Dr. Reddy’s Laboratories Limited: FY2022 Form 20-F Summary
Reporting period: Fiscal year ended March 31, 2022. The provided filing is an annual Form 20-F, not a standalone 2021 fourth-quarter filing. Financial statements are prepared under IFRS as issued by the IASB and presented primarily in Indian rupees; U.S. dollar figures are unaudited convenience translations at Rs.75.87 per U.S. dollar.
Business context
Dr. Reddy’s is an India-based global pharmaceutical company operating through Global Generics, Pharmaceutical Services and Active Ingredients (PSAI), Proprietary Products and Others. Principal markets include India, North America, Europe, Russia and other emerging markets. The company had 166,425,849 outstanding equity shares at March 31, 2022, and its ADSs trade on the NYSE under “RDY.”
Key financial metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | Rs.214,391 million | Rs.189,722 million | +13.0% |
| Gross profit | Rs.113,840 million | Rs.103,077 million | +10.4% |
| Gross margin | 53.1% | 54.3% | Down 120 bps |
| Operating profit | Rs.29,476 million | Rs.24,280 million | +21.4% |
| Operating margin | 13.7% | 12.8% | Up 90 bps |
| Profit before tax | Rs.32,298 million | Rs.26,413 million | +22.3% |
| Net profit | Rs.23,568 million | Rs.17,238 million | +36.7% |
| Net margin | 11.0% | 9.1% | Up 190 bps |
| Basic EPS | Rs.142.08 | Rs.103.94 | +36.7% |
- Revenue mix: Global Generics generated Rs.179,170 million, or 84% of total revenue, up 16%. PSAI revenue declined 4% to Rs.30,740 million. Proprietary Products revenue increased 208% to Rs.1,611 million, largely due to licensing income.
- Geography: North America Global Generics revenue was Rs.74,915 million, up 6%; India was Rs.41,957 million, up 26%; Russia was Rs.20,879 million, up 32%; Europe was Rs.16,631 million, up 8%; and other emerging markets were Rs.16,526 million, up 40%.
- Operating expenses: Selling, general and administrative expense rose 13.6% to Rs.62,081 million. Research and development expense rose 5.7% to Rs.17,482 million, equal to 8.2% of revenue.
- Unusual items: Impairment of non-current assets was Rs.7,562 million, including impairment associated with the Shreveport cash-generating unit and certain intangible assets. Other income included a Rs.1,064 million gain on the sale of E7777 rights to Citius Pharmaceuticals. Proprietary Products revenue included Rs.1,084 million of license-fee income from the ELYXYB transaction.
- Cash flow: Operating cash flow was Rs.28,108 million, down from Rs.35,703 million, primarily due to higher working-capital requirements. Investing cash outflow was Rs.26,387 million, including Rs.15,733 million of capital expenditures and net purchases of investments. Financing cash outflow was Rs.2,422 million.
- Liquidity: Working capital was Rs.87,841 million, including cash and cash equivalents of Rs.14,852 million, term deposits and bonds of Rs.12,562 million, and mutual fund investments of Rs.16,751 million. The company reported Rs.39,989 million of uncommitted bank credit lines.
- Debt: Principal debt obligations excluding leases totaled Rs.30,882 million, comprising Rs.27,082 million of short-term borrowings and Rs.3,800 million of long-term debentures. Including lease obligations, reported long-term borrowings were Rs.6,763 million.
Material changes versus FY2021
- Revenue growth was driven by higher volumes and new launches, partly offset by price erosion in North America and Europe.
- Global Generics gross margin declined from 59.0% to 57.6%, and PSAI gross margin declined from 29.5% to 22.2%, primarily because of product price erosion.
- Net profit benefited from stronger operating results, lower impairment charges, higher other income and a lower effective tax rate of 27.0% versus 34.7%.
- Receivables increased to Rs.66,764 million from Rs.49,641 million, and average days sales outstanding increased to 108 days from 91 days.
- Capital expenditures increased to Rs.15,733 million from Rs.12,476 million. Capital commitments at March 31, 2022 were approximately Rs.7,991 million, primarily for manufacturing and injectable-facility expansion.
- The company acquired Nimbus Health GmbH, a German medical-cannabis wholesaler, for an upfront payment of Rs.337 million plus earn-outs. It also sold rights to E7777 and ELYXYB and entered into an agreement concerning certain antibacterial brands in Russia and former Soviet Union countries.
- The company proposed a FY2022 dividend of Rs.30 per share, totaling approximately Rs.4,993 million, subject to shareholder approval.
Guidance, outlook, risks and contingencies
The filing does not provide quantitative revenue, earnings or margin guidance. Management states that additional capital expansion is expected to be funded through operating cash flows and available cash and investments. Projects, primarily involving injectable manufacturing capacity, were expected to be completed during fiscal years 2023 and 2024.
- Russia-Ukraine conflict: Russia represented 12% of Global Generics revenue and other former Soviet Union countries and Romania represented 5%. The company reported higher freight costs and longer supplier lead times but no significant shortages or disruptions as of the filing date. Sanctions, currency restrictions, supply-chain disruption and reduced market access remain material risks.
- Pricing and competition: Generic price erosion, customer consolidation, tender systems and faster competitor approvals may pressure revenue and margins. Ten largest North America Global Generics customers accounted for approximately 80% of that segment’s revenue; two customers represented approximately 14% of total company revenue.
- Regulatory and quality risk: Manufacturing facilities remain subject to inspections by the U.S. FDA and other regulators. Regulatory observations, import alerts, product recalls or approval delays could adversely affect operations.
- Legal and compliance matters: The company disclosed patent disputes, U.S. antitrust multidistrict litigation, ranitidine-related litigation, pricing and reimbursement matters, tax disputes, environmental matters and an internal investigation concerning alleged improper payments in Ukraine and potentially other countries. The company states that many potential losses are not reasonably estimable and that no provision was recorded for numerous matters.
- Subsequent events: After year-end, the company acquired the Cidmus cardiovascular brand in India for U.S.$61 million, settled litigation with Indivior and expected to receive U.S.$72 million by March 31, 2024, and acquired injectable products from Eton Pharmaceuticals for approximately U.S.$5 million upfront plus contingent payments of up to U.S.$45 million.
- Controls and audit: Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2022. Ernst & Young Associates LLP issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether Global Generics price erosion, particularly in North America and emerging markets, continues to offset volume growth.
- The sustainability of the FY2022 operating-margin improvement after excluding licensing gains, asset-sale gains and other unusual items.
- Working-capital trends, including the increase in receivables and days sales outstanding, and the effect on operating cash conversion.
- Progress, cost and returns from the injectable manufacturing expansion and other capital commitments.
- Potential financial and operational consequences of the Russia-Ukraine conflict, including sanctions, currency controls and supply-chain costs.
- Developments in the internal anti-corruption investigation, U.S. antitrust proceedings, ranitidine litigation, pricing disputes and environmental claims.
- Regulatory inspection outcomes and the approval timing for the company’s pending U.S. filings, including 87 ANDAs and three 505(b)(2) NDAs.
- Approval and payment timing for the proposed Rs.30 per-share dividend and the effects of subsequent acquisitions and settlements.