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 December 31, 2018

 

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 December 31, 2018

 

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, 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 “U.S. FDA” are to the United States Food and Drug Administration, 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 Holdings 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.69.58, as published by Federal Reserve Board of Governors on December 31, 2018. 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.

 

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 and Cautionary Statement

 

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 FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION TITLED “OPERATING AND FINANCIAL REVIEW, TREND INFORMATION” AND ELSEWHERE IN THIS REPORT. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT OUR ANALYSIS ONLY AS OF THE DATE HEREOF. IN ADDITION, READERS SHOULD CAREFULLY REVIEW THE INFORMATION IN OUR PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH AND/OR FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION (“SEC”) FROM TIME TO TIME.

 

2 

 

 

TABLE OF CONTENTS

 

ITEM 1. FINANCIAL STATEMENTS 4
   
ITEM 2. OPERATING AND FINANCIAL REVIEW, TREND INFORMATION 36
   
ITEM 3. LIQUIDITY AND CAPITAL RESOURCES 45
   
ITEM 4. OTHER MATTERS 47
   
ITEM 5. EXHIBITS 48
   
SIGNATURES 49

 

3 

 

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)

 

Particulars  Note   December 31, 2018   December 31, 2018   March 31, 2018 
       Convenience translation
(See Note 2(d))
         
ASSETS                    
Current assets                    
Cash and cash equivalents   4   U.S.$25   Rs.1,712   Rs.2,638 
Other investments   5    331    23,062    18,330 
Trade and other receivables   26    535    37,192    40,617 
Inventories   6    487    33,911    29,089 
Derivative financial instruments        9    625    103 
Tax assets        51    3,566    4,567 
Other current assets        185    12,844    14,301 
Total current assets       U.S.$1,623   Rs.112,912   Rs.109,645 
Non-current assets                    
Property, plant and equipment       U.S.$795   Rs.55,344   Rs.57,869 
Goodwill   10    57    3,942    3,945 
Other intangible assets        651    45,263    44,665 
Trade and other receivables   26    2    110    169 
Investment in equity accounted investees        34    2,340    2,104 
Other investments   5    12    819    2,549 
Deferred tax assets        71    4,910    3,628 
Other non-current assets        15    1,035    1,030 
Total non-current assets       U.S.$1,635   Rs.113,763   Rs.115,959 
Total assets       U.S.$3,258   Rs.226,675   Rs.225,604 
LIABILITIES AND EQUITY                    
Current liabilities                    
Trade and other payables       U.S.$229   Rs.15,939   Rs.16,052 
Short-term borrowings   12    248    17,249    25,466 
Long-term borrowings, current portion   12    27    1,875    63 
Provisions        56    3,931    3,732 
Tax liabilities        12    803    1,530 
Derivative financial instruments        1    67    85 
Bank overdraft   4    0    12    96 
Other current liabilities        326    22,684    22,668 
Total current liabilities       U.S.$899   Rs.62,560   Rs.69,692 
Non-current liabilities                    
Long-term borrowings   12    U.S.$355    Rs.24,700     Rs.25,089 
Deferred tax liabilities        9    613    730 
Provisions        1    51    53 
Other non-current liabilities        44    3,043    3,580 
Total non-current liabilities       U.S.$408   Rs.28,407   Rs.29,452 
Total liabilities       U.S.$1,307   Rs.90,967   Rs.99,144 
Equity                    
Share capital   15    U.S.$12    Rs.830     Rs.830 
Treasury shares   15    (7)   (496)   - 
Share premium        118    8,197    7,790 
Share based payment reserve        13    891    1,021 
Capital redemption reserve        2    173    173 
Retained earnings        1,786    124,301    113,865 
Other components of equity        26    1,812    2,781 
Total equity       U.S.$1,950   Rs.135,708   Rs.126,460 
Total liabilities and equity       U.S.$3,258   Rs.226,675   Rs.225,604 

 

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

 

4 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM INCOME STATEMENTS

(in millions, except share and per share data)

 

     

For the nine months ended

December 31,

   For the three months ended
December 31,
 
Particulars  Note  2018   2018   2017   2018   2017 
      Convenience
translation (See
Note 2(d))
                 
Revenues (1)  25  U.S.$1,634   Rs.113,685   Rs.106,679   Rs.38,500   Rs.38,060 
Cost of revenues      737    51,308    49,270    17,748    16,649 
Gross profit      896    62,377    57,409    20,752    21,411 
Selling, general and administrative expenses      525    36,514    34,843    12,036    12,048 
Research and development expenses      172    11,945    13,917    3,668    4,667 
Other income, net  13   (23)   (1,625)   (621)   (681)   (313)
Total operating expenses      673    46,834    48,139    15,023    16,402 
Results from operating activities (A)      223    15,543    9,270    5,729    5,009 
Finance income      20    1,686    1,688    502    1,053 
Finance expense      (9)   (918)   (640)   (515)   (202)
Finance (expense)/income, net (B)  14   11    768    1,048    (13)   851 
Share of profit of equity accounted investees, net of tax (C)      4    281    275    89    85 
Profit before tax [(A)+(B)+(C)]      238    16,592    10,593    5,805    5,945 
Tax expense  18   31    2,141    3,809    953    2,601 
Profit for the period      208    14,451   Rs.6,784    4,852   Rs.3,344 
Earnings per share:                            
Basic earnings per share of Rs.5/- each     U.S.$1.25   Rs.87.08   Rs.40.91   Rs.29.25   Rs.20.16 
Diluted earnings per share of Rs.5/- each     U.S.$1.25   Rs.86.97   Rs.40.83   Rs.29.21   Rs.20.13 

  

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

 

Effective July 1, 2017, Goods and Services Tax (“GST”) was introduced in India. Following the principles of IFRS 15, “Revenue from Contracts with Customers”, revenue from operations are disclosed net of GST. For periods prior to July 1, 2017, the excise duty amount was recorded as part of revenues with a corresponding amount recorded in the cost of revenues. Accordingly, revenues and cost of revenues for the nine months ended December 31, 2018 are not comparable with those of the previous period presented. Revenues for the nine months ended December 31, 2017 include excise duty amounting to Rs.173.

 

5 

 

 

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 nine months ended

December 31,

   For the three months ended
December 31,
 
Particulars  2018   2018   2017   2018   2017 
   Convenience
translation (See
Note 2(d))
                 
Profit for the period  U.S.$208   Rs.14,451   Rs.6,784   Rs.4,852   Rs.3,344 
Other comprehensive income/(loss)                         
Items that will not be reclassified to the consolidated income statement:                         
Changes in the fair value of financial instruments  U.S.$.(13)   Rs.(894)   Rs.-   Rs.(438)   Rs.- 
Actuarial gains on post-employment benefit obligations   -    8    -    -    - 
Tax impact on above items   3    227    -    103    - 
Total of items that will not be reclassified subsequently to the consolidated income statement  U.S.$.(9)   Rs.(659)   Rs.-   Rs.(335)   Rs.- 
Items that will be reclassified subsequently to the consolidated income statement:                         
Changes in fair value of available for sale financial instruments  U.S.$. -    Rs. -    Rs.(4,316)   Rs.-   Rs.(2,076) 
Foreign currency translation adjustments   (3)   (183)   (340)   (331)   (222)
Foreign currency translation reserve re-classified to the income statement on disposal of foreign operation   (2)   (113)   -    -    - 
Effective portion of changes in fair value of cash flow hedges, net   1    36    94    626    124 
Tax impact on above items   -    1    1,093    (230)   571 
Total of items that will be reclassified subsequently to the consolidated income statement  U.S.$.(4)   Rs.(259)   Rs.(3,469)   Rs.65    Rs.(1,603) 
Other comprehensive loss for the period, net of tax  U.S.$.(13)   Rs.(918)   Rs.(3,469)   Rs.(270)   Rs.(1,603) 
Total comprehensive income for the period  U.S.$194   Rs.13,533    Rs.3,315   Rs.4,582   Rs.1,741 

 

 

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 CHANGES IN EQUITY

(in millions, except share and per share data)

 

    Share
capital
    Share
premium
    Treasury
shares
    Share-based
payment
reserve
    Fair value
reserve
    Foreign
currency
translation 
reserve
    Hedging
reserve
    Capital
redemption
reserve
    Actuarial
gains
/(losses)
    Retained 
earnings
    Total  
Balance as of April 1, 2018   Rs. 830     Rs. 7,790     Rs. -     Rs. 1,021     Rs. (1,046 )   Rs. 4,184     Rs. 45     Rs. 173     Rs. (402 )   Rs. 113,865     Rs. 126,460  
Adjustment on account of transition to IFRS 9(1)     -       -       -       -       (50 )     -       -       -       -       (12 )     (62 )
Adjusted balance as of April 1, 2018 (A)   Rs. 830     Rs. 7,790     Rs. -     Rs. 1,021     Rs. (1,096 )(2)   Rs. 4,184     Rs. 45     Rs. 173     Rs. (402 )   Rs. 113,853     Rs. 126,398  
Profit for the period     -       -       -       -       -       -       -       -       -       14,451       14,451  
Net change in fair value of equity instruments, net of tax benefit of Rs.230     -       -       -       -       (664 )     -       -       -       -       -       (664 )
Foreign currency translation adjustments, net of tax benefit of Rs.14(3)     -       -       -       -       -       (283 )     -       -       -       -       (283 )
Effective portion of changes in fair value of cash flow hedges, net of tax expense of Rs.13     -       -       -       -       -       -       23       -       -       -       23  
Actuarial gain/(loss) on post-employment benefit obligations, net of tax expense of Rs.3     -       -       -       -       -       -       -       -       5       -       5  
Total comprehensive income (B)   Rs. 0     Rs. -     Rs. -     Rs. -     Rs. (664 )   Rs. (283 )   Rs. 23     Rs. -     Rs. 5     Rs. 14,451     Rs. 13,532  
Issue of equity shares on exercise of options     0       407       -       (407 )     -       -       -       -       -       -       0  
Share-based payment expense     -       -       -       277       -       -       -       -       -       -       277  
Purchase of treasury shares     -       -       (496 )     -       -       -       -       -       -       -       (496 )
Dividend paid (including corporate dividend tax)     -       -       -       -       -       -       -       -       -       (4,003 )     (4,003 )
Total transactions with owners of the Company (C)   Rs. 0     Rs. 407     Rs. (496 )   Rs. (130 )   Rs. -     Rs. -     Rs. -     Rs. -     Rs. -     Rs. (4,003 )   Rs. (4,222 )
Balance as of December 31, 2018 [(A)+(B)+(C)]   Rs. 830     Rs. 8,197     Rs. (496 )   Rs. 891     Rs. (1,760 )   Rs. 3,901     Rs. 68     Rs. 173     Rs. (397 )   Rs. 124,301     Rs. 135,708  
Convenience translation  (See note 2(d))   U.S.$ 12     U.S.$  118     U.S.$.  (7)     U.S.$  13     U.S.$.  (25)     U.S.$  56     U.S.$. 1     U.S.$ 2     U.S.$. (6)     U.S.$  1,786     U.S.$  1,950  
                                                                                         
Balance as of April 1, 2017 (D)   Rs. 829     Rs. 7,359     Rs. -     Rs. 998     Rs. 2,744     Rs. 4,233     Rs. 86     Rs. 173     Rs. (429 )   Rs. 108,051     Rs. 124,044  
Profit for the period     -       -       -       -       -       -       -       -       -       6,784       6,784  
Net change in fair value of available for sale financial instruments, net of tax benefit of Rs.1,089     -       -       -       -       (3,227 )     -       -       -       -       -       (3,227 )
Foreign currency translation adjustments, net of tax expense of Rs.32     -       -       -       -       -       (308 )     -       -       -       -       (308 )
Effective portion of changes in fair value of cash flow hedges, net of tax benefit of Rs.28     -       -       -       -       -       -       66       -       -       -       66  
Total comprehensive income (E)   Rs. 0     Rs. -     Rs. -     Rs. -     Rs. (3,227 )   Rs. (308 )   Rs. 66     Rs. -     Rs. -     Rs. 6,784     Rs. 3,315  
Issue of equity shares on exercise of options     0       386       -       (386 )     -       -       -       -       -       -       0  
Share-based payment expense     -       -       -       318       -       -       -       -       -       -       318  
Dividend paid (including corporate dividend tax)     -       -       -       -       -       -       -       -       -       (3,992 )     (3,992 )
Total transactions with owners of the Company (F)   Rs. 0     Rs. 386     Rs. -     Rs. (68 )   Rs. -     Rs. -     Rs. -     Rs. -     Rs. -     Rs. (3,992 )   Rs. (3,674 )
Balance as of December 31, 2017 [(D)+(E)+(F)]   Rs. 829     Rs. 7,745     Rs. -     Rs. 930     Rs. (483 )   Rs. 3,925     Rs. 152     Rs. 173     Rs. (429 )   Rs. 110,843     Rs. 123,685  

 

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

 

(1)Consists of mark to market gains on mutual funds amounting to Rs.50, offset by an impairment loss of Rs.62 on trade receivables. The net impact of Rs.12 was considered in retained earnings.

 

(2)Represents mark to market gain/(loss) on available-for-sale financial instruments (under IAS 39) recognized in other comprehensive income (“OCI”). The amount will be retained in OCI and will be re-classified to retained earnings only on disposal of these investments.

 

(3)An amount of Rs.113 was re-classified from foreign currency translation reserve to the income statement on disposal of one of the foreign operations. Refer to Note 9 of these unaudited condensed consolidated interim financial statements for further details.

 

7 

 

 

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 nine months ended December 31, 
Particulars  2018   2018   2017 
   Convenience
translation
(See Note 2(d))
         
Cash generated from operating activities:               
Profit for the period  U.S.$208   Rs.14,451   Rs.6,784 
Adjustments for:               
Income tax expense   31    2,141    3,809 
Realized and unrealized gains on investments   (7)   (503)   (1,177)
Depreciation and amortization   131    9,089    8,712 
Impairment loss on property, plant and equipment, and other intangible assets   2    128    20 
Inventory write-downs   41    2,825    2,102 
Allowance for credit loss and doubtful trade and other receivables   1    92    151 
(Profit)/loss on sale of property, plant and equipment and other intangible assets, net   (15)   (1,043)   21 
Allowance for sales returns   37    2,561    2,112 
Share of profit of equity accounted investees   (4)   (281)   (275)
Exchange gain, net   (22)   (1,507)   (1,512)
Interest expense, net   1    64    156 
Equity settled share-based payment expense   4    277    318 
Changes in operating assets and liabilities:               
Trade and other receivables   61    4,226    (4,750)
Inventories   (109)   (7,567)   (329)
Trade and other payables   11    731    1,474 
Other assets and other liabilities   (11)   (753)   (3,322)
    358    24,931    14,294 
Income tax paid   (42)   (2,938)   (2,046)
Net cash generated from operating activities  U.S.$316   Rs.21,993   Rs.12,248 
Cash flows from/(used in) investing activities:               
Purchase of property, plant and equipment   (75)   (5,196)   (7,786)
Proceeds from sale of property, plant and equipment, and other intangible assets   30    2,098    59 
Purchase of other intangible assets   (14)   (978)   (1,610)
Purchase of other investments   (896)   (62,313)   (40,932)
Proceeds from sale of other investments   846    58,836    34,287 
Interest and dividend received   6    398    302 
Net cash from/(used in) investing activities  U.S.$(103)   Rs.(7,155)   Rs.(15,680) 
Cash flows from/(used in) financing activities:               
Proceeds from issuance of equity shares   0    1    0 
Repayment of short-term borrowings, net   (143)   (9,983)   (12,397)
Repayment of long-term borrowings   (1)   (57)   - 
Proceeds from long-term borrowings   -    -    18,970 
Purchase of treasury shares   (7)   (496)   - 
Dividend paid (including corporate dividend tax)   (58)   (4,003)   (3,992)
Interest paid   (17)   (1,179)   (984)
Net cash from/(used in) financing activities  U.S.$(226)   Rs.(15,717)   Rs.1,597 
Net increase/(decrease) in cash and cash equivalents   (13)   (879)   (1,835)
Effect of exchange rate changes on cash and cash equivalents   1    37    (19)
Cash and cash equivalents at the beginning of the period   37    2,542    3,779 
Cash and cash equivalents at the end of the period (See Note 4 for further details)  U.S.$24   Rs.1,700   Rs.1,925 

 

 

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


8 

 

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 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 Karnataka 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 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, 2018. These interim financial statements were authorized for issuance by the Company’s Board of Directors on February 01, 2019.

 

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, 2018 contained in the Company’s Annual Report on Form 20-F except for the changes to the accounting policies on adoption of IFRS 9, “Financial instruments”, and IFRS 15, “Revenue from Contracts with Customers”.

 

Impact of adoption of IFRS 9 and IFRS 15

 

IFRS 9, Financial Instruments

 

In July 2014, the IASB issued the final version of IFRS 9, “Financial instruments”. IFRS 9 significantly differs from IAS 39, “Financial Instruments: Recognition and Measurement”, and includes a logical model for classification and measurement, a single, forward-looking “expected loss” impairment model and a substantially-reformed approach to hedge accounting. The Company applied the modified retrospective method upon adoption of IFRS 9 on April 1, 2018. This method requires the recognition of the cumulative effect of initially applying IFRS 9 to retained earnings and not to restate prior years. The cumulative effect recorded at April 1, 2018 was a decrease to retained earnings of Rs.12.

 

Detailed below is the impact of the implementation of IFRS 9 on the Company.

 

Investment in mutual funds

 

The most significant impact to the Company, upon adoption of IFRS 9, relates to the treatment of the unrealized gains and losses from changes in fair value on investment in mutual funds. Investment in mutual funds, was previously classified as available-for-sale investments. The unrealized gains and losses which were previously recognized in the consolidated statement of other comprehensive income will now be recognized in the consolidated income statement. On transition to IFRS 9, the unrealized gain of Rs.50 previously recognized in other comprehensive income was transferred to retained earnings.

 

9 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

2.Basis of preparation of financial statements (continued)

 

b)Significant accounting policies (continued)

 

Investment in equity shares

 

All equity investments within the scope of IFRS 9 are measured at fair value. Equity instruments which are held for trading and contingent consideration recognized by an acquirer in a business combination to which IFRS 3 applies are classified as at fair value through profit and loss (“FVTPL”). For all other equity instruments, the Company may make an irrevocable election to present subsequent changes in the fair value through other comprehensive income (“FVTOCI”). The Company makes such election on an instrument by-instrument basis. The classification is made on initial recognition and is irrevocable.

 

The Company has elected the irrevocable option to record fair value movements on certain equity investments in the consolidated statement of other comprehensive income with no future reclassification of such gains and losses to the consolidated income statement. On transition to IFRS 9, an amount of Rs.1,096, representing the change in the fair value of equity instruments as on April 1, 2018, was retained in other comprehensive income and will be reclassified to retained earnings on sale of such instruments.

 

Impairment of trade receivables

 

In accordance with IFRS 9, the Company has implemented the expected credit loss (“ECL”) model for measurement and recognition of impairment loss on its trade receivables or any contractual right to receive cash or another financial asset that result from transactions that are within the scope of IFRS 15.

 

The Company follows a “simplified approach” which does not require the Company to track changes in credit risk but rather recognize impairment loss allowance based on lifetime ECLs at each reporting date, right from its initial recognition. For this purpose, the Company designed a provision matrix to determine impairment loss allowance on the portfolio of its trade receivables. The provision matrix is based on its historically observed default rates over the expected life of the trade receivables and is adjusted for forward-looking estimates. At every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analyzed.

 

Hedge accounting

 

The new hedge accounting model introduced by the standard requires hedge accounting relationships to be based upon the Company’s own risk management strategy and objectives, and to be discontinued only when the relationships no longer qualify for hedge accounting. Based on the impact of the adoption assessment performed, the Company believes that its hedge relationships designated under IAS 39, “Financial Instruments: Recognition and Measurement”, will continue to be designated as such under the new hedge accounting requirements.

 

Tabulated below is the impact of the implementation of IFRS 9 on the financial position of the Company on the transition date:

 

   April 1, 2018  

IFRS 9

adjustment

   Adjusted April
1, 2018
 
Current assets:               
Trade and other receivables  Rs.40,617   Rs.(87)  Rs.40,530 
Non-current assets:               
Deferred tax assets  Rs.3,628   Rs.25   Rs.3,653 
Equity:               
Retained earnings  Rs.113,865   Rs.(12)  Rs.113,853 
Other components of equity   2,781    (50)   2,731 

 

10 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

2.Basis of preparation of financial statements (continued)

 

b)Significant accounting policies (continued)

 

IFRS 15, Revenue from Contracts with Customers

 

In May 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers”. This comprehensive new standard supersedes IAS 18, “Revenue”, IAS 11, “Construction contracts” and related interpretations. The new standard amends revenue recognition requirements and establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

 

The impacts of the adoption of the new standard are summarized below:

 

The Company’s revenue is derived from sales of goods, service income and income from licensing arrangements. Most of such revenue (approximately 97%) is generated from the sale of goods.

 

Sale of goods

 

Revenue from sales of goods is comprised of sale of generic and branded products and sale of active pharmaceutical ingredients and intermediates. Revenue from sale of goods is recognized where control is transferred to the Company’s customers at the time of shipment to or receipt of goods by the customers. There was no change in the point of recognition of revenue upon adoption of IFRS 15.

 

Service income

 

Service income, which primarily relates to revenue from contract research, is recognized as and when the underlying services are performed. There was no change in the point of recognition of revenue upon adoption of IFRS 15. Upfront non-refundable payments received under these arrangements continue to be deferred and are recognized over the expected period that related services are to be performed.

 

License fees

 

License fees primarily consist of income from the out-licensing of intellectual property, and other licensing and supply arrangements with various parties. Revenue from license fees is recognized when control transfers to the third party and the Company’s performance obligations are satisfied. The adoption of IFRS 15 did not significantly change the timing or amount of revenue recognized from these arrangements, nor did it change accounting for these royalty arrangements, as the standard’s royalty exception is applied for intellectual property licenses. Upfront non-refundable payments received under these arrangements continue to be deferred and are recognized over the expected period that related services are to be performed.

 

Profit share revenues and milestone payments

 

Revenues from sales of goods also include revenues from profit sharing arrangements with business partners for sales of the Company’s products in certain markets. Furthermore, the Company receives milestone payments related to out-licensing of the intellectual property. Under IFRS 15, the profit share amount is recognized only to the extent that it is highly probable that a significant reversal in the amount of profit share will not occur when the uncertainty associated with the profit share is subsequently resolved. The adoption of IFRS 15 did not significantly change the timing or amount of revenue recognized under these arrangements.

 

The Company applied the modified retrospective method upon adoption of IFRS 15 on April 1, 2018. This method requires the recognition of the cumulative effect of initially applying IFRS 15 to retained earnings and not to restate prior years.

 

Overall, the application of this standard did not have a material impact on the revenue streams from the sale of goods, service income, license fees, profit share revenues and milestone payments, and associated rebates and sales returns provision.

 

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)

 

c)Basis of measurement

 

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

 

·derivative financial instruments are measured at fair value;

 

·certain 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, except obligations under finance leases, are measured at amortized cost using the effective interest rate method;

 

·share-based payments are measured at fair value; and

 

·investments in joint ventures are accounted for using the equity method.

 

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 nine months ended December 31, 2018 have been translated into U.S. dollars at the certified foreign exchange rate of U.S.$1.00 = Rs.69.58, as published by the Federal Reserve Board of Governors on December 31, 2018. 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 auditors.

 

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, 2018.

 

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)

 

2.Basis of preparation of financial statements (continued)

 

g)Recent accounting pronouncements

 

Standards issued but not yet effective and not early adopted by the Company

 

IFRS 16, Leases

 

In January 2016, the IASB issued a new standard, IFRS 16, “Leases”. The new standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance leases is retained. IFRS 16 supersedes IAS 17, “Leases”, and related interpretations and is effective for annual reporting periods beginning on or after January 1, 2019. Earlier adoption of IFRS 16 is permitted if IFRS 15, “Revenue from Contracts with Customers”, has also been applied.

 

Upon adoption, a portion of the annual operating lease expense, which is currently fully recognized as functional expense, will be recognized as finance expense. Further, a portion of the annual lease payments recognized in the cash flow statement as reduction of lease liability will be recognized as outflow from financing activities, which are currently fully recognized as an outflow from operating activities.

 

The undiscounted and non-cancellable operating lease commitments of Rs.1,929 and Rs.1,710 as at March 31, 2018 and 2017, respectively, as disclosed in Note 27 of Form 20-F as of March 31, 2018, provide an indicator of the impact of implementation of IFRS 16 on the consolidated financial statements of the Company. Accordingly, the Company believes that the adoption of IFRS 16 will not have a material impact on its consolidated financial statements.

 

IFRIC 23, Uncertainty over Income Tax Treatments

 

On June 7, 2017, the IFRS Interpretations Committee issued IFRIC 23, which clarifies how the recognition and measurement requirements of IAS 12 “Income Taxes”, are applied where there is uncertainty over income tax treatments.

 

IFRIC 23 explains how to recognize and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment. An uncertain tax treatment is any tax treatment applied by an entity where there is uncertainty over whether that treatment will be accepted by the applicable tax authority. For example, a decision to claim a deduction for a specific expense or not to include a specific item of income in a tax return is an uncertain tax treatment if its acceptability is uncertain under applicable tax law. The interpretation provides specific guidance in several areas where previously IAS 12 was silent. IFRIC 23 applies to all aspects of income tax accounting where there is an uncertainty regarding the treatment of an item, including taxable profit or loss, the tax bases of assets and liabilities, tax losses and credits and tax rates.

 

The interpretation is effective for annual reporting periods beginning on or after January 1, 2019. Earlier application is permitted. An entity can, on initial application, elect to apply this interpretation either:

 

·retrospectively applying IAS 8, “Accounting Policies, Changes in Accounting Estimates and Errors”, if possible without the use of hindsight; or

 

·retrospectively, with the cumulative effect of initially applying the interpretation recognized at the date of initial application as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate).

 

The Company is in the process of evaluating the impact of IFRIC 23 on the 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

 

Information about segments:  For the nine months ended December 31, 2018   For the nine months ended December 31, 2017 
Segments  Global
Generics
   PSAI   Proprietary
Products
   Others   Total   Global
Generics
   PSAI   Proprietary
Products
   Others   Total 
Revenues (1)  Rs.92,519    Rs.17,375   Rs.2,237   Rs. 1,554    Rs.113,685   Rs.86,178   Rs.15,741   Rs.3,397   Rs.1,363   Rs.106,679 
Gross profit  Rs.54,916    Rs. 4,708    Rs. 1,875   Rs. 878   Rs. 62,377   Rs.50,684   Rs.2,936   Rs.3,073   Rs.716   Rs.57,409 
Selling, general and administrative expenses                       36,514                        34,843 
Research and development expenses                        11,945                        13,917 
Other income, net                       (1,625                       (621)
Results from operating activities                      Rs. 15,543                       Rs.9,270 
Finance income, net                       768                         1,048 
Share of profit of equity accounted investees, net of tax                        281                        275 
Profit before tax                      Rs.16,592                       Rs.10,593 
Tax expense                        2,141                        3,809 
Profit for the period                        14,451                       Rs.6,784 

 

(1)Revenues for the nine months ended December 31, 2018 and 2017 do not include inter-segment revenues from the PSAI segment to the Global Generics segment, which amount to Rs.4,409 and Rs.4,044, respectively.

 

Information about segments:  For the three months ended December 31, 2018   For the three months ended December 31, 2017 
Segments  Global
Generics
   PSAI   Proprietary
Products
   Others   Total   Global
Generics
   PSAI   Proprietary
Products
   Others   Total 
Revenues (2)  Rs. 31,347   Rs. 5,937    Rs. 735   Rs. 481   Rs. 38,500   Rs.30,105   Rs.5,436   Rs.2,137   Rs.382   Rs.38,060 
Gross profit  Rs. 18,049   Rs. 1,826   Rs. 628   Rs. 249   Rs. 20,752   Rs.17,912   Rs.1,296   Rs.2,022   Rs.181   Rs.21,411 
Selling, general and administrative expenses                      12,036                        12,048 
Research and development expenses                       3,668                        4,667 
Other income, net                        (681                       (313)
Results from operating activities                      Rs.5,729                       Rs.5,009 
Finance (expense)/income, net                        (13                       851 
Share of profit of equity accounted investees, net of tax                       89                         85 
Profit before tax                      Rs.5,805                        Rs.5,945 
Tax expense                       953                         2,601 
Profit for the period                      Rs. 4,852                        Rs.3,344 

 

(2)Revenues for the three months ended December 31, 2018 and 2017 do not include inter-segment revenues from the PSAI segment to the Global Generics segment, which amount to Rs.1,295 and Rs.1,349, 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 nine months ended
December 31,
   For the three months ended
December 31,
 
Country  2018   2017   2018   2017 
India  Rs.21,709   Rs.19,642   Rs.7,141   Rs.6,761 
United States   50,765    51,640    16,877    19,148 
Russia   11,680    10,046    4,099    3,367 
Others   29,531    25,351    10,383    8,784 
   Rs.113,685   Rs.106,679   Rs.38,500   Rs.38,060 

 

4.Cash and cash equivalents

 

Cash and cash equivalents consist of the following:

 

   As of 
   December 31, 2018   March 31, 2018 
Cash balances  Rs.2   Rs.2 
Balances with banks   1,447    1,454 
Term deposits with banks (original maturities up to 3 months)   263    1,182 
Cash and cash equivalents in the statement of financial position  Rs.1,712   Rs.2,638 
Bank overdrafts used for cash management purposes   12    96 
Cash and cash equivalents in the statement of cash flow  Rs.1,700   Rs.2,542 
Restricted cash balances included above          
Balance in unclaimed dividend and debenture interest account  Rs.114   Rs.72 
Other restricted cash balances   3    14 

 

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

 

Other investments primarily consist of investments in units of mutual funds, equity securities, bonds, commercial paper and term deposits (i.e., certificates of deposit having an original maturity period exceeding 3 months). The details of such investments as of December 31, 2018 and March 31, 2018 were as follows:

 

   As of December 31, 2018   As of March 31, 2018 
   Cost   Unrealized
gain/(loss)
  

Fair value/

amortized
cost(2)

   Cost   Unrealized
gain/(loss)
  

Fair value /

amortized
cost(2)

 
In units of mutual funds  Rs.14,939   Rs.268   Rs.15,207   Rs.14,703   Rs.75   Rs.14,778 
In equity securities(1)   2,706    (2,403)   303    2,703    (1,508)   1,195 
In bonds   7,111    -    7,111    4,633    -    4,633 
In commercial paper   691    -    691    232    -    232 
Term deposits   548    -    548    41    -    41 
Others   21    -    21    -    -    - 
   Rs.26,016   Rs.(2,135)  Rs.23,881   Rs.22,312   Rs.(1,433)  Rs.20,879 
Current portion                              
In units of mutual funds  Rs.14,939   Rs.268   Rs.15,207   Rs.14,703   Rs.75   Rs.14,778 
In bonds   6,616    -    6,616    3,279    -    3,279 
In commercial paper   691    -    691    232    -    232 
Term deposits   548    -    548    41    -    41 
   Rs.22,794   Rs.268   Rs.23,062   Rs.18,255   Rs.75   Rs.18,330 
Non-current portion                              
In equity securities(1)  Rs.2,706   Rs.(2,403)  Rs.303   Rs.2,703   Rs.(1,508)  Rs.1,195 
In bonds   495    -    495    1,354    -    1,354 
Others   21    -    21    -    -    - 
   Rs.3,222   Rs.(2,403)  Rs.819   Rs.4,057   Rs.(1,508)  Rs.2,549 

 

(1)Primarily represents the shares of Curis, Inc. Refer to Note 22 of these interim financial statements for further details.

 

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

 

The foregoing investments are valued as follows:

 

Type of Investment Measurement of Value
Investments in units of mutual funds Fair value through profit and loss
Investments in equity securities Fair value through other comprehensive income
Investments in bonds, commercial paper, term deposits and others Amortized cost

 

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)

 

6.Inventories

 

Inventories consist of the following:

 

   As of 
   December 31, 2018   March 31, 2018 
Raw materials  Rs.8,580   Rs.7,294 
Packing materials, stores and spares   2,304    2,394 
Work-in-progress   7,685    7,175 
Finished goods   15,342    12,226 
   Rs.33,911   Rs.29,089 

 

Details of inventories recognized in consolidated income statement:

 

   For the nine months ended
December 31,
  

For the three months ended

December 31,

 
   2018   2017   2018   2017 
Raw materials, stores and spares, and changes in finished goods and work in progress  Rs.27,312   Rs.23,429   Rs.9,632   Rs.8,540 
Inventory write-downs   2,825    2,102    1,248    516 

 

7.Hedges of foreign currency exchange rate risks

 

The Company is exposed to exchange rate risk that arises from its foreign exchange revenues and expenses, primarily in U.S. dollars, U.K. pounds sterling, Russian roubles and Euros, and foreign currency debt in U.S. dollars, Russian roubles, Mexican pesos, Ukrainian hryvnias, Euros and South African rands. The Company uses forward, option and currency swap contracts (collectively, “derivatives”) to mitigate its risk of changes in foreign currency exchange rates. The Company also uses non-derivative financial instruments, such as foreign currency borrowings, as part of its foreign currency exposure risk mitigation strategy.

 

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

 

   For the nine months ended
December 31,
   For the three months ended
December 31,
 
   2018   2017   2018   2017 
Net gain/(loss) recognized in finance costs in respect of foreign exchange derivative contracts  Rs.(195)  Rs.(517)  Rs.831   Rs.(410)
Net gain recognized in equity in respect of hedges of highly probable forecast transactions   36    94    626    124 
Net gain/(loss) recognized as component of revenue   (494)   463    (239)   143 

 

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.85 as at December 31, 2018, as compared to a gain of Rs.49 as at March 31, 2018.

 

8.Financial instruments

 

Non-derivative financial instruments

 

Non-derivative financial instruments consist of investments in mutual funds, bonds, equity and debt securities, trade receivables, cash and cash equivalents, loans and borrowings, and trade payables.

 

Derivative financial instruments

 

The Company uses derivative contracts like forwards, options and interest rate swaps to mitigate its risk of changes in foreign currency exchange rates and interest rates.

 

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)

 

8.Financial instruments (continued)

 

The carrying value and fair value of financial instruments as at December 31, 2018 and March 31, 2018 were as follows:

 

   As of December 31, 2018   As of March 31, 2018 
   Total carrying
value
   Total fair
value
   Total carrying
value
  

Total fair

value

 
Assets:                    
Cash and cash equivalents  Rs.1,712   Rs.1,712   Rs.2,638   Rs.2,638 
Other investments(1)   23,881    23,881    20,879    20,879 
Trade and other receivables   37,302    37,302    40,786    40,786 
Derivative financial instruments   625    625    103    103 
Other assets(2)   3,204    3,204    2,273    2,273 
Total  Rs.66,724   Rs.66,724   Rs.66,679   Rs.66,679 
Liabilities:                    
Trade and other payables  Rs.15,939   Rs.15,939   Rs.16,052   Rs.16,052 
Derivative financial instruments   67    67    85    85 
Long-term borrowings   26,575    26,575    25,152    25,152 
Short-term borrowings   17,249    17,249    25,466    25,466 
Bank overdraft   12    12    96    96 
Other liabilities and provisions(3)   17,162    17,162    20,712    20,712 
Total  Rs.77,004   Rs.77,004   Rs.87,563   Rs.87,563 

 

(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.10,675 and Rs.13,058 as of December 31, 2018 and March 31, 2018, respectively, are not included.

 

(3)Other liabilities and provisions that are not financial liabilities (such as statutory dues payable, deferred revenue, advances from customers and certain other accruals) of Rs.12,547 and Rs.9,321 as of December 31, 2018 and March 31, 2018, 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 December 31, 2018:

 

Particulars  Level 1   Level 2   Level 3   Total 
Investments in units of mutual funds  Rs.15,207   Rs.   -   Rs.    -   Rs.15,207 
Investment in equity securities   303    -    -    303 
Derivative financial instruments - net gain/(loss) on outstanding foreign exchange forward, option and swap contracts and interest rate swap contracts(1)   -    558    -    558 

 

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)

 

8.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, 2018:

 

Particulars  Level 1   Level 2   Level 3   Total 
Available for sale - Financial asset - Investments in units of mutual funds  Rs.14,778   Rs.        -   Rs.       -   Rs.14,778 
Available for sale - Financial asset - Investment in equity securities   1,195    -    -    1,195 
Derivative financial instruments – net gain/(loss) on outstanding foreign exchange forward, option and swap contracts and interest rate swap contracts(1)   -    18    -    18 

 

(1) The Company enters into derivative contracts 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 pricing 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 December 31, 2018 and March 31, 2018, 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.

 

9.Property, plant and equipment

 

Acquisitions and disposals

 

   For the nine months ended
December 31,
   For the year
ended
 
   2018   2017   March 31, 2018 
Cost of assets acquired during the period  Rs.4,400   Rs.7,310   Rs.8,894 
Net book value of assets disposed during the period   (867)   (80)   (157)
Impairment loss recognized during the period (1)   (94)   -    - 

 

   For the nine months ended
December 31,
   For the year
ended
 
   2018   2017   March 31,2018 
(Gain)/loss on disposal during the period (2)    (627)   21    55 

 

(1)During the three months ended June 30, 2018, the Company entered into an agreement with Neopharma Inc. for the sale of its formulations manufacturing facility and related assets in Bristol, Tennessee in the form of membership transfer and during the three months ended September 30, 2018, all the sale formalities were completed and the Company sold all of the issued and outstanding membership interests in Dr. Reddy’s Laboratories Tennessee, LLC and certain related assets.

 

The aforesaid transaction pertains to the Company’s Global Generics segment. 

 

Below table captures the accounting implications of the said transaction in the respective accounting periods:

 

Particulars  Three months
ended
  Amount 
Impairment loss on items of PPE measured under IFRS 5, Non-current assets held for sale and discontinued operations  June 30, 2018   94 
Reclassification of cumulative amount of exchange differences relating to the foreign operation from FCTR to income statement  September 30, 2018   113 

 

(2)During the three months ended December 31, 2018, the Company sold one of its API manufacturing business units located in Jeedimetla, Hyderabad to Therapiva Private Limited. This sale was done by way of slump sale (as defined under section 2(42C) of Indian Income Tax Act,1961) including all related property, plant and equipment, current assets, current liabilities, and transfer of employees. An amount of Rs. 423 million representing the profit on sale of such business unit was included under the head “Other income, net”.

 

Capital commitments

 

As of December 31, 2018 and March 31, 2018, the Company was committed to spend Rs.2,246 and Rs.3,788, respectively, under agreements to purchase property, plant and equipment. This amount is net of capital advances paid in respect of such purchase commitments.

 

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)

 

10.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 the changes in goodwill during the nine months period as at December 31, 2018 and for the year ended March 31, 2018:

 

   As at 
   December 31, 2018   March 31, 2018 
Opening balance, gross  Rs.20,219   Rs.20,026 
Effect of translation adjustments   (3)   193 
Impairment loss(1)    (16,274)   (16,274)
Closing balance  Rs.3,942   Rs.3,945 

 

(1)The impairment loss of Rs.16,274 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 during the years ended March 31, 2009 and 2010.

 

11.Other intangible assets

 

   For the nine months ended
December 31,
  

For the year ended 

 
   2018   2017   March 31, 2018 
Additions during the period  Rs.1,611   Rs.2,137   Rs.2,605 
Net book value of assets disposed during the period   (365)   -    - 
Impairment loss recognized during the period   (33)   (20)   (53)

 

   For the nine months ended
December 31,
  

For the year ended 

 
   2018   2017   March 31, 2018 
(Gain)/loss on disposal during the period   (416)   -    - 

 

Gain on disposal of assets for the three months ended September 30, 2018 includes an amount of Rs.354 representing the profit on sale of an intangible asset forming part of the Company’s Proprietary Products segment.

 

Details of significant separately acquired intangible assets as at December 31, 2018:

 

Particulars of the asset  Acquired from  Carrying
cost
 
ANDAs  Teva and an affiliate of Allergan  Rs.24,661 
Select portfolio of assets  UCB India Private Limited and affiliates   5,703 
Intellectual property rights relating to PPC-06  Xenoport, Inc   3,524 
Habitrol® brand  Novartis Consumer Health Inc.   2,598 
Beta brand  -   1,254 
Commercialization rights for an anti-cancer biologic agent  Eisai Company Limited   1,740 
Intellectual property rights relating to Xeglyze™ lotion  Hatchtech Pty Limited   1,082 
Brands  Ducere Pharma LLC   818 
Intellectual property rights relating to fondaparinux sodium  Alchemia Limited   265 
ANDAs  Gland Pharma Limited   387 

 

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)

 

12.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 Switzerland, the United States, Russia, Mexico, Ukraine and South Africa.

 

Short-term borrowings consist of the following:

 

   As at 
   December 31, 2018   March 31, 2018 
Pre-shipment credit  Rs.13,536   Rs.21,008 
Other foreign currency borrowings   3,713    4,458 
   Rs.17,249   Rs.25,466 

 

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

 

   As at 
   December 31, 2018   March 31, 2018 
   Currency(1)   Interest Rate(2)   Currency   Interest Rate 
Pre-shipment credit   USD    1 Month LIBOR + 01 to 40 bps    USD    1 Month LIBOR + (30) to 30 bps 
    -    -    INR    6.00% 
    -    -    RUB    6.75% 
Other foreign currency borrowings   USD    1 Month LIBOR + 65 to 78 bps     USD    1 Month/3 Months LIBOR + 65 to 85 bps  
    UAH     22.00% to 22.30%    UAH    18.00% 
    MXN    TIIE + 1.25%    -    - 
    ZAR    1 Month JIBAR + 120 Bps    -    - 
    -    -    RUB    8.20% 

 

(1)“INR” means Indian rupees, “RUB” means Russian roubles, “MXN” means Mexican pesos, “UAH” means Ukrainian hryvnia 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) and “JIBAR” means the Johannesburg Interbank Average Rate.

 

Long-term borrowings

 

Long-term borrowings consist of the following:

 

   As at 
   December 31,
2018
   March 31,
2018
 
Foreign currency borrowing by the parent company  Rs.5,228   Rs.4,880 
Foreign currency borrowing by the Swiss Subsidiary   17,350    16,185 
Foreign currency borrowing by the German Subsidiary   3,360    3,394 
Obligations under finance leases   637    693 
   Rs.26,575   Rs.25,152 
Current portion          
Foreign currency borrowing by the Swiss Subsidiary  Rs.698   Rs.- 
Foreign currency borrowing by the German Subsidiary   1,120    - 
Obligations under finance leases   57    63 
   Rs.1,875   Rs.63 
Non-current portion          
Foreign currency borrowing by the parent company  Rs.5,228   Rs.4,880 
Foreign currency borrowing by the Swiss Subsidiary   16,652    16,185 
Foreign currency borrowing by the German Subsidiary   2,240    3,394 
Obligations under finance leases   580    630 
   Rs.24,700   Rs.25,089 

 

The terms “Swiss Subsidiary” and “German Subsidiary”, as used in the above table, are defined below.

 

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)

 

12.Loans and borrowings (continued)

 

Long-term bank loan of the parent company

 

During the year ended March 31, 2014, the Company borrowed U.S.$150. During the three months ended December  31, 2016, the Company entered into a financing arrangement with certain financial institutions to refinance the aforementioned borrowing of U.S.$150.

 

The Company repaid U.S.$75 of this loan on November 28, 2016, and is required to repay the U.S.$75 balance of the loan in 3 equal installments at the end of the 40th month, 43rd month and 46th month after the date the loan was refinanced.

 

Long-term bank loan of subsidiary companies

 

During the six months ended September 30, 2017, the Company incurred long-term borrowings of U.S.$250 in Dr. Reddy’s Laboratories, SA, one of the Company’s subsidiaries in Switzerland (the “Swiss Subsidiary”), and EUR 42 in Reddy Holding GmbH, one of the Company’s subsidiaries in Germany (the “German Subsidiary”). The aforesaid loans are repayable over a 36 month period commencing at the end of the 24th month following the date of the loan agreement.

 

All the foregoing loan agreements impose various financial covenants on the Company. As of December 31, 2018, the Company was in compliance with all such financial covenants.

 

The interest rate profiles of long-term borrowings (other than obligations under finance leases) as at December 31, 2018 and March 31, 2018 were as follows:

 

  As at
  December 31, 2018  March 31, 2018
  Currency  Interest Rate  Currency  Interest Rate
Foreign currency borrowings  USD  1 Month LIBOR + 70 to 105 bps  USD  1 Month LIBOR + 45 to 82.7 bps
  EUR  0.81%  EUR  0.81%

 

Uncommitted lines of credit from banks

 

The Company had uncommitted lines of credit of Rs.41,210 and Rs.24,046 as of December 31, 2018 and March 31, 2018, 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.

 

13.Other income, net

 

Other (income)/expense, net consists of the following:

 

   For the nine months
ended December 31,
   For the three months
ended December 31,
 
   2018   2017   2018   2017 
(Gain)/loss on sale/disposal of property, plant and equipment and other intangible assets, net(1)  Rs.(1,043)  Rs.21   Rs.(503)  Rs.23 
Sale of spent chemicals   (281)   (206)   (91)   (73)
Scrap sales   (143)   (114)   (46)   (40)
Miscellaneous income, net   (158)   (322)   (41)   (223)
   Rs.(1,625)  Rs.(621)  Rs.(681)  Rs.(313)

 

(1)Refer to Note 9 and Note 11 of these interim financial statements for further details.

 

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)

 

14.Finance income/(expense), net

 

Finance income/(expense), net consists of the following:

 

   For the nine months ended
December 31,
   For the three months ended
December 31,
 
   2018   2017   2018   2017 
Interest income  Rs.580   Rs.454   Rs.220   Rs.247 
Profit on sale of units of mutual funds   298    1,177    116    806 
Unrealized gain measured at FVTPL on units of mutual funds   205    -    166    - 
Foreign exchange gain   603    57    -    - 
Finance income (A)  Rs.1,686   Rs.1,688   Rs.502   Rs.1,053 
Interest expense   (644)   (610)   (241)   (172)
Foreign exchange loss   (274)   (30)   (274)   (30)
Finance expense (B)  Rs.(918)  Rs.(640)  Rs.(515)  Rs.(202)
Finance (expense)/income, net [(A)+(B)]  Rs.768   Rs.1,048   Rs.(13)  Rs.851 

 

15.Share capital and share premium

 

The following table presents the changes in number of equity shares and amount of equity share capital for the nine months ended December 31, 2018 and December 31, 2017:

 

   As of December 31, 2018   As of December 31, 2017 
   Number   Amount   Number   Amount 
Opening number of equity shares
   165,910,907   Rs.830    165,741,713   Rs.829 
Issue of equity shares on exercise of options(1)   149,954    0    151,811    0 
Closing number of equity shares   166,060,861   Rs.830    165,893,524   Rs.829 
Treasury shares(2)   (202,073)  Rs.(496)   -    - 

 

(1)During the nine months ended December 31, 2018 and 2017, 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 Plan-2002 and Dr. Reddy’s Employees Stock Option Plan-2007. All of the options exercised had an exercise price of Rs.5, being equal to the par value of the underlying shares. 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, including through secondary market acquisitions, equity shares which are used for issuance to eligible employees upon exercise of stock options thereunder. During the three months and nine months ended December 31, 2018, the ESOS Trust purchased 177,073 shares and 202,073 shares respectively from secondary market for an aggregate consideration of Rs.432 and Rs.496 respectively. Refer to Note 16 of these interim financial statements for further details on the Dr. Reddy’s Employees Stock Option Scheme, 2018.

 

16.Employee stock incentive plans

 

Dr. Reddy’s Employees Stock Option Scheme, 2018 (the “DRL 2018 Plan”)

 

The Company instituted the DRL 2018 Plan for all eligible employees pursuant to the special resolution approved by the shareholders at the Annual General Meeting held on July 27, 2018. The DRL 2018 Plan covers all employees and directors (excluding independent and promoter directors) of the parent company and its subsidiaries (collectively, “eligible employees”). Upon the exercise of options granted under the DRL 2018 Plan, the applicable equity shares may be issued directly by the Company to the eligible employee or may be transferred from the Dr. Reddy’s Employees ESOS Trust (the “ESOS Trust”) to the eligible employee. The ESOS Trust may acquire such equity shares through primary issuances by the Company and/or by way of secondary market acquisitions funded through loans from the Company. The Nomination, Governance and Compensation Committee of the Board of the parent company (the “Compensation Committee”) administers the DRL 2018 Plan and grants stock options to eligible employees, but may delegate functions and powers relating to the administration of the DRL 2018 Plan to the ESOS Trust. The Compensation Committee determines which eligible employees will receive the options, the number of options to be granted, the exercise price, the vesting period and the exercise period. The vesting period is determined for all options issued on the date of grant. The options issued under the DRL 2018 Plan vest in periods ranging between the end of one and five years, and generally have a maximum contractual term of five years.

 

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)

 

16.Employee stock incentive plans(continued)

 

The DRL 2018 Plan provides for option grants having an exercise price equal to the fair market value of the underlying equity shares on the date of grant as follows:

 

Particulars  Number of securities
to be acquired from
secondary market
   Number of securities
to be issued by the
Company
   Total 
Options reserved against equity shares   2,500,000    1,500,000    4,000,000 
Options reserved against ADRs   -    1,000,000    1,000,000 
Total   2,500,000    2,500,000    5,000,000 

 

Dr. Reddy’s Employees Stock Option Scheme, 2002 and Dr. Reddy’s Employees ADR Stock Option Plan, 2007

 

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

 

Grants under Stock Incentive Plans

 

The terms and conditions of the grants made during the nine months ended December 31, 2018 under the above plans and the DRL 2018 Plan were as follows:

 

Particulars  Number of
instruments
   Exercise price   Vesting period  Contractual life
DRL 2002 Plan   119,456   Rs.5.00   1 to 4 years  5 years
DRL 2007 Plan   70,730   Rs.5.00   1 to 4 years  5 years
DRL 2007 Plan   102,960   Rs.1,982.00   1 to 4 years  5 years
DRL 2007 Plan   46,200   Rs.2,607.00   1 to 4 years  5 years
DRL 2018 Plan   235,700   Rs.2,607.00   1 to 4 years  5 years

 

The above grants were made on May 21, 2018, July 26, 2018 and September 21, 2018.

 

The terms and conditions of the grants made during the nine months ended December 31, 2017 under the above plans were as follows:

 

Particulars  Number of
instruments
   Exercise price   Vesting period  Contractual life
DRL 2002 Plan   158,112   Rs.5.00   1 to 4 years  5 years
DRL 2007 Plan   63,304   Rs.5.00   1 to 4 years  5 years

 

The above grants were made on May 11, 2017 and July 10, 2017.

 

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

 

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

 

   September 21, 2018   July 26, 2018   May 21, 2018   July 10, 2017   May 11, 2017 
Expected volatility   33.98%   34.89%   32.97%   30.86%   30.08%
Exercise price  Rs.

5.00 /

Rs.2,607.00

   Rs.5.00   Rs.

5.00 / Rs.1,982.00

   Rs.5.00   Rs.5.00 
Option life   2.5 Years    2.5 Years    2.5 Years    2.5 Years    2.5 Years 
Risk-free interest rate   7.90%   7.47%   7.46%   6.48%   6.69%
Expected dividends   0.78%   0.94%   1.06%   0.77%   0.77%
Grant date share price  Rs.2,556.25   Rs.2,132.75   Rs.1,893.05   Rs.2,726.20   Rs.2,594.00 

 

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)

 

16.Employee stock incentive plans(continued)

 

Share-based payment expense

 

   For the nine months ended
December 31,
   For the three months ended
December 31,
 
   2018   2017   2018   2017 
Equity settled share-based payment expense(1)  Rs.277   Rs.318   Rs.113   Rs.104 
Cash settled share-based payment expense(2)   62    26    24    19 
   Rs.339   Rs.344   Rs.137   Rs.123 

  

(1)As of December 31, 2018, there was Rs.625 of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of 2.17 years.

 

(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 December 31, 2018, there was Rs.120 of total unrecognized compensation cost related to unvested awards. This cost is expected to be recognized over a weighted-average period of 2.06 years. This scheme does not involve dealing in or subscribing to or purchasing securities of the Company, directly or indirectly.

 

17.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 net (asset)/liability recorded by the Company towards this obligation was Rs. (16) and Rs.49 as at December 31, 2018 and March 31, 2018, respectively.

 

Compensated absences

 

The Company provides for accumulation of compensated absences by certain categories of its employees. These employees can carry forward a portion of the unutilized compensated absences and utilize them in future periods or receive cash in lieu thereof as per the Company’s policy. The Company records a liability for compensated absences in the period in which the employee renders the services that increases this entitlement. The total liability recorded by the Company towards this obligation was Rs.1,017 and Rs.1,093 as at December 31, 2018 and March 31, 2018, respectively.

 

18.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 nine months ended December 31, 2018 and 2017 was 12.9% and 36.0%, respectively. Income tax expense was Rs.2,141 for the nine months ended December 31, 2018, as compared to income tax expense of Rs.3,809 for the nine months ended December 31, 2017.

 

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)

 

18.Income taxes (continued)

 

The Company’s consolidated weighted average tax rate for the three months ended December 31, 2018 and 2017 was 16.4% and 43.8%, respectively. Income tax expense was Rs.953 for the three months ended December 31, 2018, as compared to income tax expense of Rs.2,601 for the three months ended December 31, 2017.

 

The effective rates of tax for the three and nine months ended December 31, 2018 were lower primarily on account of:

 

a)reduction of the federal income tax rate from 35% to 21% pursuant to the enactment of The Tax Cuts and Jobs Act of 2017 in the United States on December 22, 2017.

 

b)resolution of a certain tax matter in the Companys favor resulting in a reversal of income tax expense pertaining to earlier years;  and

 

c)claim of deduction of an item in the current quarter, which was previously disallowed for tax purpose.

 

Total tax expenses of Rs.127 and tax benefits of Rs.228 were recognized directly in the equity for the three months and nine months ended December 31, 2018, respectively (as compared to tax benefits of Rs.571 and Rs.1,093 for the three months and nine months ended December 31, 2017, respectively). Such tax expenses and benefits were primarily due to tax effects on the changes in fair value of financial instruments and the foreign exchange gain/loss on cash flow hedges.

 

19.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 (“Green Park Hospitality”) for catering services;

 

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

 

Kunshan Rotam Reddy Pharmaceuticals Co. Limited (“Reddy Kunshan”) 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; and

 

Stamlo Hotels Limited for hotel services.

 

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

 

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

 

The following is a summary of significant related party transactions:

 

   For the nine months ended
December 31,
  

For the three months ended

December 31,

 
   2018   2017   2018   2017 
Research and development services received  Rs.71   Rs.65   Rs.31   Rs.25 
Contributions towards social development   178    178    59    56 
Hotel expenses paid   22    38    6    15 
Catering expenses paid   180    138    74    64 
Lease rentals paid under cancellable operating leases   26    27    9    9 
Civil works   79    -    23    - 
Sales of goods   23    -    11    - 
Others   4    -    1    - 

 

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)

 

19.Related parties (continued)

 

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

 

   As at 
   December 31, 2018   March 31, 2018 
Key management personnel and close members of their families  Rs.8   Rs.8 
Other related parties (Reddy Kunshan and Green Park Hospitality)   179    148 

 

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

 

   As at 
   December 31, 2018   March 31, 2018 
Due to related parties  Rs.14   Rs.14 
Other related parties (Reddy Kunshan)   79    - 

 

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 nine months ended
December 31,
   For the three months ended
December 31,
 
   2018   2017   2018   2017 
Salaries and other benefits  Rs.437   Rs.424   Rs.146   Rs.202 
Contributions to defined contribution plans   27    28    9    13 
Commission to directors   176    248    59    83 
Share-based payments expense   74    71    25    24 
   Rs.714   Rs.771   Rs.239   Rs.322 

 

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.

 

20.Nature of expense

 

The following table shows supplemental information related to certain “nature of expense” items for the three months and nine months ended December 31, 2018 and 2017:

 

Depreciation

 

   For the nine months ended
December 31,
   For the three months
ended December 31,
 
   2018   2017   2018   2017 
Cost of revenues  Rs.4,791   Rs.4,771   Rs.1,594   Rs.1,612 
Selling, general and administrative expenses   596    583    214    200 
Research and development expenses   839    822    265    278 
   Rs.6,226   Rs.6,176   Rs.2,073   Rs.2,090 

 

Amortization

 

   For the nine months ended
December 31,
   For the three months
ended December 31,
 
   2018   2017   2018   2017 
Selling, general and administrative expenses  Rs.2,557   Rs.2,236   Rs.929   Rs.778 
Cost of revenues   213    200    74    70 
Research and development expenses   93    100    32    34 
   Rs.2,863   Rs.2,536   Rs.1,035   Rs.882 

 

Employee benefits  For the nine months ended
December 31,
   For the three months
ended December 31,
 
   2018   2017   2018   2017 
Cost of revenues  Rs.8,071   Rs.7,834   Rs.2,450   Rs.2,632 
Selling, general and administrative expenses   13,377    12,729    4,420    4,393 
Research and development expenses   3,699    3,581    1,184    1,156 
   Rs.25,147   Rs.24,144   Rs.8,054   Rs.8,181 

 

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)

 

21.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 39 to the Consolidated Financial Statements in the Company’s Annual Report on Form 20-F for the year ended March 31, 2018 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 “at-risk”

 

On June 14, 2018, the Company received 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, a therapeutic equivalent generic version of Suboxone® (buprenorphine and naloxone) sublingual film from the U.S. FDA.  The U.S. FDA approval came after the conclusion of litigation in the U.S. District Court for the District of Delaware, where the Delaware court concluded that patents covering Suboxone® sublingual film would not be infringed by the Company’s commercial launch of its generic sublingual film product.  In view of the favorable decision from the Delaware Court, the company launched its generic sublingual film product in the U.S. immediately following the U.S. FDA approval on June 14, 2018.  Following the launch, on June 15, 2018, Indivior PLC (“Indivior”) filed an emergency application for a temporary restraining order and preliminary injunction against the Company in the U.S. District Court for the District of New Jersey (the “New Jersey District Court”).  Indivior’s motion alleged that the Company’s generic sublingual film product infringed one of three newly-issued patents obtained by Indivior and asserted in the New Jersey Court.  Pending a hearing and decision on the injunction application, the New Jersey Court 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.  The Company immediately appealed the decision and the U.S. Court of Appeals for the Federal Circuit (the “Court of Appeals”) agreed to expedite the appeal.

 

The Court of Appeals heard oral argument on the Company’s appeal on October 4, 2018. On November 20, 2018, the Court of Appeals issued a decision vacating the preliminary injunction. On December 20, 2018, Indivior filed a petition seeking rehearing of the appeal and the Court of Appeals asked the Company to respond to Indivior’s petition on January 16, 2019. The Company filed its response to Indivior’s petition, for rehearing on January 17, 2019. The Company is awaiting a decision on this matter.

 

The Company intends to vigorously defend its positions. Any liability that may arise on account of these claims is unascertainable. Accordingly, no provision was made in the consolidated financial statements of the Company.

 

Norfloxacin, India litigation

 

As previously disclosed, the Company is involved in legal proceedings with India’s National Pharmaceutical Pricing Authority regarding allegations on the maximum prices permissible for “specified product” Norfloxacin under applicable price control regulations. The matter is adjourned to April 24, 2019 for hearing.

 

28 

 

 

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

21.Contingencies (continued)

 

Product and patent related matters (continued)

 

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. The matter is adjourned to March 12, 2019 for hearing.

 

Namenda litigation

 

As previously disclosed, in August 2015, Sergeants Benevolent Assoc. Health & Welfare Fund (“Sergeants”) filed suit against the Company and certain other defendants alleging 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. All defendants, including the Company, moved to dismiss the claims. On September 13, 2016, the Court denied the defendants’ motions; the motion pertaining to the claims against the Company was denied without prejudice. That same day, however, the Court stayed the Sergeants case pending resolution of similar claims in another case in which the Company is not a party (JM Smith Corp. v. Actavis PLC, now styled In re Namenda Direct Purchaser Antitrust Litigation, 15 Civ. 7488, S.D.N.Y.). The parties in the JM Smith Namenda Direct Purchaser case have served the Company with subpoenas, in response to which the Company produced the specific documents subpoenaed and provided testimony in a deposition. The Namenda Direct Purchaser case is now trial-ready. Discovery in that case is complete, and the Court has denied the motion for summary judgment filed by the defendants in that action, but no trial date has been set. By orders dated September 10, 2018 and October 10, 2018 the Court lifted the stay in the Sergeants litigation, and ordered that fact discovery be complete by December 19, 2018. Further events and deadlines have not yet been scheduled.

 

The Company believes that the likelihood of any liability that may arise on account of these claims is not probable. Accordingly, no provision has been made in these interim financial statements.

 

Child resistant packaging matter complaint under the False Claims Act (“FCA”)

 

As previously disclosed, during the year ended March 31, 2015, two former employees of the Company filed a complaint in the United States District Court for the Eastern District of Pennsylvania under the Federal False Claims Act, alleging that the Company had during prior years sold prescription drug products that failed to comply with child resistant blister packaging requirements (the “FCA Complaint”). During the three months ended March 31, 2018, the Company obtained dismissal of the FCA Complaint with prejudice. The plaintiffs subsequently filed a petition with the Court requesting that the Court reconsider its decision to dismiss the FCA Complaint with prejudice, and that request was denied.

 

In June 2018, the plaintiffs filed their Notice of Appeal to the Third Circuit Court of Appeals. During the three months ended September 2018, the plaintiffs and the U.S. Department of Justice settled and thus this appeal was dismissed. The plaintiffs then filed an application for recovery of attorneys' fees from the Company under the "alternative remedy doctrine." The Company made opposing filings to this and in response the plaintiffs withdrew their application.

 

The Company believes that the likelihood of any liability that may arise on account of the FCA Complaint is not probable. Accordingly, no provision has been made in these interim financial statements.

 

Nexium litigation

 

As previously disclosed, two complaints, similar in nature to the Nexium litigation, were filed in the Court of Common Pleas in Philadelphia, Pennsylvania by plaintiffs who chose to opt out of the class action lawsuit. No dispositive motions were filed in these actions. Both matters were administratively closed by the Court on April 16, 2018.

 

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)

 

21.Contingencies (continued)

 

Product and patent related matters (continued)

 

Civil Litigation of Pricing/reimbursement matters

 

As previously disclosed, on November 17, 2016, certain class action complaints were filed against the Company and subsequently were consolidated into one amended complaint pending with the U.S. District Court for the Eastern District of Pennsylvania.These complaints allege that the Company and other named defendants have engaged in a conspiracy to fix prices and to allocate bids and customers in the sale of divalproex sodium extended-release tablets in the United States. In response to the consolidated new complaint, the Company filed a motion to dismiss in October 2017. The plaintiffs filed opposition to the motion to dismiss in December 2017 and a reply was filed by the Company in January 2018. In October 2018, the Court denied the motion to dismiss on the grounds that the allegations pled leave open the possibility of conspiracy. Therefore, discovery will proceed to look into this possibility.

 

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

 

Multi-District Litigation (“MDL”) Concerning Generic Pharmaceutical Price Fixing Antitrust Claims

 

As previously disclosed in Item 4 on page 43 to the Annual Report on Form 20-F for the year ended March 31, 2018, the Attorneys General for 45 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 in the United States District Court for the Eastern District of Pennsylvania, MDL 2724, In re Generic Pharmaceuticals Antitrust Pricing Litigation (the “MDL-2724”).

 

In June 2018, three additional class action complaints were filed in the MDL-2724 on behalf of classes of putative end payer plaintiffs, indirect reseller plaintiffs, and direct purchaser plaintiffs. All three complaints allege conspiracy in restraint of trade in violation of Sections 1 and 3 of the Sherman Act, and violations of 31 State antitrust statutes, Consumer Protection statutes and claims of Unjust Enrichment seeking injunctive relief, recovery of treble damages, punitive damages, attorney's fees and costs.  The complaints allege an “overarching conspiracy” among the named defendants involving fifteen drugs and, with slight variations, name approximately 25 generic pharmaceutical manufacturers including Dr. Reddy’s Laboratories, Inc. The drug-specific allegations against Dr. Reddy’s Laboratories, Inc. involve two of the fifteen drugs, meprobamate and zoledronic acid. However, plaintiffs also allege that Dr. Reddy’s Laboratories, Inc. (as well as all other manufacturers named) were part of a larger conspiracy as to all of the drugs named in the complaints. 

 

On September 25, 2018, Marion Diagnostic Center, LLC and Marion Healthcare, LLC filed a complaint in the MDL-2724, on behalf of themselves and a class of all direct purchasers from distributors, against Dr. Reddy’s Laboratories, Inc. and 22 other defendants, including a major distributor of pharmaceutical products. Such complaint alleges an “overarching conspiracy” for price fixing and to rig bids and allocate customers with respect to 16 drugs. Dr. Reddy’s Laboratories, Inc. was specifically named with respect to two drugs: meprobamate and zoledronic acid. Plaintiffs also allege that Dr. Reddy’s Laboratories, Inc. (as well as all other manufacturers named) were part of a larger conspiracy as to all of the drugs named in the complaints. The complaint alleges violations of Section 1 of the Sherman Act, 15 U.S.C. §1, and violations of 24 State antitrust statutes, Consumer Protection statutes and claims of Unjust Enrichment, seeking injunctive relief, recovery of treble damages, punitive damages, attorney's fees and costs against all named defendants on a joint and several basis.

 

On January 16, 2019, United Healthcare Services, Inc., filed a complaint against Dr. Reddy’s Laboratories, Inc. and 42 other defendants, involving a total of 30 generic drugs, alleging an “overarching” price fixing conspiracy to rig bids and allocate customers with respect to 30 drugs. Dr. Reddy’s Laboratories, Inc. is specifically named with respect to four drugs: divalproex ER, meprobamate, pravastatin and zoledronic acid. Plaintiffs also allege that Dr. Reddy’s (as well as all other manufacturers named) were part of a larger conspiracy as to all of the drugs named in the complaints. The Complaint alleges violations of Section 1 of the Sherman Act, 15 U.S.C. §1, and violations of the Minnesota and 29 other States’ antitrust laws, Minnesota’s and 16 other States’ Consumer Protection statutes, and claims of Unjust Enrichment, seeking injunctive relief, recovery of treble damages, punitive damages, attorney's fees and costs. The Company denies any wrongdoing and intends to vigorously defend against these claims.

 

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)

 

21.Contingencies (continued)

 

Product and patent related matters (continued)

 

Similarly, The Kroger Co., Albertsons Companies, LLC, and the H.E. Butt Grocery Company, L.P. filed claims in the MDL-2724 against Dr. Reddy’s Laboratories, Inc., and 33 other defendants alleging an “overarching” price fixing conspiracy and to rig bids and allocate customers with respect to 30 generic drugs. Dr. Reddy’s Laboratories, Inc. was specifically named as to four drugs: divalproex ER, meprobamate, pravastatin and zoledronic acid. Additionally, similar complaints were filed by Humana, Inc. against 34 defendants (including Dr. Reddy’s Laboratories, Inc.), involving a total of 16 generic drugs, and naming Dr. Reddy’s Laboratories, Inc. specifically with respect to two drugs: divalproex ER and pravastatin sodium tablets. The complaints allege violations of Section 1 of the Sherman Act, 15 U.S.C. §1, seeking injunctive relief, recovery of treble damages, punitive damages, attorney's fees and costs.

 

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

 

Securities Class Action Litigation

 

As previously disclosed, in August 2017 a securities class action lawsuit complaint was filed in the United States District Court for the District of New Jersey, alleging that the Company made false or misleading statements or omissions in its public filings, in violation of U.S. federal securities laws, and that the Company’s share price dropped and its investors were affected and, on May 9, 2018, the Company and other defendants filed a motion to dismiss the complaint.

 

On June 25, 2018, the plaintiffs filed an opposition to the motion to dismiss and, on July 25, 2018, a further reply in support of the motion to dismiss was filed by the Company. In August 2018, oral argument on the motion to dismiss was heard by the court and the parties are awaiting the the Court’s decision on the motion.

 

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

 

Glenmark Litigation

 

In November 2017, the Company received a letter from Glenmark Farmaceutica Ltda and Glenmark Pharmaceuticals Limited (collectively “Glenmark”), for invocation of arbitration under a distribution agreement and a deed of assignment relating to a product between the Company and Glenmark. The arbitration was invoked alleging that the non-supply of the product by the Company severely affected the value of the Intellectual Property and goodwill and therefore Glenmark claims to recover the loss along with interest and penalties from the Company.

 

In March 2018, an arbitrator was appointed by the Supreme Court of India at Glenmark’s request. In July 2018, Glenmark filed a claim statement against the Company and in September 2018, the Company filed a reply against the claim along with a counter claim.

 

Glenmark has filed reply to the counter claim of the Company in November 2018 and the issues were finalized, inspection of documents along with the filing of the statement of Admissions and Denials was completed in December 2018.The company was asked to submit the list of witnesses by March 5, 2019.

 

The Company believes that the asserted claims are without merit and intends to vigorously defend itself against the allegations. Any liability that may arise on account of these claims is unascertainable. No provision was made in the interim financial statements of the Company.

 

Environmental matters

 

Land pollution

 

As previously disclosed, since 1989 the Company has been involved in a series of legal proceedings relating to allegations that the Company, along with various other co-defendants, effected discharges of pollution that damaged certain farms and other lands in the Patancheru and Bollarum areas of Medak district of Andhra Pradesh, India. A court had ordered the defendants to compensate certain farmers at a specified rate, resulting in a total compensation of Rs.3 paid by the Company. The appeal of the ruling was ultimately transferred to the National Green Tribunal (“NGT”), Chennai, which disposed of this matter in a judgment dated October 24, 2017.

 

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)

 

21.Contingencies (continued)

 

Environmental matters (continued)

 

The Bulk Drug Manufacturers Association of India (“BDMAI”), in which the Company is a member, subsequently filed a review petition against the judgment on various aspects. The NGT, Delhi, in a judgment dated November 16, 2017 in another case in which the Company is not a party, stated that the moratorium on expansion of industries imposed in the Patancheru and Bollaram areas shall continue until the Ministry of Environment, Forest and Climate Change passes an order keeping in view the needs of the environment and public health. The Company filed an appeal challenging this judgment.

 

The High Court of Hyderabad heard the Company’s appeal challenging this judgment in July 2018 and directed the respondents to file their response within a period of four weeks. During the three months ended September 30, 2018, the respondents filed counter affidavits and the matter has now been adjourned for final hearing.

 

The appeal came up for hearing before the High Court of Hyderabad on October 25, 2018 and has been adjourned for further hearing.

 

The Company believes that any additional liability that might arise in this regard is not probable. Accordingly, no provision relating to these claims has been made in the interim financial statements.

 

Water pollution and air pollution

 

As previously disclosed, during the year ended March 31, 2012, the Andhra Pradesh Pollution Control Board alleged that the Company and various other defendants violated the Indian Water Pollution Act and the Indian Air Pollution Act, and issued orders limiting activities at certain of the Company’s manufacturing facilities in Hyderabad, India. The Company appealed these orders to the Andhra Pradesh Pollution Appellate Board (the “APP Appellate Board”), which recommended to the Andhra Pradesh Government to allow expansion of units fully equipped with Zero-Liquid Discharge (“ZLD”) facilities and otherwise found no fault with the Company (on certain conditions). The APP Appellate Board’s decision was challenged by one of the petitioners in the National Green Tribunal.

 

The challenge to the APP Appellate Board’s decision is transferred to the NGT, Delhi for a final hearing, the date for which has not yet been notified. No provision relating to these claims has been made in the interim financial statements.

 

Indirect taxes related matters

 

Value Added Tax (“VAT”) matter

 

The Company has received various demand notices from the Government of Telangana’s Commercial Taxes Department, India objecting to the Company’s methodology of calculation of VAT input credit. The below table shows the details of each of such demand notice, the amount demanded and the current status of the Company’s responsive actions.

 

Period covered under
the notice
Amount demanded Status
April 2006 to March 2009 Rs.66 plus 10% penalty The Company has filed an appeal before the Sales Tax Appellate Tribunal.
April 2009 to March 2011 Rs.59 plus 10% penalty The Company has filed an appeal before the Sales Tax Appellate Tribunal – The matter was remanded to original adjudicating authority with a direction to re-calculate the eligibility

 

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)

 

Period covered under
the notice
Amount demanded Status
April 2011 to March 2013 Rs.16 plus 10% penalty The Appellate Deputy Commissioner issued an order partially in favor of the Company.

 

The Company has recorded a provision of Rs.27 as of December 31,2018 and believes that the likelihood of any further liability that may arise on account of the allegedly inappropriate claims to VAT credits is not probable.

 

Others

 

Additionally, the Company is involved in other disputes, lawsuits, claims, governmental and/or regulatory inspections, inquiries, investigations and proceedings, including patent and commercial matters that arise from time to time in the ordinary course of business. Except as discussed above, the Company does not believe that there are any such contingent liabilities that are expected to have any material adverse effect on its financial statements.

 

22.Investment in Curis Inc.

 

Update during the nine months ended December 31, 2018

 

In May 2018, Curis Inc. completed a 1-for-5 reverse stock split of its common stock. After giving effect to such stock split, the total number of equity shares held by the Company is 5.47 million.

 

As of December 31, 2018, a loss of Rs.2,435 arising from changes in the fair value of such shares of common stock was recorded in other comprehensive income.

 

23.Receipt of warning letter from the U.S. FDA

 

The Company received a warning letter dated November 5, 2015 from the U.S. FDA relating to current Good Manufacturing Practices (“cGMPs”) deviations at its active pharmaceutical ingredient (“API”) manufacturing facilities at Srikakulam, Andhra Pradesh and Miryalaguda, Telangana, as well as violations at its oncology formulation manufacturing facility at Duvvada, Visakhapatnam, Andhra Pradesh. The contents of the warning letter emanated from Form 483 observations that followed inspections of these sites by the U.S. FDA in November 2014, January 2015 and February-March 2015.

 

The warning letter did not restrict production or shipment of the Company’s products from these facilities. However, unless and until the Company is able to correct outstanding issues to the U.S. FDA's satisfaction, the U.S. FDA may withhold approval of new products and new drug applications of the Company, refuse admission of products manufactured at the facilities noted in the warning letter into the United States, and/or take additional regulatory or legal action against the Company. Any such further action could have a material and negative impact on the Company’s ongoing business and operations. During the years ended March 31, 2016, 2017 and 2018, the U.S. FDA withheld approval of new products from these facilities pending resolution of the issues identified in the warning letter. To minimize the business impact, the Company transferred certain key products to alternate manufacturing facilities.

 

Subsequent to the issuance of the warning letter, the Company promptly instituted corrective actions and preventive actions and submitted a comprehensive response to the warning letter to the U.S. FDA, followed by periodic written updates and in-person meetings with the U.S. FDA. The U.S. FDA completed the re-inspection of the aforementioned manufacturing facilities in the months of February, March and April 2017. During the re-inspections, the U.S. FDA issued three observations with respect to the API manufacturing facility at Miryalaguda, two observations with respect to the API manufacturing facility at Srikakulam and thirteen observations with respect to the Company’s oncology formulation manufacturing facility at Duvvada. The Company responded to these observations identified by the U.S. FDA and believes that it can resolve them in a timely manner.

 

In June 2017, the U.S. FDA issued an Establishment Inspection Report (“EIR”) which indicated that the inspection of the Company’s API manufacturing facility at Miryalaguda is successfully closed. With regard to the Company’s oncology manufacturing facility at Duvvada and its API manufacturing facility at Srikakulam, the Company received EIRs from the U.S. FDA in November 2017 and February 2018, respectively, which indicated that the inspection status of these facilities remains unchanged. In June 2018, the Company requested the U.S. FDA to schedule a re-inspection of the oncology formulation manufacturing facility at Duvvada.

 

In October 2018, the re-inspection was completed and the U.S.FDA issued Form 483 with eight observations. The Company responded to these observations identified by the U.S.FDA in November 2018 and awaiting to hear from agency. With respect to the API manufacturing facility at Srikakulam, the Company was asked to carry out certain detailed investigations and analyses. In response, the Company submitted the results of the investigations and analyses in October 2018. As part of the review of the response by the U.S. FDA, certain additional follow on queries have been received by the Company. The Company responded to all queries in January 2019 to the U.S.FDA and awaiting re-inspection by the U.S.FDA.

 

Inspection of other facilities:

 

In May and June 2017, inspection of the Company’s Formulations Srikakulam Plant (SEZ) Unit II and I, India, was completed by the U.S. FDA with zero and one observations, respectively, and the U.S. FDA issued EIRs in September 2017 for both Units II and I, indicating the closure of the audit for these facilities.

 

The inspection of the Company’s Custom Pharmaceutical Services facility in Hyderabad, India was completed by the U.S. FDA on September 21, 2017 with zero observations, and the U.S. FDA issued an EIR in December 2017 indicating the closure of audit for this facility.

 

33 

 

 

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.Receipt of warning letter from the U.S. FDA (continued)

 

Inspection of other facilities (continued)

 

In April 2017, inspection of the Company’s formulations manufacturing facility at Bachupally, Hyderabad was completed by the U.S. FDA and the Company was issued a Form 483 with 11 observations. In December 2017, the U.S.FDA issued an EIR which indicates the closure of the audit for this facility.

 

In July 2017, inspection of the Company’s API facility in Cuernavaca, Mexico was completed by the U.S. FDA with zero observations, and the U.S. FDA issued an EIR in April 2018 indicating the closure of the audit for this facility.

 

The inspection of the Company’s API facility in Mirfield, United Kingdom was completed by the U.S. FDA on September 15, 2017, and the Company was issued a Form 483 with three observations. The Company responded to the observations identified by the U.S. FDA, and the U.S. FDA issued an EIR on April 24, 2018, which indicates the closure of the audit for this facility.

 

In March 2018, inspection of the Company’s API Hyderabad Plant 1 and API Hyderabad Plant 3 manufacturing facilities was completed by the U.S. FDA with four and five observations, respectively. The observations at API Hyderabad Plant 3 were related to procedures and facility maintenance. The Company responded to the observations relating to both facilities and, in June 2018, received an EIR indicating the closure of the audit for both facilities.

 

In June 2018, an inspection of the Company’s API Srikakulam Plant (SEZ) was completed by the U.S. FDA with zero observations, and the U.S. FDA issued an EIR in August 2018 indicating the closure of the audit for this facility.

 

In November 2018, inspection of the Company’s Formulations Srikakulam Plant (SEZ) Unit II, India, was completed by the U.S. FDA with zero observations.

 

In January 2019, inspection of the Company’s Formulations Srikakulam Plant (SEZ) Unit I, India, was completed by the U.S. FDA with four observations which the Company is in the process of addressing.

 

In January 2019, inspection of the Company’s API manufacturing Plant at Miryalaguda,Nalgonda district, India, was completed by the U.S. FDA with one observation which the company is in the process of addressing.

 

24.Inspection by the regulatory authority of Bavaria, Germany

 

In August 2017, the Company’s German subsidiary betapharm Arzneimittel GmbH received a letter from a regulatory authority of Bavaria, Germany (the Regierung von Oberbayern, which is the Central Authority for Supervision of Medicinal Products in Bavaria of the Upper Bavarian government) (the “Regulator”), that the GMP compliance certificate for the Company’s formulations manufacturing facility at Bachupally, Hyderabad was not renewed as the result of GMP compliance deviations identified in an inspection. Consequently, this manufacturing facility was not permitted to export products to the European Union (the “EU”) until satisfactory resolution of the issues identified in the inspection and renewal of the facility’s GMP compliance certificate. The manufacturing facility was re-inspected in January 2018 and the status of non-compliance was withdrawn. The facility since then is permitted to dispatch approved products to the EU.

 

Furthermore, on September 7, 2017, the Regulator concluded an inspection of the Company’s formulations manufacturing facility at Duvvada, Visakhapatnam, with zero critical and six major observations. The Company submitted a Corrective and Preventive Action Plan (“CAPA”) to the Regulator in this regard which was accepted by the Regulator. Consequently, the Regulator permitted the Company to start production from this facility for the EU market.

 

On November 9, 2018, the regulatory authority of Bavaria, Germany concluded the follow-on inspection of the Company’s Formulations manufacturing facility at Duvvada, Visakhapatnam.The facility is considered compliant and the EU-GMP certification continues to remain active with one specific exclusion of a new product. The Company submitted a Corrective and Preventive Action Plan (“CAPA”) to the authorities.

 

34 

 

 

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)

 

25.Revenue from contracts with customers

 

   For the nine months ended
December 31,
   For the three months
ended December 31,
 
   2018   2017   2018   2017 
Sales  Rs.111,234   Rs.103,558   Rs.37,860   Rs.36,164 
Service income   1,480    1,129    480    347 
License fees   971    1,992    160    1,549 
   Rs.113,685   Rs.106,679   Rs.38,500   Rs.38,060 
Excise duty included in revenues  Rs.-   Rs.173   Rs.-   Rs.- 

 

Refund liability amounting to Rs.3,362 and Rs.3,210 as of December 31, 2018 and March 31, 2018, respectively, was included as part of current liabilities.

 

26.Trade and other receivables

 

   As at 
   December 31,
2018
  

March 31,

2018

 
Current        
Trade and other receivables, gross  Rs.38,281   Rs.41,569 
Less: Allowance for credit losses