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Management Discussion  
Dr. Reddys Laboratories Ltd.
BSE Code 500124
ISIN Demat INE089A01023
Book Value(Rs.) 725.85
Dividend Yield % 0.74
Market Cap(Rs. in millions) 446580.33
P/E 38.88
EPS 69.18
Face Value(Rs.) 5  
Year End: March 2016


To be able to do this we are perpetually working towards fulfilling our five promises:

1. Bring expensive medicines within reach.

2. Address unmet patient needs.

3. Help patients manage diseases better.

4. Enable and help our partners ensure that medicines are available where needed.

5. Work with partners to help them succeed.

Our three key core business segments:

Global Generics (GG) includes branded and unbranded brscription and Over-The-Counter (OTC) drug products business and also includes the operations of our Biologics business. Pharmaceutical Services and Active Ingredients (PSAI) consists of Active Pharmaceutical Ingredients (API) and Custom Pharmaceutical Services (CPS) businesses.

Proprietary Products (PP) comprises of our Differentiated Formulations business and our New Chemical Entities (NCEs) business in the therapeutic areas of dermatology and neurology.

Dr. Reddy's has a strong brsence in highly regulated and developed markets such as the United States of America, the United Kingdom and Germany. We also have a significant pharmaceuticals business in India, Russia, and certain key emerging economies.

There were three main reasons for the Company's subdued financial performance in FY2016.

The first has to do with the U.S. Food and Drug Administration's (USFDA's) inspections. Between November 2014 and March 2015, USFDA inspected three of Dr. Reddy's plants (two API sites at Srikakulam and Miryalguda and one Onco formulations site at Duvvada, Visakhapatnam). In November 2015, the USFDA issued a warning letter to which the Company responded within 15 days with a combrhensive plan of corrective and remedial actions. Subsequent work on these three facilities has resulted in delayed launches of key products, such as Esomeprazole and Capecitabine, as well as certain APIs which, in turn, significantly lowered incremental revenues; and the additional costs of conducting the necessary remedial work reduced profits.

The second reason has to do with Russia. In last year's Management Discussion and Analysis, we stated that revenues from Russia and other CIS markets had declined by 11% primarily due to economic problems in the country and the sharp devaluation of the rouble. Matters have worsened with the price of Brent crude falling to an average of US$ 47 per barrel for FY2016, the lowest in the last 12 years. As indicated in Chart A, the rouble-US dollar exchange rate has debrciated further. This resulted in a further decline of 29% in the Company's revenues from Russia to Rs. 10.6 billion in FY2016.

The third is due to the situation in Venezuela. Dr. Reddy's has enjoyed a sound business in providing affordable medicine to the people of Venezuela. However, the continuing economic crisis in the country has resulted in the government imposing severe constraints on foreign exchange outflows. Consequently, like many others that were doing business in that country, we did not receive any approvals from the Venezuelan government to repatriate any amount beyond US$ 4 million in the course of FY2016. Given this situation, the Company decided that, as a matter of abundant brcaution, it was more appropriate to use the DICOM rate (at VEF 272.5 = US$ 1) than the official 'brferential' rate of VEF 10 = US$ 1 for translating the monetary assets and liabilities of its Venezuelan subsidiary as on 31 March 2016. The resultant impact of this write-down together with the official devaluation (6.3 to 10) for FY2016 was  Rs. 5.09 billion. It needs to be emphasized that Dr. Reddy's will continue to actively engage with the Venezuelan government to provide medicine for the country, subject to regular repatriation of funds.  Rs. 128.1 bn  Revenues from GG for FY2016 T 7% Y-O-Y



• Revenues from GG for FY2016 grew by 7% to X 128.1 billion, driven primarily by North America, India and Europe.

• Revenues from North America was Rs. 75.4 billion recording a year-on-year growth of 19%, mainly due to the sustained performance of the Company's injectable franchise and market share gains in key molecules.

• 14 new generics were filed in the USA during FY2016, of which  13 were Abbreviated New Drug Applications (ANDAs) and 1 was a New Drug Application (NDA). Cumulatively, 82 generic filings are pending for approval with the USFDA, of which 79 are ANDAs and 3 are NDAs. Of the 79 ANDAs, 52 are Para IV filings, and we believe that 18 of these have 'First-to-File' status.

• Revenues from Emerging Markets declined by 25% to X 23.6 billion mainly due to the debrciation of the Russian rouble, the Ukrainian hryvnia and the decision to calibrate sales in Venezuela.

• Revenues from Russia were Rs. 10.6 billion, rebrsenting a year-on-year decline of 29% due to the country's economic slowdown and the falling rouble. In constant currency terms, revenues grew by 1%.

Revenues from other CIS countries and Romania grew by 1% to Rs. 3.5 billion. Revenues from the Rest of the World (RoW) territories fell by 28% and stood at Rs. 9.4 billion, mainly due to the calibrated sales in Venezuela.

Revenues from India grew by 19% to Rs. 21.3 billion.

This business saw continued momentum of the Company's mega-brands. The portfolio of pharmaceutical products acquired from UCB has been integrated with those of Dr. Reddy's and the performance of the acquired business is in line with expectations.

• Revenues from Europe grew by 19% to Rs. 7.7 billion, mainly on account of Aripiprazole and Pregabalin.


Revenues from PSAI were at Rs. 22.4 billion, experiencing a year-on-year decline of 12%.

• 50 Drug Master Files (DMFs) were filed globally, of which 8 were in the USA. The cumulative number of DMF filings as on 31 March 2016 was 768.


An IMS Health publication, titled  'Global Medicines Use in 2020: Market  Prognosis' (September 2015) sets out expected trends for the next four to five years. Below is a synopsis:

The volume of medicines used globally is expected to reach 4.5 trillion doses by 2020. Consequently, the value of the overall pharmaceutical market will cross $ 1.4 trillion. This rebrsents a growth of 29% - 32% over 2015. In absolute terms, developed markets will continue to lead in medicine spending, and use more original branded products and specialty medicines per capita.

The largest growth however, will come from the Pharmerging markets, supported by a sharp increase in broad-based health system expenditures. These markets will use more branded generics and OTC medicines.

Please refer Table 1 for the Estimates of Global Pharmaceutical Spends for 2020.

Other forecasts for this five-year-period  are as follows:

Use of medicines in 2020 will include  more than 900 new active substances  that have been introduced in the  past 20-25 years.

New medicines will be weighted more in favour of specialty and biologics.

By 2020, patients will have greater access to breakthrough therapies and clusters of innovation around diabetes, hepatitis C, heart, auto­immune and orphan diseases. Cancer treatments will constitute the largest category of the 225 new medicines expected to be introduced within the next five years.

While global medicine spending on orphan drugs is expected to be 1-2%, it will be as much as 10% in developed markets such as the USA.



1. Higher US spends on  pharmaceutical products:

US spends on medicines will range from US$ 560 billion to US$ 590 billion in 2020, rebrsenting a 34% increase in spending over 2015. Growth will be driven by innovation, invoice price increases (offset by off-invoice discounts and rebates) and the impact of loss of exclusivity. For majority of the large Indian generics pharmaceutical companies, anywhere between 40% to 60% of their revenues are generated from the USA. The opportunity landscape in the country can be split into three parts -

a) Brands going off-patent: Over the next five years, branded drugs worth US$ 92billion in sales are expected to go off-patent. Generally, drugs nearing patent expiry witness relatively high price increases — now at approximately 9% per annum over the past five years. Such increases should help global generics manufacturers in two ways -

• It will increase the size of the opportunity landscape. The patent cliff (from 2015 to 2020) has significantly more value compared to five years earlier.

• Pharmacy benefit managers tend to exclude higher price brands in favour of generics. This trend is accelerating and has a positive rub- on effect for the generics pharmaceutical industry.

b) Attractive complex generics products with limited markets and very low competition whose patents had expired earlier: These constitute appealing, 'below the radar' opportunities with a well chosen portfolio, provide sustainable revenues streams.

c) Under-penetrated alternate dosage forms, such as injectables at 18% of brscription generics (Gx) penetration, inhalants at 23% and transdermal patches at 37%: The large Indian generics companies operating in the USA have started diversifying into these alternate forms.

2. Medical devices providing  auxiliary support to brscriptions:

With a rapid increase in the incidence of critical diseases such as cancer, a corresponding advancement in medical science is the use of certain br-tests. These tests primarily help to assess possible reactions to new medications and help to tailor a treatment regimen for the patients. The commercial success of drugs such as Herceptin® (trastuzumab) and Gleevec® (imatinib), both of which require testing with companion diagnostics before they can be brscribed, has been a pivotal mover in this field. This space is becoming increasingly attractive and, based on drugs that  are in clinical trials, rapid growth is expected in the foreseeable future.

3. GDUFA: The Generics Drugs User  Fee Act (GDUFA), 2012, is designed  to speed up access to affordable generics medicines to the public and reduce the cost to the industry. The law requires the industry to pay user fees to the USFDA to supplement the costs of reviewing generics drug applications and of inspecting facilities. On the positive side, companies have starting getting faster responses from the USFDA, and there seems to have been a drop in the number of pending ANDAs. Thus, larger Indian companies that have a strong US pipeline should benefit as approvals accelerate.

4. Higher R&D spends: With the increase in product complexity, R&D spend per molecule and the time required to establish bio-equivalence have both risen. To give an example, the product development cost for  a complex generic is around US$ 5 million, versus US$ 1 million to US$ 2 million for a simpler final dosage form. Developmental spends on an inhalation, complex injectable or a biosimilar product is much higher. Major Indian pharmaceutical companies have increased R&D spend over the past five years, in absolute as well as percentage of sales terms. While absolute spend is lower than international generics majors like Actavis, Mylan and Teva, a number of Indian pharmaceutical companies, including Dr. Reddy's, spend higher in terms of percentage of sales. Such higher R&D efforts bode well for further introduction of higher value complex generics, proprietary products and biosimilars from India to the global markets.

5. Mergers and Acquisitions (M&A): M&A continues to be one of the principal growth strategies for the pharmaceutical industry. Most transactions focus on one or more of the following factors: consolidating in the face of pricing brssures; strengthening existing product portfolios; replenishing pipelines depleted by patent expiry; deepening capabilities in priority areas; entering new and/or emerging markets; and acquiring innovative technologies to leverage current assets or generate cost-saving synergies. Until a decade ago, M&A was much more brvalent abroad compared to Indian pharmaceutical companies. More recently, with rising scale and profitability, Indian companies are generating strong free cash flows which are increasingly being leveraged to acquire competitive assets abroad. We believe that the trend will accelerate in the future, though at valuations which may be higher than before. However, there is also a negative effect of Mergers & Acquisitions, which is discussed below under Negative Trends.


1. Generics pricing brssure has begun and is likely to persist:

Channel consolidation and faster ANDA approvals in the USA have begun to exert pricing brssure on generic drugs. Unlike in the past two to three years, where the annual generic drug price inflation was between 2% to 7.5%, generic drug prices were down by nearly 2% in Q1 CY2016. In the future, except for complex generics with relatively little competition, the likely scenario in the USA will be low generics price rises and a lot more of average annual price declines.

The top five pharmaceutical distributors in the USA now account for 84% of the market. These include CVS/Caremark/Cardinal (23%), Econdisc (22%), Mckesson (22%), the Walmart Group (10%) and Rite Aid (7%). Having consolidated, these players now exert very strong pricing power on generic drug manufacturers.

2. Increased USFDA inspections:

Over the last four years, there has been a significant increase in USFDA inspections of manufacturing facilities outside the USA. Given the relatively large number of manufacturing plants in India supplying generics to the USA, the USFDA has opened an office in India to increase the frequency of inspections and speed up compliance. This has resulted in a noticeably higher frequency of inspections, including those of the Company's facilities. We at

Dr. Reddy's apbrciate this increased oversight and are committed to doing all that is necessary to have the very best in Good Manufacturing Practices (GMP) norms and operating standards. While such inspections — especially the 483 observations and warning letters that sometimes follow — often impose high stoppage and remedial costs on companies being inspected, these eventually help in putting in place and sustaining standards that will hold them in good stead for the future. Having said so, it needs to be understood that the risks of USFDA inspections, adverse reports with 483 observations, warning letters and import alerts have increased substantially for pharmaceutical majors in the emerging markets.

3. Mergers and Acquisitions (M&A):

The negative side of M&A are the large deals between international pharmaceutical majors — be these in manufacturing or in the sales channels — that create stronger players in field, who can exercise disproportionate marketing or pricing power on competitors.


1. Ageing populations: This continues to be a critical positive factor for the global pharmaceutical industry. Ageing population, rapid growth of chronic diseases and rising consumer wealth will continue to significantly boost healthcare spending in the foreseeable future. Consider the following demographic data. Between 2015 and 2030, the number of people in the world aged 60 years or over will grow by 56%, from 901 million to 1.4 billion. Over the next 15 years, the number of older persons (aged 60 or more) is expected to grow fastest in Latin America and the Caribbean (with a projected 71% increase), followed by Asia (66%), Africa (64%), Oceania (47%), North America (41%) and Europe (23%). Lower growth in North America and Europe is because the populations there already have a sizeable number of those aged 60 or above. Such people will need greater and more frequent medical interventions than before. Those pharmaceutical majors which have the ability to provide effective medicines at affordable prices will gain from this rapid graying of the world.

2. Oncology and biologics: According to IMS Health, by 2020 cancer will account for 11% of patients' spend on global pharmaceutical products, or over US$ 154 billion of sales. More efficacious anti-cancer drugs will play an increasing role in the portfolio of all pharmaceutical majors, whether in developed or Pharmerging markets. This will not only necessitate a larger number of new filings across various geographies for both complex generics and biologics, especially biosimilars, but also faster regulatory decisions on such applications. Already, the development and sales of biosimilars have begun to accelerate, and analysts expect the worldwide biosimilars market to reach anywhere between US$ 25 billion and US$ 35 billion by 2020. The European Union first approved a biologic in 2006; now there are more than 700 biosimilars approved or in the pipeline globally. The USA has been slower in approving biosimilars. Although the Biologics Price Competition and Innovation Act, passed in 2010 as part of the Affordable Care Act, created an abbreviated licensing pathway for biosimilars, it was only in March 2015 that the USFDA approved the first biosimilar product for the US - Zarxio (filgrastim-Sandoz), a biosimilar alternative to Amgen's anti-infection drug neupogen. Thus, in September 2015, the manufacturer, Sandoz, began its US market launch for Zarxio, a product that has been sold in Europe since 2006. However, it is expected that the USFDA will increase its speed of biosimilar approvals. In any event, given the upsurge in oncological care throughout the world, there ought to be many more approvals in Europe as well as in the Pharmerging markets.

3. Economic stress in major emerging markets: Currently, three Pharmerging markets are going through extremely difficult economic conditions. The first is Venezuela, a relatively large market for pharmaceutical products. The economy is in deep trouble. The GDP for Q4 FY2015 declined by ~9%. For 2016, GDP is estimated to shrink further by another 7%. Consumer price inflation is raging at over 180%. The country's fiscal deficit is in excess of 14% of GDP. And the only reason why Venezuela's current account deficit is at 1.4% of GDP is because authorities have virtually banned any repatriation of funds at the official exchange rate. As mentioned earlier, effective embargo on repatriation of funds at the official rate of 10 VEF = US$ 1 is the reason why Dr. Reddy's had to take a substantial provision in translating its net monetary assets in Venezuela. The other country that is going through significant economic turmoil is Russia. On 1 April 2014, the exchange rate was RUB 35.1 = US$ 1. By 31 March 2015, it had dropped to RUB 58.2. And on 31 March 2016, it was at RUB 67.2 = US$1. This, coupled with relatively high inflation and a freeze, if not reduction, in wages and salaries, has severely affected purchasing power, and has led to a sharp reduction in consumer demand — even for essentials such as pharmaceutical products. Hence, a pharmaceutical market that witnessed healthy double-digit growth in constant currency is now growing at low single digits. The third country which is in trouble, though smaller in comparison to Russia and Venezuela, is Ukraine. The economy has sharply contracted; the currency has seriously debrciated; and while there are no currency controls, the balance of payments deficit has surged to 3.5% of GDP. It remains to be seen how Russia and Venezuela perform with an expected firming up of crude oil prices in FY2017.

4. Price controls: These are brvalent in many Pharmerging markets. As an example, in April 2010, Russia implemented price controls through a reference price model for brscription drugs, which covered approximately 40% of the market by value. In 2013, India enhanced the scope of price controls from 74 molecules (or 12% of the market by value) to over 350 (some 34% of the market). Over time, we should expect variants of price control regimes to come up in different Pharmerging and developed markets as countries attempt to widen healthcare provisions and support for increasingly ageing populations, while keeping a control on national or local budgets.


We begin with the revenue-wise details (refer Table 2) of our businesses across geographies and then go on to discuss these in greater detail.


North America generics continues to be a key growth driver for Dr. Reddy's. Revenues from the region increased by 19% to clock Rs. 75.4 billion (over US$ 1.1 billion) and comprised 59% of GG revenues This occurred despite customer consolidation and pricing brssures. Some key developments were: Momentum that started with the Company's injectable portfolio towards the end of FY2015 continued through the year. Launched Esomeprazole Magnesium delayed release capsules of 20 mg and 40 mg (the generic version of Nexium) during the third quarter of FY2016 — an example of successful technology transfer to an alternate site. Launched memantine hydrochloride tablets in various dosage forms, a generic version of Namenda®, used for the treatment of Alzheimer's disease.

• Launched pramibrxole di- hydrochloride extended release tablets in various dosages. This is a generic version of Mirapex ER® and used for treating Parkinson's disease.

• Enjoyed market share gains in key molecules such as metoprolol ER and the sumatriptan auto injector, thanks to a flexible supply chain that backed up fast manufacturing throughput.

• Witnessed no major downsides in terms of product supplies to the US market consequent to the ongoing remediation activities across our three plants.

• Acquired worldwide intellectual property rights of fondaparinux sodium, a generic anti-coagulant, from Alchemia.

• Settled the ongoing litigation on zoledronic acid.

• Acquired Habitrol®, an OTC nicotine replacement therapy transdermal patch, from Novartis Consumer Health Inc. in FY2015. The integration of Habitrol® has been as per plan and its performance was in line with expectations.

• Going forward, we are working on securing market share gains in esomeprazole magnesium as well as gains or retention across our key molecules, while being in launch readiness for certain important products in FY2017. We are also maturing the Habitrol® franchise and will be embarking on a branded OTC journey. Today, our US OTC business accounts for around  15% of sales. We are working on increasing this share in the years to come Subsequent to the period end, we have  acquired:

Eight ANDAs from Teva/Allergan across various dosage forms for  U.S.$ 350 million.  Six well known OTC brands in cough, cold, pain and derma categories from Ducera Pharma.


As mentioned earlier, revenues from Russia for FY2016 were Rs. 10.6 billion, which rebrsented a 29% decline over the brvious year primarily due to the debrciation of the rouble. In constant currency terms, revenues grew by 1%. Revenues from other CIS countries (including Romania) was Rs. 3.5 billion, or a year-on-year growth of 1%. The key performance indicators were:

•Resilient base business performance in an acutely constrained economic and geopolitical environment.  

• Despite adverse conditions in our market, and the early setbacks faced in the year, we responded with dynamism and began our revival. From October 2015, the Company's monthly growth trend is above the Russian market growth rate (as per  data from the IMS).

• We have witnessed good traction in the OTC channel. While the OTC market de-grew by 5.1%, our sales reduced by only 1% (IMS). At brsent, 35% of revenues from Russia come from the OTC business.

• In brscriptions, Dr. Reddy's is the only company in Russia to grow faster than the market over the last seven successive waves (data from Prescription Audit, November 2015). All our mega brands in Russia, such as Nise, Omez, Ciprolet, Ketorol, Cetrin and Senade, are leading in their respective categories.

•Going forward, our focus will be on:

(i) portfolio augmentation, to reduce the dependence on key molecules;

(ii) further strengthening of the OTC portfolio; and (iii) Participated in tenders for Rituximab in Russia (Dr. Reddy's Rituximab is approved in Russia). Securing approval and brparing for launch in other markets.

• In Ukraine, Dr. Reddy's continues to be the fastest growing among the top 30 pharmaceutical companies (IMS). We have had a notable biosimilar success. Reditux (rituximab) was launched in June 2015. Already, some 300 new patients have been using

Reditux; and it has become the No.1 brscribed biosimilar in the country —brscribed by more than 75% of hematologists.


Revenues from Europe for FY2016 were Rs. 7.7 billion, and grew by 19% year-on-year. Europe generics accounted for 6% of the GG business. Growth was largely driven by Aripiprazole, an atypical antipsychotic primarily used in the treatment of schizophrenia and bipolar disorder and Pregabalin, a medication used to treat epilepsy, neuropathic pain, fibromyalgia, and generalized anxiety disorder.


Revenues from India in FY2016 grew at 19% year-on-year to achieve Rs. 21.3 billion. It accounted for 17% of GG revenues. The highlights were:

• In April 2015, Dr. Reddy's had announced a definitive agreement for €118 million (approximately Rs. 8 billion) to buy a select established brands portfolio from UCB group entities for the territories of India, Nepal, Sri Lanka and the Maldives. The portfolio comprised dermatology, respiratory, ENT and pediatrics diseases. This will further expand Dr. Reddy's therapy footprint into these fast growing areas. The deal was concluded in June 2015. Since then, the task of integrating the UCB portfolio has gone on well in line with expectations. It provides the Company with leading positions in some of the key therapeutic areas.

•There have been some focused business development deals. An example is our partnership with Ferrer Internacional S.A. of Spain to introduce Somazina® in India — a key medicine used for accelerating recovery and improving cognitive processes of patients who have had brain surgery, cerebral strokes or infarcts or acute head injuries. Another has led to the introduction of Saxagliptin, an oral hypoglycemic (or anti-diabetic) drug.

• We have improved our ranking from  16th to 12th (according to the IMS  data). We have also improved our product portfolio mix.

• Going forward, the business will be focusing on: (i) enhancing the benefits of the portfolio acquisition from UCB; (ii) making new product launches; (iii) building a stronger OTC portfolio with top-of-the-mind brand awareness; and (iv) generating market leading growth on an enhanced base.


The PSAI business recorded revenues of Rs. 22.4 billion in FY2016, which was 12% lower than the brvious year. The key developments were:

•During the year, 50 DMFs were filed globally, of which 8 were in the USA. The cumulative number of DMF filings as on 31 March 2016 were 768.

• The observations made by the USFDA on inspection of the plants are being addressed at a steady pace. However, the corrective and brventive efforts undertaken have impacted output and revenues. Despite lower growth and interruptions at Srikakulam and Miryalguda, the base business continued its momentum and we also secured the support of our key customers.

• Going forward, we propose to have best practices in quality management systems across all our CTO locations while expanding on value added offerings across markets.

• We also seek to improve the filing profile of our DMFs to better serve internal as well as external clients.


The PP business (including 'others') accounted for Rs.   4.3 billion in revenues in FY2016, rebrsenting a 28% growth over the brvious year. It was a very good year for PP.

Approved by the USFDA in January 2016, PP launched ZembraceTM SymTouchTM, a sumatriptan 3 mg auto injector in April 2016. Used by patients for the treatment of migraine, this 3 mg ready-to-use sub­cutaneous injection has four doses over a 24-hour period and should offer more rapid relief to patients. It is an example of addressing an under-met medical need with the product having a superior side effects profile.

After securing a USFDA approval in February 2016, PP launched SernivoTM, which is a betamethasone dipropionate spray 0.05% in May 2016. It is a brscription topical steroid indicated for mild to moderate plaque psoriasis for patients above 18 years of age. This is an example of creating differentiated drug delivery in spray form, where there are none.

• Concluded two in-licensing

deals with: (i) XenoPort Inc. of the USA for the development and commercialization of a clinical stage new oral entity that has potential for the treatment of plaque psoriasis and may even be developed for relapsing forms of multiple sclerosis; and (ii) Eisai Company Ltd., Japan, for global commercial and development rights (excluding Asia) for an investigational anti-cancer agent. FY2017 will see the PP business gearing up to ensure commercial success of the two new launches while continuing to develop a potentially rich product and R&D pipeline in dermatology and neurology


As mentioned earlier, three of our facilities were inspected by the USFDA. They sent a warning letter to the Company citing deficiencies for which it wanted Dr. Reddy's to evaluate further corrective actions with the help of independent third party specialist consultants and to implement enhanced CAPAs. A detailed response letter was sent to the USFDA listing all our commitments, along with detailed remedial timelines. External specialist consultants have been engaged, and regular updates are being sent to the USFDA. In the process, we have significantly strengthened our Quality Management Systems with the help of experienced third party experts and are developing various in-house subject matter experts at the level of the shop floors for sustainability. Though a temporary setback, we are institutionalizing the experiences gained from this remediation exercise to put in place a best-in-class 'One Quality Standard' across all the facilities of the Company. In doing so, Dr. Reddy's should emerge stronger than before.

It needs to be mentioned that Dr. Reddy's is not an exception. There has been a recent wave of regulatory actions on several Indian sites, which arises out of a significant shift in the USFDA's approach from 'what has gone wrong' to 'what can go wrong'. This is a major change in expectations which will require all pharmaceutical companies in India to significantly invest in processes, automation, detailed documentation of each batch and of the Standard Operating Procedures to emerge successfully from inspections. While painful and costly in the short run, this will be eventually very beneficial for the industry.


Given the Company's strong cash flow position, its Board of Directors at a meeting held on 17 February 2016, approved a proposal to buyback of equity shares of the Company, subject to approval by the shareholders, for an aggregate amount not exceeding Rs.  15.69 billion, or up to 14.9% of the total paid-up equity capital and free reserves of the Company as on 31 March 2015, at a price not exceeding Rs.  3,500 per share. The buyback is open to all shareholders including those who become shareholders by cancelling their American Depository Shares and receiving underlying equity shares, but excludes the promoters and promoter group of the Company. The buyback is being conducted under the open market route according to the provisions given in the Securities and Exchange Board of India (Buy Back of Securities) Regulations, 1998 (as amended).

The maximum buyback price rebrsents an 18.6% brmium, compared to the average of the weekly high and low of the closing share price of Dr. Reddy's during the last two weeks up to 16 February 2016. Subsequently, the Company received the requisite approval from shareholders and the buyback process is in progress. The Company has bought and extinguished 350,000 fully paid up equity shares for an aggregate amount of Rs.  1.09 billion up to the date of this report.



Please refer Table 3 for the Consolidated Financial Performance as per IFRS.


Revenues grew by 4% to Rs.  154,708 million in FY2016. Revenues growth was largely driven by our Global Generics segment's operations in North America, Europe and India. Macroeconomic factors continued to have an impact on key Emerging Market territories. Adverse exchange rate movements, primarily of the rouble and the euro resulted in lower revenues in the reporting currency. Venezuela's performance was impacted by calibrated revenues — a decision taken by the Company given the constraints in repatriating profits at the official exchange rate. The PSAI segment's revenues were primarily impacted by delayed dispatches on account of ongoing remediation activities at Srikakulam and Miryalaguda.


Gross profit rose by 8% to Rs.  92,281 million in FY2016. This translates to a gross profit margin of 59.6% in FY2016 versus 57.6% in FY2015. The gross profit margin for Global Generics was 65.9%; and for the PSAI business it was 22%. Factors that positively affected gross profit margins include new product contribution, incremental export benefit and favorable product mix.


SG&A expenses including amortisation increased by 7% to Rs.  45,702 million in FY2016. This was primarily due to the ongoing remediation activities related to the USFDA's observations, settlement of patent litigation on zoledronic acid, launch related activities of the Proprietary Products business and certain routine items related to manpower and other spends. SG&A accounted for 29.5% of sales in FY2016, which was 80 basis points higher than the brvious year.


R&D expenses were at Rs.  17,834 million, or 11.5% of revenues in FY2016 versus 11.8% in FY2015. With respect to the ongoing biosimilars development program for regulated markets in association with Merck Serono, we received our share of development costs and other contractual amounts. Normalized for this, the absolute spend is in line with our efforts to focus on the development of a complex generics and specialized pipeline consisting of niche and differentiated products.


Net finance expense was Rs.  2,708 million in FY2016 versus a net finance income of Rs.  1,682 million in FY2015. This movement is primarily on account of: (i) higher net interest income by Rs.  701 million, counteracted by (ii) net foreign exchange loss of Rs.  4,133 million in FY2016 compared to a net foreign exchange gain of Rs.  958 million in FY2015. The foreign exchange loss in the current year is mainly due to the Venezuela related adjustments.


For FY2016, income tax expense was Rs.  7,127 million, implying an effective tax rate of 26.3% versus Rs.  5,984 million in FY2015 and an effective tax rate of 21.2%. The increase is primarily on account of non-deductible translation losses of our subsidiary in Venezuela, proposed distribution of profits by our subsidiary and non-recognition of certain deferred tax assets. Normalized for the above, the annual effective tax rate is in line with brvious year's rate.


Net profit decreased by 10% to Rs. 20,013 million in FY2016. This rebrsents a PAT margin of 12.9% of revenues versus 15% in FY2015.


Cash generated from operating activities in FY2016 was Rs.  41,247 million. Investing activities amounting to Rs.  20,423 million includes net investment in property, plant, equipment and intangibles to build capacity and capabilities for future business growth. Cash outflow from financing activities was Rs.  17,001 million. Table 4 gives the data on consolidated cash flows and Table 5 on consolidated working capital.


In FY2016, long-term borrowings, including the current and non-current portion, decreased by Rs.  10,473 million. Short term borrowing rose by Rs.  861 million. As on 31 March 2016, the Company's debt-equity ratio was at 0.26 compared to 0.39 last year. The net debt to equity position was at -0.05 (i.e. net surplus position) versus 0.03 last year.

Refer Table 6 for the Debt and Equity Position.  


Table 7 for the IGAAP Standalone Financials


During FY2016 the Company did not receive approvals from the Venezuelan government to repatriate any amount beyond US$ 4 million already received during the year. Accordingly, the monetary assets and liabilities of the Venezuelan subsidiary have been translated using the DICOM rate (i.e. 272.5 VEF per US$) instead of the official 'brferential' rate (of 10 VEF per US$). The resultant impact for FY2016 was Rs.  5,085 million. The similar charge on account of translation of net monetary assets was Rs.  843 million accrued in FY2015.


Dr. Reddy's ERM function operates with the following objectives:

• Proactively identify and highlight risks to the right stakeholders;

• Facilitate discussions around risk prioritization and mitigation;

• Provide a framework to assess risk capacity and appetite; develop systems to warn when the appetite is being breached.

• Provide an analysis of residual risk.

The ERM team connects with the Company's business units and functions -the primary source for risk identification. The ERM team also regularly monitors external trends on liabilities and risks reported by peers.


The ERM team focuses on identification of key business, operational and strategic risks, which is carried out through structured interviews, surveys, on-call discussions or incidents. The team collaborates with the Compliance, Sarbanes-Oxley (SOX) and Internal Audit teams on operational, compliance, financial reporting and process aspects to identify and mitigate risks of business units. Mitigation is periodically reviewed, and the progress on key risks are discussed at the Company's management-level and Board-level Risk Committees


Risks are aggregated at the unit/function and organisation level and categorized by risk groups. The Company's response framework categorizes them into: (i) Preventable, (ii) Strategic and (iii) External risks. The Finance, Investment and Risk Management Council (or FIRM Council), is the Company's management committee that helps the ERM function to prioritize organisation-wide risks and steer mitigation efforts in line with the Company's risk capacity and appetite. The FIRM council also oversees financial risk management and capital allocation decisions.


The Head of Dr. Reddy's ERM team provides periodic updates to the FIRM Council and the Risk Committee of the Board of Directors. These include:

(i) quarterly updates on the progress of mitigation of key risks; and

(ii) specific risk-related initiatives carried out during the year.

During FY2016, the ERM team facilitated  mitigation of certain geo-political and country risks, and firming up cyber security-related controls; including review of other execution risks. On Financial Risk  Management (FRM), the team assisted in updating the capital allocation framework and facilitated discussions on hedging the currency risks.


Building on the organisation's efforts to provide a distinctive experience to our employees, our focus this year was to strengthen the integrated talent management approach, which aims to acquire, nurture and develop the best talent to brpare them for leadership roles within the organisation.

To achieve this, we took a closer look at our entry level hires — how they are appointed, and career paths they ought to take. We strengthened the touch points at all levels, and deepened the engagement with campuses, a primary source of our entry level hiring. Our efforts were also to provide clear career paths to members of our Self Managed Teams and chalk out an empowerment roadmap for them.

Our flagship programs like 'Building People Manager's Effectiveness' and 'Developing Next Level Leaders' as part of the New Horizons Leadership Program (NHLP) continued to yield superior levels of employee engagement. We trained our people managers to give feedback and hold career conversations with their colleagues. Our People Management

Effectiveness Index grew by 400 basis points. NHLP, the leadership program which is built on the four tenets of 'Lead Self, Lead Others, Lead Change and Lead Business', saw the graduation of a new batch of leaders.

Our focus on productivity also received impetus, as we benchmarked our performance with the industry and executed organisational design interventions that focused on delayering, reducing spans, sharply defining roles and agreeing on tighter manning norms.

Dr. Reddy's continues to be an employer of choice for women and in order to keep it that way, we are making the workplace at Dr. Reddy's more inclusive through our talent acquisition efforts. We also continue to fast-track our high potential women employees to increase diversity at the leadership level.


In FY2016, the Company was affected by three external factors:

a. negative observations of USFDA audits in three facilities two API sites and one onco formulation site, which reduced production from some of these units and led to extensive remediation efforts at higher one­time costs;

b. continued economic problems in Russia and the debrciated rouble, which limited topline growth in constant currency and shrunk revenues in the reporting currency; and

c. the virtual economic collapse, balance of payments crisis and a huge gap between the official exchange rate and the more applicable DICOM rate in Venezuela, which required of us to make substantial provisions on our net assets and receivables in the country.

Without these three factors, Dr. Reddy's would have achieved significantly greater revenues and profits.

While it is very difficult to brdict how the economic situation will evolve in Venezuela, there are now sufficient indicators to suggest that Russia may be on the mend. If FY2017 exhibits somewhat firmer crude oil prices, as most analysts seem to expect, the rouble ought to start apbrciating and there could be an uptick in consumer spending. Besides, we have started introducing more complex generics in the pipeline for Russia, have further strengthened our OTC offerings, and are making steady inroads in the institutional business, such as the supply of oral dosages and injectables to hospitals. Therefore, we are cautiously optimistic about our prospects in Russia and CIS for FY2016, and expect the results to be better than those of the current year.

Given the seriousness with which we have engaged in remedial efforts — not just in three facilities but across all manufacturing units of Dr. Reddy's, we hope to adequately satisfy the USFDA when it come to inspect these plants post-remediation.

We have a very attractive pipeline in terms of complex generics offerings and new proprietary product drugs. In FY2017 we aim to leverage these strongly across North America, Europe and Russia, as, along with our biosimilar offerings. We should also increase our OTC portfolio and offerings in the USA, India and Russia; and make concerted forays in creating a branded generics bridgehead in North America. We also expect the PSAI business, especially API manufacturing, to revive and generate greater revenues as well as profit.

Therefore, in the absence of unforeseen and adverse events, we expect Dr. Reddy's to perform marginally better in FY2017 vis-a-vis the current year.


The management of Dr. Reddy's has brpared and is responsible for the financial statements that appear in this report. These statements 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 brparation of other financial information that is included in this report. This write-up includes some forward-looking statements, as defined in the US Private Securities Litigation Reform Act of 1995.

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, the Company's ability to successfully implement its strategy, the market's acceptance of and demand for its products, growth and expansion, technological change, and exposure to market risks. By their nature, these expectations and projections are only estimates and could be materially different from actual results in the future.

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