Dr Reddys Laboratories Ltd Directors Report.
Your directors are pleased to present the 35th annual report for the year ended 31 March 2019.
Table 1 gives the consolidated and standalone financial highlights of the company based on Indian Accounting Standards (Ind AS) for FY2019 (i.e. from 1 April 2018 to 31 March 2019) compared to the previous financial year.
The companys consolidated total income for the year was?157.86 billion, which was up by 9% over the previous year. In US$ terms, this amounted to US$ 2.28 billion. Profit before taxes (PBT) was?22.9 billion, representing a growth of 70% over the previous year. In US$ terms, this translated to US$ 331 million.
The companys standalone total income for the year was?108.64 billion, which was up by 14% over the previous year. In US$, this amounted to US$ 1.57 billion. PBT was?17 billion, which was up by 144% over the previous year. In US$ terms, this translated to US$ 246 million.
Revenues from Global Generics up by 8% and stood at?123 billion. There was growth across Emerging Markets and India, revenues from North America Generics remained flat on a year-on-year basis.
Revenues from North America stood at?60 billion, and remained flat on a year-on-year basis. This was largely on account of revenue contribution from new products launched, market share gains for existing products, and favorable foreign exchange movement offset by higher price erosions in some of our key pharmaceutical products.
During the year, the company launched several new products. These included gSuboxone, gTepadina, gGleevec, gDiprivan etc. The company filed 20 abbreviated new drug applications (ANDAs) in the USA. As of 31 March 2019, there were 110 generic filings awaiting approval with the US Food and Drug Administration (USFDA), comprising 107 ANDAs and three NDAs filed under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act (FD&C Act) in the USA. Of these 107 ANDAs, 60 are Para IVs, out of which 34 are believed to have ‘First to File status.
Table 1 Financial Highlights
|Profit before depreciation, amortization and tax||34,268||24,276||24,813||14,711|
|Depreciation and amortization||11,348||10,772||7,806||7,741|
|Profit before tax||22,920||13,504||17,007||6,970|
|Profit after tax||19,062||9,124||12,773||5,669|
|Share of profit of equity accounted investees, net of tax||438||344||-||-|
|Net profit for the year||19,500||9,468||12,773||5,669|
|Opening balance of retained earnings||96,247||90,771||90,740||89,063|
|Net profit for the year||19,500||9,468||12,773||5,669|
|Other comprehensive income/(loss)||255||-||-||-|
|Dividend paid during the year||(3,320)||(3,316)||(3,320)||(3,316)|
|Tax on dividend paid||(682)||(676)||(682)||(676)|
|Transfer to general reserve||-||-||-||-|
|Closing balance of retained earnings||112,000||96,247||99,511||90,740|
* The conversion rate is considered as US$ 1 =?69.16.
Revenues from Emerging Markets was?28.9 billion, registering a year-on-year growth of 28%. Revenues from India stood at?26.2 billion, registering a year-on-year growth of 12%.
Revenues from PSAI stood at?24.1 billion, registering a year-on-year growth of 10%. During the year, the company filed nine drug master files (DMFs) in the US.
The above revenues are after excluding ‘other operating income.
Your directors are pleased to recommend a dividend of?20 (400%) for FY2019, on every equity share of?5/-. The recommended dividend is in line with the dividend distribution policy of the company. The dividend, if approved at the 35th annual general meeting (AGM), will be paid to those shareholders whose names appear on the register of members of the company as of end of the day on 16 July 2019.
In terms of Regulation 43A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations), the companys dividend distribution policy is attached as Annexure I to the boards report.
TRANSFER TO RESERVES
The company has not proposed to transfer any amount to the general reserve.
The paid-up share capital of your company increased by?0.78 million to?830.33 million in FY2019 due to allotment of 1,55,041 equity shares, on exercise of stock options by eligible employees through the ‘Dr. Reddys Employees Stock Option Scheme, 2002 and ‘Dr. Reddys Employees ADR Stock Option Scheme, 2007.
The company has not accepted any deposits covered under Chapter V of the Companies Act, 2013. Accordingly, no disclosure or reporting is required in respect of details relating to deposits.
CHANGE IN THE NATURE OF BUSINESS, IF ANY
During the year, there was no change in the nature of business of the company or any of its subsidiaries.
MATERIAL CHANGES AND COMMITMENTS AFFECTING THE FINANCIAL POSITION OF THE COMPANY
There have been no such changes.
SUBSIDIARIES AND ASSOCIATES
The company had 52 subsidiaries and two joint venture companies as on 31 March 2019. During FY2019, Dr. Reddys Laboratories (Thailand) Limited and Dr. Reddys Laboratories Philippines Inc. have become subsidiary companies. Pursuant to sale of all the issued and outstanding membership interests in the antibiotic manufacturing facility at Tennessee, USA, Dr. Reddys Laboratories Tennessee, LLC ceased to be a subsidiary during the year.
Section 129(3) of the Companies Act, 2013 states that where the company has one or more subsidiaries, it shall, in addition to its financial statements, prepare a consolidated financial statement of the company and of all subsidiaries in the same form and manner as that of its own and also attach along with its financial statement, a separate statement containing the salient features of the financial statements of its subsidiaries and associates.
Hence, the consolidated financial statements of the company and all its subsidiaries and joint ventures, prepared in accordance with Ind AS 110 and 111 as specified in the Companies (Indian Accounting Standards) Rules, 2015, form part of the annual report. Moreover, a statement containing the salient features of the financial statements of the companys subsidiaries and joint ventures in the prescribed Form AOC-1, is attached as Annexure II to the boards report. This statement also provides details of the performance and financial position of each subsidiary and joint venture.
In accordance with Section 136 of the Companies Act, 2013, the audited financial statements and related information of the company and its subsidiaries, wherever applicable, are available for inspection during regular business hours at our registered office in Hyderabad, India.
These are also available on the companys website, www.drreddys.com.
PARTICULARS OF LOANS, GUARANTEES OR INVESTMENTS
The company makes investments or extends loans/guarantees to its wholly-owned subsidiaries for their business purposes. Details of loans, guarantees and investments covered under Section 186 of the Companies Act, 2013, along with the purpose for which such loan or guarantee was proposed to be utilized by the recipient, form part of the notes to the financial statements provided in this annual report.
CORPORATE GOVERNANCE AND ADDITIONAL SHAREHOLDERS INFORMATION
A detailed report on the corporate governance systems and practices of the company is given in a separate chapter of this annual report. Similarly, other information for shareholders is provided in the Chapter on Additional Shareholders Information. A certificate from the statutory auditors of the company confirming compliance with the conditions of corporate governance is attached to the Chapter on Corporate Governance.
MANAGEMENT DISCUSSION AND ANALYSIS
A detailed report on the Management Discussion and Analysis in terms of Regulation 34 of the Listing Regulations is provided as a separate chapter in the annual report.
BOARD OF DIRECTORS AND KEY MANAGERIAL PERSONNEL
Mr. Hans Peter Hasler resigned from the board on 14 June 2018 as independent director. The board places on record its appreciation for the services rendered by Mr. Hans Peter Hasler during his tenure as a member of the board and its committees.
The shareholders of the company approved reappointment of Mr. Anupam Puri as an independent director, for second term of one year from 27 July 2018 up to 26 July 2019, under Section 149 of the Companies Act, 2013 at the 34th AGM held on 27 July 2018.
Mr. Leo Puri, Ms. Shikha Sharma and Mr. Allan Oberman were appointed as additional directors of the company, categorized as Independent with effect from 25 October 2018, 31 January 2019 and 26 March 2019 respectively. The board recommends appointment of Mr. Leo Puri, Ms. Shikha Sharma and Mr. Allan Oberman as independent directors under Section 149 of the Companies Act, 2013 for a term of five years each with effect from 25 October 2018, 31 January 2019 and 26 March 2019, respectively for approval of the shareholders at the forthcoming 35th AGM scheduled on 30 July 2019.
Further, the shareholders of the company approved the continuation of directorship of Dr. Bruce L A Carter, aged 75 years under Regulation 17(1A) of the Listing Regulations and also reappointed him as a non-executive independent director of the company for a second term of three consecutive years from 31 July 2019 up to 30 July 2022, by passing a special resolution through postal ballot.
The terms of Mr. Sridar Iyengar and Ms. Kalpana Morparia, independent directors, end at the forthcoming 35th AGM. The board recommends reappointment of Mr. Iyengar and Ms. Morparia, as independent directors under Section 149 of Companies Act, 2013 for another term of four and five years, respectively, for approval of the shareholders at the forthcoming 35th AGM scheduled on 30 July 2019.
In accordance with Section 149(7) of the Companies Act, 2013, each independent director has confirmed to the company that he or she meets the criteria of independence laid down in Section 149(6) of the Companies Act, 2013 and Regulation 16(1)(b) of the Listing Regulations.
Mr. Anupam Puri completes his second term as an independent director. Dr. Omkar Goswami retires from the board of the company as independent director at 35th AGM to be held on 30 July 2019, and does not seek reappointment. The board wishes them well, and places on record its appreciation for their work over the long period of time that they have served as the directors of the company.
Mr. G V Prasad, retires by rotation at the forthcoming 35th AGM and being eligible, seeks reappointment.
Brief profiles of Mr. Sridar Iyengar, Ms. Kalpana Morparia, Mr. Leo Puri, Ms. Shikha Sharma, Mr. Allan Oberman and Mr. G V Prasad are given in the Chapter on Corporate Governance and the Notice convening the 35th AGM for reference of the shareholders.
There is no change in KMP during the year under review.
As per provisions of the Companies Act, 2013 and Regulation 17(10) of the Listing Regulations, an evaluation of the performance of the board, its committees and members was undertaken. For details, please see the Chapter on Corporate Governance in this annual report.
APPOINTMENT OF DIRECTORS AND REMUNERATION POLICY
The assessment and appointment of members to the board is based on a combination of criterion that includes ethics, personal and professional stature, domain expertise, gender diversity and specific qualifications required for the position.
A potential board member is also assessed on the basis of independence criteria defined in Section 149(6) of the Companies Act, 2013 and Regulation 16(1)(b) of the Listing Regulations.
In accordance with Section 178(3) of the Companies Act, 2013, Regulation 19(4) of the Listing Regulations and on recommendations of the companys nomination, governance and compensation committee, the board adopted a remuneration policy for directors, KMP, senior management and other employees. The policy is attached in the Chapter on Corporate Governance.
The board of directors met five times during the year. In addition, an annual board retreat was held to discuss strategic matters.
Details of board meetings are given in the Chapter on Corporate Governance.
The audit committee of the board of directors consists entirely of independent directors14887>. Presently, the committee comprises Mr. Sridar Iyengar (chairman), Dr. Omkar Goswami, Mr. Bharat N Doshi and Ms. Shikha Sharma. Further details can be seen in the Chapter on Corporate Governance. The board has accepted all recommendations made by the audit committee during the year.
BUSINESS RISK MANAGEMENT
The company has a risk management committee of the board, consisting entirely of independent directors, and chaired by Dr. Omkar Goswami. Details of the committee and its terms of reference are set out in the Chapter on Corporate Governance.
The audit and risk management committees review key risk elements of the companys business, finance, operations and compliance, and respective mitigation strategies. The risk management committee reviews key strategic, business, compliance and operational risks, while issues around ethics and fraud, internal control over financial reporting (ICOFR), as well as process risks and their mitigation are reviewed by the audit committee.
The companys finance, investment and risk management council (FIRM council) is a management level committee which operates under a charter and focuses on risks associated with the companys business. The FIRM council periodically reviews matters pertaining to risk management, compliance, ethics and fraud. Additionally, the enterprise wide risk management (ERM) function helps management and the board to periodically prioritize, review and measure business risks against a pre-determined risk appetite, and their suitable response, depending on whether such risks are internal, strategic or external.
During FY2019, focus areas of risk management committee included progress on cyber security, data privacy, quality and regulatory, geo-political risk, compliance, patent infringement and other operating risk exposures.
ADEQUACY OF INTERNAL FINANCIAL CONTROL SYSTEMS
The company has in place adequate internal financial controls with reference to its financial statements. These controls ensure the accuracy and completeness of the accounting records and the preparation of reliable financial statements.
DIRECTORS RESPONSIBILITY STATEMENT
In terms of Section 134(5) of the Companies Act, 2013, your directors state that:
1. applicable accounting standards have been followed in the preparation of the annual accounts;
2. accounting policies have been selected and applied consistently. Judgments and estimates made are reasonable and prudent, so as to give a true and fair view of the state of affairs of the company at the end of the FY2019 and of the profit of the company for that period;
3. proper and sufficient care has been taken to maintain adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
4. annual accounts have been prepared on a going concern basis;
5. adequate internal financial controls for the company to follow have been laid down and these are operating effectively; and
6. proper and adequate systems have been devised to ensure compliance with the provisions of all applicable laws and these systems are operating effectively.
RELATED PARTY TRANSACTIONS
In accordance with Section 134(3)(h) of the Companies Act, 2013 and Rule 8(2) of the Companies (Accounts) Rules, 2014, the particulars of contracts or arrangements entered into by the company with related parties referred to in Section 188(1) of the Companies Act, 2013 in Form AOC-2 is attached as Annexure III. All such contracts or arrangements are in the interest of the company. Details of related party disclosures form part of the notes to the financial statements provided in this annual report.
VIGIL MECHANISM/WHISTLE- BLOWER/OMBUDSPERSON POLICY
The company has an ombudsperson policy (whistle-blower/vigil mechanism) to report concerns. The vigil mechanism consists of a hotline — namely, a dedicated e-mail ID and a phone number. The ombudsperson policy safeguards against retaliation of those who use this mechanism. The audit committee chairperson is the chief ombudsperson. The policy also provides access to the chairperson of the audit committee for raising concerns. Details of the policy are available on the weblink: www.drreddys.com/investors/ governance/ombudsperson-policy.
M/s. S R Batliboi & Associates LLP,
Chartered Accountants (firm registration no. 101049W/E300004) were appointed as statutory auditors of the company at the 32nd AGM held on 27 July 2016, for a period of five years commencing from the conclusion of 32nd AGM till the conclusion of the 37th AGM, subject to ratification by shareholders every year, as may be applicable. However, the Ministry of Corporate Affairs (MCA) in its notification dated 7 May 2018 has omitted the requirement under the first proviso to Section 139 of the Companies Act, 2013 and Rule 3(7) of the Companies (Audit and Auditors) Rules, 2014, regarding ratification of appointment of statutory auditors by shareholders at every subsequent AGM.
Consequently, M/s. S R Batliboi & Associates LLP, chartered accountants, continue to be the statutory auditors of the company till the conclusion of 37th AGM, as approved by shareholders at 32nd AGM held on 27 July 2016.
Pursuant to Section 204 of the Companies Act, 2013 and the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, Dr. K R Chandratre, practicing company secretary (membership no. FCS 1370 and certificate of practice no. 5144) was appointed to conduct the secretarial audit of the company for FY2019. The secretarial audit report for FY2019 is attached as Annexure IV.
Based on the consent received from Dr. K R Chandratre, and on the recommendations of the audit committee, the board has appointed him as the secretarial auditor of the company for FY2020.
Pursuant to Section 148(1) of the Companies Act, 2013 read with the relevant rules made thereunder, the company maintains the cost audit records in respect of its pharmaceutical business.
On the recommendation of the audit committee, the board has appointed M/s. Sagar & Associates, cost accountants (firm registration no. 000118) as cost auditors of the company for the FY2020 at a remuneration of?7 lakh plus reimbursement of out-of-pocket expenses at actuals and applicable taxes. The provisions also require that the remuneration of the cost auditors be ratified by the shareholders. As a matter of record, relevant cost audit reports for FY2018 were filed with the Central Government on 23 August 2018, within the stipulated timeline. The cost audit report for FY2019 will also be filed within the timeline.
In terms of Section 118(10) of the Companies Act, 2013, the company complies with Secretarial Standards 1 and 2, relating to the ‘Meetings of the Board of Directors and ‘General Meetings respectively as specified by the Institute of Company Secretaries of India and approved by the Central Government. The company has also voluntarily adopted the recommendatory Secretarial Standard-3 on ‘Dividend and Secretarial Standard-4 on ‘Report of the Board of Directors issued by the Institute of Company Secretaries of India.
BOARDS RESPONSE ON AUDITORS QUALIFICATIONS, RESERVATIONS OR ADVERSE REMARKS OR DISCLAIMERS MADE
There are no qualifications, reservations or adverse remarks made by the statutory auditors in their report, or by the practicing company secretary in the secretarial audit report. During the year, there were no instances of frauds reported by auditors under Section 143(12) of the Companies Act, 2013.
SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE COURTS/ REGULATORS/TRIBUNALS
On 25 August, 2017, a securities class action lawsuit was filed against the company, its Chief Executive Officer (CEO) and its Chief Financial Officer (CFO) in the United States District Court for the District of New Jersey. The companys Co-Chairman, its Chief Operating Officer (COO) of the time (since retired), and Dr. Reddys Laboratories, Inc., were subsequently named as defendants in the case. The operative complaint alleges that the company made false or misleading statements or omissions in its public filings, in violation of the US federal securities laws; that the companys share price dropped and its investors were affected.
On 21 March 2019, the District Court issued its decision (dated 20 March 2019) granting in part and denying in part the motion to dismiss. Pursuant to that decision, the Court dismissed the plaintiffs claims on 17 out of the 22 alleged misstatements/omissions.
The company believes that all the asserted claims, including the remaining five out of 22, are without merit and intends to vigorously defend itself against the allegations. At this point, any liability that may arise on account of this claim is unascertainable. Accordingly, no provision has been made in the consolidated financial statements of the company.
INFORMATION REQUIRED UNDER SEXUAL HARASSMENT OF WOMEN AT WORKPLACE (PREVENTION, PROHIBITION AND REDRESSAL) ACT, 2013
The company has an apex complaints committee and an internal complaints committee which operate under a defined redressal system for complaints pertaining to sexual harassment of women at the workplace. Details are available in the principle 3 of the Business Responsibility Report forming a part of this annual report.
CORPORATE SOCIAL RESPONSIBILITY (CSR)
As per Section 135 of the Companies Act, 2013, the company has a board-level CSR committee consisting of Mr. Bharat N Doshi (chairman), Mr. G V Prasad and Mr. K Satish Reddy. The companys CSR policy provides a constructive framework to review and organize our social outreach programs in health, livelihood and education.
During the year, the committee monitored implementation and adherence to the CSR policy. Details of the CSR policy and initiatives taken by the company during the year are available on the companys website, href=http://www.drreddys.com/>www.drreddys.com . The report on CSR activities is attached as Annexure V.
BUSINESS RESPONSIBILITY REPORT
A detailed Business Responsibility Report as required under Regulation 34 of the Listing Regulations, is given as a separate section in this annual report.
TRANSFER OF UNPAID AND UNCLAIMED AMOUNTS TO INVESTOR EDUCATION AND PROTECTION FUND (IEPF)
Pursuant to the provisions of the Companies Act, 2013, read with IEPF Authority (Accounting, Audit, Transfer and Refund) Rules, 2016, as amended, declared dividends which remained unpaid or unclaimed for a period of seven years have been transferred by the company to the IEPF, which has been established by the Central Government.
The above-referred rules also mandate transfer of shares on which dividend are lying unpaid or unclaimed for a period of seven consecutive years to IEPF. The company has issued individual notices to the shareholders whose equity shares are liable to be transferred to IEPF, advising them to claim their dividend on or before 14 August 2019. Details of transfer of unpaid and unclaimed amounts to IEPF are given in the Chapter on Additional Shareholders Information.
EMPLOYEES STOCK OPTION SCHEMES
During the year, the company has formulated and implemented ‘Dr. Reddys Employees Stock Option Scheme, 2018 and established Dr. Reddys Employees ESOS Trust for its implementation and administration. Both the Scheme and implementation of the scheme through Trust were approved by the shareholders at the 34th AGM of the company.
There has been no change in the ‘Dr. Reddys Employees Stock Option Scheme, 2002, the ‘Dr. Reddys Employees ADR Stock Option Scheme, 2007and Dr. Reddys Employees Stock Option Scheme, 2018 (collectively referred as ‘the schemes).
The schemes are in compliance with the SEBI (Share Based Employee Benefits) Regulations, 2014.
Details are available on the companys website: www.drreddys.com/media/904448/esop_details.pdf
The details also form part of note 2.23 of the notes to accounts of the standalone financial statements.
PARTICULARS OF EMPLOYEES
Disclosures pertaining to remuneration and other details as required under Section 197(12) of the Companies Act, 2013, read with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 are attached as Annexure VI.
In terms of Section 197(12) of the Companies Act, 2013, read with Rule 5(2) and 5(3) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, a statement showing the names and other particulars of the employees drawing remuneration in excess of limits set out in said rules forms part of the annual report.
Considering the first proviso to Section 136(1) of the Companies Act, 2013, the annual report, excluding the aforesaid information, is being sent to the shareholders of the company and others entitled thereto. The said information is available for inspection at the registered office of the company during business hours on working days up to the date of the forthcoming 35th AGM. Any shareholder interested in obtaining a copy thereof may write to the company secretary in this regard.
CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS AND OUTGO
The particulars as prescribed under Section 134(3)(m) of the Companies Act, 2013, read with Rule 8(3) of the Companies (Accounts) Rules, 2014 are attached as Annexure VII.
Details forming part of the extract of the annual return in form MGT-9 are attached as Annexure VIII.
Your directors place on record their sincere appreciation for the significant contribution made by its employees through their dedication, hard work and commitment, as also for the trust reposed on the company by the medical fraternity and patients. The board of directors also acknowledge the support extended by the analysts, bankers, government agencies, media, customers, suppliers, shareholders and investors at large.
It looks forward to your continued support in the companys endeavor to accelerate access to innovative and affordable medicines because Good Health Cant Wait.
For and on behalf of the board of directors
K Satish Reddy
Place : Hyderabad
Date : 17 May 2019