SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 6-K

 

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

UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarter Ended September 30, 2020

Commission File Number 1-15182

 

DR. REDDY’S LABORATORIES LIMITED

(Translation of registrant’s name into English)

 

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

Hyderabad, Telangana 500 034, India

+91-40-49002900

 

(Address of principal executive office)

 

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

 

Form 20-F x Form 40-F  ¨

 

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

 

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

 

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

 

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

 

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes  ¨ No  x

 

If “Yes” is marked, indicate below the file number assigned to registrant in connection with Rule 12g3-2(b): 82-________.

 

 

 

 

 

QUARTERLY REPORT

Quarter Ended September 30, 2020

 

Currency of Presentation and Certain Defined Terms

 

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

 

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

 

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

 

Except as otherwise stated in this report, all convenience translations from Indian rupees to U.S. dollars are at the certified foreign exchange rate of U.S.$1.00 = Rs.73.54, as published by Federal Reserve Board of Governors on September 30, 2020. No representation is made that the Indian rupee amounts have been, could have been or could be converted into U.S. dollars at such a rate or any other rate. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.

 

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

 

Forward-Looking Statements

 

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

 

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

 

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

 

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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; and

 

those discussed in the sections entitled “risk factors” in our most recent Annual Report on Form 20-F for the year ended March 31, 2020 and “Operating and Financial Review, Trend Information” and elsewhere in this quarterly report.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis and assumptions only as of the date hereof. In addition, readers should carefully review the other information in this quarterly report, in our most recent Annual Report on Form 20-F for the year ended March 31, 2020 and in our other periodic reports and documents filed with and/or furnished to the SEC from time to time.

 

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TABLE OF CONTENTS

 

ITEM 1. FINANCIAL STATEMENTS 5
ITEM 2. OPERATING AND FINANCIAL REVIEW, TREND INFORMATION 37
ITEM 3. LIQUIDITY AND CAPITAL RESOURCES 47
ITEM 4. OTHER MATTERS 49
ITEM 5. EXHIBITS 49
SIGNATURES 50
EXHIBIT 99.1: REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 51

 

4

 

 

ITEM 1. FINANCIAL STATEMENTS

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION

(in millions, except share and per share data)

 

          As of  
Particulars   Note     September 30, 2020     September 30, 2020     March 31, 2020  
         

Convenience translation

(See Note 2(d))

             
ASSETS                              
Current assets                              
Cash and cash equivalents   4     U.S.$ 53     Rs. 3,889     Rs. 2,053  
Other investments   5       288       21,154       23,687  
Trade and other receivables   6       681       50,077       50,278  
Inventories   7       559       41,134       35,066  
Derivative financial instruments           13       985       1,105  
Tax assets           30       2,206       4,379  
Other current assets           212       15,561       13,802  
Total current assets         U.S.$ 1,836     Rs. 135,006     Rs. 130,370  
Non-current assets                              
Property, plant and equipment   8     U.S. $748     Rs. 55,026     Rs. 52,332  
Goodwill   9       62       4,581       3,994  
Other intangible assets   10       557       40,972       27,659  
Trade and other receivables   6       4       258       1,737  
Investment in equity accounted investees           40       2,961       2,763  
Other investments   5       14       1,031       328  
Deferred tax assets           172       12,657       12,214  
Other non-current assets           12       885       844  
Total non-current assets         U.S.$ 1,610     Rs. 118,371     Rs. 101,871  
Total assets         U.S.$ 3,445     Rs. 253,377     Rs. 232,241  
LIABILITIES AND EQUITY                              
Current liabilities                              
Trade and other payables         U.S.$ 310     Rs. 22,833     Rs. 16,659  
Short-term borrowings   11       270       19,852       16,441  
Long-term borrowings, current portion   11       11       815       4,266  
Provisions           53       3,885       3,800  
Tax liabilities           16       1,156       573  
Derivative financial instruments           8       597       1,602  
Bank overdraft   4       1       101       91  
Other current liabilities           399       29,330       29,382  
Total current liabilities         U.S.$ 1,068     Rs. 78,569     Rs. 72,814  
Non-current liabilities                              
Long-term borrowings   11     U.S.$ 91     Rs. 6,661     Rs. 1,304  
Deferred tax liabilities           3       206       275  
Provisions           1       55       54  
Other non-current liabilities           35       2,549       2,806  
Total non-current liabilities         U.S.$ 129     Rs. 9,471     Rs. 4,439  
Total liabilities         U.S.$ 1,197     Rs. 88,040     Rs. 77,253  
Equity                              
Share capital   12     U.S.$ 11     Rs. 831     Rs. 831  
Treasury shares   12       (14 )     (1,048 )     (1,006 )
Share premium           120       8,792       8,495  
Share based payment reserve           17       1,269       1,233  
Capital redemption reserve           2       173       173  
Special economic zone re-investment reserve           14       1,059       -  
Retained earnings           2,073       152,458       144,247  
Other components of equity           25       1,803       1,015  
Total equity         U.S.$ 2,248     Rs. 165,337     Rs. 154,988  
Total liabilities and equity         U.S.$ 3,445     Rs. 253,377     Rs. 232,241  

 

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

 

5

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM INCOME STATEMENTS

(in millions, except share and per share data)

 

       

For the six months

ended September 30,

    For the three months
ended September 30,
 
Particulars   Note   2020     2020     2019     2020     2019  
       

Convenience
translation

(See Note 2(d))

                                 
Revenues   13   U.S.$ 1,267     Rs. 93,142     Rs. 86,444     Rs. 48,967     Rs. 48,009  
Cost of revenues         571       41,978       38,965       22,558       20,389  
Gross profit         696       51,164       47,479       26,409       27,620  
Selling, general and administrative expenses         352       25,893       25,282       13,107       13,217  
Research and development expenses         113       8,339       7,271       4,359       3,662  
Impairment of non-current assets         11       781       3,560       781       3,560  
Other income, net   14     (4 )     (267 )     (3,894 )     (149 )     (135 )
Total operating expenses         472       34,746       32,219       18,098       20,304  
Results from operating activities (A)         223       16,418       15,260       8,311       7,316  
Finance income         18       1,327       1,225       489       535  
Finance expense         (7 )     (485 )     (601 )     (252 )     (304 )
Finance income, net (B)   15     11       842       624       237       231  
Share of profit of equity accounted investees, net of tax (C)         2       150       280       73       117  
Profit before tax [(A)+(B)+(C)]         237       17,410       16,164       8,621       7,664  
Tax expense/(benefit)   16     54       3,994       (1,389 )     998       (3,261 )
Profit for the period       U.S.$ 182     Rs. 13,416     Rs. 17,553     Rs. 7,623     Rs. 10,925  
Earnings per share:                                            
Basic earnings per share of Rs.5/- each       U.S.$ 1.10     Rs. 80.91     Rs. 105.90     Rs. 45.96     Rs. 65.93  
Diluted earnings per share of Rs.5/- each       U.S.$ 1.10     Rs. 80.69     Rs. 105.71     Rs. 45.83     Rs. 65.82  

 

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

 

6

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME

(in millions, except share and per share data)

 

   

For the six months

ended September 30,

    For the three months
ended September 30,
 
Particulars   2020     2020     2019     2020     2019  
   

Convenience
translation

(See Note 2(d))

                         
Profit for the period   U.S.$ 182     Rs. 13,416     Rs. 17,553     Rs. 7,623     Rs. 10,925  
Other comprehensive income/(loss)                                        
Items that will not be reclassified subsequently to the consolidated income statement:                                        
Changes in the fair value of financial instruments   U.S.$ 2     Rs. 181     Rs. 113     Rs. (34 )   Rs. 160  
Tax impact on above items     -       -       (1 )     -       (1 )
Total of items that will not be reclassified subsequently to the consolidated income statement   U.S.$ 2     Rs. 181     Rs. 112     Rs. (34 )   Rs. 159  
Items that will be reclassified subsequently to the consolidated income statement:                                        
Changes in the fair value of financial instruments   U.S.$ (1 )   Rs. (37 )   Rs. (8 )   Rs. (24 )   Rs. (1 )
Foreign currency translation adjustments     0       22       255       (193 )     427  
Effective portion of changes in fair value of cash flow hedges, net     12       917       (271 )     446       (187 )
Tax impact on above items     (4 )     (294 )     88       (138 )     65  
Total of items that will be reclassified subsequently to the consolidated income statement   U.S.$ 8     Rs. 608     Rs. 64     Rs. 91     Rs. 304  
Other comprehensive income for the period, net of tax   U.S.$ 11     Rs. 789     Rs. 176     Rs. 57     Rs. 463  
Total comprehensive income for the period   U.S.$ 193     Rs. 14,205     Rs. 17,729     Rs. 7,680     Rs. 11,388  

 

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

 

7

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY

(in millions, except share and per share data)

 

    Share
capital
    Share
premium
    Treasury
shares
    Share-based
payment
reserve
    Fair value
reserve(1)
    Foreign
currency
translation
reserve
    Hedging
reserve
    Capital
redemption
reserve
    Special
economic zone
re-investment
reserve(2)
    Actuarial
gains
/(losses)
    Retained
earnings
    Total  
Balance as of April 1, 2020 (A)   Rs. 831     Rs. 8,495     Rs. (1,006 )   Rs. 1,233     Rs. (2,405 )   Rs. 4,343     Rs. (563 )   Rs. 173     Rs. -     Rs. (360 )   Rs. 144,247     Rs. 154,988  
Profit for the period     -       -       -       -       -       -       -       -       -       -       13,416       13,416  
Net change in fair value of equity and debt instruments     -       -       -       -       144       -       -       -       -       -       -       144  
Foreign currency translation adjustments     -       -       -       -       -       22       -       -       -       -       -       22  
Effective portion of changes in fair value of cash flow hedges, net of tax expense of Rs.294     -       -       -       -       -       -       623       -       -       -       -       623  
Total comprehensive income (B)   Rs. -     Rs. -     Rs. -     Rs. -     Rs. 144     Rs. 22     Rs. 623     Rs. -     Rs. -     Rs. -     Rs. 13,416     Rs. 14,205  
Issue of equity shares on exercise of options     - *     297       148       (268 )     -       -       -       -       -       -       -       177  
Share-based payment expense     -       -       -       304       -       -       -       -       -       -       -       304  
Purchase of treasury shares     -       -       (190 )     -       -       -       -       -       -       -       -       (190 )
Dividend paid     -       -       -       -       -       -       -       -       -       -       (4,147 )     (4,147 )
Total transactions with owners of the Company (C)   Rs. -     Rs. 297     Rs. (42 )   Rs. 36     Rs. -     Rs. -     Rs. -     Rs. -     Rs. -     Rs. -     Rs. (4,147 )   Rs. (3,856 )
Transfer to special economic zone re-investment reserve (D)   Rs. -     Rs. -     Rs. -     Rs. -     Rs. -     Rs. -     Rs. -     Rs. -     Rs. 1,059     Rs. -     Rs.  (1,059)     Rs. -  
Balance as of September 30, 2020 [(A)+(B)+(C)+(D)]   Rs. 831     Rs. 8,792     Rs. (1,048 )   Rs. 1,269     Rs. (2,261 )   Rs. 4,365     Rs. 60     Rs. 173     Rs. 1,059     Rs. (360 )   Rs. 152,458     Rs. 165,337  
Convenience translation  (See note 2(d))   U.S.$ 11     U.S.$ 120     U.S.$ (14)     U.S.$ 17     U.S.$ (31)     U.S.$ 59     U.S.$ 1     U.S.$ 2     U.S.$ 14     U.S.$ (5)     U.S.$ 2,073     U.S.$ 2,248  

 

* Rounded to the nearest million.

 

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, 2019 (A) Rs. 830 Rs. 8,211 Rs. (535 ) Rs. 990 Rs. (1,910 ) Rs. 4,031 Rs. 156 Rs. 173 Rs. - Rs. (395 ) Rs. 128,646 Rs. 140,197
Profit for the period - - - - - - - - - - 17,553 17,553
Net change in fair value of equity and debt instruments - - - - 86 - - - - - 19 (3) 105
Foreign currency translation adjustments - - - - - 255 - - - - - 255
Effective portion of changes in fair value of cash flow hedges, net of tax benefit of Rs.88 - - - - - - (183 ) - - - - (183 )
Actuarial gain/(loss) on post-employment benefit obligations, net of tax expense of Rs.1 - - - - - - - - - (1 ) - (1 )
Total comprehensive income (B) Rs. - Rs. - Rs. - Rs. - Rs. 86 Rs. 255 Rs. (183 ) Rs. - Rs. - Rs. (1 ) Rs. 17,572 Rs. 17,729
Issue of equity shares on exercise of options 1 215 - (208 ) - - - - - - - 8
Share-based payment expense - - - 272 - - - - - - - 272
Purchase of treasury shares - - (474 ) - - - - - - - - (474 )
Dividend paid (including corporate dividend tax) - - - - - - - - - - (3,916 ) (3,916 )
Total transactions with owners of the Company (C) Rs. 1 Rs. 215 Rs. (474 ) Rs. (64 ) Rs. - Rs. - Rs. - Rs. - Rs. - Rs. - Rs. (3,916 ) Rs. (4,110 )
Balance as of September 30, 2019 [(A)+(B)+(C)] Rs. 831 Rs. 8,426 Rs. (1,009 ) Rs. 1,054 Rs. (1,824 ) Rs. 4,286 Rs. (27 ) Rs. 173 Rs. - Rs. (396 ) Rs. 142,302 Rs. 153,816

 

(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 Special Economic Zone (“SEZ”) Reinvestment Reserve out of profits of the eligible SEZ Units in terms of the specific provisions of Section 10AA(1) of the Indian Income Tax Act, 1961 (“the Act”). The said reserve should be utilized by the Company for acquiring Plant and Machinery in terms of Section 10AA(2) of the Act.
(3) Represents gain on disposal of financial instruments classified as FVTOCI instruments re-classified to retained earnings.

 

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

 

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DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(in millions, except share and per share data)

 

    For the six months ended September 30,  
Particulars   2020     2020     2019  
    Convenience
translation (See
Note 2(d))
             
Cash flows from operating activities:                        
Profit for the period   U.S.$ 182     Rs. 13,416     Rs. 17,553  
Adjustments for:                        
Income tax expense/(benefit)     54       3,994       (1,389 )
Fair value changes and profit on sale of units of mutual funds, net     (5 )     (389 )     (562 )
Depreciation and amortization     87       6,411       6,422  
Impairment of non-current assets     11       781       3,560  
Allowance for credit losses (on trade receivables and other advances)     1       61       105  
Loss on sale or de-recognition of non-current assets, net     0       15       39  
Share of profit of equity accounted investees     (2 )     (150 )     (280 )
Foreign exchange loss/(gain), net     12       919       (29 )
Interest income, net     1       82       101  
Equity settled share-based payment expense     4       304       272  
Dividend income     -       -       (5 )
Changes in operating assets and liabilities:                        
Trade and other receivables     22       1,620       (2,512 )
Inventories (Refer to Note 7 for inventory write downs)     (76 )     (5,602 )     (1,454 )
Trade and other payables     65       4,773       910  
Other assets and other liabilities, net     (54 )     (3,991 )     872  
Cash generated from operations     302       22,244       23,603  
Income tax paid, net     (28 )     (2,077 )     (3,664 )
Net cash from operating activities   U.S.$ 274     Rs. 20,167     Rs. 19,939  
Cash flows used in investing activities:                        
Expenditure on property, plant and equipment     (54 )     (3,999 )     (2,137 )
Proceeds from sale of property, plant and equipment     0       33       53  
Expenditure on other intangible assets     (8 )     (567 )     (501 )
Proceeds from sale of other intangible assets     -       -       259  
Payment for acquisition of business (Refer to Note 24 for details)     (211 )     (15,514 )     -  
Purchase of other investments     (693 )     (50,933 )     (69,304 )
Proceeds from sale of other investments     725       53,296       65,885  
Dividend received from equity accounted investees     -       -       392  
Interest received     10       714       461  
Net cash used in investing activities   U.S.$ (231 )   Rs. (16,970 )   Rs. (4,892 )
Cash flows used in financing activities:                        
Proceeds from issuance of equity shares (including treasury shares)     2       177       0  
Purchase of treasury shares     (3 )     (190 )     (474 )
Proceeds from/(repayment of) short-term borrowings, net     50       3,644       (2,012 )
Proceeds from long-term borrowings     52       3,800       -  
Repayment of long-term borrowings     (51 )     (3,743 )     (6,765 )
Payment of principal portion of lease liabilities     (5 )     (366 )     (287 )
Dividend paid (September 30, 2019 including corporate dividend tax)     (56 )     (4,147 )     (3,916 )
Interest paid     (8 )     (559 )     (839 )
Net cash used in financing activities   U.S.$ (19 )   Rs. (1,384 )   Rs. (14,293 )
Net increase in cash and cash equivalents     25       1,813       754  
Effect of exchange rate changes on cash and cash equivalents     0       13       26  
Cash and cash equivalents at the beginning of the period     27       1,962       2,228  
Cash and cash equivalents at the end of the period (Refer to Note 4 for details)   U.S.$ 52     Rs. 3,788     Rs. 3,008  

 

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

 

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)

 

1. Reporting entity

 

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

 

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

 

2. Basis of preparation of financial statements

 

a) Statement of compliance

 

These unaudited condensed consolidated interim financial statements (hereinafter referred to as “interim financial statements”) are prepared in accordance with IAS 34, “Interim Financial Reporting” as issued by the International Accounting Standards Board (“IASB”). They do not include all of the information required for a complete set of annual financial statements and should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 20-F for the fiscal year ended March 31, 2020. These interim financial statements were authorized for issuance by the Company’s Board of Directors on October 28, 2020.

 

b) Significant accounting policies

 

The accounting policies applied by the Company in these interim financial statements are the same as those applied by the Company in its audited consolidated financial statements as at and for the year ended March 31, 2020 contained in the Company’s Annual Report on Form 20-F.

 

Several amendments and interpretations apply for the first time in the fiscal year ending March 31, 2021, but do not have an impact on the interim financial statements of the Company.

 

c) Basis of measurement

 

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

 

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

 

d) Convenience translation

 

These interim financial statements have been prepared in Indian rupees. Solely for the convenience of the reader, these interim financial statements as of and for the three months and six months ended September 30, 2020 have been translated into U.S. dollars at the certified foreign exchange rate of U.S.$1.00 = Rs.73.54, as published by the Federal Reserve Board of Governors on September 30, 2020. No representation is made that the Indian rupee amounts have been, could have been or could be converted into U.S. dollars at such a rate or any other rate. Such convenience translation is not subject to review by the Company’s independent registered public accounting firm.

 

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)

 

2. Basis of preparation of financial statements (continued)

 

e) Functional and presentation currency

 

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

 

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

 

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

 

f) Use of estimates and judgments

 

The preparation of interim financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. In preparing these interim financial statements, the significant judgments made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the audited consolidated financial statements as at and for the year ended March 31, 2020.

 

g) New accounting standards effective as on April 1, 2020

 

Amendments to IFRS 3: Definition of a Business

 

In May 2020, the IASB issued an amendment to IFRS 3 “Business Combinations – Reference to the Conceptual Framework.” The amendment is effective as of January 1, 2020, although companies may choose to apply it earlier under certain circumstances. The amendment to IFRS 3 clarifies that to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Furthermore, it clarified that a business can exist without including all of the inputs and processes needed to create outputs. These amendments had no impact on the interim financial statements of the Company, but may impact future periods should the Company enter into any business combinations.

 

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

 

The Chief Operating Decision Maker (“CODM”) evaluates the Company’s performance and allocates resources based on an analysis of various performance indicators by operating segments. The CODM reviews revenue and gross profit as the performance indicator for all of the operating segments, and does not review the total assets and liabilities of an operating segment. The Co-Chairman and Managing Director is the CODM of the Company.

 

The Company’s reportable operating segments are as follows:

 

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

 

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

 

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

 

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

 

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

 

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

 

13

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

3. Segment reporting (continued)

 

Information about segments: For the six months ended September 30, 2020 For the six months ended September 30, 2019
Segments Global
Generics
PSAI Proprietary
Products
Others Total Global
Generics
PSAI Proprietary
Products
Others Total
Revenues(1) Rs. 74,916 Rs. 17,058 Rs. 156 Rs. 1,012 Rs. 93,142 Rs. 65,798 Rs. 11,646 Rs. 7,706 Rs. 1,294 Rs. 86,444
Gross profit Rs. 45,211 Rs. 5,140 Rs. 144 Rs. 669 Rs. 51,164 Rs. 37,207 Rs. 2,075 Rs. 7,505 Rs. 692 Rs. 47,479
Selling, general and administrative expenses 25,893 25,282
Research and development expenses 8,339 7,271
Impairment of non-current assets 781 3,560
Other income, net (267 ) (3,894 )
Results from operating activities Rs. 16,418 Rs. 15,260
Finance income, net 842 624
Share of profit of equity accounted investees, net of tax 150 280
Profit before tax Rs. 17,410 Rs. 16,164
Tax expense/(benefit) 3,994 (1,389 )
Profit for the period Rs. 13,416 Rs. 17,553
             
Information about segments: For the three months ended September 30, 2020 For the three months ended September 30, 2019
Segments Global
Generics
PSAI Proprietary
Products
Others Total Global
Generics
PSAI Proprietary
Products
Others Total
Revenues(1) Rs. 39,841 Rs. 8,505 Rs. 100 Rs. 521 Rs. 48,967 Rs. 32,816 Rs. 7,107 Rs. 7,425 Rs. 661 Rs. 48,009
Gross profit Rs. 23,685 Rs. 2,284 Rs. 88 Rs. 352 Rs. 26,409 Rs. 18,200 Rs. 1,750 Rs. 7,298 Rs. 372 Rs. 27,620
Selling, general and administrative expenses 13,107 13,217
Research and development expenses 4,359 3,662
Impairment of non-current assets 781 3,560
Other income, net (149 ) (135 )
Results from operating activities Rs. 8,311 Rs. 7,316
Finance income, net 237 231
Share of profit of equity accounted investees, net of tax 73 117
Profit before tax Rs. 8,621 Rs. 7,664
Tax expense/(benefit) 998 (3,261 )
Profit for the period Rs. 7,623 Rs. 10,925

 

(1) Revenues for the six months ended September 30, 2020 and 2019 do not include inter-segment revenues from the PSAI segment to the Global Generics segment, which amount to Rs.3,288 and Rs.2,789, respectively. Revenues for the three months ended September 30, 2020 and 2019 do not include inter-segment revenues from the PSAI segment to the Global Generics segment, which amount to Rs.1,751 and Rs.1,395, respectively.

 

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)

 

3. Segment reporting (continued)

 

Analysis of revenues by geography:

 

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

 

    For the six months
ended September 30,
    For the three months
ended September 30,
 
Country   2020     2019     2020     2019  
India   Rs. 16,932     Rs. 15,923     Rs. 9,887     Rs. 8,295  
United States     38,441       39,621       20,147       22,532  
Russia     7,250       8,069       3,978       4,105  
Others     30,519       22,831       14,955       13,077  
    Rs. 93,142     Rs. 86,444     Rs. 48,967     Rs. 48,009  

 

4. Cash and cash equivalents

 

Cash and cash equivalents consist of the following:

 

    As of  
    September 30, 2020     March 31, 2020  
Cash on hand   Rs. 2     Rs. 2  
Balances with banks     1,785       1,807  
Term deposits with banks (original maturities less than 3 months)     2,102       244  
Cash and cash equivalents in the statements of financial position   Rs. 3,889     Rs. 2,053  
Bank overdrafts used for cash management purposes     101       91  
Cash and cash equivalents in the statement of cash flow   Rs. 3,788     Rs. 1,962  
Restricted cash balances included above                
Balance in unclaimed dividends and debenture interest account   Rs. 99     Rs. 111  
Balances in Escrow account pursuant to the Business Transfer Agreement with Wockhardt Limited (Refer to Note 24 for details)     40       -  
Other restricted cash balances     82       15  

 

5. Other investments

 

Other investments consist of investments in units of mutual funds, equity securities, bonds, market linked debentures, commercial paper and term deposits with banks (i.e., certificates of deposit having an original maturity period exceeding 3 months). The details of such investments as of September 30, 2020 and March 31, 2020 were as follows:

 

    As of September 30, 2020     As of March 31, 2020  
    Cost     Unrealized
gain/(loss)
    Fair value/
amortized
cost(2)
    Cost     Unrealized
gain/(loss)
    Fair value/
amortized
cost(2)
 
Current portion                                                
In units of mutual funds   Rs. 15,854     Rs. 161     Rs. 16,015     Rs. 13,686     Rs. 146     Rs. 13,832  
In bonds     -       -       -       1,851       -       1,851  
In commercial paper     977       -       977       967       -       967  
In market linked debentures     1,000       (44 )     956       2,000       (7 )     1,993  
Term deposits with banks     3,206       -       3,206       5,044       -       5,044  
    Rs. 21,037     Rs. 117     Rs. 21,154     Rs. 23,548     Rs. 139     Rs. 23,687  
Non-current portion                                                
In equity securities(1)   Rs. 2,701     Rs. (2,217 )   Rs. 484     Rs. 2,701     Rs. (2,397 )   Rs. 304  
In bonds   Rs. 522       -     Rs. 522       -       -       -  
Others     25       -       25       24       -       24  
    Rs. 3,248     Rs. (2,217 )   Rs. 1,031     Rs. 2,725     Rs. (2,397 )   Rs. 328  

 

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)

 

5. Other investments (continued)

 

(1) Primarily represents the shares of Curis, Inc. issued to the Company under a 2015 Collaboration Agreement with Curis, Inc., as amended. For further details, refer to Note 33 of the consolidated financial statements in the Company’s Annual Report on Form 20-F for the fiscal year ended March 31, 2020.
(2) Interest accrued but not due on bonds and debentures, commercial paper and term deposits with banks is included in other current assets.

 

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

 

Investments in units of mutual funds Fair value through profit and loss
Investments in bonds, commercial paper, term deposits and others Amortized cost
Investments in market linked debentures Fair value through other comprehensive income
Investments in equity securities Fair value through other comprehensive income (on account of irrevocable option elected at time of transition)

 

6. Trade and other receivables

 

As of
September 30, 2020 March 31, 2020
Current
Trade and other receivables, gross Rs. 51,308 Rs. 51,480
Less: Allowance for credit losses (1,231 ) (1,202 )
Trade and other receivables, net Rs. 50,077 Rs. 50,278
Non-current
Trade and other receivables, gross(1) Rs. 258 Rs. 1,737
Less: Allowance for credit losses - -
Trade and other receivables, net Rs. 258 Rs. 1,737

  

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

 

Pursuant to an arrangement with a bank, the Company sells to the bank certain of its trade receivables forming part of its Global Generics segment, on a non-recourse basis. The receivables sold were mutually agreed upon with the bank after considering the creditworthiness and contractual terms with the customer, including any gross to net adjustments (due to rebates, discounts etc.) from the contracted amounts. As a result, the receivables sold are generally lower than the total net amount of trade receivables. The Company has transferred substantially all the risks and rewards of ownership of such receivables sold to the bank, and accordingly, the same are derecognized in the statements of financial position. As on September 30, 2020 and March 31, 2020, the amount of trade receivables de-recognized pursuant to the aforesaid arrangement was Rs.10,277 (U.S.$139) and Rs.9,049 (U.S.$120), respectively.

 

7. Inventories

 

Inventories consist of the following:

 

    As of  
    September 30, 2020     March 31, 2020  
Raw materials   Rs. 11,882     Rs. 10,594  
Work-in-progress     8,169       6,806  
Finished goods (includes stock-in-trade)     17,854       15,126  
Packing materials, stores and spares     3,229       2,540  
    Rs. 41,134     Rs. 35,066  

 

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)

 

7. Inventories (continued)

 

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

 

    For the six months
ended September 30,
    For the three months
ended September 30,
 
    2020     2019     2020     2019  
Raw materials, consumables and changes in finished goods and work in progress   Rs. 27,469     Rs. 24,165     Rs. 15,426     Rs. 12,882  
Inventory write-downs(1)     1,528       1,915       375       1,129  

 

(1) Following the Company’s decision to voluntarily recall all of its ranitidine medications sold in the United States due to confirmed contamination with N-Nitrosodimethylamine (NDMA) above levels established by the U.S.FDA, the Company recognized Rs.231 as inventory write downs towards semi-finished and finished inventory of ranitidine during the three months ended September 30, 2019. Further, an amount of Rs.170 was recognized as a possible refund liability (as a reduction from revenue) arising out of the Company’s decision to recall such product.

 

8. Property, plant and equipment

 

Acquisitions and disposals

 

   

For the six months ended

September 30,

    For the year ended
March 31,
 
    2020     2019     2020  
Cost of assets acquired during the period(1)   Rs. 6,724     Rs. 2,205     Rs. 5,667  
Assets acquired through business combinations(2)     373       -       -  
Recognition of right-of-use asset on initial application of IFRS 16     -       1,153       1,153  
Net book value of assets disposed of during the period     72       35       81  
Depreciation expense     4,307       4,429       8,640  

 

(1) Additions for the six months ended September 30, 2020 include right-of-use asset of Rs.1,852 relating to a warehousing service in the United States.

 

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

 

Capital commitments

 

As of September 30, 2020 and March 31, 2020, the Company was committed to spend Rs.6,884 and Rs.4,888, respectively, under agreements to purchase property, plant and equipment. This amount is net of capital advances paid in respect of such purchase commitments.

 

9. Goodwill

 

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

 

The following table presents goodwill as of September 30, 2020 and March 31, 2020:

 

    As of  
    September 30, 2020     March 31, 2020  
Opening balance, gross   Rs. 20,278     Rs. 20,176  
Goodwill arising on business combinations(1)     530       -  
Effect of translation adjustments     57       102  
Impairment loss(2)     (16,284 )     (16,284 )
Closing balance   Rs. 4,581     Rs. 3,994  

 

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

 

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

 

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)

 

10. Other intangible assets

 

   

For the six months ended

September 30,

    For the year ended
March 31,
 
    2020     2019     2020  
Cost of assets acquired during the period(1)   Rs. 1,696     Rs. 837     Rs. 1,806  
Assets acquired through business combinations(2)     14,888       -       -  
Net book value of assets disposed of during the period     -       55       65  
Amortization expense     2,104       1,993       3,832  
Impairment loss recognized during the period(3)(4)     781       3,551       16,757  

 

(1) Assets acquired during the six months ended September 30, 2020 include Rs.728 representing the estimated payment for the purchase of intellectual property rights relating to product forming part of Company’s Proprietary Products segment.

 

Assets acquired during the six months ended September 30, 2019 and the year ended March 31, 2020 includes, a portfolio of approved, non-marketed Abbreviated New Drug Applications (“ANDAs”) in the United States from Teva for a total consideration of Rs.277 (U.S.$4). The Company recognized these ANDAs acquired as product related intangibles.

 

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

 

(3) Impairment charge of Rs.781 for the six months ended September 30, 2020 includes:

 

· Rs.728 pertaining to product related intangible forming part of the Company’s Proprietary Product segment due to decrease in the market potential for the product;

· Rs.53 pertaining to certain product related intangibles forming part of the Company’s Global Generics segment due to Company’s decision to discontinue their further development and commercialization.

 

(4) Total impairment loss for the year ended March 31, 2020 was Rs.16,757 (six months ended September 30, 2019 : Rs.3,551), of which Rs.11,137 pertained to impairment of gNuvaring, Rs.4,385 (six months ended September 30, 2019 : Rs.3,551) pertained to impairment of ramelteon, tobramycin and imiquimod, and the balance was towards other product related intangibles forming part of the Company’s Global Generics and Proprietary Products segments.

 

Details of significant separately acquired intangible assets as of September 30, 2020 are as follows:

 

Particulars of the asset   Acquired from   Carrying cost  
Select portfolio of branded generics business   Wockhardt Limited   Rs. 14,640  
ANDAs   Teva and an affiliate of Allergan     9,195  
Select portfolio of dermatology, respiratory and pediatric assets   UCB India Private Limited and affiliates     4,820  
Intellectual property rights relating to PPC-06 (tepilamide fumarate)   Xenoport, Inc     3,990  
Commercialization rights for an anti-cancer biologic agent   Eisai Company Limited     1,822  
Habitrol® brand   Novartis Consumer Health Inc.     1,538  
Over the counter product brands   Ducere Pharma LLC     695  
Beta brand   3i Group plc     423  
Various ANDAs   Gland Pharma Limited     357  

 

11. Loans and borrowings

 

Short-term borrowings

 

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

 

Short-term borrowings consist of the following:

 

    As of  
    September 30, 2020     March 31, 2020  
Pre-shipment credit   Rs. 15,751     Rs. 10,432  
Other working capital borrowings     4,101       6,009  
    Rs. 19,852     Rs. 16,441  

 

18

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

11. Loans and borrowings (continued)

 

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

 

As of  
September 30, 2020   March 31, 2020  
Currency(1)   Interest Rate(2)   Currency(1)   Interest Rate(2)  
Pre-shipment credit U.S.$   1 Month/6 Month LIBOR + 12.5  to 15 bps   U.S.$   1 Month LIBOR + 12.5  to 16 bps  
INR   1 Month T-bill + 35 bps   INR   1 Month T-bill + 60 bps  
INR   1 Month T-bill + 60 bps with a collar of 4.20%   -   -  
INR   5.75%   -   -  
Other working capital borrowings ZAR   1 Month JIBAR+120 bps   ZAR   1 Month JIBAR+120 bps  
RUB   7.15%   RUB   7.05%  
BRL   7.25%   BRL   7.25%  
MXN   TIIE + 1.20%   MXN   TIIE + 1.25%  
INR   6.20%   INR   7.75%  
U.S.$   1 Month LIBOR + 75 bps   U.S.$   1 Month/3 Months LIBOR + 55  to 78 bps  

  

(1) “INR” means Indian rupees, “U.S.$” means United States Dollars, “RUB” means Russian roubles, “MXN” means Mexican pesos, “BRL” means Brazilian reals and “ZAR” means South African rand.

 

(2) “LIBOR” means the London Inter-bank Offered Rate, “TIIE” means the Equilibrium Inter-banking Interest Rate (Tasa de Interés Interbancaria de Equilibrio), “JIBAR” means the Johannesburg Interbank Average Rate and “T-bill” means the India Treasury Bill interest rate.

 

Long-term borrowings

 

Long-term borrowings consist of the following:

 

    As of  
    September 30, 2020     March 31, 2020  
    Non – Current     Current     Non – Current     Current  
Foreign currency borrowing by the parent company   Rs. -     Rs. -     Rs. -     Rs. 3,783  
Non-convertible debentures by the APSL subsidiary(1)     3,800       -       -       -  
Obligations under leases(2)     2,861       815       1,304       483  
    Rs. 6,661     Rs. 815     Rs. 1,304     Rs. 4,266  

 

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

  

(2) Additions for the six months ended September 30, 2020 include right-of-use liability of Rs.1,878 relating to warehousing service in the United States.

 

During the six months ended September 30, 2020, the APSL subsidiary issued non-convertible debentures for Rs.3,800. The aforesaid non-convertible debentures are repayable at par after 3 years following the date of issue.

 

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)

 

11. Loans and borrowings (continued)

 

The interest rate profiles of long-term borrowings (other than obligations under leases) as at September 30, 2020 and March 31, 2020 were as follows:

 

    As of  
    September 30, 2020     March 31, 2020  
    Currency(1)     Interest Rate(2)     Currency(1)     Interest Rate(2)  
Foreign currency borrowings     -       -     U.S.$       1 Month LIBOR + 82.7 bps  
Non-convertible debentures     INR       6.77 %     -       -  

 

(1) “U.S.$” means United States dollars and “INR” means Indian rupees.
(2) “LIBOR” means the London Inter-bank Offered Rate.

 

Uncommitted lines of credit from banks

 

The Company had uncommitted lines of credit of Rs.41,581 and Rs.39,374 as of September 30, 2020 and March 31, 2020, respectively, from its banks for working capital requirements. The Company has the right to draw upon these lines of credit based on its working capital requirements.

 

12. Share capital

 

The following table presents the changes in number of equity shares and amount of equity share capital for the six months ended September 30, 2020 and September 30, 2019:

 

    As of  
    September 30, 2020     September 30, 2019  
    Number     Amount     Number     Amount  
Opening number of equity shares/share capital     166,172,082     Rs. 831       166,065,948     Rs. 830  
Add: Equity shares issued pursuant to employee stock option plans(1)     97,197       - *     79,800       1  
Closing number of equity shares/share capital     166,269,279     Rs. 831       166,145,748     Rs. 831  
Treasury shares(2)     383,054     Rs. 1,048       397,100     Rs. 1,009  

 

* Rounded off to nearest million.

 

(1) During the six months ended September 30, 2020 and 2019, equity shares were issued as a result of the exercise of vested options granted to employees pursuant to the Dr. Reddy’s Employees Stock Option Scheme, 2002 and the Dr. Reddy’s Employees Stock Option Scheme, 2007. The options exercised had an exercise price of Rs.5, Rs.2,607 or Rs.2,814 per share. Upon the exercise of such options, the amount of compensation cost (computed using the grant date fair value) previously recognized in the "share based payment reserve” was transferred to “share premium” in the unaudited condensed consolidated statements of changes in equity.
   
(2) Pursuant to the special resolution approved by the shareholders in the Annual General Meeting held on July 27, 2018, the Dr. Reddy’s Employees ESOS Trust (the “ESOS Trust”) was formed to support the Dr. Reddy’s Employees Stock Option Scheme, 2018 by acquiring, from the Company or through secondary market acquisitions, equity shares which are used for issuance to eligible employees (as defined therein) upon exercise of stock options thereunder. During the six months ended September 30, 2020, an aggregate of 56,175 equity shares were issued as a result of the exercise of vested options granted to employees pursuant to the Dr. Reddy’s Employees Stock Option Scheme, 2018. The options exercised had an exercise price of Rs.2,607 or Rs.2,814 per share. Upon the exercise of such options, the amount of compensation cost (computed using the grant date fair value) previously recognized in the “share based payment reserve” was transferred to “share premium” in the unaudited consolidated statements of changes in equity. In addition, any difference between the carrying amount of treasury shares and the consideration received was recognized in the “share premium”. As of September 30, 2020 and March 31, 2020, the ESOS Trust had outstanding 383,054 and 395,950 shares, respectively, which it purchased from the secondary market for an aggregate consideration of Rs.1,048 and Rs.1,006, respectively.

 

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)

 

13. Revenue from contracts with customers

 

    For the six months
ended September 30,
    For the three months
ended September 30,
 
    2020     2019     2020     2019  
Sales   Rs. 91,010     Rs. 77,606     Rs. 47,766     Rs. 39,982  
Service income     1,565       1,063       914       486  
License fees     567       7,775       287       7,541  
    Rs. 93,142     Rs. 86,444     Rs. 48,967     Rs. 48,009  

 

Analysis of revenues by geography:

 

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

 

    For the six months
ended September 30,
    For the three months
ended September 30,
 
Country   2020     2019     2020     2019  
India   Rs. 16,932     Rs. 15,923     Rs. 9,887     Rs. 8,295  
United States     38,441       39,621       20,147       22,532  
Russia     7,250       8,069       3,978       4,105  
Others     30,519       22,831       14,955       13,077  
    Rs. 93,142     Rs. 86,444     Rs. 48,967     Rs. 48,009  

 

Refund liabilities on account of sales returns amounting to Rs.3,306 and Rs.3,252 as of September 30, 2020 and March 31, 2020, respectively, have been included in provisions forming part of current liabilities.

 

14. Other income, net

 

Other income, net consists of the following:

 

    For the six months
ended September 30,
    For the three months
ended September 30,
 
    2020     2019     2020     2019  
Loss/(gain) on sale/disposal of non-current assets, net   Rs. 15     Rs. (19 )   Rs. 14     Rs. (14 )
Sale of spent chemicals     (113 )     (149 )     (60 )     (76 )
Scrap sales     (55 )     (81 )     (34 )     (34 )
Miscellaneous income, net(1)     (114 )     (3,645 )     (69 )     (11 )
    Rs. (267 )   Rs. (3,894 )   Rs. (149 )   Rs. (135 )
                                 
(1) Miscellaneous income, net for the six months ended September 30, 2019 includes Rs.3,457 (U.S.$50) received from Celgene pursuant to a settlement agreement entered into in April 2019. The agreement effectively settles any claim the Company or its affiliates may have had for damages under section 8 of the Canadian Patented Medicines (Notice of Compliance) Regulations in regard to the Company’s ANDS for a generic version of REVLIMID® brand capsules (Lenalidomide) pending before Health Canada.

 

15. Finance income, net

 

Finance income, net consists of the following:

 

    For the six months
ended September 30,
    For the three months
ended September 30,
 
    2020     2019     2020     2019  
Interest income   Rs. 403     Rs. 500     Rs. 122     Rs. 275  
Fair value changes and profit on sale of units of mutual funds, net     389       562       131       253  
Foreign exchange gain, net     535       158       236       4  
Miscellaneous income, net     -       5       -       3  
Finance income (A)   Rs. 1,327     Rs. 1,225     Rs. 489     Rs. 535  
Interest expense     (485 )     (601 )     (252 )     (304 )
Finance expense (B)   Rs. (485 )   Rs. (601 )   Rs. (252 )   Rs. (304 )
Finance income, net [(A)+(B)]   Rs. 842     Rs. 624     Rs. 237     Rs. 231  

 

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)

 

16. Income taxes

 

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

 

The Company’s consolidated weighted average tax rate for the six months ended September 30, 2020 and 2019 was 22.9% and (8.6)%, respectively. Income tax expense was Rs.3,994 for the six months ended September 30, 2020, as compared to an income tax benefit of Rs.1,389 for the six months ended September 30, 2019.

 

The Company’s consolidated weighted average tax rate for the three months ended September 30, 2020 and 2019 was 11.6% and (42.5)%, respectively. Income tax expense was Rs.998 for the three months ended September 30, 2020, as compared to an income tax benefit of Rs.3,261 for the three months ended September 30, 2019.

 

The effective rates of tax for the three and six months ended September 30, 2019 were lower than the enacted tax rate primarily on account of recognition of a deferred tax asset related to the Minimum Alternate Tax (“MAT”) credits in Dr. Reddy’s Laboratories Limited, the parent company in India. The MAT credit was recognized as a one-time benefit to the income statement for the three and six months ended September 30, 2019.

 

The effective rates of tax for the three and six months ended September 30, 2020 were lower than the enacted tax rate primarily on account of recognition of deferred tax asset amounting to Rs.1,012 pursuant to a planned restructuring activity between the Group Companies.

 

Total tax expense recognized directly in the equity were Rs.138 and Rs.294 for the three months and six months ended September 30, 2020, respectively (as compared to tax benefits of Rs.65 and Rs.88 for the three months and six months ended September 30, 2019, respectively). Such tax expenses and benefits were primarily due to tax effects of changes in fair value of financial instruments and the foreign exchange gain/loss on cash flow hedges.

 

17. Nature of expense

 

The following table shows supplemental information related to certain “nature of expense” items for the three months and six months ended September 30, 2020 and 2019:

 

    For the six months
ended September 30,
    For the three months
ended September 30,
 
Depreciation   2020     2019     2020     2019  
Cost of revenues   Rs. 3,085     Rs. 3,266     Rs. 1,551     Rs. 1,667  
Selling, general and administrative expenses     740       692       394       404  
Research and development expenses     482       471       242       234  
    Rs. 4,307     Rs. 4,429     Rs. 2,187     Rs. 2,305  

 

    For the six months
ended September 30,
    For the three months
ended September 30,
 
Amortization   2020     2019     2020     2019  
Cost of revenues   Rs. -     Rs. 142     Rs. -     Rs. 72  
Selling, general and administrative expenses     2,051       1,792       1,056       933  
Research and development expenses     53       59       28       29  
    Rs. 2,104     Rs. 1,993     Rs. 1,084     Rs. 1,034  

 

    For the six months
ended September 30,
    For the three months
ended September 30,
 
Employee benefits   2020     2019     2020     2019  
Cost of revenues   Rs. 5,948     Rs. 5,447     Rs. 3,156     Rs. 2,643  
Selling, general and administrative expenses     9,886       9,178       5,127       4,513  
Research and development expenses     2,378       2,245       1,205       1,099  
    Rs. 18,212     Rs. 16,870     Rs. 9,488     Rs. 8,255  

 

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)

 

18. Employee benefit plans

 

Gratuity benefits provided by the parent company

 

In accordance with applicable Indian laws, the Company has a defined benefit plan which provides for gratuity payments (the “Gratuity Plan”) and covers certain categories of employees in India. The Gratuity Plan provides a lump sum gratuity payment to eligible employees at retirement or termination of their employment. The amount of the payment is based on the respective employee’s last drawn salary and the years of employment with the Company. Effective September 1, 1999, the Company established the Dr. Reddy’s Laboratories Gratuity Fund (the “Gratuity Fund”) to fund the Gratuity Plan. Liabilities in respect of the Gratuity Plan are determined by an actuarial valuation, based upon which the Company makes contributions to the Gratuity Fund. Trustees administer the contributions made to the Gratuity Fund. Amounts contributed to the Gratuity Fund are invested in bonds issued by the Government of India, in debt securities and in equity securities of Indian companies. The liability recorded by the Company towards this obligation was Rs.213 and Rs.189 as at September 30, 2020 and March 31, 2020, respectively.

 

Compensated absences

 

The Company provides for accumulation of compensated absences by certain categories of its employees. These employees can carry forward a portion of the unutilized compensated absences and utilize them in future periods or receive cash in lieu thereof as per the Company’s policy. The Company records a liability for compensated absences in the period in which the employee renders the services that increases this entitlement. The total liability recorded by the Company towards this obligation was Rs.903 and Rs.1,161 as at September 30, 2020 and March 31, 2020, respectively.

 

19. Employee stock incentive plans

 

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

 

Grants under Stock Incentive Plans

 

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

 

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

 

The above grants were made on May 19, 2020.

 

The terms and conditions of the grants made during the six months ended September 30, 2019 under the above plans were as follows:

 

Particulars   Number of
instruments
    Exercise price     Vesting period   Contractual
life
DRL 2002 Plan     46,680     Rs. 5.00     1 to 4 years   5 years
DRL 2007 Plan     85,142     Rs. 5.00     1 to 4 years   5 years
DRL 2007 Plan     61,700     Rs. 2,814.00     1 to 4 years   5 years
DRL 2018 Plan     167,500     Rs. 2,814.00     1 to 4 years   5 years

 

The above grants were made on May 16, 2019.

 

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

 

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)

 

19. Employee stock incentive plans (continued)

 

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

 

    May 19, 2020     May 19, 2020     May 16, 2019     May 16, 2019  
Expected volatility     29.12 %     30.47 %     28.25 %     29.29 %
Exercise price   Rs. 3,679.00     Rs. 5.00     Rs. 2,814.00     Rs. 5.00  
Option life     5.0 Years       2.5 Years       5.0 Years       2.5 Years  
Risk-free interest rate     5.67 %     4.62 %     7.14 %     6.76 %
Expected dividends     0.68 %     0.68 %     0.71 %     0.71 %
Grant date share price   Rs. 3,700.00     Rs. 3,700.00     Rs. 2,801.00     Rs. 2,801.00  

 

Share-based payment expense

 

    For the six months
ended September 30,
    For the three months
ended September 30,
 
    2020     2019     2020     2019  
Equity settled share-based payment expense(1)   Rs. 304     Rs. 272     Rs. 161     Rs. 136  
Cash settled share-based payment expense(2)     123       38       72       31  
    Rs. 427     Rs. 310     Rs. 233     Rs. 167  

 

(1) As of September 30, 2020 and 2019, there was Rs.979 and Rs.786, 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 2.11 years, respectively.

 

(2) Certain of the Company’s employees are eligible to receive share based payment awards that are settled in cash. These awards would vest only upon satisfaction of certain service conditions which range from 1 to 4 years. These awards entitle the employees to a cash payment on the vesting date. The amount of the cash payment is determined based on the price of the Company’s ADSs at the time of vesting. As of September 30, 2020 and 2019, there was Rs.219 and Rs.148, respectively, of total unrecognized compensation cost related to unvested awards. This cost is expected to be recognized over a weighted-average period of 2.12 years and 2.18 years, respectively. This scheme does not involve dealing in or subscribing to or purchasing securities of the Company, directly or indirectly.

 

20. Related parties

 

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

 

· Green Park Hotel and Resorts Limited for hotel services;

· Green Park Hospitality Services Private Limited for catering and other services;

· Dr. Reddy’s Foundation towards contributions for social development;

· Kunshan Rotam Reddy Pharmaceuticals Company Limited for sales of goods and for research and development services;

· Pudami Educational Society towards contributions for social development;

· Indus Projects Private Limited for engineering services relating to civil works;

· CERG Advisory Private Limited for professional consulting services;

· Dr. Reddy’s Institute of Life Sciences for research and development services;

· AverQ Inc. for professional consulting services;

· Shravya Publications Pvt. Ltd. for professional consulting services;

· Cancelled Plans LLP for the sale of scrap materials;

· Araku Originals Private Limited for the purchase of coffee powder;

· DRES Energy Private Limited for the purchase of solar power; and

· Stamlo Industries Limited for hotel services.

 

These are enterprises over which key management personnel have control or significant influence. “Key management personnel” consists of the Company’s Directors and members of the Company’s Management Council.

 

The Company has also entered into cancellable operating lease transactions with key management personnel and close members of their families.

 

Further, the Company contributes to the Dr. Reddy’s Laboratories Gratuity Fund, which maintains the plan assets of the Company’s Gratuity Plan for the benefit of its employees.

 

24

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

20. Related parties (continued)

 

The following is a summary of significant related party transactions:

 

    For the six months
ended September 30,
    For the three months
ended September 30,
 
    2020     2019     2020     2019  
Research and development services received   Rs. 52     Rs. 78     Rs. 25     Rs. 52  
Sale of goods     21       11       21       10  
Lease rentals received     1       -       - *     -  
Research and development services provided     -       58       -       33  
Lease rentals paid     19       18       10       9  
Catering expenses paid     139       175       67       83  
Hotel expenses paid     4       11       - *     5  
Facility management services paid     18       -       9       -  
Purchase of Solar power     68       -       34       -  
Civil works     15       48       13       46  
Contributions towards social development     116       118       58       81  
Salaries to relatives of key management personnel     5       4       2       1  
Others     1       3       1       1  

  

* Rounded to the nearest million.

 

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

 

    As of  
    September 30, 2020     March 31, 2020  
Key management personnel and close members of  their families   Rs. 8     Rs. 8  
Other related parties     46       68  

 

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

 

    As of  
    September 30, 2020     March 31, 2020  
Due to related parties   Rs. 49     Rs. 91  

 

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

 

    For the six months
ended September 30,
    For the three months
ended September 30,
 
    2020     2019     2020     2019  
Salaries and other benefits   Rs. 375     Rs. 315     Rs. 179     Rs. 154  
Contributions to defined contribution plans     17       17       9       8  
Commission to directors     170       130       85       55  
Share-based payments expense     121       79       67       43  
    Rs. 683     Rs. 541     Rs. 340     Rs. 260  

 

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.

 

25

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

21. Financial instruments

 

Financial instruments by category

 

The carrying value and fair value of financial instruments as at September 30, 2020 and March 31, 2020 were as follows:

 

    As of September 30, 2020     As of March 31, 2020  
    Total carrying
value
   

Total fair value

    Total carrying
value
    Total fair value  
Assets:                                
Cash and cash equivalents   Rs. 3,889     Rs. 3,889     Rs. 2,053     Rs. 2,053  
Other investments(1)     22,185       22,185       24,015       24,015  
Trade and other receivables     50,335       50,335       52,015       52,015  
Derivative financial assets     985       985       1,105       1,105  
Other assets(2)     3,583       3,583       4,170       4,170  
Total   Rs. 80,977     Rs. 80,977     Rs. 83,358     Rs. 83,358  
Liabilities:                                
Trade and other payables   Rs. 22,833     Rs. 22,833     Rs. 16,659     Rs. 16,659  
Derivative financial liabilities     597       597       1,602       1,602  
Long-term borrowings     7,476       7,476       5,570       5,570  
Short-term borrowings     19,852       19,852       16,441       16,441  
Bank overdraft     101       101       91       91  
Other liabilities and provisions(3)     24,749       24,749       25,317       25,317  
Total   Rs. 75,608     Rs. 75,608     Rs. 65,680     Rs. 65,680  

 

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

 

(2) Other assets that are not financial assets (such as receivables from statutory authorities, export benefit receivables, prepaid expenses, advances paid and certain other receivables) of Rs.12,863 and Rs.11,070 as of September 30, 2020 and March 31, 2020, respectively, are not included.

 

(3) Other liabilities and provisions that are not financial liabilities (such as statutory dues payable, deferred revenue, advances from customers and certain other accruals) of Rs.11,070 and Rs.10,725 as of September 30, 2020 and March 31, 2020, respectively, are not included.

 

Fair value hierarchy

 

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

 

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

 

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

 

The following table presents the fair value hierarchy of assets and liabilities measured at fair value on a recurring basis as of September 30, 2020:

 

Particulars   Level 1     Level 2     Level 3     Total  
FVTPL - Financial asset - Investments in units of mutual funds   Rs. 16,015     Rs. -     Rs. -     Rs. 16,015  
FVTOCI - Financial asset - Investment in equity securities     483       -       -       483  
FVTOCI - Financial asset - Investment in market linked debentures     956       -       -       956  
Derivative financial instruments – net loss on outstanding foreign exchange forward, option, swap contracts and interest rate swap contracts(1)     -       388       -       388  
Contingent consideration pursuant to the Business Transfer Agreement with Wockhardt Limited (Refer to Note 24 for details)                     561       561  

 

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)

 

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, 2020:

 

Particulars   Level 1     Level 2     Level 3     Total  
FVTPL - Financial asset - Investments in units of mutual funds   Rs. 13,832     Rs. -     Rs. -     Rs. 13,832  
FVTOCI - Financial asset - Investment in equity securities     303       -       -       303  
FVTOCI - Financial asset - Investment in market linked debentures     1,993       -       -       1,993  
Derivative financial instruments – net loss on outstanding foreign exchange forward, option, swap contracts and interest rate swap contracts(1)     -       (497 )     -       (497 )

 

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

 

As at September 30, 2020 and March 31, 2020, the changes in counterparty credit risk had no material effect on the hedge effectiveness assessment for derivatives designated in hedge relationships and other financial instruments recognized at fair value.

 

Hedges of foreign currency exchange rate risks

 

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

 

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

 

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

 

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

 

    For the six months
ended September 30,
    For the three months
ended September 30,
 
    2020     2019     2020     2019  
Net gain/(loss) recognized in finance costs in respect of foreign exchange derivative contracts and cross currency interest rate swaps contracts   Rs. 1,386     Rs. (315 )   Rs. 1,882     Rs. (287 )
Net gain/(loss) recognized in equity in respect of hedges of highly probable forecast transactions     917       (271 )     446       (187 )
Net gain/(loss) reclassified from equity and recognized as component of revenue occurrence of forecasted transaction     (93 )     66       51       25  

 

The net carrying amount of the Company’s “hedging reserve” as a component of equity before adjusting for tax impact was a gain of Rs.195 as at September 30, 2020, as compared to a loss of Rs.721 as at March 31, 2020.

 

27

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

22. Contingencies

 

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 32 to the Consolidated Financial Statements in the Company’s Annual Report on Form 20-F for the year ended March 31, 2020 contains a summary of significant Legal Proceedings. The following is a summary, as of the date of this quarterly report, of significant developments in those proceedings as well as any new significant proceedings commenced since the date such Annual Report on Form 20-F was filed.

 

Product and patent related matters

 

Launch of product

 

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

 

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

 

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

 

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

 

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

 

28

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

22. Contingencies (continued)

 

On February 19, 2019, the New Jersey District Court entered a stipulated order of dismissal of Indivior’s claims under U.S. patent number 9,855,221. On November 5, 2019, the New Jersey District Court issued its claim construction decision construing certain terms in U.S. patent numbers 9,931,305 and 9,687,454. After such claim construction decision, on January 8, 2020, the New Jersey District Court entered a stipulated order that the Company’s generic sublingual film product does not infringe the asserted claims in U.S. patent number 9,931,305. In the stipulated order, Indivior reserved the ability to appeal the New Jersey District Court’s claim construction order. On August 24, 2020, the New Jersey District Court denied the Company’s motion requesting that the court enter partial final judgment in the Company’s favor relating to the allegations of infringement of U.S. patent number 9,931,305.

 

On November 11, 2019, a Magistrate Judge in the District of New Jersey granted the Company leave to file a counterclaim against Indivior that alleges that Indivior engaged in anticompetitive conduct by making false or misleading statements to the New Jersey District Court during the preliminary injunction proceedings in violation of federal antitrust laws. On August 24, 2020, the New Jersey District Court denied Indivior’s appeal of the Magistrate Judge’s ruling. The Court has ordered that discovery on the Company’s counterclaim will proceed uninterrupted, and that there will be separate trials to address the antitrust claim and Indivior’s only remaining infringement claims, regarding U.S. patent number 9,687,454.

 

The parties continue to litigate Indivior’s allegation that the Company’s generic sublingual film products infringe any valid claim of U.S. patent number 9,687,454, with such litigation ongoing before the New Jersey District Court and the Patent Trial and Appeal Board (“PTAB”).

 

In the PTAB, on November 13, 2018, the Company filed two petitions for inter-partes review challenging the validity of certain claims of U.S. patent number 9,687,454 before the PTAB. On June 13, 2019, the PTAB agreed to institute inter-partes review on one of the two petitions filed by the Company. The PTAB heard oral argument in the pending inter-partes review challenge on March 3, 2020.

 

On June 2, 2020, the PTAB issued a final written decision in the Company’s favor finding that the Company had demonstrated that claims 1–5, 7, and 9–14 of the ’454 patent were unpatentable. The PTAB upheld the validity of only one of the challenged claims, claim 8. Additionally, claim 6 was not at issue in the inter-partes review and therefore not subject to the final written decision. Claims 6 and 8 remain asserted against the Company in the New Jersey District Court litigation. The PTAB’s decision becomes effective after the time for Indivior to appeal has expired or after any appeal taken by Indivior has concluded.

 

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

 

Matters relating to National Pharmaceutical Pricing Authority

 

Litigation relating to Cardiovascular and Anti-diabetic formulations

 

As previously disclosed, the Company is involved in legal proceedings with India’s National Pharmaceutical Pricing Authority regarding allegations that the Company violated the maximum prices permissible for various formulations in the cardiovascular and anti-diabetic therapeutic areas under applicable price control regulations. Following the adjournment of a hearing before the Delhi High Court which had been scheduled in June 2020, the Company is awaiting notification of a new hearing date.

 

Other product and patent related matters

 

Namenda Litigation

 

In August 2015, Sergeants Benevolent Assoc. Health & Welfare Fund (“Sergeants”) filed suit against the Company in the United States District Court for the Southern District of New York. Sergeants alleged that certain parties, including the Company, violated federal antitrust laws as a consequence of having settled patent litigation related to the Alzheimer’s drug Namenda® (memantine) tablets during a period from about 2009 until 2010. Sergeants seeks to represent a class of “end payor” purchasers of Namenda® tablets (i.e., insurers, other third-party payors and consumers).

 

Sergeants seeks damages based upon an allegation made in the complaint that the defendants entered into patent settlements regarding Namenda® tablets for the purpose of delaying generic competition and facilitating the brand innovator’s attempt to shift sales from the original immediate release product to the more recently introduced extended release product. The Company believes that the complaint lacks merit and that the Company’s conduct complied with all applicable laws and regulations.

 

On August 23, 2020, the Company entered into a settlement agreement with Sergeants under which the Company would pay U.S.$0.4 in exchange for a release of claims from the putative end-payor class. This settlement is subject to court approval.

 

29

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

22. Contingencies (continued)

 

Following the settlement agreement, the Company recognized such amount in the unaudited condensed consolidated interim income statement for the three months ended September 30, 2020.

 

On November 5, 2019 plaintiffs MSP Recovery Claims, Series LLC and MSPA Claims 1, LLC filed suit against the Company and other drug manufacturers in the United States District Court for the Southern District of New York. The claims in this complaint were similar in nature to the claims in the Sergeants lawsuit, and those cases were coordinated for discovery purposes. On April 14, 2020, with the consent of the Company and the other defendants, plaintiffs MSP Recovery Claims, Series LLC and MSPA Claims 1, LLC voluntarily dismissed their claims without prejudice.

 

Other class action complaints containing similar allegations to the Sergeants complaint have also been filed in the U.S. District Court for the Southern District of New York. However, apart from the Sergeants case described above, there are no such class actions that are pending and that name the Company as a defendant.

 

In addition, the State of New York filed an antitrust case in the U.S. District Court for the Southern District of New York. The case brought by the State of New York contained some (but not all) of the allegations set forth in the class action complaints, but the Company was not named as a party. The case brought by the State of New York was dismissed by stipulation on November 30, 2015.

 

The Company believes that the likelihood of any liability, apart from the settlement payment described above, that may arise on account of alleged violation of federal antitrust laws is not probable.

 

Ranitidine Recall and Litigation

 

On October 1, 2019, the Company initiated a voluntary nationwide retail (at the retail level for over-the-counter products and at the consumer level for prescription products) of all of its ranitidine medications sold in the United States due to the presence of N-Nitrosodimethylamine (“NDMA”) above levels established by the U.S. FDA. NDMA is classified as a probable human carcinogen (a substance that could cause cancer) based on results from laboratory tests. On November 1, 2019, the U.S. FDA issued a statement indicating that it had found levels of NDMA in ranitidine from its testing generally that were “similar to the levels you would expect to be exposed to if you ate common foods like grilled or smoked meats.” See https://www.fda.gov/news-events/press-announcements/statement-new-testing-results-including-low-levels-impurities-ranitidine-drugs. The U.S. FDA has indicated that its investigation and testing continue. On April 1, 2020, the U.S. FDA issued a press release announcing that it was requesting manufacturers to withdraw all prescription and over-the-counter ranitidine drugs from the market immediately. The U.S. FDA stated that it “has determined that the impurity in some ranitidine products increases over time and when stored at higher than room temperatures may result in consumer exposure to unacceptable levels of this impurity.” See https://www.fda.gov/safety/medical-product-safety-information/all-ranitidine-products-zantac-press-release-fda-requests-removal?utm_campaign=FDA%20MedWatch.

 

As referenced in Note 32 of the Company’s Form 20-F for the year ended March 31, 2020, multiple ranitidine related complaints were filed against the parent company, one of the Company’s U.S. subsidiaries and the Company’s Swiss subsidiary, along with numerous other pharmaceutical manufacturers and retailers. These complaints were subsumed by the June 22, 2020, filing of three new master complaints – a Master Personal Injury Complaint, a Consolidated Consumer Class Action Complaint and a Consolidated Third-Party Payor Class Action Complaint, in the ranitidine multidistrict litigation (“MDL”) located in the United States District Court for the Southern District of Florida. More than 70 short-form complaints from individual plaintiffs have been filed against the Company in the MDL, and the Company anticipates many additional claims.

 

During the quarter ended June 30, 2020, the New Mexico State Attorney General filed suit against the Company’s U.S. subsidiary, and multiple other manufacturers and retailers. The Company has joined in an effort to transfer the case to the MDL, and the New Mexico State Attorney General opposes such transfer to the MDL.

 

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

 

United States Antitrust Multi-District Litigation

 

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

 

30

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

22. Contingencies (continued)

 

Antitrust Case Filed by Rite Aid Corporation and Rite Aid HdqtRs. Corp.

 

On July 9, 2020, Rite Aid Corporation and Rite Aid Hdqtrs Corp. filed a complaint on their own behalf, and as assignee of McKesson Corporation with regard to drugs sold by McKesson to Rite Aid, against the Company’s U.S. subsidiary and forty-six other defendants, involving a total of one hundred thirty-five generic drugs, alleging an “overarching conspiracy” to fix prices and to rig bids and allocate customers with respect to these drugs. The Company’s U.S. subsidiary is specifically named with respect to nine drugs: ciprofloxacin ER, divalproex ER, fluconazole, glimepiride, meprobamate, oxaprozine, paricalcitol, tizanidine and zoledronic acid. Plaintiffs also allege that the Company’s U.S. subsidiary was part of a larger “overarching conspiracy” with all other manufacturers named as to all of the drugs named in the complaint; and, alternatively, was part of an overarching conspiracy with eighteen of the defendants named with regard to forty-five of the drugs named. The complaint also alleges violations of Section 1 of the Sherman Act, 15 U.S.C. §1. The complaint seeks injunctive relief, recovery of treble damages, and attorney’s fees and costs against all defendants on a joint and several basis. The Company denies any wrongdoing and intends to vigorously defend against these claims.

 

Antitrust Complaint Filed by Suffolk County, New York

 

On August 27, 2020, Suffolk County, New York, filed a complaint against the Company’s U.S. subsidiary and forty-six other defendants, involving a total of one hundred thirty generic drugs, alleging an “overarching conspiracy” to fix prices and to rig bids and allocate customers with respect to these drugs. The Company’s U.S. subsidiary is specifically named with respect to twelve drugs: ciprofloxacin ER, divalproex ER, fenofibrate, fluconazole, glimepiride, glyburide, metformin, oxaprozin, pravastatin, ranitidine, tizanidine and zoledronic acid. Plaintiffs also allege that the Company’s U.S. subsidiary was part of a larger “overarching conspiracy” with all other manufacturers named as to all of the drugs named in the complaint. The complaint alleges violations of Section 1 of the Sherman Act, 15 U.S.C. §1. The complaint seeks injunctive relief, recovery of treble damages, and attorney’s fees and costs against all defendants on a joint and several basis. The Company denies any wrongdoing and intends to vigorously defend against these claims.

 

Antitrust Complaint Filed by J M Smith

 

On September 4, 2020, J M Smith Corporation, as assignee of Burlington Drug Company, filed a complaint against the Company’s U.S. subsidiary and fifty other defendants, involving a total of one hundred thirty generic drugs, alleging an “overarching conspiracy” to fix prices and to rig bids and allocate customers with respect to these drugs. The Company’s U.S. subsidiary is specifically named with respect to eleven drugs: allopurinol, ciprofloxacin ER, divalproex ER, fluconazole, glimepiride, meprobamate, oxaprozin, paricalcitol ranitidine, tizanidine and zoledronic acid. Plaintiffs also allege that the Company’s U.S. subsidiary was part of a larger “overarching conspiracy” with all other manufacturers named as to all of the drugs named in the complaint. The complaint alleges violations of Section 1 of the Sherman Act, 15 U.S.C. §1. The complaint seeks injunctive relief, recovery of treble damages, and attorney’s fees and costs against all defendants on a joint and several basis. The Company denies any wrongdoing and intends to vigorously defend against these claims.

 

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

 

Civil Litigation and Arbitration with Hatchtech Pty Limited

 

On September 25, 2020, the Company’s wholly owned Swiss subsidiary, Dr. Reddy’s Laboratories, S.A., filed an action in Delaware Chancery Court against Hatchtech Pty Limited (“Hatchtech”) to rescind the September 7, 2015, Asset Purchase Agreement with Hatchtech, pursuant to which the Company’s subsidiary acquired the patented product Xeglyze®, a topical lousicidal lotion for the treatment of head lice. On October 8, 2020, Hatchtech filed an arbitration demand against the Company’s subsidiary before the American Arbitration Association in New York City. Based on its best estimate, the Company has recorded a provision for potential liability of Rs.728.

 

31

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

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

 

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

 

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

 

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

 

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

 

The Scheme of Amalgamation of DRHL with the Company was filed with BSE and NSE (Stock Exchanges) for their consideration and approval. No observation letters were received from the stock exchanges on the basis of no comments received from SEBI on October 11, 2019. The Company has filed an application with the Hon’ble National Company Law Tribunal (“NCLT”) Hyderabad, seeking direction for conducting court convened meetings of the shareholders and unsecured creditors. The NCLT in its order dated November 22, 2019 directed the Company to conduct meetings of the shareholders’ and creditors. The NCLT also appointed the Chairpersons and Scrutinizers for the respective meetings. The notice convening the shareholders and unsecured creditors meetings on January 2, 2020, were circulated within statutory timelines for approval of Scheme of Amalgamation of DRHL with the Company.

 

The resolutions were passed with requisite majority of shareholders (99.98%) and unsecured creditors (100%) at the respective shareholders and unsecured creditors meetings on January 2, 2020. The petition for approval of the Scheme has been filed with Hon’ble NCLT on January 9, 2020. The NCLT hearing on June 3, 2020 has been adjourned and a new date is yet to be scheduled.

 

24. Business Transfer Agreement with Wockhardt Limited

 

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

 

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 has been a reduction in the revenue from the sales of the products forming part of the Business Undertaking during March and April 2020. Accordingly, through an amendment to the BTA, the Company and Wockhardt agreed that the consideration shall now be upto Rs.18,500, to be paid as per the following terms:

 

a) an amount of Rs.14,830 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 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.

 

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

 

32

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

24. Business Transfer Agreement with Wockhardt Limited (continued)

 

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 (“PPA”) was preliminary.

 

During the three months ended September 30, 2020, the Company completed the PPA and tabulated below are the fair values of the assets acquired including goodwill, and liabilities assumed on the acquisition date:

 

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

 

The total goodwill of Rs.530 consists largely of the synergies and economies of scale expected from acquired business, together with the value of workforce acquired. The entire amount of goodwill is deductible for tax purposes.

 

Acquisition related costs amounted to Rs.60 and were excluded from the consideration transferred and were recognized as expense under “Selling, general and administrative expenses” in the interim income statements for the six months ended September 30, 2020.

 

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, “Fair Value Measurement” refers to as Level 3 inputs. The significant unobservable inputs in the valuation is the estimated sales forecast.

 

A 1% increase/(decrease) in the sales forecast would result in loss/(gain) in income statements by Rs.102. However, the maximum amount of the Holdback Amount is Rs.3,000 as per the BTA.

 

The amount of revenue included in the interim income statements for the six months ended September 30, 2020 since June 10, 2020 pertaining to the business is Rs.1,518.

 

The business has been integrated into the Company’s existing activities and it is not practicable to identify the impact on the Company profit in the period.

 

25. Impact of COVID-19

 

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

 

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