Good Health Can’t Wait.

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Good Health Can’t Wait. Dr. Reddy’s Laboratories Limited NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in Indian Rupees millions, except share data and where otherwise stated) 2.38: BONUS DEBENTURES The Company had, on 24 March 2011, allotted 1,015,516,392, 9.25% unsecured, non convertible, redeemable bonus debentures aggregating to ` 5,078. The interest was payable at the end of 12, 24 and 36 months from the initial date of issuance. The bonus debentures were redeemable at the end of 36 months from the initial date of issuance. These debentures were listed on the Bombay Stock Exchange Limited and National Stock Exchange of India Limited. As per the requirements of the Companies Act, 1956, the Company created a Debenture Redemption Reserve aggregating to ` 2,539 as at 24 March 2014. On 24 March 2014, the Company redeemed these debentures at par value of ` 5,078. Accordingly, the amount of ` 2,539 representing balance in Debenture Redemption Reserve was transferred to General Reserve upon redemption of debentures. 2.39: ASSET PURCHASE AGREEMENT WITH ECOLOGIC CHEMICALS LIMITED During the year ended 31 March 2014, the Company entered into an asset purchase agreement with Ecologic Chemicals Limited (“Ecologic”), where in two directors of the company have equity interests. The Company paid ` 1,264 excluding taxes and duties for purchase of fixed and current assets. The consideration was arrived at based on valuation from independent valuers. The acquisition of these assets would help augment the Company’s manufacturing capacity in meeting the future business requirements of its PSAI segment. The acquisition was accounted for as a purchase of assets. The total purchase consideration has been allocated to the acquired assets as of 13 September 2013 based on a fair valuation carried out by the Company’s management as tabulated below: CATEGORY ` Millions Land 66 Buildings 382 Plant and machinery 702 Inventories 113 Other current assets 1 Total 1,264 2.40: AGREEMENT WITH PIERRE FABRE On 11 February 2014, Aurigene Discovery Technologies Limited (“Aurigene”), a wholly owned subsidiary of the Company, entered into a collaborative license, development and commercialization agreement granting Pierre Fabre, the third largest French pharmaceutical company, global worldwide rights (excluding India) to a new immune checkpoint modulator, AUNP-12. AUNP-12 offers a breakthrough mechanism of action in the PD-1 pathway compared to other molecules currently in development in the highly promising immune therapy cancer space. AUNP-12 is the only peptide therapeutic in this pathway and could offer more effective and safer combination opportunities with emerging and established treatment regimens. AUNP-12 will be in development for numerous cancer indications. Under the terms of this agreement, Aurigene received a non-refundable upfront payment from Pierre Fabre. Such non-refundable upfront consideration is recognised as revenue over the period in which Aurigene has continuing performance obligations. Aurigene may also receive additional royalties and milestone payments based upon the continued development, regulatory progresses and commercialization of AUNP-12. 2.41: AGREEMENT WITH NOVARTIS CONSUMER HEALTH INC. On 18 October 2014, the Company, through its wholly owned subsidiary Dr. Reddy’s Laboratories SA, entered into an asset purchase agreement with Novartis Consumer Health Inc. to acquire the title and rights to its Habitrol® brand (an over-the-counter nicotine replacement therapy transdermal patch) and to market the product in the United States. After obtaining the necessary approvals from the U.S. Federal Trade Commission, the Company completed the acquisition of Habitrol® on 17 December 2014. The total purchase consideration was ` 5,097 (USD 80 million). The transaction has been recorded as an acquisition of a product related intangible asset with a useful life of 8 years. The carrying amount of the asset as at 31 March 2015 was ` 4,911. 218
Consolidated Financial Statements Annual Report 2014 - 15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in Indian Rupees millions, except share data and where otherwise stated) 2.42: COLLABORATION AGREEMENT WITH CURIS, INC. On 18 January 2015, Aurigene Discovery Technologies Limited (“Aurigene”), a wholly owned subsidiary of the parent company, entered into a Collaboration, License and Option Agreement (the “Collaboration Agreement”) with Curis, Inc. (“Curis”) to discover, develop and commercialize small molecule antagonists for immuno-oncology and precision oncology targets. Under the Collaboration Agreement, Aurigene has the responsibility for conducting all discovery and preclinical activities, including Investigational New Drug (“IND”) enabling studies and providing Phase 1 clinical trial supply, and Curis is responsible for all clinical development, regulatory and commercialization efforts worldwide, excluding India and Russia. The Collaboration Agreement provides that the parties will collaborate exclusively in immuno-oncology for an initial period of approximately two years, with the option for Curis to extend the broad immuno-oncology exclusivity. As a partial consideration for the collaboration, pursuant to a Stock Purchase Agreement dated 18 January 2015, Curis issued to Aurigene approximately 17.1 million shares of its common stock, representing 19.9% of its outstanding common stock immediately prior to the transaction and approximately 16.6% of its outstanding common stock immediately after the transaction. The shares issued to Aurigene are subject to a lock-up agreement until 18 January 2017, with the shares being released from such lock-up in 25% increments on each of 18 July 2015, 18 January 2016, 18 July 2016 and 18 January 2017, subject to acceleration of release of all the shares in connection with a change of control of Curis. In connection with the issuance of such shares, Curis and Aurigene entered into a Registration Rights Agreement dated 18 January 2015 which provides for certain registration rights with respect to resales of the shares. The fair value of these equity shares on the date of agreement was ` 1,452 (USD 23.5 million). The upfront consideration received in the form of equity shares is deferred and recognized as revenue over the period in which Aurigene has continuing performance obligations. Aurigene is also entitled to development and commercial milestone payments as follows: • for the first two programs: up to USD 52.5 million per program, including USD 42.5 million for approval and commercial milestones, plus pre-specified approval milestone payments for additional indications, if any; • for the third and fourth programs: up to USD 50 million per program, including USD 42.5 million for approval and commercial milestones, plus prespecified approval milestone payments for additional indications, if any; and • for any program thereafter: up to USD 140.5 million per program, including USD 87.5 million in approval and commercial milestones, plus prespecified approval milestone payments for additional indications, if any. In addition, Curis has agreed to pay Aurigene royalties, ranging between high single digits to 10%, on its net sales in territories where it commercializes products. Furthermore, Aurigene is entitled to receive a share of Curis’ revenues from sublicenses, which share varies based upon specified factors such as the sublicensed territory, whether the sublicense revenue is royalty based or non-royalty based and, in some cases, the stage of the applicable molecule and product at the time the sublicense is granted. 2.43: VENEZUELA OPERATIONS Dr. Reddy’s Venezuela, C.A., a wholly owned subsidiary of the Company, is primarly engaged in import of pharmaceutical products from parent company and other subsidiaries of the company and the sale of such products in Venezuela. During the year ended 31 March 2015, the Company’s revenues from Venezuela were ` 8,335 (Venezuelan bolivar (“VEF”) 813 million). In February 2015, the Venezuelan government launched an overhaul of the exchange rate system and introduced a new exchange rate mechanism. The Marginal Currency System (known as “SIMADI”), is the third mechanism in the new three-tier exchange rate regime and allows for legal trading of the Venezuelan bolivar for foreign currency with fewer restrictions than other mechanisms in Venezuela (CENCOEX and SICAD) . The new second tier, SICAD, is a combination of the former second and third tiers, SICAD I and SICAD II, with a rate of approximately 12.0 VEF per USD. The first tier, the official exchange rate, is unchanged and sells dollars at 6.30 VEF per USD for preferential goods. As on 31 March 2015 the exchange rates in all the three aforesaid tiers are as follows: • CENCOEX preferential rate – 6.3 VEF per USD; • SICAD rate - 12 VEF per USD; and • SIMADI rate - approximately 193 VEF per USD. As per the existing laws in Venezuela, payments towards the importation of pharmaceutical products qualify for the CENCOEX preferential rate of 6.3 VEF per USD, and the Company has been receiving approvals from the CENCOEX at such preferential rate. Accordingly, monetary assets of VEF 245 million which equate to the amount of import payments (USD 39 million) that are eligible and pending for approval are translated at such preferential rate. The balance of the Company’s Venezuelan monetary assets and liabilities, in the net amount of VEF 88 million, may not qualify for the preferential rate of 6.3 VEF per USD. The Company assessed the rate at which such balances are likely to be realized or settled and believes that it is appropriate to use the SIMADI rate (VEF 193 per USD) to translate such balances. Accordingly, foreign exchange loss amounting to ` 843 on translation of such balance monetary assets and liabilities at SIMADI rate was recorded during the year ended 31 March 2015. 219
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ANNUAL REPORT 2014-15 Good Health C
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