6-K 1 drr0321_6k.htm FORM 6-K

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 6-K

 

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

UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarter Ended June 30, 2021

 

Commission File Number 1-15182

 

DR. REDDY’S LABORATORIES LIMITED

(Translation of registrant’s name into English)

 

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

Hyderabad, Telangana 500 034, India

+91-40-49002900

 

(Address of principal executive office)

 

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

 

Form 20-F x                       Form 40-F ¨

 

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

 

Yes ¨                       No x

 

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

 

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

 

Yes ¨                       No x

 

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

 

 

 

 

 

QUARTERLY REPORT

Quarter Ended June 30, 2021

 

Currency of Presentation and Certain Defined Terms

 

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

 

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

 

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

 

Except as otherwise stated in this report, all convenience translations from Indian rupees to U.S. dollars are at the certified foreign exchange rate of U.S.$1.00 = Rs.74.33, as published by Federal Reserve Board of Governors on June 30, 2021. No representation is made that the Indian rupee amounts have been, could have been or could be converted into U.S. dollars at such a rate or any other rate. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.

 

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

 

Forward-Looking Statements and Risk Factor Summary

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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TABLE OF CONTENTS

 

ITEM 1. FINANCIAL STATEMENTS 5
ITEM 2. OPERATING AND FINANCIAL REVIEW, TREND INFORMATION 30
ITEM 3. LIQUIDITY AND CAPITAL RESOURCES 35
ITEM 4. OTHER MATTERS 37
ITEM 5. EXHIBITS 37
SIGNATURES 38
EXHIBIT 99.1: REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 39

 

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ITEM 1. FINANCIAL STATEMENTS

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION

(in millions, except share and per share data)

 

       As of 
Particulars  Note   June 30, 2021   June 30, 2021   March 31, 2021 
       Convenience translation
(See Note 2(d))
         
ASSETS                   
Current assets                   
Cash and cash equivalents  4   U.S.$110   Rs.8,168   Rs.14,829 
Other investments  5    274    20,331    19,744 
Trade and other receivables  6    821    61,022    49,641 
Inventories  7    683    50,771    45,412 
Derivative financial instruments       10    780    1,218 
Tax assets       34    2,507    2,745 
Other current assets       202    15,042    14,509 
Total current assets before assets held for sale      U.S.$2,134   Rs.158,621   Rs.148,098 
Assets held for sale       2    155    151 
Total current assets      U.S.$2,136   Rs.158,776   Rs.148,249 
Non-current assets                   
Property, plant and equipment  8   U.S.$789   Rs.58,636   Rs.57,111 
Goodwill  9    62    4,615    4,568 
Other intangible assets  10    473    35,131    35,648 
Trade and other receivables  6    2    126    118 
Investment in equity accounted investees       49    3,639    3,375 
Other investments  5    79    5,857    4,958 
Deferred tax assets       142    10,592    10,630 
Other non-current assets       11    842    834 
Total non-current assets      U.S.$1,607   Rs.119,438   Rs.117,242 
Total assets      U.S.$3,743   Rs.278,214   Rs.265,491 
LIABILITIES AND EQUITY                   
Current liabilities                   
Trade and other payables      U.S.$385   Rs.28,607   Rs.23,744 
Short-term borrowings  11    354    26,299    23,136 
Long-term borrowings, current portion  11    12    908    864 
Provisions       47    3,478    3,435 
Tax liabilities       18    1,361    1,389 
Derivative financial instruments       7    504    326 
Bank overdraft       -    -    9 
Other current liabilities       409    30,368    30,488 
Total current liabilities      U.S.$1,231   Rs.91,525   Rs.83,391 
Non-current liabilities                   
Long-term borrowings  11   U.S.$83   Rs.6,166   Rs.6,299 
Deferred tax liabilities       1    67    338 
Provisions       1    59    58 
Other non-current liabilities       31    2,283    2,343 
Total non-current liabilities      U.S.$115   Rs.8,575   Rs.9,038 
Total liabilities      U.S.$1,347   Rs.100,100   Rs.92,429 
Equity                   
Share capital  12   U.S.$11   Rs.832   Rs.832 
Treasury shares  12    (24)   (1,816)   (1,967)
Share premium       122    9,087    8,887 
Share-based payment reserve       19    1,404    1,461 
Capital redemption reserve       2    173    173 
Special economic zone re-investment reserve       17    1,296    1,326 
Retained earnings       2,176    161,761    156,023 
Other components of equity       72    5,377    6,327 
Total equity      U.S.$2,396   Rs.178,114   Rs.173,062 
Total liabilities and equity      U.S.$3,743   Rs.278,214   Rs.265,491 

 

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

 

 5 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM INCOME STATEMENTS

(in millions, except share and per share data)

 

       For the three months ended June 30, 
Particulars  Note   2021   2021   2020 
       Convenience translation
(See Note 2(d))
         
Revenues  13   U.S.$662   Rs.49,194   Rs.44,175 
Cost of revenues       316    23,495    19,420 
Gross profit       346    25,699    24,755 
Selling, general and administrative expenses       202    15,045    12,786 
Research and development expenses       61    4,534    3,980 
Impairment of non-current assets       -    -    - 
Other income, net  14    (7)   (487)   (118)
Total operating expenses       257    19,092    16,648 
Results from operating activities (A)       89    6,607    8,107 
Finance income       11    845    838 
Finance expense       (3)   (193)   (233)
Finance income, net (B)  15    9    652    605 
Share of profit of equity accounted investees, net of tax (C)       2    166    77 
Profit before tax [(A)+(B)+(C)]       100    7,425    8,789 
Tax expense  16    23    1,717    2,996 
Profit for the period       U.S.$77   Rs.5,708   Rs.5,793 
Earnings per share:                   
Basic earnings per share of Rs.5/- each      U.S.$0.46   Rs.34.44   Rs.34.94 
Diluted earnings per share of Rs.5/- each      U.S.$0.46   Rs.34.34   Rs.34.86 

 

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

 

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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME

(in millions, except share and per share data)

 

 

   For the three months ended June 30, 
Particulars  2021   2021   2020 
   Convenience translation
(See Note 2(d))
         
Profit for the period  U.S.$77   Rs.5,708   Rs.5,793 
Other comprehensive (loss)/income               
Items that will not be reclassified subsequently to the consolidated income statement:               
Changes in the fair value of financial instruments  U.S.$(17)   Rs.(1,243)  Rs.215 
Tax impact on above items   4    293    - 
Total of items that will not be reclassified subsequently to the consolidated income statement  U.S.$(13)   Rs.(950)  Rs.215 
Items that will be reclassified subsequently to the consolidated income statement:               
Changes in the fair value of financial instruments  U.S.$-   Rs.-   Rs.(13)
Foreign currency translation adjustments   5    361    215 
Effective portion of changes in fair value of cash flow hedges, net   (7)   (534)   471 
Tax impact on above items   (2)   173    (156)
Total of items that will be reclassified subsequently to the consolidated income statement  U.S.$-   Rs.-   Rs.517 
Other comprehensive (loss)/income for the period, net of tax  U.S.$(13)   Rs.(950)  Rs.732 
Total comprehensive income for the period  U.S.$65   Rs.4,758   Rs.6,525 

 

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

 

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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY

(in millions, except share and per share data)

 

   Share
capital
   Share
premium
   Treasury
shares
   Share-
based
payment
reserve
   Fair value
reserve(1) 
   Foreign
currency
translation
reserve
   Hedging
reserve
   Capital
redemption
reserve
   Special
economic
zone re-
investment
reserve(2)
   Actuarial
 gains
/(losses)
   Retained
earnings
   Total 
Balance as of April 1, 2021 (A)  Rs.832   Rs.8,887   Rs.(1,967)  Rs.1,461   Rs.1,540   Rs.5,049   Rs.241   Rs.173   Rs.1,326   Rs.(503)  Rs.156,023   Rs.173,062 
Profit for the period   -    -    -    -    -    -    -    -    -    -    5,708    5,708 
Net change in fair value of equity instruments, net of tax benefit of Rs.293   -    -    -    -    (950)   -    -    -    -    -    -    (950)
Foreign currency translation adjustments   -    -    -    -    -    361    -    -    -    -    -    361 
Effective portion of changes in fair value of cash flow hedges, net of tax benefit of Rs.173   -    -    -    -    -    -    (361)   -    -    -    -    (361)
Total comprehensive income (B)  Rs.-   Rs.-   Rs.-   Rs.-   Rs.(950)  Rs.361   Rs.(361)  Rs.-   Rs.-   Rs.-   Rs.5,708   Rs.4,758 
Issue of equity shares on exercise of options   -*   200    151    (204)   -    -    -    -    -    -    -    147 
Share-based payment expense   -    -    -    147    -    -    -    -    -    -    -    147 
Total transactions (C)  Rs.-   Rs.200   Rs.151   Rs.(57)  Rs.-   Rs.-   Rs.-   Rs.-   Rs.-   Rs.-   Rs.-   Rs.294 
Transfer from special economic zone re-investment reserve on utilization   -    -    -    -    -    -    -    -    (30)   -    30    - 
Total (D)  Rs.-   Rs.-   Rs.-   Rs.-   Rs.-   Rs.-   Rs.-   Rs.-   Rs.(30)  Rs.-   Rs.30   Rs.- 
Balance as of June 30, 2021 [(A)+(B)+(C)+(D)]  Rs.832   Rs.9,087   Rs.(1,816)  Rs.1,404   Rs.590   Rs.5,410   Rs.(120)  Rs.173   Rs.1,296   Rs.(503)  Rs.161,761   Rs.178,114 
Convenience translation  (See note 2(d))  U.S.$11   U.S.$122   U.S.$(24)   U.S.$19   U.S.$8   U.S.$73   U.S.$(2)   U.S.$2   U.S.$17   U.S.$(7)   U.S.$2,176   U.S.$2,396 
                                                             
Balance as of April 1, 2020 (A)  Rs.831   Rs.8,495   Rs.(1,006)  Rs.1,223   Rs.(2,405)  Rs.4,343   Rs.(563)  Rs.173   Rs.-   Rs.(360)  Rs.144,247   Rs.154,988 
Profit for the period   -    -    -    -    -    -    -    -    -    -    5,793    5,793 
Net change in fair value of equity and debt instruments   -    -    -    -    202    -    -    -    -    -    -    202 
Foreign currency translation adjustments   -    -    -    -    -    215    -    -    -    -    -    215 
Effective portion of changes in fair value of cash flow hedges, net of tax expense of Rs.156   -    -    -    -    -    -    315    -    -    -    -    315 
Total comprehensive income (B)  Rs.-   Rs.-   Rs.-   Rs.-   Rs.202   Rs.215   Rs.315   Rs.-   Rs.-   Rs.-   Rs.5,793   Rs.6,525 
Issue of equity shares on exercise of options   -*   183    66    (157)   -    -    -    -    -    -    -    92 
Share-based payment expense   -    -    -    143    -    -    -    -    -    -    -    143 
Total transactions (C)  Rs.-   Rs.183   Rs.66   Rs.(14)  Rs.-   Rs.-   Rs.-   Rs.-   Rs.-   Rs.-   Rs.-   Rs.235 
Balance as of June 30, 2020 [(A)+(B)+(C)]  Rs.831   Rs.8,678   Rs.(940)  Rs.1,219   Rs.(2,203)  Rs.4,558   Rs.(248)  Rs.173   Rs.-   Rs.(360)  Rs.150,040   Rs.161,748 

 

* Rounded to the nearest million.

 

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

 

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

 

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

 

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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(in millions, except share and per share data)

 

   For the three months ended June 30, 
Particulars  2021   2021   2020 
   Convenience
translation
(See Note 2(d))
         
Cash flows (used in)/from operating activities:               
Profit for the period  U.S.$77   Rs.5,708   Rs.5,793 
Adjustments for:               
Tax expense   23    1,717    2,996 
Fair value changes and profit on sale of units of  mutual funds, net   (2)   (126)   (258)
Depreciation and amortization   39    2,905    3,140 
Allowance for credit losses (on trade receivables and other advances)   1    87    54 
(Gain)/loss on sale or de-recognition of non-current assets, net   (-*)    (29)   1 
Share of profit of equity accounted investees   (2)   (166)   (77)
Foreign exchange (gain)/loss, net   (6)   (416)   620 
Interest income, net   (-*)    (16)   (48)
Equity settled share-based payment expense   2    147    143 
Changes in operating assets and liabilities:               
Trade and other receivables   (154)   (11,479)   3,659 
Inventories (Refer to Note 7 for inventory write downs)   (72)   (5,359)   (3,649)
Trade and other payables   64    4,787    2,403 
Other assets and other liabilities, net   (-*)    (22)   (2,980)
Cash (used in)/generated from operations   (30)   (2,262)   11,797 
Income tax paid, net   (16)   (1,186)   (884)
Net cash (used in)/from operating activities  U.S.$(46)   Rs.(3,448)  Rs.10,913 
Cash flows used in investing activities:               
Expenditures on property, plant and equipment   (43)   (3,200)   (1,499)
Proceeds from sale of property, plant and equipment   1    47    3 
Expenditures on other intangible assets   (2)   (137)   (392)
Payment for acquisition of business (Refer to Note 24 for details)   -    -    (14,990)
Purchase of other investments   (249)   (18,524)   (34,024)
Proceeds from sale of other investments   215    15,957    34,672 
Interest received   3    250    506 
Net cash used in investing activities  U.S.$(75)   Rs.(5,607)  Rs.(15,724)
Cash flows from financing activities:               
Proceeds from issuance of equity shares (including treasury shares)   2    147    92 
Proceeds from short-term borrowings   36    2,662    5,617 
Proceeds from long-term borrowings   -    -    3,800 
Repayment of long-term borrowings   -    -    (1,897)
Payment of principal portion of lease liabilities   (3)   (206)   (148)
Interest paid   (5)   (342)   (283)
Net cash from financing activities  U.S.$30   Rs.2,261   Rs.7,181 
Net (decrease)/increase in cash and cash equivalents   (91)   (6,794)   2,370 
Effect of exchange rate changes on cash and cash equivalents   2    142    68 
Cash and cash equivalents at the beginning of the period   199    14,820    1,962 
Cash and cash equivalents at the end of the period (Refer to Note 4 for details)  U.S.$            110   Rs.8,168   Rs.4,400 

 

* Rounded to the nearest million.

 

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

 

 9 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

1.Reporting entity

 

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

 

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

 

2.Basis of preparation of financial statements

 

a) Statement of compliance

 

These unaudited condensed consolidated interim financial statements (hereinafter referred to as “interim financial statements”) are prepared in accordance with IAS 34, “Interim Financial Reporting” as issued by the International Accounting Standards Board (“IASB”). They do not include all of the information required for a complete set of annual financial statements and should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 20-F for the fiscal year ended March 31, 2021. These interim financial statements were authorized for issuance by the Company’s Board of Directors on July 27, 2021.

 

b) Significant accounting policies

 

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

 

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

 

c) Basis of measurement

 

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

 

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

 

 10 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

2.Basis of preparation of financial statements (continued)

 

d) Convenience translation

 

These interim financial statements have been prepared in Indian rupees. Solely for the convenience of the reader, these interim financial statements as of and for the three months ended June 30, 2021 have been translated into U.S. dollars at the certified foreign exchange rate of U.S.$1.00 = Rs.74.33, as published by the Federal Reserve Board of Governors on June 30, 2021. No representation is made that the Indian rupee amounts have been, could have been or could be converted into U.S. dollars at such a rate or any other rate. Such convenience translation is not subject to review by the Company’s independent registered public accounting firm.

 

e) Functional and presentation currency

 

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

 

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

 

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

 

f) Use of estimates and judgments

 

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

 

 11 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

3. Segment reporting

 

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

 

The Company’s reportable operating segments are as follows:

 

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

 

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

 

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

 

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

 

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

 

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

 

 12 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

3. Segment reporting (continued)

 

Information about segments:  For the three months ended June 30, 2021   For the three months ended June 30, 2020 
Segments  Global
Generics
   PSAI   Proprietary
Products
   Others   Total   Global
Generics
   PSAI   Proprietary
Products
   Others   Total 
Revenues(1)  Rs.41,113   Rs.7,540   Rs.59   Rs.482   Rs.49,194   Rs.35,075   Rs.8,553   Rs.56   Rs.491   Rs.44,175 
Gross profit  Rs.23,719   Rs.1,630   Rs.45   Rs.305   Rs.25,699   Rs.21,526   Rs.2,856   Rs.56   Rs.317   Rs.24,755 
Selling, general and administrative expenses                       15,045                        12,786 
Research and development expenses                       4,534                        3,980 
Impairment of non-current assets                       -                        - 
Other income, net                       (487)                       (118)
Results from operating activities                      Rs.6,607                       Rs.8,107 
Finance income, net                       652                        605 
Share of profit of equity accounted investees, net of tax                       166                        77 
Profit before tax                      Rs.7,425                       Rs.8,789 
Tax expense                       1,717                        2,996 
Profit for the period                      Rs.5,708                       Rs.5,793 

 

(1)Revenues for the three months ended June 30, 2021 and 2020 do not include inter-segment revenues from the PSAI segment to the Global Generics segment, which amount to Rs.1,322 and Rs.1,537, respectively.

 

Analysis of revenues by geography:

 

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

 

   For the three months ended June 30, 
Country  2021   2020 
India  Rs.11,138   Rs.7,045 
United States   18,639    18,294 
Russia   3,527    3,272 
Others(1)   15,890    15,564 
   Rs.49,194   Rs.44,175 

 

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

 

 13 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

4. Cash and cash equivalents

 

Cash and cash equivalents consist of the following:

 

   As of 
   June 30, 2021   March 31, 2021 
Cash on hand  Rs.1   Rs.1 
Balances with banks   7,807    14,324 
Term deposits with banks (original maturities less than 3 months)   360    504 
Cash and cash equivalents in the statements of financial position  Rs.8,168   Rs.14,829 
Restricted cash balances included above          
Balance in unclaimed dividends and debenture interest account  Rs.84   Rs.106 
Balances in Escrow account pursuant to the Business Transfer Agreement with Wockhardt Limited (Refer to Note 24 for details)   40    40 
Other restricted cash balances   99    82 

 

   As of 
   June 30, 2021   June 30, 2020 
Cash and cash equivalents in the statements of cash flow  Rs.8,168   Rs.4,400 

 

5. Other investments

 

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

 

   As of June 30, 2021   As of March 31, 2021 
   Cost   Unrealized
gain/(loss)
   Fair value/
amortized
cost(2)
   Cost   Unrealized
gain/(loss)
   Fair value/
amortized
cost(2)
 
Current portion                              
In units of mutual funds  Rs.14,493   Rs.95   Rs.14,588   Rs.13,197   Rs.66   Rs.13,263 
In bonds   522    -    522    522    -    522 
Term deposits with banks   5,221    -    5,221    5,959    -    5,959 
   Rs.20,236   Rs.95   Rs.20,331   Rs.19,678   Rs.66   Rs.19,744 
Non-current portion                              
In equity securities(1)  Rs.2,701   Rs.589   Rs.3,290   Rs.2,701   Rs.1,832   Rs.4,533 
In limited liability partnership firm   400    -    400    400    -    400 
Term deposits with banks   2,142    -    2,142    -    -    - 
Others   25    -    25    25    -    25 
   Rs.5,268   Rs.589   Rs.5,857   Rs.3,126   Rs.1,832   Rs.4,958 

 

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

 

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

 

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

 

Investments in units of mutual funds Fair value through profit and loss
Investments in bonds, term deposits with banks and others Amortized cost
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 interests Fair value through profit and loss

 

 14 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

6. Trade and other receivables

 

   As of 
   June 30, 2021   March 31, 2021 
Current        
Trade and other receivables, gross  Rs.62,430   Rs.50,937 
Less: Allowance for credit losses   (1,408)   (1,296)
Trade and other receivables, net  Rs.61,022   Rs.49,641 
Non-current          
Trade and other receivables, gross(1)  Rs.126   Rs.118 
Less: Allowance for credit losses   -    - 
Trade and other receivables, net  Rs.126   Rs.118 

 

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

 

Pursuant to an arrangement with a bank, the Company sells to the bank certain of its trade receivables forming part of its Global Generics segment, on a non-recourse basis. The receivables sold were mutually agreed upon with the bank after considering the creditworthiness and contractual terms with the customer, including any gross to net adjustments (due to rebates, discounts etc.) from the contracted amounts. As a result, the receivables sold are generally lower than the total net amount of trade receivables. The Company has transferred substantially all the risks and rewards of ownership of such receivables sold to the bank, and accordingly, the same are derecognized in the statements of financial position. As on June 30, 2021 and March 31, 2021, the amount of trade receivables de-recognized pursuant to the aforesaid arrangement was Rs.1,045 and Rs.9,254, respectively.

 

7. Inventories

 

Inventories consist of the following:

 

   As of 
   June 30, 2021   March 31, 2021 
Raw materials  Rs.13,644   Rs.12,287 
Work-in-progress   10,535    10,009 
Finished goods (includes stock-in-trade)   23,157    19,829 
Packing materials, stores and spares   3,435    3,287 
   Rs.50,771   Rs.45,412 

 

Details of inventories recognized in the interim income statement are as follows:

 

   For the three months ended June 30, 
   2021   2020 
Raw materials, consumables and changes in finished goods and work in progress  Rs.15,994   Rs.12,043 
Inventory write-downs   1,027    1,153 

 

8. Property, plant and equipment

 

  

For the three months ended

June 30,

   For the  year ended
March 31,
 
   2021   2020   2021 
Opening balance  Rs.57,111   Rs.52,332   Rs.   52,332 
Cost of assets acquired during the period(1)   3,329    3,537    13,159 
Assets acquired through business combinations(2)   -    373    373 
Net book value of assets disposed of during the period   (43)   (10)   (140)
Net book value of assets held for sale   -    -    (151)
Depreciation expense   (1,973)   (2,120)   (8,527)
Impairment loss   -    -    (46)
Effect of changes in foreign exchange rates   212    71    111 
Closing balance  Rs.58,636   Rs.54,183   Rs.57,111 

 

 15 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

8. Property, plant and equipment (continued)

 

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

 

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

 

Capital commitments

 

As of June 30, 2021 and March 31, 2021, the Company was committed to spend Rs.10,800 and Rs.9,841, respectively, under agreements to purchase property, plant and equipment. This amount is net of capital advances paid in respect of such purchase commitments.

 

9. Goodwill

 

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

 

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

 

   As of 
   June 30, 2021   March 31, 2021 
Opening balance, gross  Rs.20,852   Rs.20,278 
Goodwill arising on business combinations(1)   -    530 
Effect of changes in foreign exchange rates   47    44 
Impairment loss(2)    (16,284)   (16,284)
Closing balance  Rs.4,615   Rs.4,568 

 

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

 

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

 

10. Other intangible assets

 

  

For the three months ended

June 30,

   For the year ended
March 31,
 
   2021   2020   2021 
Opening balance  Rs.35,648   Rs.27,659   Rs.27,659 
Cost of assets acquired during the period(1)(2)   191    398    6,411 
Assets acquired through business combinations(3)   -    14,141    14,888 
Net book value of assets disposed of during the period   (1)   -    - 
Amortization expense   (932)   (1,020)   (4,269)
Impairment loss(4)   -    -    (8,542)
Effect of changes in foreign exchange rates   225    (4)   (499)
Closing balance  Rs.35,131   Rs.41,174   Rs.35,648 

 

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

 

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

 

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

 

(4)Total impairment loss for the year ended March 31, 2021 was Rs.8,542, of which Rs.3,291 was attributable to impairment of Xeglyze® forming part of Company’s Proprietary Products segment , Rs.3,180 was attributable to impairment of gNuvaring forming part of the Company’s Global Generics segment and the balance of Rs.2,071 was attributable to other product related intangibles forming part of the Company’s Global Generics segment.

 

 16 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

10. Other intangible assets (continued)

  

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

 

Particulars of the asset  Acquired from  Carrying cost 
Select portfolio of branded generics business  Wockhardt Limited  Rs.14,041 
Select portfolio of dermatology, respiratory and pediatric assets  UCB India Private Limited and affiliates   4,443 
Intellectual property rights relating to PPC-06 (tepilamide fumarate)  Xenoport, Inc.   4,144 
Various ANDAs  Teva and an affiliate of Allergan   3,867 
Commercialization rights for an anti-cancer biologic agent  Eisai Company Limited   1,887 
Select Anti-Allergy brands  Glenmark Pharmaceuticals Limited   1,462 
Habitrol® brand   Novartis Consumer Health Inc.   1,155 

 

11. Loans and borrowings

 

Short-term borrowings

 

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

 

Short-term borrowings consist of the following:

 

   As of 
   June 30, 2021   March 31, 2021 
Pre-shipment credit  Rs.13,950   Rs.10,300 
Other working capital borrowings   12,349    12,836 
   Rs.26,299   Rs.23,136 

 

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

 

  As of
  June 30, 2021   March 31, 2021
  Currency(1)   Interest Rate(2)   Currency(1)   Interest Rate(2)
Pre-shipment credit INR   3 Months T-bill +25 bps to 30 bps   INR   3 Months T-bill + 30 bps
  -   -   INR   5.75%
Other working capital borrowings U.S.$   (2.20)% to (1.80)%(3)   U.S.$   (2.20)% to (1.80)% (3)
  RUB   3.00% to 3.40% and 6 Months MosPrime + 65 bps   RUB   3.00% to 3.40% and 5.55%
  MXN   TIIE + 1.20%   MXN   TIIE + 1.20%
  INR   4.00% and 5.65%   INR   4.00%
  BRL   CDI + 1.79%   BRL   4.00%
  UAH   6.00%   UAH   4.75%

  

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

 

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

 

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

 

 17 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

11. Loans and borrowings (continued)

 

Long-term borrowings

 

Long-term borrowings consist of the following:

 

   As of 
   June 30, 2021   March 31, 2021 
   Non – Current   Current   Non – Current   Current 
Non-convertible debentures by the APSL subsidiary(1)  Rs.3,800   Rs.-   Rs.3,800   Rs.- 
Obligations under leases(2)   2,366    908    2,499    864 
   Rs.6,166   Rs.908   Rs.6,299   Rs.864 

 

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

 

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

 

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

 

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

 

(1)“INR” means Indian rupees.

 

Uncommitted lines of credit from banks

 

The Company had uncommitted lines of credit of Rs.36,216 and Rs.38,766 as of June 30, 2021 and March 31, 2021, respectively, from its banks for working capital requirements. The Company draw upon these lines of credit based on its working capital requirements.

 

12. Share capital

 

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

 

   As of 
   June 30, 2021   June 30, 2020 
   Number   Amount   Number   Amount 
Opening number of equity shares/share capital   166,301,231   Rs.832    166,172,082   Rs.831 
Add: Equity shares issued pursuant to employee stock option plans(1)   58,903    -*   60,434    -*
Closing number of equity shares/share capital   166,360,134   Rs.832    166,232,516   Rs.831 
Treasury shares(2)   531,421   Rs.1,816    370,200   Rs.940 

 

* Rounded off to nearest million.

 

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

 

 18 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

12. 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 three months ended June 30, 2021 and 2020, an aggregate of 43,780 and 25,750 equity shares, respectively, were issued as a result of the exercise of vested options granted to employees pursuant to the Dr. Reddy’s Employees Stock Option Scheme, 2018. The options exercised had an exercise price of Rs.2,607, Rs.2,814 or Rs.3,679 per share. Upon the exercise of such options, the amount of compensation cost (computed using the grant date fair value) previously recognized in the “share based payment reserve” was transferred to “share premium” in the unaudited condensed consolidated interim statements of changes in equity. In addition, any difference between the carrying amount of treasury shares and the consideration received was recognized in the “share premium”. As of June 30, 2021 and March 31, 2021, the ESOS Trust had outstanding 531,421 and 575,201 shares, respectively, which it purchased from the secondary market for an aggregate consideration of Rs.1,816 and Rs.1,967, respectively.

 

13. Revenue from contracts with customers

 

   For the three months ended June 30, 
   2021   2020 
Sales  Rs.48,262   Rs.43,244 
Service income   704    651 
License fees   228    280 
   Rs.49,194   Rs.44,175 

 

Analysis of revenues by geography:

 

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

 

   For the three months ended June 30, 
Country  2021   2020 
India  Rs.11,138   Rs.7,045 
United States   18,639    18,294 
Russia   3,527    3,272 
Others(1)   15,890    15,564 
   Rs.49,194   Rs.44,175 

 

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

 

Refund liabilities on account of sales returns amounting to Rs.2,851 and Rs.2,824 as of June 30, 2021 and March 31, 2021, respectively, have been included in provisions forming part of current liabilities.

 

14. Other income, net

 

Other income, net consists of the following:

 

   For the three months ended June 30, 
   2021   2020 
(Gain)/loss on sale/disposal of non-current assets, net  Rs.(29)  Rs.1 
Sale of spent chemicals   (76)   (53)
Scrap sales   (48)   (21)
Miscellaneous income, net   (334)   (45)
   Rs.(487)  Rs.(118)

 

 19 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

15. Finance income, net

 

Finance income, net consists of the following:

 

   For the three months ended June 30, 
   2021   2020 
Interest income  Rs.209   Rs.281 
Fair value changes and profit on sale of units of mutual funds, net   126    258 
Foreign exchange gain   510    299 
Finance income (A)  Rs.845   Rs.838 
Interest expense   (193)   (233)
Finance expense (B)  Rs.(193)  Rs.(233)
Finance income, net [(A)+(B)]  Rs.652   Rs.605 

 

16. Income taxes

 

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

 

   For the three months ended June 30, 
   2021   2020 
Weighted average tax rate   23.12%   34.09%
Tax expense  Rs.1,717   Rs.2,996 
Tax (benefit)/expense recognised directly in the equity  Rs.(466)  Rs.156 

 

The effective rate of tax for the three months ended June 30, 2021 was lower as compared to the three months ended June 30, 2020, primarily on account of the changes in the Company’s jurisdictional mix of earnings (i.e., an increase in the proportion of the Company’s profits from lower tax jurisdictions and decrease in the proportion of the Company’s profits from higher tax jurisdictions) for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020.

 

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

 

17.Nature of expense

 

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

 

Depreciation  For the three months ended June 30, 
   2021   2020 
Cost of revenues  Rs.1,351   Rs.1,534 
Selling, general and administrative expenses   369    346 
Research and development expenses   253    240 
   Rs.1,973   Rs.2,120 

 

Amortization  For the three months ended June 30, 
   2021   2020 
Cost of revenues  Rs.-   Rs.- 
Selling, general and administrative expenses   925    995 
Research and development expenses   7    25 
   Rs.932   Rs.1,020 

 

 20 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

17. Nature of expense (continued)

 

Employee benefits  For the three months ended June 30, 
   2021   2020 
Cost of revenues  Rs.2,902   Rs.2,792 
Selling, general and administrative expenses   5,433    4,759 
Research and development expenses   1,129    1,173 
   Rs.9,464   Rs.8,724 

 

18. Employee benefit plans

 

Gratuity benefits provided by the parent company

 

In accordance with applicable Indian laws, the Company has a defined benefit plan which provides for gratuity payments (the “Gratuity Plan”) and covers certain categories of employees in India. The Gratuity Plan provides a lump sum gratuity payment to eligible employees at retirement or termination of their employment. The amount of the payment is based on the respective employee’s last drawn salary and the years of employment with the Company. Effective September 1, 1999, the Company established the Dr. Reddy’s Laboratories Gratuity Fund (the “Gratuity Fund”) to fund the Gratuity Plan. Liabilities in respect of the Gratuity Plan are determined by an actuarial valuation, based upon which the Company makes contributions to the Gratuity Fund. Trustees administer the contributions made to the Gratuity Fund. Amounts contributed to the Gratuity Fund are invested in bonds issued by the Government of India and in debt securities and equity securities of Indian companies. The liability recorded by the Company towards this obligation was Rs.650 and Rs.631 as of June 30, 2021 and March 31, 2021, respectively.

 

Compensated absences

 

The Company provides for accumulation of compensated absences by certain categories of its employees. These employees can carry forward a portion of the unutilized compensated absences and utilize them in future periods or receive cash in lieu thereof as per the Company’s policy. The Company records a liability for compensated absences in the period in which the employee renders the services that increases this entitlement. The total liability recorded by the Company towards this obligation was Rs.1,027 and Rs.1,130 as of June 30, 2021 and March 31, 2021, respectively.

 

19. Employee stock incentive plans

 

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

 

Grants under Stock Incentive Plans

 

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

 

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

 

The above grants were made on May 13, 2021.

 

 21 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

19. Employee stock incentive plans (continued)

 

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

 

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

 

The above grants were made on May 19, 2020.

 

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

 

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

 

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

 

Share-based payment expense

 

   For the three months ended June 30, 
   2021   2020 
Equity settled share-based payment expense(1)  Rs.147   Rs.143 
Cash settled share-based payment expense(2)   77    51 
   Rs.224   Rs.194 

 

(1)As of June 30, 2021 and 2020, there was Rs.1,076 and Rs.1,154, respectively, of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of 2.16 years and 2.30 years, respectively.

 

(2)Certain of the Company’s employees are eligible to receive share based payment awards that are settled in cash. These awards would vest only upon satisfaction of certain service conditions which range from 1 to 4 years. These awards entitle the employees to a cash payment on the vesting date. The amount of the cash payment is determined based on the price of the Company’s ADSs at the time of vesting. As of June 30, 2021 and 2020, there was Rs.247 and Rs.94, respectively, of total unrecognized compensation cost related to unvested awards. This cost is expected to be recognized over a weighted-average period of 2.15 years and 1.90 years, respectively. This scheme does not involve dealing in or subscribing to or purchasing securities of the Company, directly or indirectly.

 

20. Related parties

 

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

 

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

 

 22 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

20. Related parties (continued)

 

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

 

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

 

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

 

The following is a summary of significant related party transactions:

 

   For the three months ended  June 30, 
   2021   2020 
Research and development services received  Rs.26   Rs.27 
Sale of goods   8    - 
Lease rentals received   -*   -*
Lease rentals paid   10    9 
Catering expenses paid   67    72 
Hotel expenses paid   4    4 
Facility management services paid   9    9 
Purchase of solar power   34    34 
Civil works   17    2 
Professional consultancy services paid   22    -*
Contributions towards social development   128    58 
Salaries to relatives of key management personnel   4    3 

* Rounded to the nearest million.

 

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

 

   As of 
   June 30, 2021   March 31, 2021 
Key management personnel and close members of  their families  Rs.8   Rs.8 
Other related parties   76    72 

 

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

 

   As of 
   June 30, 2021   March 31, 2021 
Due to related parties  Rs.37   Rs.93 

 

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

 

   For the three months ended June 30, 
   2021   2020 
Salaries and other benefits  Rs.165   Rs.196 
Contributions to defined contribution plans   8    8 
Commission to directors   94    85 
Share-based payments expense   53    54 
   Rs.320   Rs.343 

 

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

 

 23 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

21. Financial instruments

 

Financial instruments by category

 

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

 

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

Total fair
value 

   Total carrying
value
   Total fair
value
 
Assets:                
Cash and cash equivalents  Rs.8,168   Rs.8,168   Rs.14,829   Rs.14,829 
Other investments(1)   26,188    26,188    24,702    24,702 
Trade and other receivables   61,148    61,148    49,759    49,759 
Derivative financial assets   780    780    1,218    1,218 
Other assets(2)   2,591    2,591    2,626    2,626 
Total  Rs.98,875   Rs.98,875   Rs.93,134   Rs.93,134 
Liabilities:                    
Trade and other payables  Rs.28,607   Rs.28,607   Rs.23,744   Rs.23,744 
Derivative financial liabilities   504    504    326    326 
Long-term borrowings   7,074    7,074    7,163    7,163 
Short-term borrowings   26,299    26,299    23,136    23,136 
Bank overdraft   -    -    9    9 
Other liabilities and provisions(3)   24,644    24,644    23,233    23,233 
Total  Rs.87,128   Rs.87,128   Rs.77,611   Rs.77,611 

 

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

 

(2)Other assets that are not financial assets (such as receivables from statutory authorities, export benefit receivables, prepaid expenses, advances paid and certain other receivables) of Rs.13,293 and Rs.12,717 as of June 30, 2021 and March 31, 2021, respectively, are not included.

 

(3)Other liabilities and provisions that are not financial liabilities (such as statutory dues payable, deferred revenue, advances from customers and certain other accruals) of Rs.11,544 and Rs.13,091 as of June 30, 2021 and March 31, 2021, respectively, are not included.

 

Fair value hierarchy

 

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

 

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

 

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

 

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

 

Particulars  Level 1   Level 2   Level 3   Total 
FVTPL - Financial asset - Investments in units of mutual funds  Rs.14,588   Rs.-   Rs.-   Rs.14,588 
FVTPL - Financial asset - Investment in limited liability partnership firm interests   -    -    400    400 
FVTPL - Financial asset - Investments in equity securities   -    -    1    1 
FVTOCI - Financial asset - Investments in equity securities   3,289    -    -    3,289 
Derivative financial instruments – net gain/(loss) on outstanding foreign exchange forward, option and swap contracts and interest rate swap contracts(1)   -    276    -    276 

 

 24 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

21. Financial instruments (continued)

 

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

 

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

 

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

 

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

 

Hedges of foreign currency exchange rate risks

 

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

 

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

 

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

 

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

 

   For the three months ended June 30, 
   2021   2020 
Net loss recognized in finance costs in respect of foreign exchange derivative contracts and cross currency interest rate swaps contracts  Rs.(539)  Rs.(496)
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   (534)   471 
Net gain/(loss) reclassified from equity and recognized as component of revenue occurrence of forecasted transaction   70    (144)

 

The net carrying amount of the Company’s “hedging reserve” as a component of equity before adjusting for tax impact was a loss of Rs.133 as of June 30, 2021, as compared to a gain of Rs.401 as of March 31, 2021.

 

 25 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

22. Contingencies

 

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

 

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

 

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

 

Other product and patent related matters

 

Ranitidine Recall and Litigation

 

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

 

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

 

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

 

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

 

 26 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

22. Contingencies (continued)

 

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 interim financial statements of the Company.

 

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 (“SEC”) and Securities Exchange Board of India. On July 6, 2021 the Company received a subpoena from the SEC for the production of documents pertaining to certain CIS geographies, and the Company is in the process of responding to the same. 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. On or about June 23, 2021, the Texas AG contacted the Company’s counsel to request additional information related to the Texas AG’s investigation for the time-period of October 1, 2003 through February 29, 2012. The Company continues to cooperate with this investigation.

 

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

 

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

 

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

 

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

 

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

 

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

 

 27 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

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

 

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

 

24. Business Transfer Agreement with Wockhardt Limited

 

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

 

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

 

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

 

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

 

a)an amount of Rs.14,830 to be paid on the date of closing;
b)an amount of Rs.670 to be deposited in an escrow account which shall be released subject to adjustments for, inter alia, net working capital, employee liabilities and certain other contractual and statutory liabilities;
c)an amount of Rs.3,000 (the “Holdback Amount”) which shall be released as follows:
·If the revenue from sales of the products forming part of the Business Undertaking during the twelve (12) months post-closing exceeds Rs.4,800, the Company will be required to pay to Wockhardt an amount equal to two (2) times the amount by which the revenue exceeds Rs.4,800, subject to the maximum of the Holdback Amount.

 

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

 

The transaction was completed on June 10, 2020.

 

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

 

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

 

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

 

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

 

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

 

 28 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

24. Business Transfer Agreement with Wockhardt Limited (continued)

 

Acquisition related costs amounted to Rs.60 and were excluded from the consideration transferred and were recognized as expense under “Selling, general and administrative expenses” in the consolidated income statements for the year ended March 31, 2021. The amount of revenues included in the consolidated income statements for the three months ended June 30, 2020 and for the year ended March 31, 2021 pertaining to the acquired business since June 10, 2020 was Rs.171 and Rs.3,887, respectively.

 

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

 

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

 

25. Impact of COVID-19

 

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

 

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

 

26. The Code on Social Security, 2020

 

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

 

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

 

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

 

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

No observations noted.

No EIR will be issued but Remote Record Review Summary will be issued in six months from the date of inspection.

 

28. Subsequent events

 

None

 

 29 

 

 

ITEM 2. OPERATING AND FINANCIAL REVIEW, TREND INFORMATION

 

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

 

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

 

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

 

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

   For the three months ended June 30, 
   2021   2020     
   Rs. in
millions
   % of
Revenues
   Rs. in
millions
   % of
Revenues
   Increase/
(Decrease)
 
Revenues  Rs.49,194    100.0%  Rs.44,175    100.0%   11%
Gross profit   25,699    52.2%   24,755    56.0%   4%
Selling, general and administrative expenses   15,045    30.6%   12,786    28.9%   18%
Research and development expenses   4,534    9.2%   3,980    9.0%   14%
Impairment of non-current assets   -    0.0%   -    0.0%   0%
Other income, net   (487)   (1.0%)   (118)   (0.3%)   313%
Results from operating activities   6,607    13.4%   8,107    18.4%   (19)%
Finance income, net   652    1.3%   605    1.4%   8%
Share of profit of equity accounted investees, net of  tax   166    0.3%   77    0.2%   116%
Profit before tax   7,425    15.1%   8,789    19.9%   (16)%
Tax expense   1,717    3.5%   2,996    6.8%   (43)%
Profit for the period  Rs.5,708    11.6%  Rs.5,793    13.1%   (1)%

 

Revenues

 

Our overall consolidated revenues were Rs.49,194 million for the three months ended June 30, 2021, an increase of 11% as compared to Rs.44,175 million for the three months ended June 30, 2020.

 

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

 

   For the three months ended June 30, 
   2021   2020     
   Rs. in
millions
   Revenues
% of
Total
   Rs. In
millions
   Revenues
% of
Total
   Increase/
(Decrease)
 
Global Generics  Rs.41,113    84%  Rs.35,075    80%   17%
Pharmaceutical Services and Active Ingredients   7,540    15%   8,553    19%   (12)%
Proprietary Products   59    0%   56    0%   5%
Others   482    1%   491    1%   (2)%
Total  Rs.49,194    100%  Rs.44,175    100%   11%

 

 30 

 

 

Segment Analysis

 

Global Generics

 

Revenues from our Global Generics segment were Rs.41,113 million for the three months ended June 30, 2021, an increase of 17% as compared to Rs.35,075 million for the three months ended June 30, 2020. The revenue increase was in all of the four business geographies of this segment: North America (the United States and Canada), Europe, India, and “Emerging Markets” (which is comprised of Russia, other countries of the former Soviet Union, Romania and certain other countries from our “Rest of the World” markets, including South Africa, China, Brazil and Australia).

 

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

 

·an increase of approximately 17% resulting from new products launched during the period;

 

·an increase of approximately 10% resulting from a net increase in the sales volumes of existing products in this segment; and

 

·the foregoing was partially offset by a decrease of approximately 10% resulting from the net impact of changes in sales prices of the products in this segment.

 

North America (the United States and Canada): Our Global Generics segment’s revenues from North America (the United States and Canada) were Rs.17,390 million for the three months ended June 30, 2021, an increase of 1% as compared to Rs.17,282 million for the three months ended June 30, 2020. In U.S. dollar absolute currency terms (i.e., U.S. dollars without taking into account the effect of currency exchange rates), such revenues increased by 2% in the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.

 

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

 

During the three months ended June 30, 2021, we launched four new products in the United States. These are sapropterin dihydrochloride powder for oral solution, albendazole tablets, ertapenem injection and icosapent ethyl capsules. We also launched two new products in Canada.

 

During the three months ended June 30, 2021, we made two new ANDA filing with the U.S. FDA. As of June 30, 2021, we had 93 filings pending approval with the U.S. FDA, which includes 90 ANDAs and three NDAs filed under section 505(b)(2). Out of these 93 filings, 47 are Paragraph IV filings and we believe we are the first to file with respect to 24 of these filings.

 

Europe: Our Global Generics segment’s revenues from Europe are primarily derived from Germany, the United Kingdom, Italy, France and Spain. Such revenues were Rs.3,994 million for the three months ended June 30, 2021, an increase of 12% as compared to Rs 3,551 million for the three months ended June 30, 2020. This increase was primarily on account of new products launched between July 1, 2020 and June 30, 2021 and an increase in volumes of our existing products, partly offset by a decrease in prices of our existing products.

 

India: Our Global Generics segment’s revenues from India for the three months ended June 30, 2021 were Rs.10,600 million, an increase of 69% as compared to Rs.6,260 million for the three months ended June 30, 2020. This growth was attributable to an increase in sales volumes and sales prices of our existing products and revenues from new products launched between July 1, 2020 and June 30, 2021. During the three months ended June 30, 2021, we launched six new brands in India.

 

 31 

 

 

According to IQVIA in its report for the three months ended June 30, 2021, our secondary sales in India grew by 60.5% during such period, as compared to the India pharmaceutical market’s growth of 39.2%.

 

Emerging Markets: Our Global Generics segment’s revenues from “Emerging Markets” (which is comprised of Russia, other countries of the former Soviet Union, Romania and certain other countries from our “Rest of the World” markets, including South Africa, China, Brazil and Australia) for the three months ended June 30, 2021 were Rs.9,129 million, an increase of 14% as compared to Rs.7,982 million for the three months ended June 30, 2020.

 

Russia: Our Global Generics segment’s revenues from Russia for the three months ended June 30, 2021 were Rs.3,527 million, an increase of 8% as compared to Rs.3,272 million for the three months ended June 30, 2020. In Russian rouble absolute currency terms (i.e., Russian roubles without taking into account the effect of currency exchange rates), such revenues increased by 14%. The increase in revenues was primarily on account of an increase in sales prices and sales volumes of our existing products and contribution from new products launched between July 1, 2020 and June 30, 2021. Our over-the-counter (“OTC”) division’s revenues from Russia for the three months ended June 30, 2021 were 49% of our total revenues from Russia.

 

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

 

   For the two months ended May 31, 2021 
   Dr. Reddy's Laboratories   Russian
pharmaceutical
market
 
   Sales value   Volume   Sales value   Volume 
Prescription (Rx)   8.8%   8.1%   12.9%   2.4%
Over-the-counter (OTC)   10.4%   8.9%   3.3%   (9.7)%
Total (Rx + OTC)   9.6%   8.4%   8.1%   (5.7)%

 

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.1,438 million for the three months ended June 30, 2021, an increase of 4% as compared to Rs.1,388 million for the three months ended June 30, 2020. This increase was largely attributable to additional revenues from new products launched between July 1, 2020 and June 30, 2021, partially offset by a reduction in the prices and decrease in sales volumes of certain of our existing products.

 

“Rest of the World” Markets: We refer to all markets of this segment other than North America (the United States and Canada), Europe, Russia and other countries of the former Soviet Union, Romania and India as our “Rest of the World” markets. Our Global Generics segment’s revenues from our “Rest of the World” markets were Rs.4,163 million for the three months ended June 30, 2021, an increase of 25% as compared to Rs.3.322 million for the three months ended June 30, 2020. This increase was largely attributable to additional revenues from new products launched between July 1, 2020 and June 30, 2021, partially offset by a reduction in the prices and decrease in sales volumes of certain of our existing products.

 

Pharmaceutical Services and Active Ingredients (“PSAI”)

 

Our PSAI segment’s revenues for the three months ended June 30, 2021 were Rs.7,540 million, a decrease of 12% as compared to Rs.8,553 million for the three months ended June 30, 2020. After taking into account the impact of exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, this decrease was attributable to a decrease in sales volumes and prices of our existing products, partially offset by new products launched between July 1, 2020 and June 30, 2021.

 

During the three months ended June 30, 2021, we filed 30 Drug Master Files (“DMFs”) across the world.

 

Proprietary Products

 

Revenues from our Proprietary Products segment were Rs.59 million for the three months ended June 30, 2021, an increase of 5% as compared to Rs.56 million for the three months ended June 30, 2020.

 

 32 

 

 

Gross Profit

 

Our total gross profit was Rs.25,699 million for the three months ended June 30, 2021, representing 52.2% of our revenues for that period, as compared to Rs.24,755 million for the three months ended June 30, 2020, representing 56.0% of our revenues for that period.

 

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

 

   For the three months ended June 30, 
   2021   2020 
   (Rs. in millions) 
   Gross
Profit
   % of Segment
Revenue
   Gross
Profit
   % of Segment
Revenue
 
Global Generics  Rs.23,719    57.7%  Rs.21,526    61.4%
Pharmaceutical Services and Active Ingredients (“PSAI”)   1,630    21.6%   2,856    33.4%
Proprietary Products   45    76.3%   56    100.0%
Others   305    63.3%   317    64.6%
Total  Rs.25,699    52.2%  Rs.24,755    56.0%

 

The gross profit from our Global Generics segment decreased to 57.7% for the three months ended June 30, 2021 from 61.4% for the three months ended June 30, 2020. This decrease was on account of a reduction in the proportion of sales of certain products with higher gross margins, lower export benefits (i.e., tax benefits applicable to exports) and price erosion in certain of our products, primarily in the United States, Europe, Brazil and Romania. This decrease was partially offset by a lower rate of increase in manufacturing overhead costs as compared to sales.

 

The gross profits from our PSAI segment decreased to 21.6% for the three months ended June 30, 2021 from 33.4% for the three months ended June 30, 2020. This decrease was primarily on account of price erosion in certain of our products, changes in our existing product mix (i.e., a decrease in the proportion of sales of products with higher gross margins and an increase in the proportion of sales of products with lower gross margins), a higher rate of increase in manufacturing overhead costs as compared to sales and lower export benefits (i.e., tax benefits applicable to exports).

 

Selling, general and administrative expenses

 

Our selling, general and administrative expenses were Rs.15,045 million for the three months ended June 30, 2021, an increase of 18% as compared to Rs.12,786 million for the three months ended June 30, 2020. After taking into account the impact of exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which we operate, this increase was largely attributable to the following:

 

·a 10% increase due to higher selling and advertisement expenses;

 

·a 5% increase due to higher personnel costs, primarily on account of annual raises and an increase in personnel due to integration of the business acquired from Wockhardt Limited;

 

·a 5% increase due to higher spending on other costs, including legal and professional fees;

 

·the foregoing was partially offset by a 2% decrease due to reduced freight outward expenses.

 

As a proportion of our total revenues, our selling, general and administrative expenses increased to 30.6% for the three months ended June 30, 2021 from 28.9% for the three months ended June 30, 2020.

 

Research and development expenses

 

Our research and development expenses were Rs.4,534 million for the three months ended June 30, 2021, an increase of 14% as compared to Rs.3,980 million for the three months ended June 30, 2020. This increase was largely on account of higher developmental expenditures on certain projects in our biosimilars and generics business, including development of COVID related molecules.

 

As a proportion of our total revenues, our research and development expenses was at 9.2% for the three months ended June 30, 2021, as compared to 9.0% for the three months ended June 30, 2020.

 

 33 

 

  

Other income, net

 

Our net other income was Rs.487 million for the three months ended June 30, 2021, as compared to net other income of Rs.118 million for the three months ended June 30, 2020. The other income was higher for the three months ended June 30, 2021 primarily on account of certain claim settlements income, as well as increased income from sales of scraps, spent chemicals and others.

 

Finance income, net

 

Our net finance income was Rs.652 million for the three months ended June 30, 2021, as compared to net finance income of Rs.605 million for the three months ended June 30, 2020. This increase in net finance income was due to the following:

 

·profit on sale of investments and unrealized gains on investments recorded at fair value through profit and loss of Rs.126 million for the three months ended June 30, 2021, as compared to Rs.258 million for the three months ended June 30, 2020;

 

·net interest income of Rs.16 million for the three months ended June 30, 2021, as compared to net interest income of Rs.48 million for the three months ended June 30, 2020; and

 

·net foreign exchange gain of Rs.510 million for the three months ended June 30, 2021, as compared to net foreign exchange gain of Rs.299 million for the three months ended June 30, 2020.

 

Profit before tax

 

As a result of the above, our profit before tax was Rs.7,425 million for the three months ended June 30, 2021, as compared to Rs.8,789 million for the three months ended June 30, 2020.

 

Tax expense

 

Our consolidated weighted average tax rate was 23.1% for the three months ended June 30, 2021, as compared to 34.1% for the three months ended June 30, 2020.

 

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

 

Our tax expense was Rs.1,717 million for the three months ended June 30, 2021, as compared to Rs.2,996 million for the three months ended June 30, 2020.

 

Profit for the period

As a result of the above, our net profit was Rs.5,708 million for the three months ended June 30, 2021, representing 11.6% of our total revenues for such period, as compared to Rs.5,793 million for the three months ended June 30, 2020, representing 13.1% of our total revenues for such period.

 

 34 

 

 

ITEM 3. LIQUIDITY AND CAPITAL RESOURCES

 

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

 

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

 

Principal Debt Obligations

 

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

 

 

Amount

(Rs. in millions)

  Currency(1)   Interest Rate(2)
Pre-shipment credit Rs.13,950   INR   3 Months T-bill +25 bps to 30 bps
Other working capital borrowings 12,349   U.S.$   (2.20)% to (1.80)%(3)
      RUB   3.00% to 3.40% and 6 Months MosPrime + 65 bps
      MXN   TIIE + 1.20%
      INR   4.00%  and 5.65%
      BRL   CDI + 1.79%
      UAH   6.00%
Long-term Non-convertible debentures 3,800   INR   6.77%

 

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

 

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

 

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

 

Summary of statements of cash flows

 

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

 

   For the three months ended June 30, 
   2021   2020 
   (Rs. in millions) 
Net cash (used in)/from:          
Operating activities  Rs.(3,448)  Rs.10,913 
Investing activities   (5,607)   (15,724)
Financing activities   2,261    7,181 
Net (decrease)/ increase in cash and cash equivalents  Rs.(6,794)  Rs.2,370 

 

In addition to cash, inventory and accounts receivable, our unused sources of liquidity included Rs.36,216 million available in credit under revolving credit facilities with banks as of June 30, 2021.

 

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Cash Flows from Operating Activities

 

The result of operating activities was a net cash outflow of Rs.3,448 million for the three months ended June 30, 2021, as compared to a net cash inflow of Rs.10,913 million for the three months ended June 30, 2020.

 

The increase in net cash outflow of Rs.14,361 million was primarily due to an increase in our working capital requirements and decrease in our earnings.

 

Our average days’ sales outstanding (“DSO”) as of June 30, 2021, March 31, 2021 and June 30, 2020 were 106 days, 93 days and 94 days, respectively. The increase in our DSO as compared to March 31, 2021 was primarily on account of a reduction in the sale to a bank of our trade receivables in North America (Refer to Note 6 for details).

 

Cash Flows used in Investing Activities

 

Our investing activities resulted in net cash outflows of Rs.5,607 million and Rs.15,724 million for the three months ended June 30, 2021 and 2020, respectively. The decrease in net cash outflow was primarily on account of the following:

 

·the acquisition of property, plant and equipment, and other intangible assets, net of dispositions, of Rs.3,290 million for the three months ended June 30, 2021, as compared to Rs.1,888 million for the three months ended June 30, 2020;

 

·net purchases of other investments of Rs.2,567 million for the three months ended June 30, 2021, as compared to net proceeds from sales of other investments of Rs.648 million for the three months ended June 30, 2020; and

 

·the payment, in connection with our acquisition of certain business assets from Wockhardt Limited, of Rs.14,990 million for the three months ended June 30, 2020.

 

Cash Flows from Financing Activities

 

Our financing activities resulted in net cash inflows of Rs.2,261 million and Rs.7,181 million for the three months ended June 30, 2021 and 2020, respectively. The decrease in net cash outflow was primarily on account of the following:

 

·net proceeds from short-term borrowings of Rs.2,662 million for the three months ended June 30, 2021, as compared to net proceeds from short-term and long-term borrowings of Rs.7,520 million for the three months ended June 30, 2020;

 

·interest payments of Rs.342 million for the three months ended June 30, 2021, as compared to interest payments of Rs.283 million for the three months ended June 30, 2020; and

 

·payments of the principal portion of lease liabilities of Rs.206 million for the three months ended June 30, 2021, as compared to payments of the principal portion of lease liabilities of Rs.148 million for the three months ended June 30, 2020.

 

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ITEM 4. OTHER MATTERS

 

None

 

ITEM 5. EXHIBITS

 

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

 

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SIGNATURES

 

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

 

  DR. REDDY’S LABORATORIES LIMITED
(Registrant)
 
Date:  July 27, 2021 By:   /s/ Sandeep Poddar  
    Name:  Sandeep Poddar 
    Title:  Company Secretary 

 

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