Dr. Reddy(RDY) - 2022 Q4 - Annual Report

PART I Key Information The company faces significant regulatory, competitive, geopolitical, and operational risks affecting its business and financial results Risk Factors Key risks include regulatory non-compliance, pricing pressures, intense competition, geopolitical instability, and cybersecurity threats - Failure to comply with regulatory standards from agencies like the U.S. FDA can lead to significant adverse impacts, including withheld product approvals and import alerts[28][29] - The company's future success is highly dependent on its ability to develop and commercialize new pharmaceutical products, a process that is time-consuming, costly, and involves high business risk[38][43] - Significant sales concentration exists, with the ten largest customers accounting for approximately 80% of North America Global Generics revenue in FY2022[52] - The military conflict between Russia and Ukraine could adversely impact operations and growth in the region due to geopolitical instability and sanctions[80] - The company is subject to various data privacy laws like GDPR and CCPA, and failure to comply could result in significant fines and reputational damage[83][85][89] - The promoter group, including executive directors and their families, beneficially owned 26.72% of issued shares as of March 31, 2022, giving them significant influence[183] Information on the Company This section details the company's history, business segments, strategic focus, and principal markets and operations History and Development of the Company Recent developments include strategic asset sales, an acquisition to enter the medical cannabis market, and significant capital expenditures - Acquired Nimbus Health GmbH, a German pharmaceutical wholesaler focusing on medical cannabis, to enter this emerging market[210] - Sold U.S. and Canada rights for ELYXYB® to BioDelivery Sciences International, Inc, recognizing Rs 1,084 million as a licensee fee[209] - Sold all rights for the anti-cancer agent E7777 to Citius Pharmaceuticals, Inc for an upfront payment of U.S.$40 million, recognizing a gain of Rs 1,064 million[212] Principal Capital Expenditures (Net of Sales) | Fiscal Year Ended March 31 | Amount (Rs in millions) | | :--- | :--- | | 2022 | 15,733 | | 2021 | 12,476 | | 2020 | 5,725 | Business Overview The company operates through four segments, with Global Generics being the largest revenue contributor across key global markets Revenue by Business Segment (FY2022) | Segment | Revenue (Rs in millions) | % of Total Revenue | | :--- | :--- | :--- | | Global Generics | 179,170 | 84% | | PSAI | 30,740 | 14% | | Proprietary Products | 1,611 | 1% | | Others | 2,870 | 1% | | Total Revenue | 214,391 | 100% | - As of March 31, 2022, the company had 309 cumulative ANDA/NDA filings with the U.S. FDA, with 90 filings pending approval[308] - In India, the company ranked 12th largest by sales with a 2.89% market share for the twelve months ended March 31, 2022[241] - In Russia, the company ranked 17th in sales with a 1.6% market share, with its top five brands accounting for 64.4% of its retail sales[254][256] - The PSAI segment had 1,302 total active Drug Master Files (DMFs) filed worldwide as of March 31, 2022[431] Organizational Structure Dr Reddy's Laboratories Limited is the parent company for a global group of subsidiaries and joint ventures - Dr Reddy's Laboratories Limited is the parent company of the group, with a full list of subsidiaries available in Note 40 of the financial statements[487] Property, Plant and Equipment The company operates numerous manufacturing, research, and office facilities globally, with ongoing capital expansion projects - The company operates principal manufacturing facilities in India, Mexico, the UK, and the USA[488][422] - As of March 31, 2022, the company had capital commitments of Rs 7,791 million for the expansion of manufacturing and research facilities[495] Operating and Financial Review and Prospects The company's financial performance analysis shows revenue growth driven by sales volumes, offset by price erosion and rising costs Operating Results Consolidated revenues grew 13% in FY2022, driven by the Global Generics segment, leading to a 36.7% increase in profit for the year Consolidated Income Statement Highlights (FY2022 vs FY2021) | Metric | FY 2022 (Rs in millions) | FY 2021 (Rs in millions) | % Change | | :--- | :--- | :--- | :--- | | Revenues | 214,391 | 189,722 | 13.0% | | Gross Profit | 113,840 | 103,077 | 10.4% | | Results from operating activities | 29,476 | 24,280 | 21.4% | | Profit for the year | 23,568 | 17,238 | 36.7% | - Global Generics revenue increased by 16% to Rs 179,170 million, driven by growth across all geographies[540][541][544] - PSAI segment revenue decreased to Rs 30,740 million from Rs 31,982 million, primarily due to price erosion[551] - Proprietary Products revenue increased by 208% to Rs 1,611 million, mainly from a Rs 1,084 million license fee for ELYXYB®[553][555] - Selling, general and administrative (SG&A) expenses increased by 13.6% to Rs 62,081 million[558] - Research and development (R&D) expenses rose by 5.7% to Rs 17,482 million, driven by biosimilars and drug discovery spending[560] Liquidity and Capital Resources The company maintains liquidity through operating cash flows and borrowings, though net cash from operations decreased in FY2022 Summary of Cash Flows (in Rs millions) | Activity | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Net cash from Operating activities | 28,108 | 35,703 | 29,841 | | Net cash used in Investing activities | (26,387) | (22,660) | (4,923) | | Net cash used in Financing activities | (2,422) | (298) | (25,159) | - As of March 31, 2022, the company had working capital of Rs 87,841 million and uncommitted credit lines of Rs 39,989 million[587][598] - Total principal debt obligations as of March 31, 2022, were Rs 30,882 million[589] - The company had capital expenditure commitments of Rs 7,991 million as of March 31, 2022[596] Research and Development, Patents and Licenses R&D spending increased in FY2022, focusing on generics, APIs, and proprietary products, supported by a robust patent portfolio R&D Expenditure | Fiscal Year Ended March 31 | Amount (Rs in millions) | | :--- | :--- | | 2022 | 17,482 | | 2021 | 16,541 | | 2020 | 15,410 | - The company holds over 1,550 trademarks filed in India and continues to file patent applications globally to protect its innovations[601] Trend Information Key trends affecting the company include ongoing COVID-19 uncertainty, accelerated inflation increasing costs, and geopolitical risks - The company did not experience significant impacts from the COVID-19 pandemic on its business operations in FY2022[602] - Accelerated inflation is increasing costs for labor, raw materials, and logistics, with limited ability to pass these on to customers[604] - The military conflict between Russia and Ukraine could adversely affect operations and growth in the region[605] Directors, Senior Management and Employees This section details the company's leadership, board structure, compensation practices, and workforce composition Directors and Senior Management The company is led by an experienced Board of Directors, with a majority of independent members, and a Management Council - The Board of Directors consists of 11 members, with nine of the eleven directors being independent[608][650] - The senior management team is organized into a Management Council, led by CEO Erez Israeli[609][611] Compensation Director and executive compensation includes salary, commissions, and stock options, overseen by a dedicated board committee Director Compensation for FY2022 (Rs in millions) | Name of Director | Commission | Salary | Perquisites | Total | | :--- | :--- | :--- | :--- | :--- | | Mr K Satish Reddy | 80.00 | 18.35 | 4.54 | 102.89 | | Mr G.V. Prasad | 130.00 | 22.02 | 5.42 | 157.44 | | Ms Kalpana Morparia | 12.88 | - | - | 12.88 | | Dr Bruce L.A. Carter | 12.13 | - | - | 12.13 | | Mr Sridar Iyengar | 13.64 | - | - | 13.64 | Top Executive Officer Compensation for FY2022 (Rs in millions) | Name | Compensation | | :--- | :--- | | Mr Erez Israeli | 127.15 | | Mr Marc Kikuchi | 77.93 | | Mr Patrick Aghanian | 72.92 | - The company has three employee stock option schemes administered by the Nomination, Governance and Compensation Committee[647] Board Practices The Board operates with seven committees, including fully independent Audit and Compensation committees, adhering to governance standards - As of March 31, 2022, the Board had eleven directors, nine of whom are independent and serve terms of up to five years[650][653] - The Board has seven committees, including an Audit Committee and a Nomination, Governance and Compensation Committee, both composed entirely of independent directors[659][661][665] - The Audit Committee's primary responsibilities include supervising financial reporting and reviewing internal controls[660][662][663] Employees The company's total workforce grew to 24,795 in FY2022, with the majority located in India and concentrated in manufacturing roles Employee Headcount by Function as of March 31, 2022 | Function | India | North America | Europe | Rest of World | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Manufacturing | 9,902 | 188 | 171 | 380 | 10,641 | | Sales and marketing | 8,052 | 60 | 86 | 1,477 | 9,675 | | Research and development | 2,695 | 12 | 84 | 63 | 2,854 | | Others | 1,213 | 80 | 68 | 264 | 1,625 | | Total | 21,862 | 340 | 409 | 2,184 | 24,795 | - Total employee count increased from 22,739 in FY2021 to 24,795 in FY2022[675] - Approximately 3.4% of employees were part of labor unions as of March 31, 2022, and the company considers its employee relations to be good[676] Share Ownership This section details equity ownership by directors and executives and outlines the company's employee stock incentive plans - As of March 31, 2022, Chairman K Satish Reddy held 898,432 equity shares (0.54% of outstanding capital)[678] - During FY2022, a total of 176,754 options were granted to employees under the DRL 2002, 2007, and 2018 stock option plans[681] - The Dr Reddy's Employees ESOS Trust has purchased an aggregate of 661,601 shares from the secondary market since its inception[683] - For FY2022, Rs 592 million was recorded as employee share-based payment expense[684] Major Shareholders and Related Party Transactions The promoter group holds a significant stake, and a recent merger simplified the shareholding structure Major Shareholders The promoter group collectively held 26.72% of equity shares, with a recent merger simplifying the holding structure - The promoter group, including directors and their families, beneficially owned 26.72% of the company's issued shares as of March 31, 2022[685] - Dr Reddy's Holdings Limited, which held 24.85% of the company, was merged into Dr Reddy's Laboratories Limited effective April 8, 2022[686] - As of March 31, 2022, 11.23% of the company's outstanding equity shares were held in the form of American Depositary Shares (ADSs)[692] Related Party Transactions The company engages in transactions with related parties, including joint ventures and entities controlled by key management Significant Related Party Transactions for FY2022 (Rs in millions) | Transaction | Amount | | :--- | :--- | | Catering expenses paid | 319 | | Contributions towards social development | 230 | | Research and development services received | 122 | | Purchase of solar power | 124 | | Professional consultancy services paid | 75 | Financial Information Financial statements are prepared per IFRS, with export sales comprising 79% of revenue and a dividend of Rs 30 per share proposed - The company's financial statements are prepared in accordance with International Financial Reporting Standards (IFRS)[695] - Export sales accounted for 79% of total revenues for the fiscal year ended March 31, 2022, amounting to Rs 170,405 million[696] - The Board of Directors proposed a dividend of Rs 30 per equity share for FY2022, an increase from Rs 25 per share in prior years[698] The Offer and Listing The company's equity shares are listed in India, while its American Depositary Shares are traded on the NYSE - The company's equity shares are traded on the BSE and NSE in India[704] - American Depositary Shares (ADSs) are traded on the New York Stock Exchange (NYSE) under the ticker 'RDY'[704] Additional Information This section covers the company's corporate framework, material contracts, exchange controls, and key tax implications for investors Material Contracts A key material contract was the Business Transfer Agreement with Wockhardt Limited for a portfolio of branded generics - In June 2020, the company completed the acquisition of select branded generics business divisions from Wockhardt Limited for Rs 18,500 million[719][721] - The acquisition included a portfolio of 62 brands, a manufacturing plant, and 2,051 employees[722] Exchange Controls Indian regulations permit up to 100% FDI in greenfield pharma projects, with specific rules governing ADSs and FPI investments - Foreign Direct Investment (FDI) in new 'greenfield' pharmaceutical projects is allowed up to 100% under the automatic route[730] - The aggregate limit for Foreign Portfolio Investors (FPIs) in the company is the sectoral cap of 74%[745][748] - The Depository Receipts Scheme, 2014, governs the issuance of ADSs and allows for two-way fungibility between ADSs and shares[757][758] Taxation This section summarizes key Indian and U.S. tax implications for shareholders, including changes to dividend tax and capital gains - Effective April 1, 2020, India abolished the Dividend Distribution Tax, making dividends taxable in the hands of shareholders[780][782] - In India, long-term capital gains from the sale of equity shares exceeding Rs 100,000 are taxed at 10%[790][795] - For U.S. holders, dividends may be eligible for a reduced tax rate as the company is considered a "qualified foreign corporation"[813][815] - The company does not believe it was a Passive Foreign Investment Company (PFIC) for the fiscal year ended March 31, 2022[827] Quantitative and Qualitative Disclosures About Market Risk The company manages market risks from foreign exchange, interest rates, and commodity prices using derivative instruments and policies - The company uses derivative financial instruments, such as foreign exchange forward and option contracts, to mitigate foreign currency risk[839] - A 10% change in foreign exchange rates would result in a Rs 3,169 million change in the hedging reserve[842] - The company is exposed to interest rate risk through floating-rate loans, where a 10% change in rates would affect net profit by Rs 89 million[844][850] Description of Securities Other Than Equity Securities This section details the fees associated with the company's American Depositary Shares (ADSs) managed by J.P. Morgan Chase Bank ADS Holder Fees | Service | Fee | | :--- | :--- | | Issuing/Cancelling ADSs | U.S.$5.00 per 100 ADSs | | Dividend Distribution | U.S.$0.02 or less per ADS | | Transferring Receipts | U.S.$1.50 per ADS | | General Depositary Services (Annual) | U.S.$0.02 per ADS | - The Depositary, J.P. Morgan Chase Bank, N.A., reimbursed the company U.S.$949,838 for ADS program-related expenses in FY2022[858] PART II Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of March 31, 2022 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[866] - Management concluded that the company's internal control over financial reporting was effective as of March 31, 2022, based on the COSO 2013 framework[870] - The independent registered public accounting firm issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[871][873] Corporate Governance The company largely complies with NYSE governance standards but follows Indian practices in certain areas, such as proxy solicitation - The company complies with the NYSE requirement for a majority of independent directors, with nine out of eleven directors being independent[896] - The company has a Nomination, Governance and Compensation Committee and an Audit Committee, both composed entirely of independent directors[896] - A key difference from NYSE practice is that the company does not solicit proxies for shareholder meetings, as this is prohibited under Indian law[898] PART III Financial Statements This section contains the complete audited consolidated financial statements and accompanying notes prepared in accordance with IFRS Note 6. Business Combinations The company completed two significant acquisitions, including Nimbus Health GmbH and select branded generics from Wockhardt - On February 24, 2022, the company completed the acquisition of 100% of Nimbus Health GmbH for an upfront payment of Rs 337 million[1188][1189][1190] - On June 10, 2020, the company completed the acquisition of select branded generics business from Wockhardt Limited for a total consideration of Rs 16,115 million[1198][1200] Note 14. Other Intangible Assets The company recorded significant impairment losses on intangible assets in recent fiscal years due to adverse market conditions - In FY2022, the company recorded an impairment loss of Rs 4,511 million on intangible assets, primarily for the IPR&D asset PPC-06[1239][1245] - In FY2021, total impairment charges were Rs 8,542 million, which included Rs 3,180 million for gNuvaring and Rs 3,291 million for Xeglyze®[1247][1250][1251] - In FY2020, total impairment charges were Rs 16,757 million, with Rs 11,137 million attributable to gNuvaring[1255][1256] Note 32. Contingencies The company is involved in numerous legal proceedings, including patent litigation, antitrust lawsuits, and regulatory investigations - The company settled litigation with Indivior regarding its generic Suboxone® film, receiving payments totaling U.S.$72 million[1486] - The company is involved in multiple U.S. antitrust multi-district litigations alleging price-fixing and market allocation for numerous generic drugs[1536][1539][1540] - An internal investigation was initiated in September 2020 following an anonymous complaint about potential FCPA violations[1610] - The company is involved in ongoing litigation with India's National Pharmaceutical Pricing Authority (NPPA) regarding drug pricing[1487][1496] - On June 1, 2022, the company's U.S. subsidiary settled with the Texas Attorney General for a payment of U.S.$12.9 million[1613]