Dr. Reddy’s Laboratories Limited: FY2019 Form 20-F Summary
Business context and reporting period
This is an annual Form 20-F for the fiscal year ended March 31, 2019, prepared under IFRS as issued by the IASB. It is not a quarterly filing for 2018 Q4. Dr. Reddy’s is an India-based global pharmaceutical company operating through Global Generics, Pharmaceutical Services and Active Ingredients (PSAI), Proprietary Products, and discovery-stage biotechnology activities.
Key financial metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | Rs.153,851 million | Rs.142,028 million | 8.3% increase |
| Gross profit | Rs.83,430 million | Rs.76,304 million | 9.3% increase |
| Gross margin | 54.2% | 53.7% | Up 0.5 percentage points |
| Operating profit | Rs.20,888 million | Rs.11,917 million | 75.3% increase |
| Operating margin | 13.6% | 8.4% | Up 5.2 percentage points |
| Profit before tax | Rs.22,443 million | Rs.14,341 million | 56.5% increase |
| Net profit | Rs.18,795 million | Rs.9,806 million | 91.7% increase |
| Net margin | 12.2% | 6.9% | Up 5.3 percentage points |
| Basic EPS | Rs.113.28 | Rs.59.13 | 91.7% increase |
| Operating cash flow | Rs.28,704 million | Rs.18,029 million | Rs.10,675 million increase |
FY2019 revenue was approximately U.S.$2.225 billion at the filing’s convenience rate of Rs.69.16 per U.S.$1. The U.S. dollar translation is unaudited and provided for convenience.
- Global Generics revenue was Rs.122,903 million, up 8%; PSAI revenue was Rs.24,140 million, up 10%; Proprietary Products revenue was Rs.4,750 million, up 12%.
- North America Global Generics revenue was Rs.59,957 million, broadly flat in rupees but down 6% in U.S. dollar terms because of price erosion and competition. India revenue increased 12% to Rs.26,179 million, while Russia revenue increased 21% to Rs.15,299 million.
- PSAI gross margin improved to 25% from 20%, while Global Generics gross margin remained approximately 59%.
- SG&A increased 4.2% to Rs.48,890 million, but declined to 31.8% of revenue from 33.0%. R&D declined 14.6% to Rs.15,607 million, or 10.1% of revenue versus 12.9%.
- The effective tax rate declined to approximately 16.3% from 31.6%, partly because FY2018 included a Rs.1,304 million charge related to U.S. tax-law changes.
Liquidity, debt and capital resources
- Cash and cash equivalents were Rs.2,228 million, compared with Rs.2,638 million at March 31, 2018.
- Other investments totaled Rs.23,342 million, producing substantial additional liquidity.
- Working capital was Rs.54,801 million, including cash, deposits, bonds, commercial paper and mutual-fund investments.
- Total debt obligations were approximately Rs.38,472 million, comprising Rs.12,125 million of short-term borrowings and Rs.26,347 million of long-term debt including the current portion.
- The company had Rs.47,134 million of uncommitted bank credit lines available at March 31, 2019.
- Capital expenditures were Rs.8,376 million, with capital commitments of Rs.2,495 million and capital work-in-progress of Rs.4,918 million.
- Financing cash outflow was Rs.21,326 million, primarily reflecting repayment of borrowings of Rs.15,126 million, dividends and dividend tax of Rs.4,002 million, and interest payments of Rs.1,607 million.
Material changes versus the prior comparable period
- Revenue growth was driven by higher volumes, new product launches and favorable rupee translation, partly offset by generic price erosion in North America and Europe.
- Operating and net margins expanded materially because of stronger gross profit, lower R&D spending, operating efficiencies, higher other income and a substantially lower tax rate.
- Operating cash flow improved significantly as earnings increased and trade receivables declined; days sales outstanding improved to 90 days from 102 days, partly due to non-recourse sale of Rs.7,592 million of trade receivables.
- Short-term borrowings declined from Rs.25,466 million to Rs.12,125 million, while long-term borrowings remained substantial.
- The company adopted IFRS 9 and IFRS 15 effective April 1, 2018. Management stated that IFRS 15 had no material effect on revenue timing or amount; IFRS 9 reduced opening retained earnings by Rs.12 million.
- The company established an employee stock-option trust, which purchased 217,976 shares for Rs.535 million.
Guidance, outlook, commentary and unusual items
- The filing does not provide a specific quantitative revenue, earnings or margin forecast. Management expects PSAI growth from newer technologies, platforms and partnerships and intends to continue investing in complex generics, biosimilars and differentiated products.
- The company filed 20 new U.S. ANDAs during FY2019. At year-end, 110 U.S. filings were pending, including 60 Paragraph IV filings, with the company believing it was first to file 34.
- The generic buprenorphine/naloxone sublingual film was launched in the United States after favorable patent litigation developments, but the product remains subject to ongoing litigation.
- Other income included gains of Rs.423 million from the sale of the Jeedimetla API business, Rs.423 million from the sale of U.S. Cloderm rights and Rs.159 million from other proprietary-product intangible-asset sales. The company also completed disposals of its Bristol, Tennessee manufacturing facility and other assets.
- U.S. FDA remediation continued. The Duvvada oncology facility received an EIR indicating successful audit closure in February 2019. The Srikakulam API facility remained subject to follow-up activity and had not completed the same remediation process as of the filing date.
- Significant contingencies include U.S. generic-drug antitrust and pricing litigation, ongoing government investigations, patent disputes, Indian NPPA pricing matters, tax disputes and environmental matters. The company generally believes losses beyond recorded provisions are not probable, but states that potential liabilities in several proceedings cannot be estimated.
- Key operating risks include generic price erosion, customer concentration, regulatory delays, manufacturing and quality failures, patent litigation, foreign-exchange volatility, floating-rate debt, supply-chain disruption and changing healthcare pricing rules.
Most important facts for an investor to verify
- Confirm that the applicable period is FY2019 ended March 31, 2019 rather than 2018 Q4.
- Review the sustainability of FY2019 profit growth after removing asset-sale gains and the favorable year-over-year tax comparison.
- Assess North American pricing pressure, customer concentration and the outlook for U.S. ANDA approvals and launches.
- Monitor U.S. FDA remediation, particularly the Srikakulam API facility and the effect on product approvals and supply.
- Review the potential exposure from U.S. antitrust, pricing, patent and securities litigation, including amounts not accrued because outcomes are considered uncertain.
- Reconcile cash, investments, debt maturities, available credit lines and the company’s ability to fund capital commitments from operating cash flow.
- Evaluate foreign-exchange and interest-rate sensitivity, including the effect of LIBOR-linked borrowings and currency movements on earnings.