dr reddys laboratories ltd Management discussions

We are an integrated global pharmaceutical enterprise and we operate across two core business segments

GLOBAL GENERICS (GG), WHICH INCLUDES BRANDED AND UNBRANDED \ PRESCRIPTION MEDICINE AS WELL ^; AS OVER-THE-COUNTER (OTC)

- PHARMACEUTICAL PRODUCTS. IT ALSO INCLUDES THE COMPANYS BIOSIMILARS BUSINESS.

PHARMACEUTICAL SERVICES AND ACTIVE INGREDIENTS (PSAI), COMPRISING ACTIVE PHARMACEUTICAL INGREDIENTS (APIs) AND AURIGENE PHARMACEUTICAL SERVICES (APSL).

We are an integrated global pharmaceutical enterprise and we operate across two core business segments

GLOBAL GENERICS (GG), WHICH INCLUDES BRANDED AND UNBRANDED \ PRESCRIPTION MEDICINE AS WELL ^; AS OVER-THE-COUNTER (OTC)

- PHARMACEUTICAL PRODUCTS. IT ALSO INCLUDES THE COMPANYS BIOSIMILARS BUSINESS.

PHARMACEUTICAL SERVICES AND ACTIVE INGREDIENTS (PSAI), COMPRISING ACTIVE PHARMACEUTICAL INGREDIENTS (APIs) AND AURIGENE PHARMACEUTICAL SERVICES (APSL).

In addition, our wholly-owned subsidiary Aurigene Oncology Limited (AOL) focuses on the drug discovery business, which is reported under the ‘Others segment. In recent years, we have ventured into the digital healthcare business through our wholly-owned subsidiary Svaas Wellness Limited (Svaas), which is also reported under the ‘Others segment.

Through our products and services, we operate in multiple therapeutic areas, of which the major ones are (i) gastrointestinal, (ii) oncology, (iii) cardiovascular, (iv) pain management,

(v) central nervous system (CNS), (vi) respiratory, and (vii) anti-infective.

We are present in several countries across the globe, with the key geographies being the US, Europe, India, Russia, Commonwealth of Independent States (CIS) countries, South Africa, China, Brazil, Australia, and some other markets.

FY2023 was a good year with strong performance across multiple parameters. Despite an intensely competitive environment, we saw robust top-line growth and an increase in core operating profit through our new launches and growth in existing categories. Like many other businesses, we had to navigate the challenges of operating in a volatile macroeconomic environment. We experienced an increase in costs due to inflation, including higher shipping, utilities, and employee benefits costs, and volatility in the forex market.

However, thanks to operating efficiencies, we were able to absorb these increases, minimise their overall impact and demonstrate the strength and resilience of our underlying businesses.

During the year, we focused on driving growth and profitability through a pragmatic mix of organic and inorganic initiatives. We strengthened our portfolio by acquiring select brands and further

I consolidated our business through the divestment of non-core brands. We are making good progress in digitalisation, in line with our aspiration to become one of the most efficient pharmaceutical operations in the world. Our largest manufacturing facility in Bachupally, Hyderabad, joined the Global Lighthouse Network of the World Economic Forum. The successful inclusion of our 25-year-

Iold site as a ‘Digital Lighthouse factory is a big milestone in our productivity improvement journey.

Recognising the importance of emerging trends in the pharma sector, we are excited and committed to progress on our journey in two horizons. Horizon 1 continues our emphasis on ‘Growing the Core; while Horizon 2 focuses on ‘Building the Future. In other words, Horizon 2 prioritises beyond the core. It includes scaling up some of our existing businesses as well as venturing into new spaces.

Improvements in revenue and EBITDA in FY2023 were mainly due to the following factors:

1. Sustained performance in the generics markets with key new product launches: We witnessed decent growth in the US and Europe, which was driven by high value new product launches and base business traction, despite this growth being constrained by price erosion and increased competition in some of our products.

2. Divestment of non-core brands and strategic acquisitions: To

grow our core businesses and growth brands, we made the strategic acquisition of Cidmus to strengthen our presence in chronic space in India. Simultaneously, we divested certain non-core brands in the dermatology, paediatric, gynaecology, and urology segments. Further, to enhance our portfolio in our chosen growth markets, we acquired the US generic prescription product portfolio of Mayne Pharma; and some key branded and generic injectable products from Eton Pharma.

3. Productivity improvement measures: As earlier, across all our businesses, we continued on our journey to trim costs through improved productivity and eliminate waste while creating a more efficient structure. Initiatives undertaken

to drive cost efficiencies and productivity improvement across manufacturing, procurement, and R&D spending played a significant part in improving the financial performance of our Company. While focusing on productivity, we made significant investments to build people and digital capabilities, brands, and product pipelines and, thus keep our future growth strategy in mind.

A snapshot of performance

Global Generics (GG)

• Revenue from GG in FY2023 was C213.8 billion, or a growth of 19% compared to the previous year. This was driven by strong performances witnessed in North America, India, and the European markets.

• Revenue from North America Generics (NAG) was C101.7 billion, translating to an impressive growth of 36% over FY2022. This growth was supported by the launch of 25 new products during the year. Of these, the major new launches were Lenalidomide capsules, Sorafenib, and Pemetrexed Injection. It should be noted that a healthy growth in the sales volumes of our existing products was partly offset by pricing pressures on some of our key products, such as Icosapent Ethyl Capsules and Vasopressin.

In FY2023, our Company filed 12 new Abbreviated New Drug Applications (ANDAs) with the US Food and Drug Administration (USFDA). As of March 31, 2023, we had 86 generic filings pending approval from the US FDA. These comprise 81 ANDAs and five New Drug Applications (NDAs) filed under the Section 505(b)(2) route of the US Federal Food, Drug, and Cosmetic Act. Of the 86 ANDAs,

45 are Para IV applications, and we believe that 18 of these have the ‘First to File status.

Launched Lenalidomide in the US during the year

• Revenue from Europe was ?17.6 billion, or a growth of 6% compared to FY2022. This was primarily due to the expansion of the base business across our European markets and new product launches, but it was partially offset by pricing pressures on some of our products.

• Revenue from Emerging Markets was ?45.5 billion, which remained flat compared to FY2022 due to the high base effect of COVID-19- related products. Growth due to new product launches and forex benefits was offset by a reduction in base business volumes.

- Revenue from Russia was C21.2 billion, or an annual year- on-year growth of 2%.

- Revenue from other CIS countries and Romania was C8.6 billion, with an annual growth of 4%.

- Revenue from Rest of the World (RoW) territories was C15.7 billion, with an annual decline of 5%.

• Revenue from India was C48.9 billion, which represented a growth of 17% compared to FY2022. This was attributable to an increase in the prices of our existing products, along with additional revenues from the launch of new products. During FY2023, we launched nine new brands in India. The growth was also aided by the divestment of a few non-core brands during the year.

Made strategic acquisitions and divested non core brands in India

Pharmaceutical Services and Active Ingredients (PSAI)

Revenues from PSAI stood at C29.1 billion, which represents a decline of 5% as compared to FY2022. This was mainly on account of the base effect of the COVID-19-related portfolio being partially offset by forex benefit. During the year, we filed 134 Drug Master Files (DMFs) worldwide, including 12 filings in the US.

Filed 134 DMFs worldwide, including 12 filings in the US

Global pharmaceutical market outlook

In the last few years, the pharma sector has been sailing steadily despite the uncertainties and turbulence caused by COVID-19. With advances in information and research, the outlook for the sector is getting clearer with more predictable challenges ahead. The health systems have responded well by developing vaccines with significant efficacy,

safety, and speed. However, with the inconsistent use of vaccines and therapeutics, the next few years are not without uncertainties, especially with the periodic emergence of infection and viral variants.

At the same time, research has been ongoing to improve the understanding of the long-term complications and the presence of post-acute sequels of COVID-19. Considering this, it is believed that COVID-19 will still be a major driver for global medicine spending in the coming years. Global spending on COVID-19 is expected to touch around $500 billion in the seven years leading to 2027.

Another major uncertainty will be the potential impact of economic factors on countries policies and budgeting. Global economic activity is experiencing a sharper-than-expected slowdown. COVID-19, followed by geopolitical tensions, weighs heavily on the outlook, which depends on how government regulators across the world calibrate their monetary and fiscal policies.

According to IQVIAs recent report on medicine usage, excluding COVID-19, the global medicine market is expected to grow at 3% to 6% CAGR through 2027,

reaching about $1.9 trillion. The highest volume growth over the next five years is expected in Asia-Pacific, Latin America, India, and Africa/Middle East, largely driven by population growth. Growth in developed countries will be led by innovative medicines, which should offset losses due to patent expiries and loss of exclusivities. (Refer Table 1)

Oncology, the leading therapy area in terms of global spending, is forecasted to grow at higher than earlier predicted rates, with an estimated growth of 13% to 16% CAGR as it faces limited losses of exclusivity in the coming years.

Another key growth area for medicines is biotech, which is estimated to represent 35% of global spending in the next five years.

Oncology is forecasted to grow at 13-16% CAGR

Table 1:	MARKET SPENDING AND GROWTH OUTLOOK BY REGION
Timeline	REGION	ORIGINAL BRANDS	BRANDED GENERICS	UNBRANDED GENERICS	OTHER	TOTAL
CAGR	Global	3-6%	5-8%	1-4%	3-6%	3-6%
2023 to 2027	Developed	3-6%	5-8%	(1)-2%	0.5-3.5%	2.5-5.5%
	10 Developed	3-6%	5-8%	(1)-2%	(0.5)-2.5%	2.5-5.5%
	Other developed	4-7%	5-8%	3.5-6.5%	3.5-6.5%	4-7%
	Pharmerging countries	5-8%	5-8%	4.5-7.5%	5-8%	5-8%
	Lower-income countries	4-7%	4-7%	6.5-9.5%	6-9%	4.5-7.5%

Source: IQVIAs "Global Use of Medicines 2023" report.

Pharmerging countries are countries with per capita GDP < $30,000/year and forecasted five-year aggregate pharma growth > $1 billion. Includes Brazil, China, India, Russia, South Africa and some others

Spending in the US is expected to grow between (1%) and 2% annually over the next five years. During this period, more than 250 new active substances are expected to be launched in the US, which will increase spending on new brands. However, this growth is estimated to be offset by higher losses of exclusivity in both small molecules and biologic products. Furthermore, the introduction of the Inflation Reduction Act, with one of its priorities to reduce healthcare costs through price negotiations and cost caps, is expected to significantly increase the pressure on medicine pricing and cost-sharing among stakeholders.

Europes biosimilar market is the largest in the world. It is expected to grow due to the loss of exclusivity in Europe set to triple over the next five years, and more than half of this impact is expected to be from biologics. The losses are expected to be offset by new launches, mainly from oncology, neurology, and rare diseases.

China, the worlds second- largest country in terms of healthcare spending, continues to focus on its Healthy China 2030 policy by expanding access to novel drugs via the National Reimbursement Drug List (NRDL). In recent years, with zero tolerance pandemic policies, Chinas spending pattern on healthcare has been fluctuating heavily. In the next five years, however, spending is estimated to grow in the range of 2% to 5% annually.

Considered one of the high- growth markets, spending in India is expected to grow, boosted by volumes, at around 8% to 10% per annum up to 2027. With the COVID-19 pandemic and the more recent Russia-Ukraine conflict impacting supply chains across industries, many multinational pharma corporations are looking at India as an alternative to China.

Increased commitment towards environmental, social, and governance (ESG)

The impact of health disparities due to COVID-19, increasing human rights issues, greater scrutiny on governance, and the looming global climate crisis have amplified the importance of ESG. Investors are demanding stronger action from companies on adopting responsible business practices, fighting climate change, and demonstrating how they are building resilient businesses. Businesses today have realised that ESG is not just a social license to operate, but a powerful medium to communicate how a company creates long-term value for its stakeholders. It has a significant positive impact on fundamental business issues relevant to the long-term success of any company, fast becoming a measure of business sustainability. ESG is helping create both financial and non-financial value by providing opportunities for market differentiation, operational efficiency, talent retention, access to new revenue streams, and improved financial performance.

The years ahead will be crucial for the pharma industry where we might witness significant changes across all areas of pharma-from clinical trials, drug discovery and development, digitisation, and innovative treatment models to new people-centric approaches. Some key trends that may emerge over the next few years are given below.

• Economic Uncertainty:

Geopolitical shocks will continue to overshadow the world economy. Despite some recent improvements, the outlook remains fragile and downside risks

predominate. Concerns about financial vulnerabilities have risen, including in financial institutions, housing markets, and low-income countries. While headline inflation has started declining, it remains elevated and could persist longer. The re-opening in China is also expected to have a positive impact on global activity, reducing supply chain pressures. However, sensitive to macro-economic conditions, a compounding impact on multiple activities is likely on everything from R&D and manufacturing costs to drug prices and access to medicines.

• Personalised medicine:

The field of personalised medicine, which arose from the concept of the customisation of therapeutics, holds the potential for boosting the future of healthcare. From a ‘one-size- fits-all approach to graded and outcome-based targeted therapies, the sector is making greater investments in precision medicine, thanks to advances in technology around genomics. Recent developments in digitalisation have opened possibilities for

R&D procedures in personalised medicine to be much more advanced. The adoption of artificial intelligence (AI) by the industry will mature, and going forward, the development of new therapies and drugs can be bolstered by active advances via AI.

• Medical devices facilitating preventive healthcare:

In line with an uptick in personalised medicine, the preventive medicine market is expected to pick up pace. This area deals with the prevention of a certain disease instead of its treatment, as it anticipates, and hence, helps prevent the disease. Wearable medical devices make it possible to monitor and share vital health information, such as blood pressure, glucose levels etc. to medical practitioners on a real-time basis, thus facilitating early detectior and attention.

Partnerships and collaborations:

Traditionally, the life sciences industry was siloed, with different functions such as R&D, manufacturing, and sales operating in isolation from each other. This has changed remarkably over the last few years and will do so at a faster pace in the future. New forms of collaboration will be witnessed in the pharmaceutical industry to provide stronger accessibility and new healthcare delivery models to patients. Public-private partnerships, associations with other research, and academic institutions will pave the way for the industry.

Digital healthcare delivery:

The spectrum of patient care has widened and is no longer limited exclusively to hospitals and doctors clinics. The healthcare industry is becoming increasingly verticalised; ie organisations at different levels of the supply chain are creating alliances to enhance delivery. In this, digital health has emerged as a powerful opportunity to deliver care to individuals and positively impact the health of communities. ‘Digital health describes healthcare that is enabled or accessed by information technology. This includes modalities like video or virtual visits and rapid and informal communication through electronic messaging.

Ageing population and lifestyle changes:

Ageing populations, particularly an increase in life expectancies, are resulting in a rise in chronic illness. Lifestyle changes are also triggering an increase in diseases. Malnutrition, unhealthy diet, smoking, alcohol consumption, drug abuse, and stress, among others, are the presentations of an unhealthy lifestyle. These are putting further pressure on healthcare resources.

Greater use of natural language processing tools:

Increasing numbers of companies are tapping into the potential of Natural Language Processing (NLP) tools to gain insights from troves of

unstructured data. These tools then transform all such information into structured formats where it can be rapidly identified and analysed at each phase of the safety life cycle. NLP will be critical in enabling researchers and data scientists to garner information at a scale that will help provide an increasingly large treasure trove of medical intelligence to further spark pharmaceutical innovations.

• Climate change: The effects of climate change will be wide- reaching and shall impact multiple industries. Healthcare is no exception to that. Rising temperatures will likely accelerate the spread of tropical diseases, while waterborne illnesses may become more common with increased rain and storm surges contributing to flooding. Just as in the wake of COVID-19, the pharmaceutical industry may come under increasing pressure to fulfil its public health needs.

• Policy changes altering pricing and reimbursements:

Ever- changing government policies on drug approvals and drug pricing have long-lasting outcomes. For instance, in the US, the Inflation Reduction Act reflects an ongoing trend towards rewiring global supply chains to be more resilient to geopolitical challenges and natural disasters. Considering the impacts of COVID-19, it will be interesting to see how different countries regulators try to pass reforms in shaping the future of the healthcare industry.

Disruptive technologies and emerging trends such as robotics, artificial intelligence, 3D printing, precision medicine, or patient design will impact the manufacturing and distribution of pharmaceuticals. The industry will have to embrace new technologies and put a greater focus on prevention and digital health.

Dr. Reddys market performance, FY2023

North America Generics (NAG)

NAG is Dr. Reddys largest market and has crossed the $1 billion revenue mark for the second consecutive year. In FY2023, it contributed to around 48% of our Companys GG sales and 41% of overall sales.

Revenue from the region for FY2023 was C101.7 billion ($1.2 billion), representing an impressive growth of 36% over the previous year. FY2023 saw the successful launch and commercialisation of Lenalidomide in the US, contributing

significantly to the growth. Like previous years, FY2023 also witnessed high price erosion due to increased competition across some of our key products. However, this impact was offset by an increase in volumes for some of our base products and contribution from new product launches—the most important ones being Lenalidomide capsules, Sorafenib, and Pemetrexed Injection. Growth was further aided by the strengthening of the US dollar against the Indian rupee. Some key developments were:

• Filed 12 new ANDAs, comprise some complex products and across different dosage forms.

• Acquired the US generic prescription product portfolio of Australia-based Mayne Pharma Group Limited.

• Acquired a portfolio of branded and generic hospital injectable products from Deer Park, Illinois-based

Eton Pharmaceuticals.

• Launched Lenalidomide Capsules (a cancer drug used to treat myeloma) in the US with two of six strengths eligible for first-to-market, 180-day exclusivity.

• Launched Sorafenib tablets, a drug used to treat a type of liver cancer called hepatocellular carcinoma.

• Launched Timolol gel, an ophthalmic gel forming solution used to

treat glaucoma.

• Gained a market share in certain key products, such as Isotretinoin and Sumatriptan injection.

Our current priority includes accelerating the development and launch of new products that are difficult to make and increasing the market share of existing products through both traditional marketing and digital channels. The strategy is to significantly expand our portfolio and ensure the right cost structures for our products to be able to compete sustainably in this highly competitive market.

We will continue to focus on complex formulations, primarily injectable and oral solid dosage forms, as well as OTC brands in the medium term while focusing on biosimilars, differentiated formulations, and other Horizon 2 businesses in the longer term.

E101.7 bn

Revenue from NAG for FY2023

Europe

Revenue from Europe in FY2023 was C17.6 billion, representing a growth of 6% over the previous year. The increase in revenues was propelled by high volume growth and new product launches across our major markets, which was partially offset by price erosion in some of our products.

Currently, Europe comprises 8% of our global generics sales. In the medium to long term, we expect it to grow by leveraging our in-house portfolio of generics and biosimilars, seeking inlicensing opportunities, entering and scaling up business in new markets, and exploring new business opportunities in the future growth segments through Horizon 2 businesses.

E17.6 bn

Revenue from Europe for FY2023 80 •

Emerging Markets

Revenue from Emerging Markets for FY2023 was C45.5 billion and remained flat compared to the previous year. Revenues were supported by new product launches across markets and beneficial forex rates; however, growth was impacted by a higher base in FY2022 owing to revenues from COVID-19 products and the divestment of a few of our non-core brands.

Revenue from Russia for FY2023 was C21.2 billion, representing an increase of 2% over the previous year. However, in terms of local currency (ruble), there was a decline of 9% over the previous year. This was largely attributable to the divestment of a few non-core brands during the previous year.

E45.5 bn

Revenue from Emerging Markets for FY2023

Revenue from CIS countries and Romania was C8.6 billion, representing 4% growth over the previous year. The growth was led by the increase in prices of certain products partly offset by the decrease in base business volumes.

Revenue from our Rest of the World markets (which includes Brazil, China, South Africa, Australia, and certain other markets) was C15.7 billion, representing a decline of 5% over the previous year. This was primarily due to a decrease in revenue from COVID-19-related products in FY2023. This was offset by the growth in base business mainly in China, Columbia, Algeria, and Brazil.

Our focus is to improve the market share in the chosen therapy areas through growth in the existing products as well as new product launches.

Our strategy for Emerging Markets is to build a healthy portfolio pipeline, including differentiated and oncology products, coupled with the expansion of biosimilars. We will focus on further scaling up in our major markets, which include Russia, China, Brazil, and South Africa while opening new geographies by leveraging our in-house portfolio of

generics and biosimilars and seeking inlicensing opportunities.

India

Revenue from India in FY2023 was C48.9 billion, or a growth of 17% compared to the previous year. The growth was aided by the divestment ( 4.9 billion) of a few non-core brands during the year. According to IQVIA in its report for the 12-month period ended March 31, 2023, our growth has been 2.5%. Our market rank was 10th as per Moving annual total (MAT) March 2023 in terms of sales value. Our growth in this market has been due to improved prices and revenues from the launch of new products including the Cidmus brand acquired during the year. Growth was also aided by the revenues from the divestment of a few non-core brands during the year.

During the year, we launched nine brands in India, including Cidmus and PrimcyV. Sixteen of our brands—Voveran, Omez, Cidmus, Atarax, Econorm,

3 Omez-D, Practin, Zedex, Ketorol, Bro- Zedex, Razo-D, Stamlo, Tryptomer, Mintop, Clamp, and Nise—are among the top 300 brands of the Indian pharmaceuticals market.

In the near term, we will continue to drive productivity improvement and focus on our core therapeutic areas and big brands. In the medium to long term, our strategy is to build a healthy pipeline of differentiated products in relevant therapies including biosimilars, expand ³ our presence in areas such as OTC and nutraceuticals, and explore future growth businesses through our Horizon 2 focus.

E48.9 bn

Revenue from India for FY2023

PSAI

The PSAI business recorded revenues of C29.1 billion in FY2023, a decline of 5% compared to the previous year. This was primarily due to a reduction in volumes of COVID-19-related products. In FY2023, we filed 134 DMFs globally, of which 12 were in the US.

The PSAI segment primarily consists of our business of manufacturing and marketing active pharmaceutical ingredients and intermediates, also known as ‘APIs, which are the principal ingredients for finished pharmaceutical products. APIs become finished pharmaceutical products when the dosages are fixed in a form ready for human consumption, such as a tablet, capsule, or liquid, using additional inactive ingredients. We also serve our customers with incremental value-added products including semi-finished and finished formulations. This segment also includes our contract research services business and our manufacture and sale of APIs and steroids in accordance with specific customer requirements.

Our strategy of building a sustainable and growing business involves new product launches and the ramping up of base businesses in key geographies. We will continue to leverage our relationships with key customers by supplying materials that have value addition instead of being ‘plain vanilla APIs. We aim to be a partner of choice for global pharmaceutical companies and achieve global leadership through costs and service.

E29.1 bn

Revenue from PSAI for FY2023

Aurigene Oncology Limited (AOL)

AOL is our wholly-owned subsidiary and is a clinical-stage biotech company committed to bringing novel therapeutics for the treatment of cancer and inflammation. It recorded a revenue of C2.5 billion in FY2023 or a decline of 12%. AOL is reported as part of our ‘others segment.

Svaas Wellness Limited (Svaas)

‘Svaas is in the business of providing digital healthcare and information technology-enabled business support services. It has been enabling access to healthcare services through its web-

based or mobile application platform and provides integrated healthcare, medical, and other related services and technology-driven solutions to promote health and wellness.

USFDA audits: An Update

Our facilities are fully compliant with US FDA regulations. Currently, the status for all our facilities is either ‘NAI, which means ‘No Action Indicated or ‘VAI, which means ‘Voluntary Action Indicated.

Recent USFDA audits:

1. In July 2022, our formulations manufacturing facility (FTO XI) at Srikakulam was audited by the US FDA. Subsequently, we were issued two observations. We responded to the observations in July 2022, and in August 2022, an Establishment Inspection Report (EIR) was issued by the USFDA indicating the closure of the audit.

2. In May 2023, our API manufacturing facility (CTO I) at Bollarum

was audited by the US FDA. Subsequently, we were issued one observation. We are currently in the process of responding to the observation.

3. An audit of our formulations manufacturing facility (FTO SEZ PU II) at Srikakulam commenced on May 8, 2023.

Our culture results in a quality mindset. We care greatly about what we do, demonstrated by a relentless focus on quality at our plants, whether it be through the number of quality professionals or the rigorous levels of testing that our finished products go through. We continuously undertake operational improvements, such as shop floor supervision and process walks, engineering, implementation of electronic batch records, and Laboratory Information Management Systems (LIMS) in quality control to eliminate manual errors and focus on the robustness of our processes. Our facilities are maintained to be ready for any regulator inspection. We also have a global pharmacovigilance programme to monitor the safety of our products.

We remain fully committed to following high standards of quality, and we strive towards further strengthening our quality management systems and processes for sustainability. Our plans to enhance quality management systems and operations include improvements in the rigour of investigations and document control systems, standardisation of instrument calibrations, strengthening controls with respect to IT and shop-floor training programmes, and simplifying and systematising standard operating procedures and batch records on the shop floor.

Financials

Table 2 gives the abridged IFRS consolidated revenue performance of Dr. Reddys for FY2023 compared to FY2022. Table 3 gives the consolidated income statement.

Table 2: CONSOLIDATED REVENUE MIX BY SEGMENT

(MILLION)

		FY2023			FY2022		GROWTH %
Particulars	($)	(D)	%	($)	(D)	%
Global Generics	2,601	2,13,768	86.9	2,180	1,79,170	83.6	19
North America		1,01,704			74,915		36
Europe*		17,603			16,631		6
India		48,932			41,957		17
Emerging Markets#		45,529			45,666		0
Pharmaceutical Services and Active Ingredients (PSAI)	354	29,069	11.8	374	30,740	14.3	(5)
Others	37	3,042	1.2	55	4,481	2.1	(32)
Total	2,992	2,45,879	100	2,608	2,14,391	100	15

* Europe primarily includes Germany, the UK and out-licensing sales business, Italy, France and Spain.

# Emerging markets refer to Russia, other CIS countries, Romania and Rest of the World markets.

Table 3: CONSOLIDATED INCOME STATEMENT

(IN MILLION)

		FY2023			FY2022		GROWTH %
Particulars	($)	(D)	%	($)	(D)	%
Revenues	2,992	2,45,879	100.0	2,608	2,14,391	100.0	15
Cost of Revenues	1,296	1,06,536	43.3	1,223	1,00,551	46.9	6
Gross Profit	1,695	1,39,343	56.7	1,385	1,13,840	53.1	22
Operating Expenses
Selling, General & Administrative expenses	828	68,026	27.7	755	62,081	29.0	10
Research and Development expenses	236	19,381	7.9	213	17,482	8.2	11
Impairment of non-current assets	9	699	0.3	92	7,562	3.5	(91)
Other operating (income)	(72)	(5,907)	(2.4)	(34)	(2,761)	(1.3)	114
Results from operating activities	695	57,144	23.2	359	29,476	13.7	94
Finance (income), net	(35)	(2,853)	(1.2)	(26)	(2,119)	(1.0)	35
Share of (profit) of equity accounted investees, net of income tax	(5)	(370)	(0.2)	(9)	(703)	(0.3)	(47)
Profit before income tax	734	60,367	24.6	393	32,298	15.1	87
Income tax expense	186	15,300	6.2	106	8,730	4.1	75
Profit for the period	548	45,067	18.3	287	23,568	11.0	91
Diluted Earnings Per Share (EPS)	3.30	270.85		1.72	141.69		91

Revenue

Total revenue grew by 15% to C245,879 million in FY2023. This was primarily due to the contribution of new product launches across our businesses and growth in existing and new categories, partially offset by price erosion in our GG segments North America (the US and Canada), Europe, and certain other emerging markets. The growth was also aided by revenues from the divestment of a few of our non-core brands in India, while the revenue in the previous year was boosted by COVID-19-related product sales and the divestment of noncore brands largely in Russia and India.

Gross profit

Gross profit increased by 22% to C139,343 million in FY2023. This led to a gross profit margin of 56.7% in FY2023, representing an increase of 360 basis points compared to the previous year.

The gross profit margin for GG was 62.1%. This increase was on account of new product sales of certain products with higher gross margins, higher government incentives, and favourable foreign exchange. The increase was partly offset by the price erosion in some of the products, primarily in the US and Europe. For the PSAI business, the gross profit margin was 16.2%. PSAIs gross profit margin decreased primarily on account of a higher percentage of manufacturing overhead costs on a lower sales base and the price erosion in some of the products.

Gross profit margin of 56.7% in FY2023, representing an increase of 360 basis points compared to the previous year.

Selling, general, and administrative (SG&A) expenses

SG&A expenses increased by 10% to C68,026 million in FY2023. This was largely attributable to an increase in personnel costs primarily on account of annual increments, rupee depreciation, and increased headcount; higher investments towards brand building and marketing activities; and an increase in travel and vehicle expenses, which were lower last year due to COVID-19. It should be noted that SG&A accounted for 27.7% of sales in FY2023, representing a decline of 130 basis points compared to last year.

R&D expenses

R&D expenses for FY2023 were C19,381 million, or 79% of revenue, versus 8.2% in FY2022. The R&D spending in FY2023 increased by 11% over FY2022 due to an increase in the development activities relating to our biosimilars and an increase in the number of high-value product pipelines.

Impairment of non-current assets

In FY2023, there has been an impairment charge of C699 million. This mainly pertains to a decrease in the market potential of the medical cannabis- based business acquired from Nimbus Health GmbH and an impairment of the companys product-related intangibles due to adverse market conditions.

Net other income

The net other income was C5,907 million in FY2023 versus C2,761 million in FY2022. The net other income was higher primarily on account of the recognition of an income of C5,638 million from a settlement agreement with Indivior Inc, Indivior UK Limited, and Aquestive Therapeutics Inc, resolving all claims between the parties relating to the generic buprenorphine and naloxone sublingual film, 2 mg/0.5 mg, 4 mg/1 mg,

8 mg/2 mg, and 12 mg/3 mg dosages.

Net finance income

The net finance income was C2,853 million in FY2023 versus C2,119 million in FY2022.

Net profit

Net profit increased by 91% to C45,067 million in FY2023. This represents a PAT margin of 18.3% of revenues versus 11.0% in FY2022. In FY2023, the effective tax rate was lower compared to FY2022 largely due to changes in our Companys jurisdictional mix of earnings.

Liquidity and capital resources

The data are given in Tables 4 and 5. Cash generated from operating activities in FY2023 was C58,875 million. Investing activities net outflow amounting to C(41,373) million in FY2023 includes net investment in property, plant, equipment, and intangibles to build capacity and capabilities for future business growth. Cash outflow from financing activities was C26,861 million. Closing cash and cash equivalents on March 31, 2023, was C5,779 million.

Table 4: CONSOLIDATED CASH FLOW, IFRS

(Q MN)

Particulars	FY2023	FY2022
Opening Cash and Cash Equivalents	14,852	14,820
Cash flows from:
(a) operating activities	58,875	28,108
(b) investing activities	(41,373)	(26,387)
(c) financing activities	(26,861)	(2,422)
Effect of exchange rate changes	286	733
Closing Cash and Cash Equivalents	5,779	14,852

Table 5: CONSOLIDATED WORKING CAPITAL, IFRS

(Q MN)

Particulars	AS ON 31 MARCH 2023	AS ON 31 MARCH 2022	CHANGE
Trade Receivables (A)	72,485	66,764	5,721
Inventories (B)	48,670	50,884	(2,214)
Trade Payables (C)	26,444	25,572	872
Working Capital (A+B-C)	94,711	92,076	2,635
Other Current Assets (D)	85,785	64,208	21,577
Total Current Assets (A+B+D)	2,06,940	1,81,856	25,084
Short & Long-term loans and borrowings, current portion (E)	12,194	28,099	(15,905)
Other Current Liabilities (F)	47,207	40,344	6,863
Total Current Liabilities (C+E+F)	85,845	94,015	-8,170

Debt-equity

In FY2023, long-term borrowings, including the current and non-current portion, decreased by C681 million as compared to FY2022. On March 31, 2023, our Companys debt-to-equity ratio was 0.06, which is lower than that on March 31, 2022, which was at 0.16. The net debt-to-equity position was at (0.21) versus (0.08) last year. Table 6 gives the data.

Table 6: DEBT AND EQUITY POSITION, IFRS

>

(Q MN)

Particulars	AS ON 31 MARCH 2023	AS ON 31 MARCH 2022	CHANGE
Total Shareholders Equity	2,30,991	1,90,527	40,464
Long-term debt (current portion)	4,804	1,017	3,787
Long-term debt (non-current portion)	1,278	5,746	(4,468)
Short-term borrowings	7,390	27,082	(19,692)
Total Debt	13,472	33,845	(20,373)

Enterprise-wide risk management (ERM)

Our ERM function operates with the following objectives:

• Proactively identify and highlight risks to relevant stakeholders;

• Facilitate discussions around risk prioritisation and mitigation;

• Provide a framework to assess appetite;

• Develop systems to warn when the appetite is being breached; and

• Provide an analysis of residual risk.

The ERM team connects with our business units and functions, which are the primary sources for risk identification. It also monitors external trends on liabilities and risks reported by peers in the industry. The team collaborates with quality assurance, compliance, information security, safety, HR, internal audit, and other assurance teams to identify and mitigate the risks of business units, including risks relating to cyber security and the environment.

Our ERM function focuses on the identification of key sectoral, business, operational and strategic risks. These are carried out through quarterly assurance meetings, structured interviews, on-call discussions, and reviews of incidents.

Risks are aggregated at the unit, function, and organisation levels and are categorised by risk groups. Our response framework categorises these risks into (i) internal (preventable), (ii) internal (strategic), and (iii) external risks. The integrated assurance forum and the executive risk management committee are management-level committees that help the ERM function to prioritise organisation-wide risks and steer mitigation efforts in line with our risk appetite.

Mitigation work carried out by the ERM team is regularly reviewed, and the progress of key risks is discussed with the Executive Risk Management Committee and senior management, as well as at the Risk Management Committee of the Board of Directors.

These include (i) updates on the progress of mitigation of key risks and (ii) specific risk-related initiatives carried out during the year.

During FY2023, risk mitigation efforts included the review of risks and mitigations related to cyber security, data privacy, ethics and compliance risk, quality, supply chain management, geopolitical risks and business continuity, foreign exchange risk, pharmacovigilance, and environmental risk (with a focus on water risk).

ESG

In 2022, we made ESG central to our purpose and business strategy and announced our ESG vision for 2030 to maximise positive social impact. We set up a strong governance structure through a Board-level committee on sustainability to provide ESG guidance, formed a sustainability council chaired by leadership to drive the progress on our ESG goals, and nominated ESG champions across our Company to advance our sustainability agenda.

We continue to embed and integrate sustainability into our decision-making and strategy, defining key performance indicators to evaluate our performance and setting up targets and tangible actions with defined timelines to measure our progress. ESG is integrated into our overall ERM programme, identifying ESG-related risks, evaluating likely impact scenarios and risk exposure, and developing mitigation plans to better manage these risks. To better report on the linkages between our strategy,

governance, and financial performance in an ESG context, we produced our first integrated report in FY2023. To read more about our detailed ESG performance and initiatives, please refer to page 38 of our integrated report and page 114 for our Business Responsibility and Sustainability Report.

In 2022, we made ESG central to our purpose and business strategy and announced our ESG vision for 2030 to maximise positive social impact.

Human Resources (HR)

In FY2023, the focus has been on improving people productivity across the organisation, for which we leveraged automation and digitalisation of processes leading to reduced human intervention. We are working to develop autonomous work areas and lighthouse factories of the future by building appropriate capabilities in the organisation. We are closely tracking per-person productivity metrics across business units, and personalised learning

journeys are being undertaken to cover business-critical skill gaps through certifications of our employees to ensure better delivery of business.

We have sought to unlock productivity by leveraging the new-age tool, Digital Ninja - our flagship digital capabilitybuilding programme. Launched earlier, it had over 36,000-course completions on LinkedIn. We have succeeded in developing over 2,850 new Digital Ninjas in the organisation. To embed the Dr. Reddys way of execution excellence, the simplified SDP way of governance continues to be followed across the organisation while focusing on lean daily management and reducing the number of reviews across levels. Kaizen optimiser continues to be leveraged as a digital tool for the same purpose.

For a winning product strategy, we have carried out appropriate staffing of the central portfolio organisation and product strategy dissemination to the relevant populations across the different business units. To effectively execute a winning product strategy, we have covered over 90% of our target population via six training modules through the Specialisation2Commercialisation initiative. To bring necessary focus to Products That Matter (PTM), 100% staffing of PTM projects is being ensured.

We continue to take proactive steps to retain the right talent and ensure continuity of delivery. Some interventions that have helped us are predictive analytics, which focuses on hotspots of attrition and the profiling of talent that must stay and managers that we should retain. We are also incentivising lateral moves, and ring-fencing key talent through market benchmarking and structured communication and engagement with employees. We have been able to retain critical talent to ensure business continuity and support our growth agenda.

To facilitate growth opportunities for employees through lateral movements and cross-BU movements and to create a well-rounded talent pool with strong succession benches, we launched the first-ever career development week at Dr. Reddys - called Propel - in October 2022. We also launched the Propel platform, which works as an internal talent marketplace, connecting employees to new opportunities and hiring managers to the best-fit talent across the organisation. It should promote new ways of working with short-term projects and gigs and create a ready pool of internal talent to take on various business critical projects in the future. Al-based skill matching is

expected to help employees understand their fit for a particular role even before applying.

With eased restrictions after COVID-19, we revamped ways of working in the organisation along the lines of Future of Work. This centralised induction programme includes both ‘in-person and ‘digital components to move away from the remote approach adopted during the COVID-19 outbreak. This ‘Phygital induction model allows all non- Hyderabad-based recruits a seamless and virtual induction experience while catering to the preferences of most Hyderabad-based joiners to avail the benefits of an ‘in-person experience.

Several developmental journeys have been launched for top teams across the organisation. These involve a combination of forum, coaching, and systemic levers; and bring about multiple benefits - the most important being (a) coherent teams with improved ways of working and (b) a renewed ‘set-up that brings about a common definition of outcomes.

To strengthen the culture of aspirational thinking in the organisation, Moonshot Goals have been introduced this year in the performance enablement process

o help set ambitious targets. A matrix manager (dotted line reporting) feature was also enabled to ensure that we accurately reflect the reality of our organisation and the cross-functional work that our colleagues undertake cross geographies and BUs.

to create a workplace where employees :an unleash their full potential, we have aunched employee experience journeys across the organisation. As a step to enhance employee experience, we are attempting to make it connected, efficient, and joyful across all touchpoints, mpacting employees work every day.

We have revamped our recognition elatform, ‘Spark. It is now based on a amplified recognition framework linked o ASPIRE and strategic moves linked o the scorecard. This has made on-the- apot recognition easier for managers and enabled peer-to-peer recognition .hrough e-cards that can be posted on he platform. The process of creating a eulture of recognition will be an ongoing one with a focus on communication with employees, inducting new employees, and educating first-time managers.

We continue to focus on holistic well-being at the organisation level hrough workshops, daily wellness sessions covering meditation, yoga, and pranayama, and platforms to allow employees access to counselling for their mental well-being. We are strengthening our focus on condition management hrough the MyHealth Index (MHI), which tracks the health parameters of employees who are enrolled on a year- ong journey of health improvement. MHI s currently operating for around 8,100 employees in FTO 2 and 3, FTO HO, FTO 7 and 9, Biologics, and IPDO.

Faking forward our agenda of increasing diversity representation and developing an inclusive culture in the organisation, our focus has been on dedicated diversity hiring in entry-level roles and egularly connecting with women to address their challenges. We have aised the representation of women in eadership roles to 16%. Our efforts in ncreasing the diversity in the salesforce are focused on three pillars: care, career,

and connection. We have worked on providing hygiene kits, increasing out-station allowance, arranging boot camps for campus hires in sales roles, and establishing regular connects to proactively address the challenges.

Taking into view other areas of workforce diversity, structured workshops on working with differently-abled people were also conducted to sensitise over 70 people managers and enable them to take a ‘people-first approach that looks at all employees in terms of skills and strengths. We also organised a workshop on recruiting differently-abled people for HRBPs and the talent acquisition team, where we identified 10 roles across BUs for hiring differently-abled.

In February 2023, we conducted three LGBTQIA+ related sensitisation sessions for 150 employees and contract staff and onboarded two transgender women in our organisation.

We kicked off our annual flagship event Celebration of Excellence on October 12, 2022. This culminated in the Excellence Awards in January 2023. The theme of the celebrations was ‘Excel in Horizon 1, Build Horizon 2. The celebrations cut across hierarchy and geography, covered all sites and locations and touched some 15,000 employees. Various activities like quizzes, sports, musical performances, talent hunts, alumni meets, and employee stories on living the purpose were carried on for three months of fun, collaboration, and camaraderie.

In FY2023, the focus has been on improving people productivity across the organisation, for which we leveraged automation and digitalisation of processes leading to reduced human intervention.

Digital transformation

Digital transformation has sped up, and we are using it to unlock the potential of data. We are also innovating our processes with the use of new technologies. You can refer to the initiatives that we have undertaken in more detail on pages 44 and 45 of this report.

Outlook

FY2023 has been a good year in terms of financial and operational performance across the various businesses. We have a strong foundation, and our diversified geographical presence allows us to suitably respond to opportunities and threats while delivering long-term value for our stakeholders.

We have a strategy that will drive growth and, most importantly, one that should keep increasing access to medicines for people who need these the most. While we continue our focus on our core (Horizon 1) businesses, we are reasonably optimistic that our Horizon 2 initiatives will help improve the lives of patients by addressing unmet and unarticulated needs through affordable and innovative solutions.

We have shown excellent financial discipline with a strong balance sheet and robust cash generation in FY2023. While the strong balance sheet provides financial flexibility to support future growth, we will follow a disciplined approach to cash management and acquisitions. We will continue to bolster operating efficiency, drive productivity, improve operations and processes to increase efficiency and responsiveness, enhance quality systems, strengthen our R&D, and invest in digital initiatives to get closer to customers. We maintain our unwavering commitment to quality and to building a portfolio that anticipates future health needs.

Cautionary Statement

The management of Dr. Reddys has prepared and is responsible for the financial statements that appear in this report. These are in conformity with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board, and accounting principles generally accepted in India and, therefore, include amounts based on informed judgments and estimates. The management also accepts responsibility for the preparation of other financial information that is included in this report. This write-up includes some forwardlooking statements, within the meaning of section 27A of the US Securities Act of 1933, as amended and section 21E of the US Securities Exchange Act of 1934, as amended.

The management has based these forward-looking statements on its current expectations and projections about future events. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. These factors include but are not limited to, changes in local and global economic conditions, changes in government regulations, ability to successfully implement the strategy, manufacturing or quality control outcomes, ability to achieve expected results from investments in our product pipeline, change in market dynamics, technological change, currency fluctuations, and exposure to various market risks. By their nature, these expectations and projections are only estimates and could be materially different from actual results in the future. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect managements analysis and assumptions only as of the date hereof. In addition, readers should carefully review the other information in this annual report and in our periodic reports and other documents filed with all the stock exchanges.