Dr Reddys Laboratories

In February 2009, your Company completed 25 years of its life. It is a
 signifcant milestone. We have grown from a small establishment located
 in Hyderabad to a – 10,000 strong global company with facilities in
 India, Europe, the USA, Russia and China — earning a net revenue of Rs.
 69.4 billion (Rs. 6,944 crore or U.S.$. 1.37 billion) in 2008-09. And
 with this growth, your Company has created signifcant shareholder value
 
 As I refect on the 25-year of your Company, I remember 1984, when Dr.
 Reddy’s Laboratories was established with an initial capital outlay of
 Rs. 25 lakh. Two years later, in 1986, it got listed on the Bombay
 Stock Exchange. For the next 11 years, we worked on providing bulk
 drugs and formulations, while focusing on our R&D. In 1997, we licensed
 an anti-diabetic molecule, DRF 2593 (Balaglitazone), to Novo Nordisk —
 thus becoming the first Indian pharmaceutical company to out-license an
 original molecule. That year, we also fled our first abbreviation new
 drug application for Ranitidine with the United States Food and Drug
 Administration.
 
 Four years later, on 11 April 2001, your Company became the first Asia
 Pacific pharmaceutical company, outside Japan, to list on the New York
 Stock Exchange. And also the first Indian pharmaceutical company to
 obtain a 180-day exclusive marketing rights for a generic drug in the
 US market with the launch of its oxetine 40mg capsules.
 
 Five years thereafter, in 2006, the Company’s revenues crossed U.S.$. 1
 billion. In the same year Dr. Reddy’s became the first manufacturing
 company in India to be compliant with Section 404 of the Sarbanes Oxley
 Act of 2002, well in advance of the mandatory deadline of 31 March
 2007. In 2007, we launched Reditux™ (rituximab), the world’s first
 biosimilar of a monoclonal antibody. Today, we are a U.S.$. 1.37
 billion global entity, all set for even higher growth.
 
 If any shareholder purchased 100 shares during your Company’s IPO in
 August 1986, plus the 60% rights issue in August 1989, and held on to
 these till date, the person would be owning a total of 5,760 shares of
 Dr. Reddy’s Laboratories at a face value of Rs. 5 per share. Against a
 total outlay of Rs. 2,500 (Rs. 1,000 during the IPO and Rs. 1,500 to
 purchase 60 shares of the rights issue at Rs. 25 per share) that
 investor will have earned a total of Rs. 1.95 lakh as dividends,
 including the proposed total dividend of Rs. 6.25 per share for
 2008-09. On 31 March 2009, your Company’s share on BSE was being quoted
 at Rs. 488.65. Thus, the value of this investor’s portfolio would have
 been Rs. 28.15 lakh.
 
 You will agree that this represent a track record of providing very
 good long term shareholder value.
 
 I am happy with the numbers. But I am happier still with the fact that,
 throughout the growth process, your Company has never forgotten the
 basic reason for its existence — to provide affordable and innovative
 medicines to patients across the world.  And that it has the - strategy
 to leverage research and development, product offerings and customer
 services to be - a leading global pharmaceutical company.
 
 Let me now quickly brief you of the key elements of your Company’s
 performance in 2008-09, followed by how I see its growth in 2009-10.
 
 - We launched sumatriptan - the authorized generic version of Imitrex®
 in the USA ahead of other competitors. This alone has contributed to
 Rs. 7,188 million or 10% of your Companys total revenues for 2008-09.
 
 - Dr. Reddys Global Generics revenue increased by 51 % to Rs. 49,790
 million, primarily on account of the launch of sumatriptan in North
 America and strong performance in Russia and CIS. Sixteen new products
 were launched in the US generics market in 2008-09, including two
 over-the-counter (OTC) products
 
 - The Pharmaceutical Services and Active ngredients (PSAI) business
 grew by 13% to Rs. 18,758 million; and revenues from the emerging
 markets grew by 20%
 
 - We made three new acquisitions: DowPharmas Small Molecules
 facilities in the UK, located at Mirfield and Cambridge (Chirotech);
 BASF Corporations manufacturing facility at Shreveport in Louisiana,
 USA; and Jet Generici SRL, a company engaged in the sale of generic
 finished dosages in Italy. These acquisitions are already paying
 dividends, and will act as building blocks for future growth of your
 Company
 
 - On a consolidated basis, your Companys revenues (net of excise
 duties and sales returns) increased by 39% over the previous year to
 Rs. 69,441 million in 2008-09 —or U.S.$. 1.37 billion.
 
 - EBIDTA stood at Rs. 14,529 million in 2008-09, or U.S.$. 286 million.
 
 I am happy with your Companys continued commitment to build a robust
 generics and API pipeline. In 2008-09, Dr. Reddys filed 23 abbreviated
 new drug applications (ANDAs), of which 20 were in the US and 3 in
 Canada. Among these were 7 Para IV filings. Thus, your Company has
 filed 159 cumulative ANDAs as of 31 March 2009. The year also saw the
 highest number of approvals for our ANDA filings 23 final approvals
 from the US and 4 from Canada, in addition to 4 tentative approvals
 from the US.
 
 The API pipeline is also strong. Your Company filed 55 DMFs in 2008-09.
 Of these, 21 were filed in US, 5 in Canada, 19 in Europe and 10 in
 other countries. As on 31 March 2009, there have been cumulative
 filings of 351 DMFs, with 148 in the US.
 
 Regarding discovery research, your Company has several molecules or New
 Chemical Entities (NCEs), which are under active development in
 pipeline. These cover metabolic, respiratory and cardiovascular
 disorders.
 
 I need to now share the facts about the betapharm impairment that you
 may have read in the financial press. The German generics market is
 rapidly transiting to a lowest-price tender model. State Healthcare
 Insurance Fund companies are issuing tenders for generics supply, where
 the lowest bidder for each generic in each local geography wins This
 has led to a rapid decline in generics prices With this change in
 external business conditions, accounting standards dictated that your
 Company tests the carrying value of betapharm intangibles for possible
 impairment. This was done, and resulted in a non-cash write-down of
 intangible assets amounting to Rs. 317 crore. In addition, the
 betapharm goodwil on the balance sheet was also tested for impairment —
 on the ground that it existed due to the earlier branded nature of the
 German market, which was being impaired by the move to tender-based
 supplies. This test was also carried out, resulting in a non-cash
 charge of Rs. 1,086 crore. In the aggregate, therefore, the non-cash
 impairment charge was around Rs.  1,402 crore
 
 Two things need to be emphasized here. First, this is a pure non-cash
 entry. Second, your Company has done significant work with betapharm to
 optimize costs and streamline the supply chain in a milieu of
 tender-based pricing. These initiatives are yielding results. Thus, you
 should see stronger performance from betapharm in 2009-10 and
 thereafter
 
 Your Company has been steadily building capabilities and resources over
 the years, and strengthened these further with initiatives at mproving
 productivity and reducing costs. I expect these initiatives delivering
 value in 2009-10
 
 If you will recollect, last year I had exhorted your Company to grow
 its top-line by at least 25%. It has done much better — by increasing
 its revenues by 39% in 2008-09. Given the superior performance in
 2008-09,1 am asking your Company to grow its revenues by another 10% in
 2009-10, with the return on capital employed in middle to high teens
 This is not a modest target, for it implies more than a 50% growth in
 revenues over two years. I am sure that your Company will achieve this
 objective.
 
 My thanks to all employees of the Dr. Reddys group everywhere in the
 world for the excellent work that they have done, and their dedication
 to furthering the cause of affordable medicine. Also my sincere thanks
 to you for being with us in all times.
 
 Stay with us for another 25 years. I am sure they will be more
 rewarding
 
                                                    Thank you 
                                                    Yours sincerely, 
                                                    Dr. K. Anji Reddy
                                                    Chairman