management discussion and analysisIn 2011, Dr. Reddy's became the only Indian pharmaceutical company to celebrate the10th anniversary of listing at the New York Stock Exchange.
The Company enjoys some key strengths which are listed below:
• Industry leading chemistry skills and development processes which have resultedin monetizing several niche product opportunities.
• A high degree of vertical integration with most of the APIs being sourcedinternally to manufacture formulations. This has not only helped in speed to market butalso kept Dr. Reddy's generic and formulation products cost competitive. The Company ranksamongst the global leaders in Drug Master Filings (DMF), with 486 global DMFs as of 31March 2011.
• The Company enjoys critical business mass in key markets such as North America,Russia and India.
• Creates and leverages value opportunities through strategic partnerships.
• Has established a presence in biosimilars through Reditux™, Dr. Reddy'sbrand of rituximab, the world's first biosimilar monoclonal antibody, as well as threeadditional products, Grafeel, Cresp and Peg-Grafeel™.
KEY FINANCIAL HIGHLIGHTS
As per financial reporting standards prescribed under the International FinancialReporting Standards (IFRS):
• The Company's consolidated revenue for 2010-11 grew by 6% to Rs 74,693 millions(US$ 1.7 billion). As Chart A shows, Dr. Reddy's revenue has been rising at a CAGR of 21%over the last ten years.
• Profit after tax (PAT) for 2010-11 was Rs 11,040 millions versus Rs 1,068millions in 2009-10.
KEY EVENTS
BUILDING STRATEGIC PARTNERSHIPS
• In 2010-11, Dr. Reddy's acquired GlaxoSmithKline's (GSK) oral penicillinmanufacturing facility located in Tennessee, USA. This allows the Company to enter the USpenicillin-containing antibacterial market segment through brands such as Augmentin andAmoxil, and serve the needs of customers through manufacturing and other capabilitiesthat did not previously exist within Dr. Reddy's.
• Promius™ Pharma, a subsidiary of Dr. Reddy's, collaborated with ValeantPharma to market Cloderm cream in the US market. Cloderm is a well-tested productamong dermatologists, and is universally recognized for its safety profile and uniquenon-sensitizing formulation. It is used for the relief of the inflammatory and pruriticmanifestations of corticosteroid-responsive dermatoses. This should bolster thePromius™ Pharma's efforts to build a successful prescription branded franchise in theUS, and contribute to the Company's goal to become a leader in medical dermatology.
• 2010-11 saw an expansion of Over-the-counter (OTC) and prescription portfolio inRussia and the Commonwealth of Independent States (CIS) through various in-licensing dealswith partners for exclusive marketing rights. With strong brands, increasing growth in theprescription, OTC and hospital segments and the Company's association with top tierdistribution partners, these deals should add to Dr. Reddy's growth ambitions in Russiaand the CIS.
• The Company entered into a settlement with AstraZeneca in the US relating to theAbbreviated New Drug Application (ANDA) filed for the generic versions of AstraZeneca'sNexium (esomeprazole). According to IMS, Nexium is the second largest selling drug inUS. AstraZeneca has granted Dr. Reddy's a license, subject to regulatory approval, tolaunch generic version of esomeprazole delayed-release capsules in 2014, or earlier incertain circumstances.
• The Company had entered the South African market in 2003 through 60:40 JointVenture (JV) with a local partner, Calshelf. During 2010-11, the Company increased thestake in this JV to 100% after acquiring the 40% stake of the partner. South Africa is animportant market and the Company hopes to increase the presence there, especially in theareas of the Central Nervous System (CNS), oncology and women's health.
BIOSIMILARS: THE NEXT WVE OF GROWTH
• Dr. Reddy's has sold approximately 1.4 million units of biosimilar products andhas treated approximately 97,000 patients in 12 countries.
• Launched three years ago, Reditux™ was the first — and still the only— biosimilar monoclonal antibody in the world. In 2010-11, Reditux™ registered agrowth of 75% over the previous year and is now among the Company's Top Five brands inIndia.
• In 2010-11, Dr. Reddy's launched Cresp in India — the first biosimilardarbepoetin alfa in the world. This launch is a significant achievement, for it has againdemonstrated the Company's development capabilities in biosimilars. Cresp offerspatients with both nephrology and oncology indications, an improved treatment regimen ataffordable prices.
• In March 2011, the Company launched Peg-grafeelTM in India — in the form ofan affordable pegfilgrastim, which is used to stimulate the bone marrow to produce moreneutrophils to fight infection in patients undergoing chemotherapy. Peg-grafeelTMrepresents a breakthrough in the pricing of this complex molecule. It is priced atapproximately 25% of the originator brand in India, and 95% lower than the US price. Thispricing has been enabled by the Company's vertically integrated global manufacturingnetwork. Peg-grafeel™ is manufactured using Dr. Reddy's 'PEGtech' brand of activatedmPEGs, which are synthesized at the Company's facility in Mexico and the UK.
FOCUS ON R & D
• Investments in R&D in 2010-11 grew by 33% to Rs 5,060 millions. Thisrepresents 7% of overall sales, compared to 5% in 2009-10.
• Dr. Reddy's has filed 21 ANDAs in 2010-11. As of 31 March 2011, the Company has179 cumulative ANDAs (including partnered ANDAs). The Company's North America genericspipeline comprises 76 ANDAs pending with the USFDA as of 31 March 2011. Of these, 38 arePara-IV filings with 10 in the category of 'first to file'. The value of 'first to file'represents approximately US$ 3 billion of innovator sales.
• The Company has filed 56 DMFs in 2010-11 — which includes 19 DMFs in theUS, 7 in Europe, and 30 in the rest of the world. As of 31 March 2011, Dr. Reddy's hasfiled 486 cumulative DMFs, and is among the global leaders in DMF filings.
ROBUST GROWTH IN EMERGING MARKETS
• In 2010-11, Dr. Reddy's continued to outperform the Russian market by reportinga growth of 24% versus a market growth of 7.5% (Source: Pharmexpert). The Company isranked 15th in Russia.
• The branded formulation business in India continues to be one of the key marketsfor the Company. In 2010-11, Dr. Reddy's expanded the field force by approximately 500people to widen the reach with doctors, and reported a growth of 15% — in line withthe market.
• Dr. Reddy's grew in other emerging markets as well by 12% over the previousyear. The major countries include Ukraine, Venezuela, South Africa and New Zealand.
CONTINUED GROWTH IN NORTH AMERICA GENERICS
• In the US prescription market, 25 of Dr. Reddy's products featured among the topthree ranks in terms of market share (Source: IMS Sales Volumes, March 2011).
• The Company's presence in the OTC segment yielded good returns, with keyproducts such as ranitidine and omeprazole magnesium growing well. Within three years ofcommencement, Dr. Reddy's OTC business in North America generics is worth approximatelyUS$ 60 millions.
• In 2010-11, North America generics showed a revenue growth of 13% over previousyear. Significant portion of this growth was led by the Company's presence in productswith limited competition.
• 11 new products were launched in the North America generics market in 2010-11.Of these, five experienced limited competition. These were: amlodipine benazepril,tacrolimus, lansoprazole, zafirlukast and fexofenadine pseudoephedrine 180 / 240 mg.
PHARMACEUTICAL MARKET TRENDS
Note: Global market information referred to in this and subsequent sections are basedon latest available reports from IMS Health Inc., and Datamonitor.
According to IMS Health, the global pharmaceutical market value is expected to bearound $880 billion in 2011, exhibiting a growth of 5% to 7%. This growth is expected tobe about one percentage point higher than in 2010, and will be largely driven by strongeroverall contribution from emerging countries. In the regulated markets, products with morethan US$ 30 billion of sales are expected to face generic competition, including iconicbrands such as Lipitor, Plavix, and Zyprexa.
KEY GLOBAL TRENDS
• Increasing pace of genericization. On average, brands in the US — the mostmature of all generics markets — experienced the greatest degree of volume erosionfollowing patent expiry and exposure to direct generic competition. Between 2006 and 2009,brand sales declined by 72% after six months of generic competition. After the US, branderosion was the most severe in the UK, Germany, and France, with mean sales erosion in theregion of 44% after six months of generic competition. Brand erosion in Australia, Italy,Russia, Spain, and Japan ranged from 54% (in Italy) to 6% (in Japan) in terms of value,after two years of generic competition.
• Key growth drivers and resistors facing healthcare payers and pharma. A numberof factors have and will continue to effect pharmaceutical sales and profits goingforward. Ageing populations, the growing prevalence of chronic disease, greater use ofexpensive treatments, and expanding public healthcare coverage in markets such as the USare stretching existing healthcare resources. Both public and private payers across theworld are pursuing a wave of budgetary control mechanisms that target drug spending. Forcountries with publicly funded healthcare, this is being implemented in the context ofrestoring fiscal balance. Further, during 2010-15, branded pharmaceutical is set to loseapproximately US$ 108 billion in sales due to patent cliffs and the resultant genericerosion of branded sales. However, the industry is implementing a number of strategies todrive sales and profitability going forward: product innovation, diversification, andcost-containment. It is difficult to estimate how these will play out over time.
• Global market for biosimilars is expected to be more than 15 times thecurrent size in the next five years. The global biosimilars market is expected to growfrom US$ 243 millions in 2010 to US$ 3.7 billion in 2015. This will be driven by patentexpirations of more than 30 biologic medicines, with sales of US$ 51 billion in the nextfive years.
• Rapid erosion from CNS and Cardiovascular Therapeutic areas. CNS is thelargest therapeutic area across major markets followed by cardiovascular drugs. However,these have become increasingly saturated with 'me-too' drugs, and are suffering rapiderosion from generic competitors following patent expiry of key brands.
• Metabolic, oncology, and drugs for the treatment of immunology and inflammatorydisorders will experience strong sales growth - as these have between 2005 and 2009. Thegrowth is being driven by continued uptake of novel biologic drugs. For the top 50pharmaceutical companies, sales across these three therapy areas are forecasted to grow by5.4%, 5.8% and 4.1% CAGR during the period 2010-2015.
• Significant new breakthroughs on the horizon. In 2011, the introduction and useof new drugs - a third of which are specialty pharmaceutical products - are poised tofulfill unmet patient needs and significantly alter treatment paradigms in several keytherapeutic areas. These include innovative treatment options for stroke prevention,melanoma, multiple sclerosis, breast cancer and hepatitis C. As these new drugs arebrought to market, patient access is expected to expand and funding redirected from otherareas where lower-cost generics are available. In total, 30 to 35 new chemical orbiological entities are expected to be launched globally in 2011.
KEY REGIONAL TRENDS REGULATED MARKET TRENDS
• Improvement in the us market growth. In 2011, the US market is expected togrow between 3% and 5% translating to a market value of US$ 320 to US$ 330 billion —up slightly from the growth in 2010.
• Peak years of patent expiries shift major therapies to generics. In 2011,products with sales of more than US$ 30 billion are expected to face the prospect ofgeneric competition in the major developed markets. In the US alone, Lipitor, Plavix,Zyprexa and Levaquin — which together accounted for more than 93 millionsprescriptions dispensed in the past 12 months and generated over US$ 17 billion in sales— will likely lose market exclusivity. The full impact of patients shifting tolower-cost generic alternatives for these products, as well as out of other brands intheir therapeutic classes, will be mostly felt in 2012.
• Us healthcare reforms with the us President seeking to shorten the exclusivityperiod for biologics to seven year. Branded biologics in the US are eligible to receivefour years 'data exclusivity and 12 years' market exclusivity. However, this is currentlyunder debate in the US House of Representatives. In February 2011, the US Presidentannounced that he wishes to shorten market exclusivity from 12 years to seven. If it wereto pass, it will significantly reduce the timescale for biosimilars to enter the USmarket.
• Germany on the road to becoming a commodity market. Historically, Germany'sgenerics market has been highly branded. But new wide ranging reforms in Germany have putthe negotiating power firmly in the hands of the country's sick funds. This has resultedin auctioning of generics and in making the sales and marketing forces obsolete, withprice playing the most important factor.
EMERGING MARKET TRENDS
• 'Pharmerging' countries contribute to nearly half of total growth. The 17Pharmerging' countries are forecast to grow at a 15% to 17% in 2011, to somewhere betweenUS$ 170 and US$ 180 billion. Many of these are expected to benefit from greater governmentspending on healthcare and broader public and private
1
'Pharmerging' countries includes China, Brazil, Russia, India, Mexico, Turkey,Venezuela, Poland, Argentina, Thailand, Romania, Indonesia, S. Africa, Egypt, Ukraine,Pakistan and Vietnam.
healthcare funding, thus driving greater demand and access to medicines.
• Continued growth expected in Russia Government's health expenditure. Thegenerics industry in Russia is complex and fragmented, and dominated by a small number ofinternational generics manufacturers. These companies enjoy preferential uptake driventhanks to their perceived superiority in terms of safety and efficacy vis-a-visdomestically manufactured generics. In Russia, investment in healthcare is considered along term national priority as a means of reducing mortality rates and increasing lifeexpectancy. Government health expenditures per capita reached US$ 590 in 2010 compared toaround US$ 360 in 2005. Their continued growth is anticipated: estimates from the FederalMinistry of Health and Social Development suggest US$ 1,400 in 2017, rising to US$ 1,800by 2020.
• Acute therapeutic segment continues to dominate in India. The Indianpharmaceutical market has seen a CAGR of about 15% in the last five years. The domesticindustry grew by 15% in March 2011(MAT) versus 18% in March 2010. Acute therapy dominates,with a share of 73% of the total market value. The chronic segment has registered a CAGRof 18%. Anti-diabetics grew by 24%, cardiovascular by 16%, CNS and gastro-intestinal grew17%, anti-infectives by 14%, respiratory by 10% and dermatology by 15%.
DR. REDDY'S MARKET PERFORMANCE REVENUE
The Company's consolidated revenues increased by 6% to Rs 74,693 millions (US$ 1.7billion) in 2010-11. Revenues from Global Generics increased by 10% while PSAI revenuesdecreased by 4%.
In 2010-11, Dr. Reddy's share of revenue from the international businesses stood at81%. The remaining 19% came from India. North America (US and Canada) contributed to 31%of total revenues in 2010-11, versus 30% last year. Europe accounted for 21% of totalsales in 2010-11, compared to 24% in 2009-10. Russia and other CIS countries contributedto 15% of total revenues.
Chart B plots the data.
Table 1 gives Dr. Reddy's consolidated financial performance by businesses under IFRS.
GLOBAL GENERICS
Global Generics revenues were at Rs 53,340 millions in 2010-11, versus Rs 48,606millions in 2009-10.
Chart C gives the geographic distribution.
TABLE 1 Consolidated Business-Wise Performance under IFRS
| | Rs millions |
| 2010-11 | 2009-10 |
| Revenue | Gross profit(1) | % to revenue | Revenue! | Gross profits(1) | % to revenue |
| Global Generics | 53,340 | 34,499 | 65 | 48,606 | 29,146 | 60 |
| Pharmaceutical Services and Active Ingredients (PSAI) | 19,648 | 5,105 | 26 | 20,404 | 6,660 | 33 |
| Proprietary Products and Others | 1,705 | 659 | 39 | 1,267 | 534 | 42 |
| Total | 74,693 | 40,263 | 54 | 70,277 | 36,340 | 52 |
NOTE(1) Does not include selling, general and administrative expenses, research anddevelopment costs and foreign exchange gains and losses.
TABLE 2 Revenues from the Top-10 Brands in India
| | | Rs millions |
| Product | 2010-2011 | 2009-2010 | Growth |
| Omez | 1,028 | 892 | 15% |
| Nise™ | 700 | 690 | 1% |
| Stamlo | 507 | 473 | 7% |
| Reditux™ | 405 | 232 | 75% |
| Omez-DR | 377 | 310 | 22% |
| Stamlo Beta | 328 | 326 | 0% |
| Razo™ | 285 | 247 | 15% |
| Atocor | 278 | 274 | 2% |
| Mintop™ | 209 | 196 | 7% |
| Razo-D™ | 200 | 169 | 18% |
NORTH AMERICA
Over the previous year, revenues from North America increased by 13% to Rs 18,996millions in 2010-11. Significant portion of this growth was led by the Company's presencein products with limited competition. As mentioned earlier, 11 new products were launchedin US in 2010-11, of which five experienced limited competition. These were amlodipinebenazepril, tacrolimus, lansoprazole, zafirlukast and fexofenadine-pseudoephedrine. Dr.Reddy's launched fexofenadine-pseudoephedrine on 31 January 2011 after the District Courtof New Jersey lifted the preliminary injunction granted to Sanofi-Aventis.
The Company has filed 21 ANDAs in 2010-11. As of 31 March 2011, the Company has 179cumulative ANDAs (including partnered ANDAs). Dr. Reddy's North America generics pipelinecomprises 76 ANDAs pending with the USFDA. Of these 38 are Para-IV filings, with 10 in thecategory of 'first to file'.
INDIA
Revenues from India grew by 15% to Rs 11,690 millions in 2010-11—driven by volumegrowth of 11% and new products led growth of 4%. During the year, Dr. Reddy's launched newproducts under 55 new brands including two biosimilars—Cresp and Peg-Grafeel™.
Dr. Reddy's Top-10 brands accounted for revenues of Rs 4,317 millions (37% of Indiaformulations revenue). Some of the details are:
• Omez and Omez DR, the Company's brands of omeprazole, grew by 15%. Omeznow accounts for 53% market share.
• Reditux™, the Company's brand of rituximab, grew by 75%.
• Revenues from Razo™, the Company's brand of rabeprazole, grew by 15%, andhad a market share of 13%.
• Mintop™, Dr. Reddy's brand of minoxidil, grew by 7%, and is ranked firstwith a market share of 40%.
• Stamlo, the Company's brand of amlodipine, grew by 7%, and is ranked firstwith a market share of 20%.
Table 2 gives the revenues from the Company's Top 10 brands in India.
RUSSIA AND OTHER CIS COUNTRIE
Revenues from Russia grew by 24% to Rs 8,942 millions in 2010-11 — driven byvolume growth of 33% that was partially offset by a price decline of 9%. Dr. Reddy's hasbeen outperforming the industry's growth over many years. During the year, the Companylaunched new products under seven new brands with some of those being in-licensed and inthe OTC space. OTC sales are now 25% of the overall portfolio. Growth was led by keybrands such as Nise, Cetrine, Keterol, Omez, Ciprolet and Senade.
Table 3 gives the revenues from the Company's top brands in Russia.
Revenue from other CIS countries increased by 2% to Rs 1,916 millions.
TABLE 3 Revenues from the Top Formulations in Russia
| | | Rs MILLIONS |
| Product | 2010-2011 | 2009-2010 | Growth |
| Nise | 2,311 | 1,862 | 26% |
| Omez | 1,554 | 1,458 | 18% |
| Keterol | 1,376 | 1,287 | 16% |
| Ciprolet | 778 | 760 | 9% |
| Senade | 598 | — | — |
| Cetrine | 590 | 408 | 45% |
EUROPE
Revenues from Europe fell by 13% to Rs 8,431 millions. This was largely due to revenuesfrom Germany decreasing by 25% on account of pricing pressures due to the sick fund'stender system. Revenues from rest of Europe increased by 27% to Rs 2,974 millions largelyled by the growth from out-licensing sales.
REST OF THE WORLD (ROW)
Revenues from RoW markets increased by 17% to Rs 3,366 millions in 2010-11. This waslargely contributed by markets of Venezuela, New Zealand and South Africa.
PHARMACEUTICAL SERVICES AND ACTIVE INGREDIENTS (PSAI)
Revenues from PSAI decreased by 4% to Rs 19,648 millions in 2010-11. Internationalmarkets accounted for 87% of PSAI's revenue, amounting to Rs 17,028 millions. For theyear, the Active Ingredients business grew modestly on the back of new launches offset bypricing pressures. Revenues from the Pharmaceutical Services segment declined due to lowercustomer orders.
As given earlier, Dr. Reddy's filed 56 Drug Master Files (DMFs) in 2010-11 — 19 inthe US, 7 in Europe, and 30 in RoW. As of 31 March 2011, the Company has filed 486cumulative Drug Master Files (DMFs).
• Active Ingredients revenue from Europe grew by 6% to Rs 7,020 millions in2010-11, primarily on account of increased sale of atorvastatin, clopidogrel, escitalopramoxalate, and ramipril.
• Revenue from North America fell by 14% to Rs 3,170 millions. This was mostly dueto the decrease in sales of finasteride and rabeprazole, which was partially offset byincreased sales of gemcitabine.
• Revenue from other emerging markets decreased by 8% to Rs 6,838 millions, onaccount of decreased sales in South Korea, Turkey, Brazil, Japan and Australia.
PROPRIETARY PRODUCTS BUSINES
As on 31 March 2011, Dr. Reddy's had 27 products in the pipeline, of which seven areNew Chemical Entities (NCEs) and 20 are novel Differentiated Formulations (DFs). Out ofthese 27 products seven are in clinical development and 20 in the pre-clinical stage. TheCompany successfully repositioned its research activities in the year 2009-10 whichresulted in creating a robust differentiated product pipeline. The Company also initiatedthree NCE programs in 2010-11. Details of a few Dr. Reddy's development pipeline productsare given in Table 4.
Dr. Reddy's global employee strength crossed 14,500 in 2010-11, of which over 2,400 arebased at international locations. There is a conscious effort at building diversity in theworkforce, which has resulted in the rise of the percentage of women employees. In2010-11, almost 46% of the campus recruits were women.
TABLE 4 Dr. Reddy's Development Pipeline
| Compound | Therapeutic Area | Status | Remarks |
| DRF 2593 | Metabolic disorders | Phase III | In Phase lll clinical testing for Type 2 diabetes partnered with Nordic Biosciences |
| DRL 17822 | Metabolic disorders / Cardiovascular disorders | Phase II | Targeting dyslipidemia / atherosclerosis |
| Novel Differentiated Formulations (DFs) | | | |
| DRL-NAB-P2 | Onchomycosis | Phase III | In Phase III clinical testing for Onchomycosis |
| DRL-NAB-P5 | Psoriasis | Clinical | Targeting Psoriasis |
| DRL-NAB-P6 | Psoriasis | Clinical | Targeting Psoriasis |
| DFA-02 | Anti-infectives | Clinical | Targeting bacterial infections |
| DFP-02 | Migraine | Clinical | Targeting Migraine |
During the year, around 4,100 new employees were hired, including replacements. Indiafield hires contributed to 31% of the hiring, while 43% was in manufacturing, quality,R&D and engineering services. Critical talent was added in the areas of safety, healthand environment, formulation technology, development of differentiated formulations,global sales and marketing, OTC products, strategy, patents, quality and cell andmolecular biology. The Company recruited 16 management trainees and 7 laterals fromprestigious B-Schools.
As part of the Company's transition to a 'Role Based Organization', Dr. Reddy's hasredefined a new set of leadership competencies. These are: (i) performance orientation,(ii) business acumen and decision making, (iii) communicating and influencing, (iv)building and leveraging relationships, (v) commitment to learning and coaching, and (vi)innovation and problem solving. This talent management process for senior management wasinitiated by the Management Council in 2010-11. The second phase of this process coveringadditional employees is scheduled to be completed in the first half of 2011-12.
A culture of continuous learning and leadership development across all levels are keyto Dr. Reddy's growth aspirations. Key senior management met for their third LeadershipSummit at Boston, USA with world class faculty sharing ideas on performance and execution,talent and leadership, and organizational culture. Dr. Reddy's launched several learninginterventions focused on developing critical skill sets and leadership competencies. In2010-11, there were 10,112 person-days of training.
FINANCIALS
The financials are given in two sub-sections:
• Abridged IFRS accounts for Dr. Reddy's as a consolidated entity.
• Abridged Indian GAAP stand-alone accounts for Dr. Reddy's, as statutorilyrequired under India's Companies Act, 1956.
IFRS CONSOLIDATED FINANCIALS
Table 5 gives the abridged IFRS consolidated financial performance of Dr. Reddy's for2010-11 and 2009-10.
REVENUES
The Company's consolidated revenues increased by 6% to Rs 74,693 millions (US$ 1.7billion) in 2010-11. Revenues from Global Generics increased by 10% while PSAI revenuesdecreased by 4%.
GROSS PROFIT
Dr. Reddy's gross profit rose by 11% to Rs 40,263 millions in 2010-11. As a percentageof revenue, gross profit was 54% in 2010-11 versus 52% in 2009-10. The improved margin isdue to a favorable product mix in the North America generics market. Gross margins forGlobal Generics are at 65% in 2010-11 versus 60% in 2009-10. In the PSAI segment marginsare at 26% in 2010-11 versus 33% in 2009-10, largely due to price erosions in existingproducts.
TABLE 5 Abridged IFRS Consolidated Financial Performance
| 2010-11 | 2009-10 | |
| Rs Millions | % to sales | Rs Millions | % to sales | Increase / (decrease) |
| Revenues | 74,693 | 100% | 70,277 | 100% | 6% |
| 40,263 | 54% | 36,340 | 52% | 11% |
| Selling, general and administrative expenses | 23,689 | 32% | 22,505 | 32% | 5% |
| Research and development expenses | 5,060 | 7% | 3,793 | 5% | 33% |
| Impairment loss on other intangible assets | - | - | 3,456 | 5% | NC |
| Impairment loss on goodwill | - | - | 5,147 | 7% | NC |
| Other expenses / (income), net | (1,115) | (2%) | (569) | (1%) | NC |
| Operating income / (loss) | 12,629 | 17% | 2,008 | 4% | NC |
| Finance expense | (362) | - | (372) | (1%) | NC |
| Finance income | 173 | - | 369 | 1% | NC |
| Finance (expense) / income, net | (189) | - | (3) | 0% | NC |
| Share of profit of equity accounted investees | 3 | - | 48 | 0% | NC |
| Profit / (loss) before income tax | 12,443 | 17% | 2,053 | 4% | NC |
| Income tax benefit / (expense) | (1,403) | (2%) | (985) | (1%) | NC |
| Profit / (loss) for the year | 11,040 | 15% | 1,068 | 3% | NC |
Note: NC = Not Comparable
TABLE 6 Consolidated Cash FIow under IFRS
| | Rs millions |
| 2010-11 | 2009-10 |
| Opening cash & cash equivalents | 6,545 | 5,378 |
| Cash flows from: | | |
| (a) Operating activities | 8,009 | 13,226 |
| (b) Investing activities | (8,658) | (6,998) |
| (c) Financing activities | (377) | (5,307) |
| Effect of exchange rate changes | 141 | 246 |
| Closing cash & cash equivalents | 5,660 | 6,545 |
TABLE 7 Dr. Reddy's Consolidated Working Capital
| | | Rs MILLIONS |
| As on 31 March 2011 | As on 31 March 2010 | Change |
| Accounts receivable (A) | 17,615 | 11,960 | 5,655 |
| Inventories (B) | 16,059 | 13,371 | 2,688 |
| Trade accounts payable (C) | 8,480 | 9,322 | (842) |
| Working capital (A+B-C) | 25,194 | 16,009 | 9,185 |
| Other current assets (D) | 13,919 | 16,732 | (2,813) |
| Total current assets (A+B+D) | 47,593 | 42,063 | 5,530 |
| Short and long term loans and borrowings, current portion (E) | 18,301 | 9,310 | 8,991 |
| Other current liabilities (F) | 14,234 | 10,390 | 3,844 |
| Total current liabilities (C+E+F) | 41,015 | 29,022 | 11,993 |
SWLLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative (SG&A) expenses increased by 5% to Rs 23,689millions in 2010-11. Most of it was on account of legal expenses in the US, OTC-relatedmarketing spend in Russia and the CIS and new field force expenditure in India. Part ofthis has been offset by the savings in manpower and related costs due to the restructuringof betapharm in Germany.
R&D EXPENSES
R&D expenses grew by 33% to Rs 5,060 millions. As a share of total revenue, R&Dexpenditure was at7% in 2010-11, compared to 5% in 2009-10. The increase was due tosignificant scaling up of R&D activities in biosimilars, generics and differentiatedformulations.
OTHER EXPENSES / (INCOME), NET
In 2010-11, net other income amounted to Rs 1,115 millions compared to Rs 569 millionsin 2009-10. This was primarily on account of profit from sale of land. During the year theCompany also recorded an amount of Rs 73 millions towards negative goodwill under 'OtherIncome'.
FINANCE EXPENSES / (INCOME), NET
Finance costs (net) are at Rs 189 millions in 2010-11 versus Rs 3 millions in 2009-10.The change is mainly on account of: (i) net foreign exchange (forex) loss of Rs 57millions in 2010-11 versus a net forex gain of Rs 72 millions in 2009-10; (ii) netinterest expense of Rs 199 millions in 2010-11 versus Rs 123 millions in 2009-10 —largely due to an increase in the outstanding amount of short term loans and lowerinterest income from fixed deposits; and (iii) profit on sale of investments of Rs 68millions in 2010-11 versus Rs 48 millions in 2009-10.
TABLE 8 Dr. Reddy's Debt-Equity Position
| | | Rs MILLIONS |
| As on 31 March 2011 | As on 31 March 2010 | Change |
| Total stockholders' equity | 45,990 | 42,915 | 3,075 |
| Long-term debt (non-current) | 5,271 | 5,385 | (114) |
| Long-term debt (current) | 12 | 3,706 | (3,694) |
| Short term borrowings | 18,289 | 5,604 | 12,685 |
| Total debt | 23,572 | 14,695 | 8,877 |
INCOME TAX
Provision for income tax for 2010-11 amounted to Rs 1,403 millions compared to Rs 985millions in
2009-10.
NET INCOME
Dr. Reddy's net profit was Rs 11,040 millions in 201011, versus a net profit of Rs1,068 millions in 2009-10.
LIQUIDITY AND CAPITAL RESOURCES
Table 6 gives the Company's consolidated cash flow for 2010-11 and 2009-10 based onIFRS. due to repayments of loan taken on account of betapharm acquisition. The Company'sratio of total debt-to-stockholders' equity increased to 0.51 as on 31 March 2011 from0.34 on 31 March 2010.
INDIAN GAAP STAND-ALONE FINANCIALS
INTERNAL CONTROLS AND RISK MANAGEMENT
Dr. Reddy's has a comprehensive system of internal controls with the objective ofsafeguarding the
TABLE 9 Indian GAAP Stand-alone Financial
| | | Rs MILLIONS |
| 2010-11 | 2009-10 | Increase / (Decrease) |
| Gross sales | 52,537 | 44,327 | 19% |
| Less: Excise duty | 356 | 316 | 13% |
| Net sales | 52,181 | 44,011 | 19% |
| License fees and service income | 310 | 1,111 | (72%) |
| Other income | 1,750 | 2,124 | (18%) |
| Total Income | 54,241 | 47,246 | 15% |
| Expenditure | | | |
| Material consumed | 17,323 | 15,245 | 14% |
| Research and development expenses, net | 5,128 | 3,643 | 41% |
| Personnel costs | 7,012 | 5,100 | 37% |
| Selling expenses | 4,771 | 4,485 | 6% |
| Other expenditure | 6,399 | 5,269 | 21% |
| Depreciation and amortization | 2,479 | 2,224 | 11% |
| Interest expense | 53 | 111 | (51%) |
| Provision for decline in the value of long term investments | 557 | 321 | |
| Total expenditure | 43,722 | 36,398 | 20% |
| Profit / (loss) before tax | 10,519 | 10,848 | (3%) |
| Tax expense | 1,585 | 2,387 | |
| Net profit | 8,934 | 8,461 | 6% |
Cash generated from operating activities in 2010-11 is Rs 8,009 millions. Investingactivities includes net investment in property, plant and equipment of Rs 8,768 millionsto meet the business growth, compared to Rs 4,068 millions in 2009-10. Sale proceeds inmutual funds net of investments amounted to Rs 3,642 millions. Net cash outflow fromfinancing activities in 2010-11 mainly represents the repayment of Rs 8,942 millions oflong term debt, and payment of dividends amounting to Rs 8,089 millions. Table 7 gives theCompany's consolidated working capital.
DEBT-EQUITY
The Debt — Equity position of the Company as on 31 March 2011 and 2010 is given inTable 8. Stockholders' equity increased in 2010-11. Long-term debt, including the currentand non-current portions, decreased by Rs 3,808 millions in 2010-11 Company's assets,ensuring that transactions are properly authorized, and provide significant assurance atreasonable cost, of the integrity, objectivity and reliability of financial information.The management of Dr. Reddy's duly considers and takes appropriate action onrecommendations made by the statutory auditors, internal auditors, and the independentAudit Committee of the Board of Directors. More on internal controls is given in thechapter on Corporate Governance.
In a dynamic business environment, the traditional base business model inpharmaceuticals is exposed to considerable volatility, both upwards and downwards. Whilethe upsides create non-linear value for the organization, there is a conscious attempt toprotect it against the downsides.
ENTERPRISE-WIDE RISK MANAGEMENT [ERM] IN DR. REDDY'S
Risk management at Dr. Reddy's is modeled around the COSO (Committee of SponsoringOrganizations) ERM framework. It operates with the following objectives:
• Proactively identify and highlight risks to the right stakeholders.
• Facilitate discussions around risk prioritization and risk mitigation.
• Provide a framework to assess risk capacity and risk appetite and developsystems to warn when the appetite is getting breached.
• Provide an analysis that a formal and focused risk management process isfacilitating reduction in residual risks.
The central ERM team connects with each business unit and function. These units /functions are the primary source for risk identification.
• Risk identification and mitigation at the business unit / function level: TheERM team conducts interviews, facilitates polls that helps prioritize risks at the unitand function level. While there are independent assurance processes for compliance andSarbanes-Oxley Act (SOX) related financial risks, the ERM team focuses on identifyingbusiness risks, both operational and strategic. Mitigation plans for key business risksare identified with timelines and owners. While the responsibility for risk mitigationlies with the risk owners, the ERM team periodically ensures oversight of the mitigationprocess through formal reviews and updates are provided to the Management Risk Committee.
• Risk aggregation, prioritization and mitigation at the Organization level: Risksare aggregated at the unit, function and organization level by risk groups. There areapproximately 60 such groups, organized into strategic, operational, financial andcompliance categories. The Management Risk Committee comprising business segment heads,finance, legal, HR, safety, medical and quality is entrusted with organization wide riskprioritization and mitigation in line with the Company's risk capacity and appetite.
• Reviewing the status of mitigation projects and residual risk: The ERMfunction's responsibility is to provide a periodic review of (i) risks identified andprioritized across the Company, (ii) breaches in risk appetite and how these are beingmitigated, and (iii) the magnitude of post-mitigation residual risks.
• Update to and review by the Risk Management Committee: The Chief Risk Officerprovides periodic updates to the Risk Management Committee of the Board. The Committee isupdated quarterly on the status of key de-risking initiatives; and annually on the keyrisks and their movement compared to the previous year, along with their residual risk.
THREATS, RISKS AND CONCERNS
Given below are some key threats, risks and concerns.
• Health care reforms across the globe:Increasingly, healthcare expenses,especially public expenditure, have been the subject of policy-makers' attention acrossthe globe. Both private and government entities are seeking ways to contain healthcarecosts. The consequence has been unanticipated reductions, especially in generics andactive ingredient prices.
• Russia reference pricing: The Russian government's health care prioritizationplan for the pharmaceutical market is making a slow transition from a largelyout-of-pocket market to the western European model of centralized reimbursements. Throughthis, the government will play an active role in regulating market access, particularlyfor high-cost medicines. The Russian government is extremely focused on regulating priceof essential drugs by way of reference pricing, which may impact the Company's revenuesfrom Russia.
• Price controls in India: The Government of India through its Drugs (PricesControl) Order, 1995 (DPCO) imposes price controls for specified pharmaceutical productsunder certain circumstances. Adverse changes in the DPCO list or a widening of the span ofprice control can affect pricing, and hence, revenues from India.
• Regulatory and compliance (i.e. rising audit burdens, inspections and fines): Inthe recent past, the pharmaceutical industry has witnessed rising regulatory andcompliance barriers, as seen in increased inspections and warning letters from USFDA.While the Company continues to give top priority to compliance and quality Year-on-Year,an increasing audit burden could impact the business.
• Proprietary products: Dr. Reddy's long term research efforts will depend, to alarge extent, upon the Company's ability to successfully patent and commercialize our ownNCE molecules and differentiated formulations. There are significant risks of execution,as the process of development; and commercialization of new molecules is time consuming aswell as costly.
• Generics: The Company's generic business remains challenging due to increasedcompetition in India and Eastern Europe. The segment has inherent risks with regard topatent litigation, product liability, pricing pressure, increasing regulation andcompliance related issues. The business could be negatively impacted if innovatorpharmaceutical companies are successful in limiting the use of generics through aggressivelegal defense as well as authorized generics deals, development of combination productsand over-the-counter switching. In view of the number of patent expiries coming up in thenear future, sales of patent expiry drugs in the US as well as in Europe representsignificant opportunity for all generics and API manufacturers. However, obtaining180-days exclusivity is getting increasingly difficult in the US, and the generics marketis rapidly becoming commoditized.
• Foreign exchange fluctuations: Being a global company, the income is exposed tocurrency rate fluctuations. In 2010-11, the Indian rupee appreciated by approximately 4%vis-a-vis the US dollar, from Rs 47.44 per US$ for the year ending 31 March 2010 to Rs45.56 per US$ for the year ending 31 March 2011. Appreciation of the Indian rupee mayimpact top-line growth for Indian companies with higher exposure to the US dollar. TheCompany has adopted a conservative hedge strategy to protect receivables and part of itsanticipated income.
• Launch at risk: At times, the Company seeks approval to market generic productsbefore the expiration of patents — based on sufficient data that such patents areinvalid, unenforceable, or would not be infringed by the Company's products. As a result,the Company is involved in patent litigation, the negative outcome of which couldadversely affect the business.
In April 2006, the Company launched, and continues to sell fexofenadine, the genericversion of Allegra. This is despite the fact that there is an ongoing litigation withthe Company that holds the patents for and sells this branded product. In the EuropeanUnion, the Company also had generic launches that involve ongoing patent litigation,negative outcome of which could adversely affect the business. In Germany, the Company hada launch at risk of oxycodon. A cost sharing agreement has been entered to with thesupplier to reimburse part of the losses resulting from any damage claim by innovator.
• FCPA and other worldwide anti-bribery laws: The Company is subject to the USForeign Corrupt Practices Act, the UK Bribery Act and similar worldwide anti-bribery laws,which impose restrictions and may carry substantial penalties. These laws generallyprohibit companies and their intermediaries from making improper payments to officials forthe purpose of obtaining or retaining business, and require not only accurate books andrecords, but also sufficient controls, policies and processes to ensure business isconducted without the influence of bribery and corruption. The penalties are substantial,including fines, prosecution, potential debarment from public procurement and reputationaldamage. The Company's policies mandate strict compliance with these anti-bribery laws.However, given the high level of complexity of these laws, there is a risk that someprovisions may be inadvertently breached.
OUTLOOK
The Company believes our focus on profitable growth and targeting a leadership positionin Global Generics and PSAI will create significant value in the near term. The Company isaddressing the need for infrastructure and capacity increases to meet future growth.
In the Global Generics segment, improving depth through portfolio expansion, consistentdelivery of limited competition products and supply chain excellence should lead to aleadership position in key markets. In the PSAI segment, the objective is to be thepartner of choice by creating compelling value for customers through leveraging IP,technology and cost leadership. In the Proprietary business, the aim is to create a viablebusiness by calibrating investments to produce a self sustainable model.
The Company expects a positive outlook for the next year. The largest increment ofgrowth is expected to be contributed by the North America generics business. The Companyalso expects continued momentum from its key emerging markets.
CAUTIONARY STATEMENT
The management of Dr. Reddy's has prepared and is responsible for the financialstatements that appear in this report. These financial statements are in conformity withInternational Financial Reporting Standards, as issued by the International AccountingStandards Board and accounting principles generally accepted in India and thereforeinclude amounts based on informed judgments and estimates. The management also acceptsresponsibility for the preparation of other financial information that is included in thisreport.
This write-up includes some forward-looking statements, as defined in the US PrivateSecurities Litigation Reform Act of 1995. The management has based these forward-lookingstatements on its current expectations and projections about future events. Suchstatements involve known and unknown risks, uncertainties and other factors that may causeactual results to differ materially. These factors include, but are not limited to,changes in local and global economic conditions, the Company's ability to successfullyimplement its strategy, the market's acceptance of and demand for its products, growth andexpansion, technological change and exposure to market risks. By their nature, theseexpectations and projections are only estimates and could be materially different fromactual results in the future.