminary injunction prohibiting the Company and the other defendants from launching generic equivalents to the Reclast® and Zometa® products. The Court denied Novartis’ motion for a temporary restraining order on March 1, 2013 and, later that month, the Company launched its generic version of Novartis’ Zometa® Injection (zoledronic acid, 4 mg/5mL product). The Company launched its generic version of Novartis’ Reclast® Injection (zoledronic acid, 5 mg/100mL product) in April 2013.
In January 2016, the parties reached an agreement settling litigation regarding these products. Under the terms of the agreement, the Company made a one-time payment to Novartis in exchange for a license to all relevant patents. The settlement ended the potential patent related liability associated with the Company’s sale of these products.
Pursuant to this agreement, the Company paid Rs.430 (U.S.$6.5) to Novartis as a settlement amount for past and future sales of the products. Of the total amount, Rs.69 (U.S.$1.04) represents the payment for a non-exclusive license and is recognized as a product related intangible asset and the balance of Rs.361 (U.S.$5.46) is recorded as “Selling, general and administrative expense” in the Company’s consolidated income statement for the year ended March 31, 2016.
Child resistant packaging matter complaint under the False Claims Act (“FCA”)
In May 2012, the Consumer Product Safety Commission (the “CPSC”) requested that Dr. Reddy’s Laboratories Inc., a wholly-owned subsidiary of the Company in the United States, provide certain information with respect to compliance with requirements of special packaging for child resistant blister packs for 6 products sold by the Company in the United States during the period commencing in 2002 through 2011. The Company provided the requested information. The CPSC subsequently alleged in a letter dated April 30, 2014 that the Company hashad violated the Consumer Product Safety Act (the “CPSA”) and the Poison Prevention Packaging Act (the “PPPA”) and intendsthat the CPSC intended to seek civil penalties. Specifically, the CPSC asserted, among other things, that from or about August 14, 2008 through June 1, 2012, the Company sold prescription drugs having unit dose packaging that failed to comply with the CPSC’sCPSC's special child resistant packaging regulations under the PPPA and failed to issue general certificates of conformance. In addition, the CPSC asserted that the Company violated the CPSA by failing to immediately advise the CPSC of the alleged violations. The Company disagrees with the CPSC’s allegationsallegations.
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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and is engaged in discussions withper share data)
33. Contingencies (continued)
Simultaneously, the CPSC regarding its compliance with the regulations.
Simultaneously, theU.S. Department of Justice (the “DOJ”) had begunbegan to investigate a sealed complaint which was filed in the United States District Court for the Eastern District of Pennsylvania under the Federal False Claims Act (“FCA”) related to these same issues (the “FCA Complaint”). The Company cooperated with the DOJ in its investigation. The DOJ and all States involved in the investigation declined to intervene in the FCA Complaint. On November 10, 2015, the FCA Complaint was unsealed and the plaintiff whistleblowers, (the “Relators”), who are two former employees of the Company, have proceeded without the DOJ’s and applicable States’ involvement. The unsealed FCA Complaint relates to the 6 blister pack products originally subject to the investigation and also 38 of the Company’s generic prescription products sold in the U.S. in various bottle and cap packaging.
The Company disputesfiled its response to the allegationsFCA Complaint on February 23, 2016 in the form of a motion to dismiss for failure to state a claim upon which relief can be granted. On March 26, 2017, the Court granted the Company’s motion to dismiss, dismissing the FCA Complaint and intendsallowing the plaintiffs one more chance to vigorously defend against thoserefile this complaint in an attempt to plead sustainable allegations.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
43. Contingencies (continued)
ProductOn March 29, 2017, the plaintiffs filed their final amended FCA Complaint, which the Company opposed and patent related matters (continued)
Althoughduring the DOJ and States have declined to intervene inthree months ended March 31, 2018, the Company obtained dismissal of the FCA Complaint with prejudice. The plaintiffs filed bya petition with the Relators,Court requesting that the Court reconsider its decision to dismiss the FCA Complaint with prejudice, and that request was denied.
The parallel investigation by the CPSC under the CPSA and the PPPA was referred by the CPSC to the DOJDOJ’s office in Washington, D.C. in April 2016, with the recommendation that the DOJ initiate a civil penalty action against the Company. The CPSC related matter referred to the DOJ relates to 5five of the blister pack products.
On January 18, 2018, the Company and the DOJ entered into a settlement of the action and agreed to a consent decree providing for a civil penalty of U.S.$5 (Rs.319), and injunctive relief. The settlement was without adjudication of any issue of fact or law, and the Company has not admitted any violations of law pursuant to this settlement.
During the three months ended March 31, 2018, the Company obtained dismissal of the FCA Complaint with prejudice. The plaintiffs subsequently filed a petition with the Court requesting that the Court reconsider its decision to dismiss the FCA Complaint with prejudice, and that request was denied.
In June 2018, the plaintiffs filed their Notice of Appeal to the Third Circuit Court of Appeals. During the three months ended September 2018, the plaintiffs and the DOJ settled and thus this appeal was dismissed. The plaintiffs then filed an application for recovery of attorneys' fees from the Company under the "alternative remedy doctrine." The Company cannot concludemade opposing filings to this and in response the plaintiffs withdrew their application.
The Company believes that the likelihood of an unfavorable outcomeany liability that may arise on account of the FCA Complaint is either probable or remote.not probable. Accordingly, no provision related to these investigations and claims ishas been made in the Company’sthese consolidated financial statements as of March 31, 2016. An unfavorable outcome in these matters could result in significant liabilities, which could have a material adverse effect on the Company.statements.
Namenda United States LitigationsLitigation
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’sAlzheimer’s drug Namenda®Namenda® (memantine) tablets during a period from about 2009 until 2010. Sergeants seeks to represent a class of “end-payor”“end payor” purchasers of Namenda®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®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.
On August 23, 2020, the Company and certain other defendants entered into a settlement agreement. The settlement agreement calls for the dismissal with prejudice of the claims brought by the plaintiff on behalf of the putative class, in exchange for the payment of U.S.$0.4. The Company believespaid that amount into escrow. The Court preliminarily approved the complaint lacks merit and thatsettlement on October 5, 2020. The settlement agreement is contingent upon final court approval. The settlement agreement explicitly disclaims any liability or wrongdoing.
Following the Company’s conduct complied with all applicable laws and regulations. All defendants, includingsettlement agreement, the Company have movedrecognized such amount in the income statement for the three months ended September 30, 2020.
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 dismiss the claims.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.
Four other
Other class action complaints each 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, two of those complaints were voluntarily dismissed,apart from the Sergeants case described above, there are no such class actions that are pending and the other two do notthat 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 outforth 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.
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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
33. Contingencies (continued)
The Company believes that the likelihood of any liability, apart from the settlement payment described above, that may arise on account of alleged violation of federal antitrust laws is not probable. Accordingly, no provision has been made in these consolidated financial statements.
Private Party
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 its ranitidine medications sold in the United States due to the presence of N-Nitrosodimethylamine (“NDMA”) above levels established by the U.S. FDA. On November 1, 2019, the U.S. FDA issued a statement indicating that it had found levels of NDMA in ranitidine from its testing generally that were “similar to the levels you would expect to be exposed to if you ate common foods like grilled or smoked meats.” See https://www.fda.gov/news-events/press-announcements/statement-new-testing-results-including-low-levels-impurities-ranitidine-drugs. On April 1, 2020, the U.S. FDA issued a press release announcing that it was requesting manufacturers to withdraw all prescription and over-the-counter ranitidine drugs from the market immediately.
Individual federal court personal injury lawsuits, as well as various class actions, have been transferred to the In re Zantac (Ranitidine) Products Liability Litigation Multidistrict Litigation in the Southern District of Florida, MDL-2924 (“MDL-2924”). The Company and/or one or more of its U.S. subsidiaries have been named as a defendant in over 250 lawsuits pending in the MDL-2924. A census registry established in the MDL-2924 includes tens of thousands of claimants who have not filed complaints but are presenting claims for consideration in the MDL-2924 against the many pharmaceutical manufacturers, distributors and retailers which are defendants in the MDL-2924. The MDL-2924 also involves a proposed nationwide consumer class action and a proposed nationwide class action for medical monitoring. A third-party payor class action was dismissed without prejudice and has been appealed by plaintiffs to the U.S. Court of Appeals for the Eleventh Circuit.
On December 31, 2020, the MDL-2924 Court ruled on multiple motions to dismiss in the MDL-2924 and granted the generic manufacturers’ (the Company is a generic manufacturer) motion to dismiss based on federal preemption. The plaintiffs’ failure-to-warn and design defect claims against the Company were dismissed with prejudice, but the Court permitted plaintiffs to attempt to replead several claims/theories. Plaintiffs have filed their amended complaints and the defendants, including the Company, filed motions to dismiss seeking dismissal of all claims against them on March 24, 2021. The briefings and arguments as to the latest round of motions to dismiss were completed and the parties continue to engage in discovery consistent with orders from the MDL-2924 Court.
There are three ranitidine-related actions currently pending against the Company in state courts. The New Mexico State Attorney General filed suit against the Company’s U.S. subsidiary, and multiple other manufacturers and retailers. The State of New Mexico asserted claims of statutory and common law public nuisance and negligence claims against the Company. The Company joined in an effort to transfer the case from the Santa Fe County Court to the MDL-2924, but the case was remanded by the MDL-2924 Court to the Santa Fe County Court. Plaintiff filed an amended complaint on April 16, 2021, and a briefing schedule has been entered pursuant to which the defendants will move to dismiss the case.
In November 2020, the City of Baltimore filed a similar action against the Company’s U.S. subsidiary, and multiple other manufacturers and retailers. The City of Baltimore asserts public nuisance and negligence claims against the Company. The City of Baltimore action also was transferred to the MDL-2924 and subsequently was remanded to the Circuit Court of Maryland by the MDL-2924 Court. The City of Baltimore intends to file an amended complaint and the defendants will then move to dismiss the case.
In January 2021, the Company was served in a Proposition 65 case filed by the Center for Environmental Health in the Superior Court of Alameda County, California. The plaintiff purports to bring the case on behalf of the people of California and alleges that the Company violated Proposition 65, a California law requiring manufacturers to disclose the presence of carcinogens in consumer products. The Company and other defendants have filed demurrers (motions to dismiss) in the case, and on May 7, 2021 the Court granted all such demurrers without leave to amend the pleadings. The People of California have the right to appeal this decision.
The Company believes that all of the aforesaid complaints and asserted claims are without merit and it denies any wrongdoing and intends to vigorously defend itself against the allegations. Any liability that may arise on account of these claims is unascertainable at this time. Accordingly, no provision was made in these consolidated financial statements of the Company.
Class Action and Other Civil Litigation on Pricing/Reimbursement Matters
On December 30, 2015 and on February 4, 2016, respectively, a class action complaint was(the “First Pricing Complaint”) and another complaint (not a class action) (the “Second Pricing Complaint”) were filed against the Company and eighteen other pharmaceutical defendants (the “Action”) in State Court in the Commonwealth of Pennsylvania. In these actions, the Action, class action plaintiffs allege that the Company and other defendants, individually or in some cases in concert with one another, have engaged in pricing and price reporting practices in violation of various Pennsylvania state laws. More specifically, the plaintiffs allege that: (1) the Company provided false and misleading pricing information to third party drug compendia companies for the Company’s generic drugs, and such information was relied upon by private third party payers that reimbursed for drugs sold by the Company in the United States, and (2) the Company acted in concert with certain other defendants to unfairly raise the prices of generic divalproex sodium ER (bottle of 80, 500 mg tablets ER 24H) and generic pravastatin sodium (bottle of 500, 10 mg tablets).
The First Pricing Complaint was removed to the U.S. District Court for the Eastern District of Pennsylvania (the “E.D.P.A. Federal Court”) and, pending the outcome of the First Pricing Complaint, the Second Pricing Complaint was stayed. On September 25, 2017, the E.D.P.A. Federal Court dismissed all the claims of the plaintiffs in the First Pricing Complaint and denied leave to amend such complaint as futile. Subsequent to this decision, the plaintiffs’ right to appeal the dismissal of the First Pricing Complaint expired.
194 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
33. Contingencies (continued)
Further, on November 17, 2016, certain class action complaints were filed against the Company and a number of other pharmaceutical companies as defendants in the E.D.P.A. Federal Court. Subsequently, these complaints were consolidated into one amended complaint as part of a multi-district, multi-product litigation pending with the E.D.P.A. Federal Court. These complaints allege that the Company and the other named defendants have engaged in a conspiracy to fix prices and to allocate bids and customers in the sale of pravastatin sodium tablets and divalproex sodium extended-release tablets in the United States.
In March 2017, plaintiffs agreed by stipulation to dismiss Dr. Reddy’s Laboratories Inc. and Dr. Reddy’s Laboratories Limited from the actions related to pravastatin sodium tablets without prejudice. The Company disputes these allegationsdenies any wrongdoing and intends to vigorously defend against these allegations.
In response to the consolidated new complaint, the Company filed a motion to dismiss in October 2017. The plaintiffs filed opposition to the motion to dismiss in December 2017 and a reply was filed by the Company in January 2018. In October 2018, the Court denied the motion to dismiss on the grounds that the allegations pled leave open the possibility of conspiracy. Therefore, discovery will proceed to look into this possibility.
The Company believes that the asserted claims are without merit and intends to vigorously defend itself against the allegations. Also any liability that may arise on account of these claims is unascertainable. Accordingly, no provision was made in these consolidated financial statements of the Company.
United States Antitrust Multi-District Litigations
The following cases against the Company’s U.S. subsidiary, Dr. Reddy’s Laboratories, Inc., have been filed and are pending and consolidated in In re Generic Pharmaceutical Pricing Antitrust Litigation, MDL 2724, 14-MD-2724 (Eastern District of Pennsylvania), Multi District Litigation (“MDL”) in the Eastern District of Pennsylvania (“MDL-2724”):
a) | U.S. States Attorneys General Antitrust Complaints: |
On October 30, 2017, the Attorneys General of forty-nine U.S. States, the Commonwealth of Puerto Rico and the District of Columbia, filed an Amended Complaint in the United States District Court for the Eastern District of Pennsylvania, against eighteen generic pharmaceutical companies (including the Company’s U.S. subsidiary) with respect to fifteen generic drugs, alleging that the Company’s U.S. subsidiary and the other named defendants engaged in a conspiracy to fix prices and to allocate bids and customers in the United States in the sale of the fifteen named drugs. The Company’s U.S. subsidiary is specifically named as a defendant with respect to two generic drugs (meprobamate and zoledronic acid), and is named as an alleged co-conspirator on an alleged “overarching conspiracy” with respect to the other thirteen generic drugs named. The Amended Complaint alleges violations of Section 1 of the Sherman Act, 15 U.S.C. §1, and the consumer protection and antitrust laws of each of the jurisdictions that are plaintiffs.
The Amended Complaint seeks injunctive relief, statutory penalties, punitive damages, and recovery of treble damages, plus attorney’s fees and costs, against all named defendants on a joint and several basis, on behalf of the plaintiff jurisdictions and their citizens and inhabitants. The Company denies any wrongdoing and intends to vigorously defend against the claims asserted.
On May 10, 2019, the Attorneys General of forty-nine U.S. States, the Commonwealth of Puerto Rico and the District of Columbia, filed a Complaint in the United States District Court for the District of Connecticut against twenty-one generic pharmaceutical companies (including the Company’s U.S. subsidiary) and fifteen individual defendants, with respect to 116 generic drugs, alleging that the Company’s U.S. subsidiary and the other named defendants engaged in a conspiracy to fix prices and to allocate bids and customers in the United States in the sale of the 116 named drugs. Under the MDL rules, this action will be designated a related “tag along” action and will be transferred to and become a part of the MDL-2724. The Company’s U.S. subsidiary is specifically named as a defendant with respect to five generic drugs (ciprofloxacin HCL tablets, glimepiride tablets, oxaprozin tablets, paricalcitol and tizanidine), and is named as an alleged co-conspirator on an alleged “overarching conspiracy” with respect to the other thirteen generic drugs named. The Complaint alleges violations of Section 1 of the Sherman Act, 15 U.S.C. §1, and the consumer protection and antitrust laws of each of the jurisdictions that are plaintiffs. The Complaint seeks injunctive relief, statutory penalties, punitive damages, and recovery of treble damages, plus attorney’s fees and costs, against all named defendants on a joint and several basis, on behalf of the plaintiff jurisdictions and their citizens and inhabitants. The Company denies any wrongdoing and intends to vigorously defend against the claims asserted.
b) | Divalproex Antitrust Class Action Cases Filed by Direct Payor Plaintiffs, End Payor Plaintiffs and Indirect Reseller Plaintiffs Classes: |
Since November 17, 2016, certain class action complaints on behalf of Direct Purchaser Plaintiffs, Indirect Reseller Plaintiffs and End Payor Plaintiffs classes were filed against the Company’s U.S. subsidiary, Dr. Reddy’s Laboratories, Inc., and a number of other pharmaceutical defendants in the United States District Court for the District of Pennsylvania alleging that the Company’s U.S. subsidiary and the other named defendants have engaged in a conspiracy to fix prices and to allocate bids and customers in the sale of divalproex ER tablets in the United States.
The actions allege violations of Section 1 of the Sherman Act, 15 U.S.C. §1, and of state consumer protection and antitrust laws, and asserts claims of unjust enrichment, under a total of thirty-one States and the District of Columbia. The actions seek injunctive relief and recovery of treble damages, punitive damages, plus attorney’s fees and costs, on a joint and several basis, on behalf of the plaintiff classes. The Company denies any wrongdoing and intends to vigorously defend against these class action claims.
195 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
33. Contingencies (continued)
c) | Pravastatin Antitrust Class Action Cases Filed by Direct Payor Plaintiffs, End Payor Plaintiffs and Indirect Reseller Plaintiffs Classes: |
Since November 17, 2016, certain class action complaints on behalf of Direct Purchaser Plaintiffs, Indirect Reseller Plaintiffs and End Payor Plaintiffs classes were filed against the Company and a number of other pharmaceutical defendants in the United States District Court for the District of Pennsylvania, alleging that the Company’s U.S. subsidiary and the other named defendants engaged in a conspiracy to fix prices and to allocate bids and customers in the sale of pravastatin sodium tablets in the United States. The Company’s U.S. subsidiary has been dismissed from these actions, without prejudice, in exchange for a tolling agreement with the plaintiffs suspending the statute of limitations as to the claims asserted. The Company denies any wrongdoing and intends to vigorously defend against these claims.
d) | Antitrust “Overarching Conspiracy” Cases Filed by Direct Payor Plaintiffs, End Payor Plaintiffs and Indirect Reseller Plaintiffs Classes: |
In June 2018, three class action complaints were filed in the MDL-2724 by Direct Purchaser Plaintiffs, Indirect Resellers Plaintiffs and End Payor Plaintiffs classes. All three complaints allege conspiracies in restraint of trade in violation of Sections 1 of the Sherman Act, and violations of thirty-one State antitrust statutes and consumer protection statutes, and asserts claims of unjust enrichment seeking injunctive relief, recovery of treble damages, punitive damages, attorney's fees and costs against all named defendants on a joint and several basis. They allege an “overarching conspiracy” among the named defendants involving fifteen drugs and, with slight variations, name approximately twenty-five generic pharmaceutical manufacturers including the Company’s U.S. subsidiary, Dr. Reddy’s Laboratories, Inc.
The drug-specific allegations against the Company’s U.S. subsidiary involve two of the fifteen drugs, meprobamate and zoledronic acid. Plaintiffs also allege that the Company’s U.S. subsidiary (as well as all other manufacturers named) were part of a larger “overarching conspiracy” as to all of the drugs named in the complaints. The complaint alleges violations of Section 1 of the Sherman Act, 15 U.S.C. §1, and violations of thirty-one States’ antitrust statutes and consumer protection statutes, and asserts claims of unjust enrichment. The complaint seeks injunctive relief, recovery of treble damages, punitive damages, attorney's fees and costs against all named defendants on a joint and several basis. The Company denies any wrongdoing and intends to vigorously defend against these claims.
e) | Antitrust Case Filed by The Kroger Co., Albertsons Companies, LLC, and H.E. Butt Grocery Company, L.P.: |
On January 22, 2018, each of the Kroger Co., Albertsons Companies, LLC, and H.E. Butt Grocery Company, L.P., filed a complaint against the Company’s U.S. subsidiary and thirty-one other companies alleging that they had engaged in a conspiracy to fix prices and to allocate bids and customers in the United States in the sale of the thirty named generic drugs. The Company’s U.S. subsidiary is specifically named as a defendant with respect to three generic drugs (divalproex ER, meprobamate and zoledronic acid), and is named as an alleged co-conspirator on an alleged “overarching conspiracy” claim with respect to the other generic drugs named.
This action alleges violations of Section 1 of the Sherman Act, 15 U.S.C. §1, and seeks injunctive relief and recovery of treble damages, punitive damages, plus attorney’s fees and costs, against all named defendants on a joint and several basis. The Company denies any wrongdoing and intends to vigorously defend against these class action claims.
f) | Antitrust Case Filed by Humana Inc.: |
On August 3, 2018, Humana, Inc., filed a complaint against the Company’s U.S. subsidiary and thirty-nine other companies alleging that they had engaged in a conspiracy to fix prices and to allocate bids and customers in the United States in the sale of twenty-nine named generic drugs. On December 15, 2020, Humana, Inc., filed an Amended Complaint encompassing fifty-one defendants and a total of one hundred forty nine drugs. In the Amended Complaint, the Company’s U.S. subsidiary is specifically named as a defendant with respect to eighteen generic drugs: allopurinol, ciprofloxacin ER, eszopiclone, fluconazole, glimepiride, isotretinoin, lamotrigine ER, meprobamate, metroprolol succinate ER, montelukast, omeprazole sodium bicarbonate, oxaprozin, paricalcitol, ranitidine, sumatriptan, tizanidine, valganciclovir, and zoledronic acid. The Company’s subsidiary is also named as a co-conspirator on an alleged “overarching conspiracy” claim with respect to the other generic drugs named. The complaint also alleges violations of Section 1 of the Sherman Act, 15 U.S.C. §1, and violations of thirty-one States’ antitrust statutes and consumer protection statutes, and asserts claims of unjust enrichment. The complaint seeks injunctive relief, recovery of treble damages, punitive damages, attorney's fees and costs against all named defendants on a joint and several basis. The Company denies any wrongdoing and intends to vigorously defend against these claims.
g) | Antitrust Case Filed by Marion Diagnostic Center, LLC, and Marion Healthcare, LLC: |
On September 25, 2018, Marion Diagnostic Center, LLC, and Marion Healthcare, LLC, filed a complaint in the MDL-2724, on behalf of themselves and a class of all direct purchasers from distributors, against the Company’s U.S. subsidiary and twenty-two other defendants, including a major distributor of pharmaceutical products, involving a total of sixteen generic drugs, alleging an “overarching conspiracy” to fix prices and to rig bids and allocate customers with respect to sixteen generic drugs. The Company’s U.S. subsidiary is specifically named with respect to two drugs: meprobamate and zoledronic acid. Plaintiffs also allege that the Company’s U.S. subsidiary (as well as all other manufacturers named) were part of a larger “overarching conspiracy” as to all of the drugs named in the complaints. The complaint alleges violations of Section 1 of the Sherman Act, 15 U.S.C. §1, and violations of twenty-four States’ antitrust statutes and consumer protection statutes, and asserts claims of unjust enrichment. The complaint seeks injunctive relief, recovery of treble damages, punitive damages, attorney's fees and costs against all named defendants on a joint and several basis. The Company denies any wrongdoing and intends to vigorously defend against these claims.
196 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
33. Contingencies (continued)
h) | Antitrust Case Filed by United Healthcare Services, Inc.: |
On January 16, 2019, United Healthcare Services, Inc., filed a complaint against the Company’s U.S. subsidiary and forty-two other defendants, involving a total of thirty generic drugs, alleging an “overarching conspiracy” to fix prices and to rig bids and allocate customers with respect to the thirty drugs. The Company’s U.S. subsidiary is specifically named with respect to four drugs: divalproex ER, meprobamate, pravastatin and zoledronic acid. Plaintiffs also allege that the Company’s U.S. subsidiary (as well as all other manufacturers named) were part of a larger “overarching conspiracy” as to all of the drugs named in the complaints. The complaint alleges violations of Section 1 of the Sherman Act, 15 U.S.C. §1, and violations of the thirty States’ antitrust laws and consumer protection statutes, and asserts claims of unjust enrichment. The complaint seeks injunctive relief, recovery of treble damages, punitive damages, and attorney's fees and cost against all defendants on a joint and several basis. The Company denies any wrongdoing and intends to vigorously defend against these claims.
i) | Pennsylvania Court of Common Pleas Praecipe For a Writ of Summons Filed by 87 End Payor Entities consisting of Blue Cross Blue Shield entities and other health insurance companies and HMO entities: |
On July 19, 2019, a Praecipe For a Writ of Summons for a tort action was filed in the Pennsylvania Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania, Civil Trial Division, by 87 Blue Cross Blue Shield entities, and other health insurance companies and HMO entities, against the Company’s U.S. subsidiary and 69 other defendants (consisting of 51 other pharmaceutical companies and 17 individuals). These 87 plaintiffs had been previously encompassed by the End Payor Plaintiff class actions in the MDL-2724. Only a Praecipe of Writ of Summons has been filed. No complaint has been filed and, therefore, the potential claims have not been asserted or delineated in any manner, including what drugs any such claims may relate to. A complaint may, at some point, be filed encompassing the claims asserted by the End Payor Plaintiffs in the MDL-2724 actions. On December 12, 2019, an Order of the Court of Common Pleas placed the matter “in Deferred Status Pending Further Developments in Related Federal Multidistrict Litigation.” Because no Complaint has been filed setting forth any claims, and because the action has been placed into Deferred Status, no response is required by the Company’s subsidiary at this time.
j) | Antitrust Case Filed by United Healthcare Services, Inc.: |
On October 11, 2019, United Healthcare Services, Inc. filed a second complaint (which substantially tracks the second complaint filed by the State Attorneys General on May 10, 2019) against the Company’s U.S. subsidiary and twenty-four other defendants in the United States District Court for the District of Minnesota with respect to 116 generic drugs, alleging that the Company’s U.S. subsidiary and the other named defendants engaged in a conspiracy to fix prices and to allocate bids and customers in the United States in the sale of the 116 named drugs. Under the MDL rules, this action will be designated a related “tag along” action and will be transferred to and become a part of the MDL-2724. The Company’s U.S. subsidiary is specifically named as a defendant with respect to five generic drugs (ciprofloxacin HCL tablets, glimepiride tablets, oxaprozin tablets, paricalcitol and tizanidine), and is named as an alleged co-conspirator on an alleged “overarching conspiracy” with respect to the other generic drugs named. The complaint alleges violations of Section 1 of the Sherman Act, 15 U.S.C. §1, and violations of the Minnesota antitrust laws and various other state antitrust and consumer protection laws, and asserts claims for unjust enrichment.
The complaint seeks injunctive relief, statutory penalties, punitive damages, and recovery of treble damages, plus attorney’s fees and costs, against all named defendants on a joint and several basis. The Company denies any wrongdoing and intends to vigorously defend against these claims.
k) | Antitrust “Overarching Conspiracy” Cases Filed by Direct Payor Plaintiffs, End Payor Plaintiffs and Indirect Reseller Plaintiffs Classes: |
On December 19, 2019, a new class action complaint was filed by the End Payor Plaintiffs. The complaint alleges a conspiracy in restraint of trade in violation of Section 1 of the Sherman Act, 15 U.S.C. §1, and violations of twenty-eight States’ antitrust statutes and twenty-nine States’ consumer protection statutes, and asserts claims of unjust enrichment. The complaint seeks injunctive relief, recovery of treble damages, punitive damages, attorney’s fees and costs. The complaint alleges an “overarching conspiracy” among the named defendants involving one hundred and thirty-five drugs and, with slight variations, names approximately thirty-six generic pharmaceutical manufacturers, including the Company’s U.S. subsidiary.
The drug-specific allegations against the Company’s U.S. subsidiary involve eight of the one hundred thirty-five drugs, including allopurinol, ciprofloxacin HCL, fluconazone, glimepiride, oxaprozine, paricalcitol, ranitidine HCL and tizanidine. The Company denies any wrongdoing and intends to vigorously defend against these claims.
On December 19, 2019, a new class action complaint was filed by certain pharmacy and hospital indirect purchaser plaintiffs. The complaint alleges a conspiracy in restraint of trade in violation of Sections 1 and 3 of the Sherman Act, 15 U.S.C. §1 and §3, and violations of forty-three States’ antitrust statutes and consumer protection statutes, and asserts claims of unjust enrichment. The complaint seeks injunctive relief, recovery of treble damages, punitive damages, attorney’s fees and costs against all named defendants on a joint and several basis. The complaint alleges an “overarching conspiracy” among the named defendants involving one hundred and sixty-two drugs and, with slight variations, names approximately twenty-eight generic pharmaceutical manufacturers, including the Company’s U.S. subsidiary, as well as seven pharmaceutical distributor defendants and sixteen individual defendants.
The drug-specific allegations against the Company’s U.S. subsidiary involve nineteen drugs: allopurinol, capecitabine, ciprofloxacin HCL, divalproex ER, eszopiclone, fenofibrate, glimepiride, isotretinoin, lamotrigine ER, meprobamate, metoprolol ER, montelukast granules, omeprazole sodium bicarbonate, oxaprozine, paricalcitol, sumatriptan, tizanidine HCL, valganciclovir and zoledronic acid. The Company denies any wrongdoing and intends to vigorously defend against these claims.
197 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
33. Contingencies (continued)
l) | Antitrust Case Filed by Fourteen New York State Counties: |
On December 19, 2019, a new class action complaint was filed by certain pharmacy and hospital indirect purchaser plaintiffs. The complaint alleges a conspiracy in restraint of trade in violation of Sections 1 and 3 of the Sherman Act, 15 U.S.C. §1 and §3, and violations of forty-three States’ antitrust statutes and consumer protection statutes, and asserts claims of unjust enrichment. The complaint seeks injunctive relief, recovery of treble damages, punitive damages, attorney’s fees and costs against all named defendants on a joint and several basis. The complaint alleges an “overarching conspiracy” among the named defendants involving one hundred and sixty-two drugs and, with slight variations, names approximately twenty-eight generic pharmaceutical manufacturers, including the Company’s U.S. subsidiary as well as seven pharmaceutical distributor defendants and sixteen individual defendants. The drug-specific allegations against the Company’s U.S. subsidiary involve nineteen drugs: allopurinol, capecitabine, ciprofloxacin HCL, divalproex ER, eszopiclone, fenofibrate, glimepiride, isotretinoin, lamotrigine ER, meprobamate, metoprolol ER, montelukast granules, omeprazole sodium bicarbonate, oxaprozine, paricalcitol, sumatriptan, tizanidine HCL, valganciclovir and zoledronic acid. The Company denies any wrongdoing and intends to vigorously defend against these claims.
m) | Antitrust Case Filed by Health Care Services, Inc.: |
On December 11, 2019, Health Care Services, Inc. filed a complaint against the Company’s U.S. subsidiary and thirty-eight other defendants, involving a total of one hundred twenty-eight generic drugs, alleging an “overarching conspiracy” to fix prices and to rig bids and allocate customers with respect to these drugs. On December 15, 2020, Health Care Services filed an Amended Complaint naming a total of one hundred seventy drugs. In the Amended Complaint, the Company’s U.S. subsidiary is specifically named with respect to nineteen drugs: allopurinol, ciprofloxacin HCL, divalproex ER, eszopiclone, fluconazole, glimepiride, isotretinoin, lamotrigine ER, meprobamate, metroprolol succinate ER, montelukast, omeprazole sodium bicarbonate, oxaprozine, paricalcitol, ranitidine, sumatriptan, tizanidine, valganciclovir and zoledronic acid. Plaintiffs allege that the Company’s U.S. subsidiary (as well as all other manufacturers named) were part of a larger “overarching conspiracy” as to all of the drugs named in the complaint. The complaint also alleges violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §1 and §2, and violations of thirty-one States’ antitrust laws and twenty-seven States’ consumer protection statutes, and asserts claims of unjust enrichment. The complaint seeks injunctive relief, recovery of treble damages, punitive 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.
n) | Antitrust Case Filed by MSP Recovery Claims, Series LLC, MAO-MSO Recovery II, LLC, and MSPA Claims I, LLC (collectively “MSP Recovery”), as Assignees of certain Medicare Advantage Plans: |
On December 16, 2019, MSP Recovery filed a complaint against the Company’s U.S. subsidiary and twenty-five other defendants, involving a total of sixteen generic drugs, alleging an “overarching conspiracy” to fix prices and to rig bids and allocate customers with respect to the sixteen drugs. The Company’s U.S. subsidiary is specifically named with respect to one drug: Divalproex ER. Plaintiffs also allege that the Company’s U.S. subsidiary (as well as all other manufacturers named) were part of a larger “overarching conspiracy” as to all of the drugs named in the complaint.
The complaint alleges violations of Sections 1 and 3 of the Sherman Act, 15 U.S.C. §1 and §3, and violations of twenty-eight States’ antitrust laws and twenty-three States’ consumer protection statutes, and asserts claims of unjust enrichment. The complaint seeks injunctive relief, recovery of treble damages, punitive 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.
o) | Antitrust Case Filed by Molina Healthcare Inc.: |
On December 27, 2019, Molina Healthcare Inc. filed a complaint against the Company’s U.S. subsidiary and forty-one other defendants, involving a total of one hundred twenty-eight generic drugs, alleging an “overarching conspiracy” to fix prices and to rig bids and allocate customers with respect to these drugs. On December 15, 2020, Molina Healthcare filed an Amended Complaint against a total of fifty-eight defendants involving one hundred eighty four drugs. In the Amended Complaint, the Company’s U.S. subsidiary is specifically named with respect to nineteen drugs: allopurinol, ciprofloxacin, divalproex ER, eszopiclone, fluconazole, glimepiride, isotretinoin, lamotrigine ER, meprobamate, metroprolol succinate ER, montelukast, omeprazole sodium bicarbonate, oxaprozine, paricalcitol, ranitidine, sumatriptan, tizanidine, valganciclovir and zoledronic acid. Plaintiffs allege that the Company’s U.S. subsidiary (as well as all other manufacturers named) were part of a larger “overarching conspiracy” as to all of the drugs named in the complaint. The complaint also alleges violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §1 and §2, and violations of eleven States’ antitrust laws and consumer protection statutes, and asserts claims of unjust enrichment. The complaint seeks injunctive relief, recovery of treble damages, punitive 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.
p) | Antitrust Case Filed by Harris Countv, Texas: |
On March 1, 2020, Harris County, Texas filed a Complaint against the Company's U.S. Subsidiary and forty-two other defendants, involving a total of one hundred twenty-eight generic drugs, alleging an "overarching conspiracy" to fix prices and to rig bids and allocate customers with respect to the one hundred eighty-seven drugs. The case is in the process of being transferred to the MDL-2724 proceeding. The Company's U.S. subsidiary is specifically named with respect to twenty drugs: allopurinol, amoxicillin, ciprofloxacin HCL, divalproex ER, famotidine, fenofibrate, fluconazole, fluoxetine, glimepiride, glycopyrrolate, levalbuterol meprobamate, naproxen, ondansetron, oxaprozine, pravastatin sodium, raloxifene HCL, ranitidine, tizanidine and zoledronic acid. Plaintiffs also allege that the Company's U.S. subsidiary (as well as all other manufacturers named) were part of a larger "overarching conspiracy" as to all the drugs named in the complaints.
198 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
33. Contingencies (continued)
The Complaint alleges violations of Sections 1 of the Sherman Act, 15 U.S.C. §1, violations of twenty-eight State's antitrust laws, violations of the Texas Deceptive Trade Practices Act and Texas Free Enterprise and Antitrust Act and asserts claims of unjust enrichment and civil conspiracy. The Complaint seeks injunctive relief, recovery of treble damages, punitive damages, disgorgement, 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.
q) | Pennsylvania Court of Common Pleas Praecipe For a Writ of Summons Filed by 7 End Payor Entities consisting of Blue Cross Blue Shield entities and other health insurance companies: |
On May 6, 2020, a Praecipe For a Writ of Summons for a tort action was filed in the Pennsylvania Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania, Civil Trial Division, by 7 Blue Cross Blue Shield entities and other health insurance companies, against the Company’s U.S. subsidiary and 69 other defendants (consisting of 51 other pharmaceutical companies and 17 individuals). These 7 plaintiffs had been previously encompassed by the End Payor Plaintiff class actions in the MDL-2724. Only a Praecipe of Writ of Summons has been filed. No complaint has been filed and, therefore, the potential claims have not been asserted or delineated in any manner, including what drugs any such claims may relate to. A complaint may, at some point, be filed encompassing the claims asserted by the End Payor Plaintiff class actions in the MDL-2724 actions. It is anticipated that this action will be placed in Deferred Status Pending Further Developments in the related MDL-2724 case. Because no Complaint has been filed setting forth any claims, and because it is expected that the action will be placed into Deferred Status, no response is required by the Company’s subsidiary at this time.
r) | Antitrust Case Filed by Cigna Corp.: |
On June 9, 2020, Cigna Corp. filed a complaint against the Company’s U.S. subsidiary and forty-one other defendants, involving a total of one hundred forty generic drugs, alleging an “overarching conspiracy” to fix prices and to rig bids and allocate customers with respect to these drugs. On December 15, 2020, Cigna Corp. filed an Amended Complaint against a total of forty-two defendants encompassing a total of two hundred and thirty-nine drugs. In the Amended Complaint, the Company’s U.S. subsidiary is specifically named with respect to twelve drugs: allopurinol, ciprofloxacin HCL, divalproex ER, fluconazole, glimepiride, meprobamate, oxaprozine, paricalcitol, pravastatin, ranitidine, tizanidine and zoledronic acid. Plaintiffs allege that the Company’s U.S. subsidiary (as well as all other manufacturers named) were part of a larger “overarching conspiracy” as to all of the drugs named in the complaint. The complaint also alleges violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §1 and §2, and violations of thirty-one States’ antitrust laws and twenty-nine States’ consumer protection statutes, and asserts claims of unjust enrichment. The complaint seeks injunctive relief, recovery of treble damages, punitive 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.
s) | 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. On December 15, 2020, Rite Aid filed an Amended Complaint against a total of fifty-five defendants involving a total of one hundred eighty eight drugs. In the Amended Complaint, the Company’s U.S. subsidiary is specifically named with respect to eleven drugs: allopurinol, ciprofloxacin ER, divalproex ER, fluconazole, glimepiride, meprobamate, oxaprozine, paricalcitol, ranitidine, tizanidine and zoledronic acid. Plaintiff alleges 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.
t) | Antitrust Complaint Filed by Suffolk County, New York: |
On August 27, 2020, Suffolk County, New York, filed a complaint against the Company’s U.S. subsidiary and forty-six other defendants, involving a total of one hundred thirty 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 twelve drugs: ciprofloxacin ER, divalproex ER, fenofibrate, fluconazole, glimepiride, glyburide, metformin, oxaprozin, pravastatin, ranitidine, tizanidine and zoledronic acid. Plaintiffs 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. 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.
u) | Antitrust Complaint Filed by J M Smith: |
On September 4, 2020, J M Smith Corporation, as assignee of Burlington Drug Company, filed a complaint against the Company’s U.S. subsidiary and fifty other defendants, involving a total of one hundred thirty 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 eleven drugs: allopurinol, ciprofloxacin ER, divalproex ER, fluconazole, glimepiride, meprobamate, oxaprozin, paricalcitol ranitidine, tizanidine and zoledronic acid.
199 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
33. Contingencies (continued)
Plaintiffs 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; 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.
v) | Antitrust Complaint Filed by Walgreen Company: |
On December 11, 2020, Walgreen Company filed a complaint against the Company’s U.S. subsidiary and fifty-four other defendants, involving a total of one hundred eighty-eight generic drugs, alleging an “overarching conspiracy” to fix prices and to rig bids and allocate customers with respect to these drugs. Walgreen asserts claims on its own behalf and as assignee of Amerisource Bergen for drugs that Amerisource Bergen sold to Walgreen. The Company’s U.S. subsidiary is specifically named with respect to eleven drugs: allopurinol, ciprofloxacin ER, divalproex ER, fluconazole, glimepiride, meprobamate, oxaprozin, paricalcitol, ranitidine, tizanidine and zoledronic acid. Plaintiff alleges 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. 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.
w) | Antitrust Complaint Filed by CVS Pharmacy Inc.: |
On December 15, 2020, CVS Pharmacy, Inc., filed a complaint against the Company’s U.S. subsidiary and fifty-seven other defendants, involving a total of four hundred four generic drugs, alleging an “overarching conspiracy” to fix prices and to rig bids and allocate customers with respect to these drugs. CVS Pharmacy asserts claims on its own behalf and as assignee of Cardinal Health and McKesson for drugs that Cardinal Health and McKesson sold to CVS Pharmacy, Inc. The Company’s U.S. subsidiary is specifically named with respect to seven drugs: ciprofloxacin ER, glimepiride, meprobamate, oxaprozin, pravastatin, tizanidine and zoledronic acid. Plaintiff alleges 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. 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.
x) | Antitrust Complaint Filed by Various Counties, Cities and Insurance Companies: |
On December 15, 2020, a Complaint was filed in the Supreme Court of the State of New York, Suffolk County, by a group of 22 plaintiffs against the Company and 55 other defendants. Plaintiffs include 14 New York Counties (Albany, Cattaraugus, Chemung, Chenango, Columbia, Erie, Essex, Livingston, Monroe, Oneida, Onondaga, Otsego and Schuyler), the Town of Amherst, New York, the City of Poughkeepsie, New York, the City of Mobile, Alabama, the Counties of Osceola, Florida, and Shelby, Tennessee, and three insurance companies (Magnacare Insurance, Mebco and WCA Group Health Trust). The case has been removed to the United States District Court for the Eastern District of New York and is in the process of being transferred to, and consolidated with, the MDL-2724 litigation. The Complaint alleges an overarching conspiracy to fix prices and allocate markets for 294 generic drugs. Of the 294 drugs, DRL is specifically named with respect to 14 drugs: Allopurinol, Ciprofloxacin, Divalproex, Glimepiride, Glyburide Metformin, Isotretinoin, Lamotrigine, Meprobamate, Metoprolol Succinate, Oxaprozin, Paricalcitol, Tizanidine, Valganciclovir and Zoledronic Acid. The Complaint alleges violations of Sections 1 and 2 of the Sherman Act, as well as violations of the Antitrust Statutes of Alabama, Florida, New York and Tennessee and Unjust Enrichment claims under the laws of Alabama, Florida, New York and Tennessee. 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.
Note on Antitrust Complaints
The Company believes that the aforesaid asserted claims in subsections a) though x) above are without merit and intends to vigorously defend itself against the allegations. Also, any liability that may arise on account of these claims is unascertainable. Accordingly, no provision was made in these consolidated financial statements of the Company.
Class Action under the Canadian Competition Act filed in Federal Court in Toronto, Canada
On June 3, 2020, a Class Action Statement of Claim was filed by an individual consumer in Federal Court in Toronto, Canada, against the Company’s U.S. and Canadian subsidiaries and 52 other generic drug companies. The Statement of Claim alleges an industry-wide, overarching conspiracy to violate Sections 45 and 46 of the Canadian Competition Act by conspiring to allocate the market, fix prices, and maintain the supply of generic drugs in Canada. The action is brought on behalf of a class of all persons, from January 1, 2012 to the present, who purchased generic drugs in the private sector. The Statement of Claim states that it seeks damages against all defendants on a joint and several basis, attorney’s fees and costs of investigation and prosecution. An Amended Statement of Claim was served on the Company’s U.S. and Canadian subsidiaries on January 15, 2021 and adds an additional 20 generic drug companies. The Amended Statement of Claim also removes the identification of defendant companies with conspiracy allegations regarding specific generic drugs and alleges a conspiracy to allocate the North America Market as to all generic drugs in Canada.
The Company believes that the asserted claims are without merit and intends to vigorously defend itself against the allegations. Any liability that may arise on account of this claim is unascertainable. Accordingly, no provision was made in these consolidated financial statements of the Company.
200 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
33. Contingencies (continued)
Civil litigation with Mezzion
On January 13, 2017, Mezzion Pharma Co. Ltd. and Mezzion International LLC (collectively, “Mezzion”) filed a complaint in the New Jersey Superior Court against the Company and its wholly owned subsidiary in the United States. The complaint pertains to the production and supply of the active pharmaceutical ingredient (“API”) for udenafil (a patented compound) and an udenafil finished dosage product during a period from calendar years 2007 to 2015. Mezzion alleges that the Company failed to comply with the U.S. FDA’s current Good Manufacturing Practices (“cGMP”) at the time of manufacture of the API and finished dosage forms of udenafil and, consequently, that this resulted in a delay in the filing of a NDA for the product by Mezzion. The Company filed a motion to dismiss Mezzion’s complaint on the technical grounds that the Court lacks jurisdiction over the Company. In January 2018, the Court denied the Company’s motion to dismiss the complaint on the jurisdictional matter. The Company’s interlocutory appeal of said denial was also denied. The case is continuing in pretrial discovery.
The Company denies any wrongdoing or liability in this regard, and intends to vigorously defend against the claims asserted in Mezzion’s complaint. Any liability that may arise on account of this claim is unascertainable. Accordingly, no provision was made in these consolidated financial statements of the Company.
Civil Litigation and Arbitration with Hatchtech Pty Limited
On September 7, 2015, the Company’s Swiss subsidiary, Dr. Reddy’s Laboratories, S.A., entered into an Asset Purchase Agreement (“APA”) with Hatchtech Pty Limited (“Hatchtech”). Pursuant to the APA, the Company’s subsidiary acquired from Hatchtech the patented product Xeglyze®, a topical lousicidal lotion for the treatment of head lice, and all rights in the product. The APA provides that the Company would seek to obtain New Drug Application (“NDA”) approval from the U.S. FDA, and would then commercialize the product in the United States. The APA specifies certain milestone payments to be paid by the Company’s Swiss subsidiary to Hatchtech, including a U.S.$20 NDA approval milestone payment, a U.S.$25 ovicidal label approval milestone payment, and certain net sales milestone payments.
On July 24, 2020, the Company received the NDA approval from the U.S. FDA for the Xeglyze® product.
On September 25, 2020, the Company’s Swiss subsidiary filed an action in Delaware Chancery Court against Hatchtech to rescind the APA based upon claims of fraud, negligent misrepresentations and mutual mistake in connection with the acquisition of the product Xeglyze®, which was dismissed as being untimely under the Delaware statute of limitations.
On October 8, 2020, Hatchtech filed an arbitration demand against the Swiss Subsidiary before the American Arbitration Association (“AAA”), International Center for Dispute Resolution (“ICDR”), in New York City, claiming that it was owed U.S.$20 for the NDA approval milestone and U.S.$25 for the ovicidal label approval milestone.
On January 25, 2021, the Company’s Swiss subsidiary filed a Writ of Summons and Statement of Claim in Victoria at Melbourne, Australia, against Hatchtech (as a nominal party), certain of its officers and a principal shareholder, alleging misrepresentations in connection with the acquisition of the Xeglyze® product and seeking damages and other relief.
Based on its best estimate, the Company had recorded a provision for potential liability of U.S.$20 relating to the AAA-ICDR arbitration filed by Hatchtech and believed that the likelihood of any further liability that may arise pursuant to that arbitration to be not probable.
On June 14, 2021, the Company received the arbitration decision and award issued by the AAA-ICDR in favor of Hatchtech in an amount of U.S.$46.25 towards milestone payments, interest and fees.
As this constitutes an adjusting subsequent event, the consolidated financial statements for the year ended March 31, 2021 were adjusted to reflect the impact of this event by recognizing the balance amount of U.S.$26.25 in the consolidated income statement.
Of the total amount of U.S.$46.25 awarded to Hatchtech, the amount of U.S.$45 (Rs.3,291) was recognized in the consolidated income statement under the heading “Impairment of non-current assets” and the balance of U.S.$1.25 (Rs.91) was recognized under the heading, “Selling, general and administrative expenses”.
Securities Class Action Litigation
On August 25, 2017, a securities class action lawsuit was filed against the Company, its Chief Executive Officer and its Chief Financial Officer in the United States District Court for the District of New Jersey. The Company’s Co-Chairman, its Chief Operating Officer, and Dr. Reddy’s Laboratories, Inc., were also subsequently named as defendants in the case. The operative complaint alleges that the Company made false or misleading statements or omissions in its public filings, in violation of U.S. federal securities laws, and that the Company’s share price dropped and its investors were affected. On May 9, 2018, the Company and other defendants filed a motion to dismiss the complaint in the United States District Court for the District of New Jersey.
On June 25, 2018, the plaintiffs filed an opposition to the motion to dismiss and, on July 25, 2018, a further reply in support of the motion to dismiss was filed by the Company. In August 2018, oral argument on the motion to dismiss was heard by the Court.
On March 21, 2019, the District Court issued its decision granting in part and denying in part the motion to dismiss. Pursuant to that decision, the Court dismissed the plaintiffs claims with respect to seventeen out of the twenty two alleged misstatements and omissions.
201 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
33. Contingencies (continued)
On May 15, 2020, Dr. Reddy’s Laboratories Limited, Dr. Reddy’s Laboratories, Inc., and certain of the Company’s current or former directors and officers have entered into a Stipulation and Agreement of Settlement (the “Stipulation”) with lead plaintiff the Public Employees’ Retirement System of Mississippi in the putative securities class action filed against the defendants in the United States District Court for the District of New Jersey. As consideration for the settlement of the class action, the Company has agreed to pay U.S.$9.
The settlement is subject to the approval of the court and may be terminated prior to court approval pursuant to the grounds for termination set forth in the Stipulation. Subject to the terms of the Stipulation, in exchange for the settlement consideration, the lead plaintiff and members of the settlement class who do not opt-out of this settlement would release, among other things, the claims that were asserted, or that they could have asserted, in this class action. In entering into the settlement, the defendants do not admit, and explicitly deny, any liability or wrongdoing of any kind.
Subject to the terms of the Stipulation, the settlement resolves the remainder of the litigation.
As the Company is adequately insured with respect to the aforesaid liability, the settlement did not have any impact on the Company’s consolidated income statement for the year ended March 31, 2020.
The amount payable to the plaintiffs on account of the settlement and the corresponding receivable from the insurer have been presented under “other current assets” and “other current liabilities”, respectively, in the consolidated statement of financial position of the Company as of March 31, 2020.
On December 23, 2020, the court issued a final order and judgment approving the settlement. Pursuant to the settlement/court order, the escrow was funded on January 4, 2021. The effective date of the settlement occurred on February 1, 2021, upon transfer of the settlement fund balance into the final escrow account. As the transfer of funds to the final escrow account constitutes settlement of liability, the amount of liability has been derecognized during the three months ended March 31, 2021.
Internal Investigation
The Company has commenced a detailed investigation into an anonymous complaint. The complaint alleges that healthcare professionals in Ukraine and potentially in other countries were provided with improper payments by or on behalf of the Company in violation of U.S. anti-corruption laws, specifically the U.S. Foreign Corrupt Practices Act. A U.S. law firm is conducting the investigation at the instruction of a committee of the Company’s Board of Directors. The investigation is ongoing. The Company has disclosed the matter to the U.S. Department of Justice, Securities and Exchange Commission and Securities Exchange Board of India. While the matter may result in government enforcement actions against the Company in the United States and/or foreign jurisdictions, which could lead to civil and criminal sanctions under relevant laws, the probability of such action and the outcome are not reasonably ascertainable at this time.
Other matters
Civil Investigative Demand from the Office of the Attorney General, State of Texas
On or about November 10, 2014, Dr. Reddy’s Laboratories, Inc., one of the Company’s subsidiaries in the United States, received a Civil Investigative Demand (“CID”) from the Office of the Attorney General, State of Texas (the “Texas AG”) requesting certain information, documents and data regarding sales and price reporting in the U.S. marketplace of certain products for the period of time between January 1, 1995 and the date of the CID. The Company responded to all of the Texas AG’s requests to date.
Subpoena duces tecum from the Office of the Attorney General, California
On November 3, 2014, Dr. Reddy’s Laboratories, Inc. received a subpoena duces tecum to appear before the Office of the Attorney General, California (the “California AG”) and produce records and documents relating to the pricing of certain products. A set of five interrogatories related to pricing practices was served as well. On July 18, 2016, the California AG sent a letter to inform Dr. Reddy’s Laboratories, Inc. that, in light of the information which had been provided, no further information would be requested at such time in response to this subpoena.
Subpoenas from the Antitrust Division of the U.S. Department of Justice (“DOJ”) and the office of the Attorney General for the State of Connecticut
On July 6, 2016 and August 7, 2016, Dr. Reddy’s Laboratories, Inc. received subpoenas from the DOJ (Anti-trust Division) and the office of the Attorney General for the State of Connecticut, respectively, seeking information relating to the marketing, pricing and sale of certain of our generic products and any communications with competitors about such products. On May 15, 2018, another subpoena was served on Dr. Reddy’s Laboratories, Inc. by the DOJ (False Claims Division) seeking similar information. The Company has been cooperating, and intends to continue to fully cooperate, with these inquiries.
Civil Investigative Demand from Civil Division of the DOJ
On May 15, 2018, Dr. Reddy’s Laboratories, Inc. received a Civil Investigative Demand from the Civil Division of the DOJ, enquiring whether there have been any violations of the U.S. False Claims Act. This query arose from allegations that generic pharmaceutical manufacturers, including us, have engaged in market allocation or price fixing agreements, or paid illegal remuneration, and caused false claims to be submitted in violation of the U.S. False Claims Act. The Company has been cooperating, and intends to continue to fully cooperate with the DOJ in responding to the demand and cooperate with the investigation.
202 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
33. Contingencies (continued)
Environmental matters
Land pollution
The Indian Council for Environmental Legal Action filed a writ in 1989 under Article 32 of the Constitution of India against the Union of India and others in the Supreme Court of India for the safety of people living in the Patancheru and BollarumBollaram areas of Medak district of the then existing undivided state of Andhra Pradesh. The Company has been named in the list of polluting industries. In 1996, the Andhra Pradesh District Judge proposed that the polluting industries compensate farmers in the Patancheru, BollarumBollaram and Jeedimetla areas for discharging effluents which damaged the farmers’ agricultural land. The compensation was fixed at Rs.0.0013 per acre for dry land and Rs.0.0017 per acre for wet land. Accordingly, the Company has paid a total compensation of Rs.3. The Company believes that the possibility of additional liability is remote. The Andhra Pradesh High Court disposed of the writ petition on February 12, 2013 and transferred the case to the National Green Tribunal (“NGT”), Chennai, India. The interim orders passed in the writ petitions will continue until the matter is decided by the NGT. The NGT has, through its order dated October 30, 2015, constituted a Fact Finding Committee.
The NGT has also permitted the alleged polluting industries to appoint a person on their behalf in the Fact Finding Committee. However, the Company, along with the alleged polluting industries, havehas challenged the constitution and composition of the Fact Finding Committee. The NGT has directed that until all the applications challenging the constitution and composition of the Fact Finding Committee are disposed of, the Fact Finding Committee shall not commence its operation.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(The NGT, Chennai in millions, except share and per share data and where otherwise stated)
43. Contingencies (continued)The NGT, Delhi, in a judgment dated November 16, 2017 in another case in which the Company is not a party, stated that the moratorium imposed in the Patancheru and Bollaram areas shall continue until the Ministry of Environment, Forest and Climate Change passes an order keeping in view the needs of the environment and public health. The Company filed an appeal challenging this judgment.
Environmental matters (continued)The High Court of Hyderabad heard the Company’s appeal challenging this judgment in July 2018 and directed the respondents to file their response within a period of four weeks. During the three months ended September 30, 2018, the respondents filed counter affidavits and the matter has now been adjourned for final hearing.
The appeal came up for hearing before the High Court of Hyderabad on October 25, 2018 and has been adjourned for further hearing.
On April 24, 2019, based upon the judgment of the NGT, Chennai dated October 24, 2017, the Government of Telangana has issued GO.Ms. No. 24 of 2019 that allows for expansion of production of all kinds of existing industrial units located within the stretch of Patancheru – Bollaram upon depositing an amount equivalent to 1% of the annual turnover of the respective unit for the concluded fiscal year, i.e., March 31, 2019. Accordingly, the Company made a provision of Rs.29.4, representing the probable cost of expansion, during the year ended March 31, 2019.
During the three months ended September, 2019, the Telangana State Pollution Control Board (“TSPCB”) has issued Operational Guidelines basis the NGT, Chennai Order dated October 24, 2017, G.O.Ms. No. 24 dated April 24, 2019 and G.O.Ms. No. 31 dated May 24, 2019 and sought to recover retrospectively an amount of 0.5% of the annual turnover from the fiscal years 2016-2017 to 2018-2019 for all the industrial units situated in Patancheru and Bollaram for the purposes of restoration of the said effected area. The Company has four industrial units situated in Patancheru and Bollaram. The Consent For Operation (“CFO”) for change of product mix application filed by one of the industrial unit of the Company has been recommended for issuance of CFO with change of product mix only upon payment of 0.5% of the annual turnover from the fiscal years 2016-2017 to 2018-2019 to the TSPCB. The Company intends to vigorously defend itself against the Operational Guidelines.
In November 2019, demand notices were issued by the TSPCB for collection of Corpus Fund of 0.5 % as remediation fee on the previous year turnover as per Operational Guidelines dated August 3, 2019 issued by TSPCB under the guise of G.O.Ms No. 24 dated April 24, 2019 and G.O.Ms No. 31 dated May 24, 2019 and basis the judgment of NGT, Chennai dated October 24, 2017 for the fiscal years 2015-2016 to 2018-2019 received by CTO-1, CTO-2 and CTO-3 of the Company.
On November 22, 2019, The Hon’ble High Court of Judicature at Hyderabad issued an Interim Order which stayed the demand on the condition that the Company deposit Rs.60 as the remediation fee for the fiscal year 2018-2019 payable in the fiscal year 2019-2020. The deposit of Rs.60 was made and the Interim Order is continuing. The matter was adjourned to April 22, 2020 but has been delayed as a result of the closure of the Court due to the COVID-19 lockdown, and a new date has not yet been rescheduled.
The Company believes that any additional liability that might arise in this regard is not probable. Accordingly, no provision relating to these claims has been made in the financial statements.
Water pollution and air pollution
During the year ended March 31, 2012, the Company, along-withalong with 14 other companies, received a notice from the Andhra Pradesh Pollution Control Board (“APP(the “APP Control Board”) to show cause as to why action should not be initiated against them for violations under the Indian Water Pollution Act and the Indian Air Pollution Act. Furthermore, the APP Control Board issued orders to the Company to (i) stop production of all new products at the Company’s manufacturing facilities in Hyderabad, India without obtaining a “Consent for Establishment”, (ii) cease manufacturing products at such facilities in excess of certain quantities specified by the APP Control Board and (iii) furnish a bank guarantee to assure compliance with the APP Control Board’s orders.
203 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
33. Contingencies (continued)
The Company appealed the APP Control Board orders to the Andhra Pradesh Pollution Appellate Board (the “APP Appellate Board”). The APP Appellate Board, on the basis of a report of a fact-finding advisory committee, recommended to the Andhra Pradesh Government to allow expansion of units fully equipped with Zero-Liquid Discharge (“ZLD”) facilities and otherwise found no fault with the Company (on certain conditions). The APP Appellate Board’s decision was challenged by one of the petitioners that was pending in the National Green Tribunal, and the matter is currently pending before it.(the “NGT”), Delhi.
Separately, the Andhra Pradesh Government, following recommendations of the APP Appellate Board, published a notification in July 2013 that allowed expansion of production of all types of existing bulk drug and bulk drug intermediate manufacturing units subject to the installation of ZLD facilities and the outcome of cases pending in the National Green Tribunal.NGT. Importantly, the notification directed pollution load of industrial units to be assessed at the point of discharge (if any) as opposed to the point of generation.
In September 2013, the Ministry of Environment and Forests, based on the revised Comprehensive Environment Pollution Index, issued a notification that re-imposed a moratorium on expansion of industries in certain areas where some of the Company’s manufacturing facilities are located. This notification overrides the Andhra Pradesh Government’s notification that conditionally permitted expansion.
The appeals filed by Mr. K. Chidambaram against the Orders of the Appellate Authority, Andhra Pradesh are disposed off as the same do not survive for consideration as the G.O. based on which the then APPCB had passed its order which was subject matter of appeal before the Appellate Authority has itself been amended vide order July 25, 2013. However, the NGT, Delhi has passed a direction for the issue of pollution to be considered by the Joint Committee of Central Pollution Control Board, National Environmental Engineering Institute (“NEERI”), and the Telangana State Pollution Control Board to ascertain the present status of pollution issues in the Medak, Ranga Reddy, Mahaboobnagar and Nalagonda districts in the State of Telangana particularly in the Patancheru and Bollaram industrial clusters and file a report within three months before the NGT, Delhi.
Indirect taxes related matters
Assessable value of products supplied by a vendor to the Company
During the year ended March 31, 2003, the Central Excise Authorities of India (the “Central Excise Authorities”) issued a demand notice to a vendor of the Company regarding the assessable value of products supplied by this vendor to the Company. The Company has been named as a co-defendant in this demand notice. The Central Excise Authorities demanded payment of Rs.176 from the vendor, including penalties of Rs.90. Through the same notice, the Central Excise Authorities issued a penalty claim of Rs.70 against the Company. During the year ended March 31, 2005, the Central Excise Authorities issued an additional notice to this vendor demanding Rs.226 from the vendor, including a penalty of Rs.51. Through the same notice, the Central Excise Authorities issued a penalty claim of Rs.7 against the Company. Furthermore, during the year ended March 31, 2006, the Central Excise Authorities issued an additional notice to this vendor demanding Rs.34. The Company filed appeals against these notices with the Customs, Excise and Service Tax Appellate Tribunal (the “CESTAT”). In October 2006, the CESTAT passed an order in favor of the Company setting aside all of the above demand notices. In July 2007, the Central Excise Authorities appealed against CESTAT’s order in the Supreme Court of India, New Delhi.
On November 27, 2015, the Supreme Court of India dismissed the appeal of the Central Excise Authorities and passed an order in favor of the Company.
Distribution of input service tax credits
The Central Excise Authorities have issued various show cause notices to the Company objecting to the Company’s methodology of distributing input service tax credits claimed for one of the Company’s facilities. The below table shows the details of each of such show cause notices and the consequential actions on and status of the same.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
43. Contingencies (continued)
Indirect taxes related matters (continued)
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The Company believes that the possibility of any liability that may arise on account of the allegedly inappropriate distribution of input service tax credits is not probable. Accordingly, no provision relating to these claims has been made in the Company’s consolidated financial statements as of March 31, 2016.
Value Added Tax (“VAT”) matter
The Company received various show cause notices from the Government of Telangana’s Commercial Taxes Department objecting to the Company’s methodology of calculation of VAT input credit. The below table shows the details of each of such show cause notices and the consequential actions on and status of the same.
|
|
| ||
The Company has recorded a provision of Rs.27 as of March 31, 2016, and believes that the possibility of any further liability that may arise on account of the allegedly inappropriate claims to VAT credits is not probable.
Others
Additionally, the Company is in receipt of various show cause notices from the Indian Sales Tax authorities. The disputed amount is Rs.57. The Company has responded to such show cause notices and believes that the chances of any liability arising from such notices are less than probable. Accordingly, no provision is made in the Company’s consolidated financial statements as of March 31, 2016
Fuel Surcharge Adjustments
The Andhra Pradesh Electricity Regulatory Commission (the “APERC”) passed various orders approving the levy of Fuel Surcharge Adjustment (“FSA”) charges for the period from April 1, 2008 to March 31, 2013 by power distribution companies from all the consumers of electricity in the then existing undivided state of Andhra Pradesh, India where the Company’s headquarters and principal manufacturing facilities are located. Separate writ petitions filed by the Company for various periods, challenging and questioning the validity and legality of this levy of FSA charges by the APERC, are pending before the High Court of Andhra Pradesh and the Supreme Court of India.
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
43. Contingencies (continued)
Fuel Surcharge Adjustments (continued)
After taking into account all of the available information and legal provisions, the Company has recorded Rs.219 as the potential liability towards FSA charges. The total amount approved by APERC for collection by the power distribution companies from the Company in respect of FSA charges for the period from April 1, 2008 to March 31, 2013 is Rs.482. AsAfter taking into account all of March 31, 2016,the available information and legal provisions, the Company has made “paymentsrecorded Rs.219 as the potential liability towards FSA charges.
However, the Company has paid, under protest”protest, an amount of Rs.354 as demanded by the power distribution companies as part of monthly electricity bills. The Company remains exposed to additional financial liability should the orders passed by the APERC be upheld by the Courts.
During the three months ended June 30, 2016, the Supreme Court of India dismissed the Special Leave Petition filed by the Company in this regard for the period from April 1, 2012 to March 31, 2013. As a result, for the quarter ended June 30, 2016, the Company recognized an expenditure of Rs.55 (by de-recognizing the payments under protest) representing the FSA charges for the period from April 1, 2012 to March 31, 2013.
DirectIndirect taxes related matters
During
Value Added Tax (“VAT”) matter
The Company has received various demand notices from the Government of Telangana’s Commercial Taxes Department objecting to the Company’s methodology of calculation of VAT input credit. The below table shows the details of each of such demand notice, the amount demanded and the current status of the Company’s responsive actions.
Period covered under the notice | Amount demanded | Status | ||
April 2006 to March 2009 | Rs.66 plus 10% penalty | The State VAT Appellate Tribunal has remanded the matter to the assessing authority to re-compute the eligibility and penalty orders are set-aside. The Company filed appeal against the same with the High Court, Telangana. | ||
April 2009 to March 2011 | Rs.59 plus 10% penalty | The Company has filed an appeal before the Sales Tax Appellate Tribunal. The matter was remanded to the original adjudicating authority with a direction to re-calculate the eligibility for the year ended March 31, 2010. | ||
April 2011 to March 2014 | Rs.27 plus 10% penalty | The Appellate Deputy Commissioner issued an order partially in favor of the Company |
The Company has recorded a provision of Rs.51 as of March 31, 2014, the Indian Income Tax authorities disallowed for tax purposes certain business transactions entered into by the parent company with its wholly-owned subsidiaries. The associated tax impact is Rs.570. The Company believes that such business transactions are allowed for tax deduction under Indian Income Tax laws2021 and has accordingly filed an appeal with the Income Tax Appellate Authorities. The Company further believes that the probabilitylikelihood of succeeding any further liability that may arise on account of the ongoing litigation is not probable.
204 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in this mattermillions, except share and per share data)
33. Contingencies (continued)
Notices from Commissioner of Goods and Services Tax, India
In the months of November 2019 and January 2020, the Commissioner of Goods and Services Tax, India issued notices to the Company alleging that the Company has irregularly availed input tax credit of Rs.307. The Company has received order dropping the demand.
The Company has recorded a provision of Rs.31 as of March 31, 2021 and believes that the likelihood of any further liability that may arise on account of the allegedly inappropriate claims to credits is more likely than not and thereforeprobable. Accordingly, no further provision was made in respectthese consolidated financial statements.
Others
Additionally, the Company is in receipt of this mattervarious demand notices from the Indian Sales and Service Tax authorities. The disputed amount is Rs.474. The Company has responded to such demand notices and believes that the chances of any liability arising from such notices are less than probable. Accordingly, no provision is made in the Company’sthese consolidated financial statements as of March 31, 2016.2021.
Additionally, the Company is contesting various other disallowances by the Indian Income Tax authorities. The associated tax impact is Rs.845. The Company believes that the chances of an unfavorable outcome in each of such disallowances are less than probable and accordingly, no provision was made in respect of these matters in the Company’s consolidated financial statements as of March 31, 2016.
During the years ended March 31, 2014, 2015 and 2016, Industrias Quimicas Falcon de Mexico, S.A. de CV, a wholly owned subsidiary of the Company in Mexico, received a notice from Mexico’s Tax Administration Service, Servicio de Administracion Tributaria (“SAT”), with respect to disallowance on account of transfer pricing adjustments pertaining to the calendar years ended on December 31, 2006, December 31, 2007 and December 31, 2008. The associated tax impact is Rs.663 (MXN172.5). The Company disagrees with the SAT’s allegations and filed an appeal with the SAT. The Company believes that possibility of any liability that may arise on account of this litigation is not probable and hence, no provision has been made in the financial statements.
Others
Additionally, the Company is involved in other disputes, lawsuits, claims, governmental and/or regulatory inspections, inquiries, investigations and proceedings, including patent and commercial matters that arise from time to time in the ordinary course of business. Except as discussed above, the Company does not believe that there are any such contingent liabilities that are expected to have any material adverse effect on its consolidated financial statements.
44. Nature
34. Collaboration, License and Option Agreement with Curis, Inc.
On January 18, 2015, Aurigene Discovery Technologies Limited ("ADTL"), a wholly-owned subsidiary of Expensethe parent company, entered into a Collaboration, License and Option Agreement (as amended, the "Collaboration Agreement") with Curis, Inc. ("Curis") to discover, develop and commercialize small molecule antagonists for immuno-oncology and precision oncology targets.
Under the Collaboration Agreement, ADTL has the responsibility for conducting all discovery and preclinical activities, including Investigational New Drug ("IND") enabling studies and providing Phase 1 clinical trial supply, and Curis is responsible for all clinical development, regulatory and commercialization efforts worldwide, excluding India and Russia. The Collaboration Agreement provides that the parties will collaborate exclusively in immuno-oncology for an initial period of approximately two years, with the option for Curis to extend the broad immuno-oncology exclusivity.
Revenues under the Collaboration Agreement consist of upfront consideration (including shares of Curis common stock) and the development and commercial milestone payments (including royalties) which are deferred and recognized as revenue over the period for which ADTL has continuing performance obligations.
As a partial consideration for the collaboration, the following shares of common stock of Curis were issued to ADTL:
Number of Curis shares (pre-split) | Fair value | |||||
Pursuant to the collaboration agreement dated January 18, 2015 | 17.1 million | Rs.1,452 (U.S.$23.5) | ||||
Pursuant to an amendment to collaboration agreement dated September 7, 2016 (Common stock in lieu of receiving up to U.S.$24.5 of milestone and other payments) | 10.2 million | Rs.1,247 (U.S.$18.8) |
The Company has classified all of the shares of Curis common stock received, as a partial consideration for the collaboration, as an investment in equity instruments measured at FVTOCI.
In May 2018, Curis completed a 1-for-5 reverse stock split of its common stock. After giving effect to such stock split, the total number of Curis equity shares held by the Company is 5.47 million.
The following table shows supplemental information relatedis a summary of the details of cost, fair value, and the amount recognized in OCI of the fair value changes:
As of March 31, 2021 | ||||||||||||
Cost | Unrealized gain | Fair value | ||||||||||
Received on January 18, 2015 | Rs. | 1,452 | Rs. | 1,382 | Rs. | 2,834 | ||||||
Received on September 7, 2016 | 1,247 | 442 | 1,689 | |||||||||
Rs. | 2,699 | Rs. | 1,824 | Rs. | 4,523 |
35. 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 certain “naturethe approval of expense” itemsshareholders, stock exchanges, the National Company Law Tribunal (“NCLT”) and other relevant regulators.
The Scheme will lead to simplification of the shareholding structure and reduction of shareholding tiers.
The Promoter Group cumulatively would continue to hold the same number of shares in the Company, pre- and post the amalgamation. All costs, charges and expenses relating to the Scheme will be borne out of the surplus assets of DRHL. Further, any expense, if exceeding the surplus assets of DRHL, will be borne directly by the Promoters.
The Scheme also provides that the Promoters of the Company will jointly and severally indemnify, defend and hold harmless the Company, its directors, employees, officers, representatives, or any other person authorized by the Company (excluding the Promoters) for any liability, claim, or demand, which may devolve upon the yearsCompany on account of this amalgamation.
During year ended March 31, 2016, 20152020, the Scheme was approved by the board of directors, members and 2014:unsecured creditors of the Company. The no-observation letters from the BSE Limited and National Stock Exchange of India Limited were received on the basis of no comments received from Securities and Exchange Board of India (“SEBI”). The petition for approval of the said Scheme was filed with the Hon’ble NCLT, Hyderabad Bench.
For the Year Ended March 31, 2016 | ||||||||||||||||
Particulars | Cost of revenues | Selling, general and administrative expenses | Research and development expenses | Total | ||||||||||||
Employee benefits | Rs. | 9,574 | Rs. | 16,641 | Rs. | 4,959 | Rs. | 31,174 | ||||||||
Depreciation and amortization | 5,241 | 3,933 | 1,076 | 10,250 | ||||||||||||
For the Year Ended March 31, 2015 | ||||||||||||||||
Particulars | Cost of revenues | Selling, general and administrative expenses | Research and development expenses | Total | ||||||||||||
Employee benefits | Rs. | 9,469 | Rs. | 15,400 | Rs. | 4,098 | Rs. | 28,967 | ||||||||
Depreciation and amortization | 4,154 | 3,023 | 923 | 8,100 |
The hearings on the petition took place on April 20, 2021, and the Hon’ble NCLT reserved the issuance of an order pending its review and further analysis of the matter.
For the Year Ended March 31, 2014 | ||||||||||||||||
Particulars | Cost of revenues | Selling, general and administrative expenses | Research and development expenses | Total | ||||||||||||
Employee benefits | Rs. | 8,526 | Rs. | 13,727 | Rs. | 2,684 | Rs. | 24,937 | ||||||||
Depreciation and amortization | 3,771 | 2,901 | 434 | 7,106 |
205 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
45. Subsequent events
Buyback of equity shares
The Board of Directors36. Secondary listing of the Company, in their meeting heldCompany’s ADR on February 17, 2016, approved a proposal to buyback equity shares of the Company, subject to approval by the Company’s shareholders, for an aggregate amount not exceeding Rs.15,694 (referred to as the “Maximum Buyback Size”) and at a price not exceeding Rs.3,500 per equity share (referred to “Maximum Buyback Price”) from shareholders of the Company (including persons who become shareholders by cancelling American Depository Shares and receiving underlying equity shares, and excluding the promoters and promoter group of the Company) under the open market route in accordance with the provisions contained in the Securities and Exchange Board of India (Buy Back of Securities) Regulations, 1998 and the Companies Act, 2013 and rules made thereunder. The shares bought back under this plan shall be extinguished in accordance with the provisions of the Securities and Exchange Board of India (Buy Back of Securities) Regulations, 1998 and the Companies Act, 2013 and rules made thereunder.NSE IFSC Limited
The Company obtainedcompleted the secondary listing of its American Depository Receipts (“ADRs”) on NSE IFSC Limited under the symbol ’DRREDDY’ on December 9, 2020. NSE IFSC Limited is a recognized international stock exchange established in the International Financial Services Centre (“IFSC”) at Gujarat International Finance Tec (“GIFT”) City in Gujarat, India. IFSC is one of the permissible jurisdictions where Depository Receipts can be listed in India. This listing provides a secondary platform (other than NYSE Inc.) to overseas investors for trading in the Company’s ADRs. This is a secondary listing of ADRs that are currently issued by J.P. Morgan Chase Bank N.A. under its ADR Deposit Agreement with the Company, and no further capital raising or issuance of new securities is involved.
37. 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 consolidated financial statements. The Company based on its judgments, estimates and assumptions including sensitivity analysis, expects to fully recover the shareholders forcarrying amount of receivables, goodwill, intangible assets, investments and other assets.
The Company will continue to closely monitor any material changes to future economic conditions.
38. Update on Cyber Incident
On October 22, 2020, the buyback plan on April 1, 2016Company experienced a cybersecurity incident related to ransom-ware. The company employed two leading cyber security incident response firms to assist with the investigation process. The incident was contained in a timely fashion and an enterprise-wide remediation was undertaken to ensure all traces of infection are completely removed from the buyback plan commenced on April 18, 2016.
As of June 22, 2016,network. Since then, the Company has bought back 5,024,178 equity shares pursuantstrengthened a series of technical controls to this buyback plan for an aggregate purchase price of Rs.15,526.
Asset purchase agreement with Ducere Pharma LLC
On May 23, 2016,augment the Company entered into an asset purchase agreement with Ducere Pharma LLC for the purchase of a portfolio of certain pharmaceutical brands for a total consideration of Rs.1,144 (U.S.$17). The acquisition is expectedcurrent cyber security posture and has also focused on implementing significant improvements to strengthen the Company’s presenceits cyber and data security systems to safeguard from such risks in the dermatology, cough-and-coldfuture.
39. The Code on Social Security, 2020
India’s Code on Social Security, 2020, which aims to consolidate, codify and pain therapeutic areas forming partrevise certain existing social security laws, received Presidential assent in September 2020 and has been published in the Gazette of India. However, the related final rules have not yet been issued and the date on which this Code will come into effect has not been announced. The Company will assess the impact of this Code and the rules thereunder when they come into effect.
40. Update on the warning letter from the U.S. FDA
The Company received a warning letter dated November 5, 2015 from the U.S. FDA relating to current Good Manufacturing 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 Company’s over-the-counter (“OTC”) business in the United States.
Asset purchase agreement with Teva Pharmaceutical Industries Ltd.
On June 10, 2016, the Company entered into a definitive agreement with Teva Pharmaceutical Industries Ltd. (“Teva”) and an affiliate of Allergan plc (“Allergan”) to acquire a portfolio of eight Abbreviated New Drug Applications (“ANDAs”) in the United States for U.S.$350 in cash at closing. The acquired portfolio consists of productswarning letter emanated from Form 483 observations that are being divested by Teva as a precondition to its closing of the acquisition of Allergan’s generics business. The acquisitionfollowed inspections of these ANDAs is also contingent on the closing of the Teva/Allergan generics purchase transaction and approvalsites by the U.S. Federal Trade Commission of the Company as a buyer.
46. Organizational structure
Dr. Reddy’s Laboratories Limited is the parent company. Tabulated below is the list of subsidiaries, associatesFDA in November 2014, January 2015 and joint ventures as of March 31, 2016:February-March 2015.
| ||||||
|
Aurigene Discovery Technologies Inc.
Aurigene Discovery Technologies Limited
beta Institut gemeinnützige GmbH
betapharm Arzneimittel GmbH
Cheminor Investments Limited
Chienna B.V.
Chirotech Technology Limited
DRANU LLC
Dr. Reddy’s Bio-Sciences Limited
Dr. Reddy’s Farmaceutica Do Brasil Ltda.
Dr. Reddy’s Laboratories (Australia) Pty. Limited
Dr. Reddy’s Laboratories Canada, Inc.
Dr. Reddy’s Laboratories (EU) Limited
Dr. Reddy’s Laboratories Inc.
Dr. Reddy’s Laboratories International SA
Dr. Reddy’s Laboratories Japan KK (from April 21, 2015)
Dr. Reddy’s Laboratories, LLC
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)
46. Organizational structure40. Update on the warning letter from the U.S. FDA (continued)
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 an 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 the 2015 warning letter are now determined as VAI.
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. |
207 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
40. Update on the warning letter from the U.S. FDA (continued)
Month and year | Unit | Details of observations | ||||
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. | ||||
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 the audit and the inspection classification of the facility was determined as VAI. |
No U.S. FDA audits were conducted during the year ended March 31, 2021.
41. Subsequent events
Please refer to Notes 6, 20 and 33 of these consolidated financial statements for the details of subsequent events relating to the business transfer agreement with Wockhardt Limited, proposed dividend and contingencies, respectively.
On June 3, 2021, the Company allotted 43,083 equity shares to various employees with an exercise price of Rs.5 each (34,610 equity shares for Rs.5 each pursuant to the DRL 2002 Plan and 8,473 equity shares for Rs.5 each underlying 8,473 ADRs pursuant to the DRL 2007 plan).
208 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
42. Organizational structure
Dr. Reddy’s Laboratories Limited is the parent company. Tabulated below is the list of subsidiaries and joint ventures as of March 31, 2021:
Name of the | Country of Incorporation | Percentage of Direct/Indirect Ownership Interest | ||||
Aurigene Discovery Technologies (Malaysia) Sdn. Bhd. | Malaysia | 100%(3) | ||||
Aurigene Discovery Technologies, Inc. | U.S.A. | 100%(3) | ||||
Aurigene Discovery Technologies Limited | India | 100% | ||||
Aurigene Pharmaceutical Services Limited (from September 16, 2019) | India | 100%(3) | ||||
beta Institut gemeinnützige GmbH | Germany | 100%(8) | ||||
betapharm Arzneimittel GmbH | Germany | 100%(8) | ||||
Cheminor Investments Limited | India | 100% | ||||
Cheminor Employees Welfare Trust | India | Refer to below footnote(16) | ||||
Chirotech Technology Limited | United Kingdom | 100%(2)(5) | ||||
Dr. Reddy’s Research Foundation | India | Refer to below footnote(16) | ||||
Dr. Reddy's Employees ESOS Trust (from July 27, 2018) | India | Refer to below footnote(16) | ||||
Dr. Reddy’s Farmaceutica Do Brasil Ltda. | Brazil | 100% | ||||
Dr. Reddy’s Laboratories (EU) Limited | United Kingdom | 100%(10) | ||||
Dr. Reddy’s Laboratories (Proprietary) Limited | South Africa | 100%(10) | ||||
Dr. Reddy’s Laboratories (UK) Limited | United Kingdom | 100%(5) | ||||
Dr. Reddy’s Laboratories Canada, Inc. | Canada | 100%(10) | ||||
Dr. Reddy's Laboratories Chile SPA. | Chile | 100%(10) | ||||
Dr. Reddy’s Laboratories, Inc. | U.S.A. | 100%(10) | ||||
Dr. Reddy’s Laboratories Japan KK | Japan | 100%(10) | ||||
Dr. Reddy’s Laboratories Kazakhstan LLP | Kazakhstan | 100%(10) | ||||
Dr. Reddy’s Laboratories Louisiana, LLC | U.S.A. | |||||
Dr. Reddy’s Laboratories Malaysia Sdn. Bhd. | Malaysia | 100%(10) | ||||
Dr. Reddy’s Laboratories New York, | U.S.A. | 100%(1) | ||||
Dr. |
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Dr. Reddy’s Laboratories Romania S.R.L. | Romania | |||||
Dr. Reddy’s Laboratories SA | Switzerland | |||||
Dr. Reddy's Laboratories Taiwan Limited | Taiwan | 100%(10) | ||||
Dr. Reddy's Laboratories (Thailand) Limited (from June 13, 2018) | Thailand | 100%(10) | ||||
Dr. Reddy’s Laboratories, |
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Dr. Reddy’s New Zealand | New Zealand | |||||
Dr. Reddy’s |
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Dr. |
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Dr. |
| 100%(10) | ||||
Dr. |
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Dr. Reddy's Research and Development B.V. (formerly Octoplus B.V.) | Netherlands | 100%(12) | ||||
Dr. Reddy's Venezuela, C.A. | Venezuela | 100%(10) | ||||
Dr. Reddy’s (WUXI) Pharmaceutical Company Limited | China | 100%(10) | ||||
Dr. Reddy’s (Beijing) Pharmaceutical Co. Limited (from August 19, 2020) | China | 100%(10) | ||||
DRANU LLC | U.S.A. | 50%(14)(17) | ||||
DRES Energy Private Limited | India | 26%(15) | ||||
DRL Impex Limited | India | |||||
Dr. Reddy's Laboratories B.V. (formerly Eurobridge Consulting B.V. ) | Netherlands | 100%(12) | ||||
Dr. Reddy’s Formulations Limited (from March 11, 2021) | India | 100% | ||||
Idea2Enterprises (India) Private Limited | India | 100% | ||||
Imperial Credit Private Limited | India | 100% | ||||
Industrias Quimicas Falcon de Mexico, S.A. de CV | Mexico | |||||
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Kunshan Rotam Reddy Pharmaceutical Co. Limited | China | |||||
Lacock Holdings Limited | Cyprus | |||||
OOO Dr. | Russia | |||||
OOO DRS LLC | Russia | |||||
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| 100%(6) | ||||
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| 100%(10) | ||||
| Netherlands | 100%(10) | ||||
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Reddy Pharma Iberia | Spain | |||||
Reddy Pharma Italia S.R.L. | Italy | |||||
Reddy Pharma SAS | France | 100%(10) |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
42. Organizational structure(continued)
|
Incorporation | Ownership Interest | ||||
| India |
(1) | Indirectly owned through |
| Entity under liquidation. |
(3) | Indirectly owned through Aurigene Discovery Technologies Limited. |
(4) | Kunshan Rotam Reddy Pharmaceutical Co. Limited is a subsidiary as per Indian Companies Act, 2013, as the Company holds a 51.33% stake. However, the Company accounts for this investment by the equity method and does not consolidate it in the Company’s financial statements. |
(5) | Indirectly owned through Dr. Reddy’s Laboratories (EU) Limited. |
(6) | Indirectly owned through Dr. Reddy’s Laboratories Inc. |
(7) | Indirectly owned through Lacock Holdings Limited. |
(8) | Indirectly owned through Reddy Holding GmbH. |
(9) | Indirectly owned through OOO Dr. Reddy's Laboratories Limited. |
(10) | Indirectly owned through Dr. Reddy’s Laboratories SA. |
(11) | Indirectly owned through Reddy Pharma Italia S.R.L. |
(12) | Indirectly owned through Reddy Netherlands B.V. |
(13) | Indirectly owned through Idea2Enterprises (India) Pvt. Limited. |
(14) | DRANU LLC is consolidated in accordance with guidance available in IFRS 10, “Consolidated Financial Statements”. |
(15) | Accounted in accordance with IFRS 11, “Joint Arrangements”. |
(16) | The Company does not have any equity interests in this entity, but has significant influence or control over it. |
(17) | Pursuant to the sale of the membership interests in DRANU, LLC, it ceased to be a joint venture effective March 31, 2021. |
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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data and where otherwise stated)data)
46. Organizational structure (continued)
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Exhibit | Description of Exhibits | Footnotes | ||
1.1. | Memorandum and Articles of Association of the Registrant dated February 4, 1984. | (1)(3)(5) | ||
1.2. | Certificate of Incorporation of the Registrant dated February 24, 1984. | (1)(3) | ||
1.3. | Amended Certificate of Incorporation of the Registrant dated December 6, 1985. | (1)(3) | ||
1.4. | Amendment to Memorandum and Articles of Association of the Registrant dated June 12, 2009 (regarding an increase in our authorized share capital pursuant to the amalgamation of Perlecan Pharma Private Limited into Dr. Reddy’s Laboratories Limited, its parent company). | (6) | ||
1.5. | Amendment to Memorandum and Articles of Association of the Registrant dated July 19, 2010 Order of the Hon’bl High Court of Andhra Pradesh, India dated July 19, 2010 (regarding Amendment to Memorandum and Articles of Association of the Registrant and capitalization or utilization of undistributed profit or retained earnings or security premium account or any other reserve or fund in connection with our bonus debentures). | (8) | ||
1.6. | Amended and Restated Articles of Association of the Registrant dated September 17, 2015 | (9) | ||
2.1. | Form of Deposit Agreement, including the form of American Depositary Receipt, among Registrant, Morgan Guaranty Trust Company as Depositary, and holders from time to time of American Depositary Receipts Issued there under, including the form of American Depositary. | (1) | ||
2.2. | Order of the Hon’bl High Court of Andhra Pradesh, India dated July 19, 2010 (regarding capitalization or utilization of undistributed profit or retained earnings or security premium account or any other reserve or fund in connection with our bonus debentures). | (8) | ||
2.3. | Scheme of Arrangement between the Registrant and its members for issue of bonus debentures, including Notice of Meeting of Members to approve same dated April 29, 2010 and Explanatory Statement dated April 29, 2010. | (8) | ||
2.4. | Debenture Trust Deed dated March 16, 2011 between the Registrant and IDBI Trusteeship Services Limited (regarding trustee services for our bonus debentures). | (8) | ||
2.5. | Liquidity Facility Services Agreement dated April 2, 2011 between the Registrant and DSP Merrill Lynch Capital Limited (regarding liquidity facility for our bonus debentures). | (8) | ||
4.1. | Agreement by and between Dr. Reddy’s Laboratories Limited and Dr. Reddy’s Research Foundation regarding the undertaking of research dated February 27, 1997. | (1) | ||
4.2. | Dr. Reddy’s Laboratories Limited Employee Stock Option Scheme, 2002. | (2) | ||
4.3. | Sale and Purchase Agreement Regarding the Entire Share Capital of Beta Holding GmbH dated February 15th/16th 2006 | (4) | ||
4.4. | Dr. Reddy’s Employees ADR Stock Option Scheme, 2007. | (7) | ||
8. | List of subsidiaries, associates and joint ventures of the Registrant. | |||
23.1 | Consent of Independent Registered Public Accounting Firm | |||
99.1 | Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
99.2 | Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
99.3 | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
99.4 | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Previously filed on March 26, 2001 with the SEC along with Form |
(2) | Previously filed on October 31, 2002 with the SEC along with Form S-8. |
(3) | Previously filed with the Company’s Form 20-F for the fiscal year ended March 31, 2003. |
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Previously filed with the Company’s Form 20-F for the fiscal year ended March 31, 2006. |
(5) | Previously filed with the Company’s Form 20-F for the fiscal year ended March 31, 2010. |
(6) | Previously filed on March 5, 2007 with the SEC along with Form S-8. |
(7) | Previously filed with the Company’s Form 20-F for the fiscal year ended March 31, 2011. |
(8) | Incorporated by reference to Exhibit 99.1 to the Company’s Form 6-K dated September 25, 2015. |
(9) | Previously filed on September 5, 2018 with the SEC along with Form S-8. |
# | Certain confidential portions of this Exhibit were omitted because they both (i) are not material and (ii) are of the type that the Registrant treats as private and confidential. |
211 |
DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
The registrant hereby certifies that it meets all of the requirements for filing on Form 20–F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
DR. REDDY’S LABORATORIES LIMITED | |||
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By: | /s/Erez Israeli | ||
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By: | /s/Parag Agarwal | ||
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Hyderabad, India
June 23, 201630, 2021
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