Dr Reddys Laboratories

1.  COMMITMENTS AND CONTINGENT LIABILITIES
                                                            as at as at
                                            31 march 2009 31 march 2008
 i) Commitments / contingent liabilities:
 (a) Guarantees issued by banks                     90             85
 (b) Guarantees issued by the Company on 
 behalf of subsidiaries, associates and 
 joint venture                                   17,749         16,699
 (c) Letters of credit outstanding                  329            658
 (d) Contingent consideration payable in
 respect of subsidiaries acquired                    12            12
 (e) Undrawn borrowing facilities                 7,986         13,559
 ii) Claims against the Company not 
 acknowledged as debts in respect of:
 (a) Income tax matters, pending decisions
 on various appeals made by the Company 
 and by the  Department                             541           669
 (b) Excise matters, under dispute                   1              1
 (c) Custom matters, under dispute                   36            36
 (d) Sales tax matters, under dispute                28            15
 (e) Other matters, under dispute 
 (Rs. Nil; previous year: Rs. 276 thousands,
 rounded off in millions)                            -              - 
 
 (f) Demand for payment to the credit of the Drug Prices Equalisation
 Account under Drugs (Price Control) Order, 1995 which is being
 contested by the Company in respect of its product Norfoxacin. During
 year ended 31 March 2005, the Hon’ble High Court of Andhra Pradesh
 dismissed the review petition fled by the Company against the original
 order passed by the same Court. Subsequently, the Company had fled a
 Special Leave Petition with the Supreme Court of India appealing
 against the High Court Order.
 
 During the year ended 31 March 2006, the Company received a further
 demand notice from the authorities for a total of Rs. 285 towards the
 overcharged sale price (principal) and interest thereon. The Company
 fled a fresh writ petition in the High Court of Andhra Pradesh
 challenging the demand notice. The High Court whilst admitting the writ
 petition, granted an interim order wherein it ordered the Company to
 deposit 50% of the principal amounting to Rs. 77. The Company deposited
 this amount with the authorities under protest on 14 November 2005,
 while it awaits the outcome of its appeal with the Supreme Court. In
 February 2008, the Hon’ble High Court directed the Company to deposit
 an additional amount of Rs. 30, which was deposited by the Company in
 March 2008. The Company has provided fully against the potential
 liability in respect of the principal amount demanded and believes that
 possibility of any liability that may arise on account of interest and
 penalty is remote. In the event that the Company is unsuccessful in the
 litigation in Supreme Court, it will be required to remit the sale
 proceeds in excess of the maximum selling price to Government of India
 and penalties or interest if any, the amounts of which are not readily
 ascertainable.
 
 iii) Estimated amount of contracts remaining to be executed on capital
 account and not provided for (net 993 1,524 of advances)
 
 iv) The Company is also involved in other lawsuits, claims,
 investigations and proceedings, including patent and commercial
 matters, which arise in the ordinary course of business. However, there
 are no such matters pending that the Company expects to be material in
 relation to its business.
 
 2.  RElaTED PaRTy DISClOSURES
 
 a.  The related parties where control exists are the subsidiaries, step
 down subsidiaries, joint ventures and the partnership frms. There are
 no other parties over which the Company has control.
 
 b.  Related parties where control exists or where signifcant infuence
 exists and with whom transactions have taken place during the year:
 
 3. DIvIDEND REmITTaNCE IN FOREIgN CURRENCy
 
 The Company does not make any direct remittances of dividends in
 foreign currencies to ADS holders. The Company remits the equivalent of
 the dividends payable to the ADS holders in Indian Rupees to the
 depositary bank, which is the registered shareholder on record for all
 owners of the Company’s ADS. The depositary bank purchases the foreign
 currencies and remits dividends to the ADS holders.
 
 4. RESEaRCh aND DEvElOPmENT aRRaNgEmENTS
 
 i-Ven pharma arrangement
 
 During the year ended 31 March 2005, the Company entered into an
 agreement with I-VEN Pharma Capital Limited (I-VEN) for the joint
 development and commercialization of a portfolio of 35 generic drug
 products. As per the terms of the agreement, I-VEN has a right to fund
 up to 50% of the project costs (development, registration and legal
 costs) related to these products and the related U.S. Abbreviated New
 Drug Applications (ANDA) fled or to be fled, subject to a maximum
 contribution of U.S.$. 56 million. The terms of the agreement do not
 require the Company to repay the funds or purchase I-VEN’s interest in
 the event the Company is not able to develop or commercialize one or
 more of the products under this agreement. However, upon successful
 commercialization of these products, the Company is required to pay
 I-VEN a royalty on net sales at agreed rates for a period of 5 years
 from the date of commercialization of each product.
 
 The frst tranche of Rs. 985 (U.S.$. 23 million) was funded by I-VEN on
 28 March 2005. This amount received from I-VEN was initially recorded
 as an advance and subsequently credited in the income statement as a
 reduction of research and development expenses upon completion of
 specifc milestones as detailed in the agreement. A milestone (i.e. a
 product fling as per the terms of the agreement) was considered to be
 completed once the appropriate ANDA is submitted by the Company to the
 U.S. FDA. Achievement of a milestone entitled the Company to reduce the
 advance and credit research and development expenses in a fxed amount
 equal to I-VEN’s share of the research and development costs of the
 product (which varied depending on whether the ANDA is a Paragraph III
 or Paragraph IV fling). Accordingly, based on product flings made by
 the Company through 31 March 2009, the advance of Rs. 933 has been
 credited to research and development expenditure over the various
 years.
 
 Additionally, in April 2010 and upon successful achievement of certain
 performance milestones specifed in the agreement (e.g. successful
 commercialisation of a specifed number of products, achievement of
 specifed sales milestone), I-VEN has a right requiring the Company to
 pay I-VEN a Portfolio Termination Value (‘PTV’) for such portfolio of
 products. In the event I-VEN decides to exercise this PTV option, then
 it will not be entitled to the sales-based royalty payment for the
 remaining contractual years.
 
 During the year ended 31 March 2009, the Company has achieved the
 relevant performance milestone. Further, I-VEN has communicated to the
 Company its intention to exercise the PTV option as per the provisions
 of the agreement. However, since the PTV option will be exercised only
 in April 2010, the Company has not recorded any liability in the
 fnancial statements for the year ended 31 March 2009.
 
 perlecan pharma arrangement
 
 In September 2005, the Company announced the formation of an integrated
 drug development company, Perlecan Pharma Private Limited (Perlecan
 Pharma), with equity to be contributed jointly by the Company,
 Citigroup Venture Capital International Growth Partnership Mauritius
 Limited (Citigroup Venture) and ICICI Venture Funds Management
 Company (ICICI Venture). Perlecan Pharma would be engaged in the
 clinical development and out-licensing of New Chemical Entity (NCE)
 assets. As part of this arrangement, the Company transferred all rights
 and title, including the development and commercialization rights, of
 four NCE assets to Perlecan Pharma, on 27 March 2006.
 
 As per the terms of the arrangement, the Company would have the frst
 right to conduct product development and chemical trials on behalf of
 Perlecan Pharma on an arm’s length basis subject to the fnal decision
 by the Board of Directors of Perlecan Pharma. Moreover, the research
 and development expenses incurred by the Company from 1 April 2005
 would be reimbursed by Perlecan Pharma (Rs. Nil towards 2008-09,
 previous year: Rs. 90).
 
 As of 31 March 2008, the Company owned approximately 14.3% of equity of
 Perlecan Pharma. During the year, pursuant to a share purchase
 agreement dated 30 July 2008, the Company acquired the remaining shares
 (except two shares) from the other partners for an aggregate
 consideration of Rs. 758. Consequently, Perlecan Pharma has become a
 99.99% subsidiary of the Company with effect from 31 July 2008.
 
 Further, in January 2009, a petition has been fled in the High Court of
 Andhra Pradesh to sanction a scheme of amalgamation of Perlecan Pharma
 with the Company under Sec 391 and 394 of the Companies Act, 1956. The
 sanction of the High Court is awaited.
 
 5.  Investments include an equity investment of Rs. 12,904 in Lacock
 Holdings, Cyprus (‘Lacock’), a wholly-owned subsidiary of the Company.
 As at 31 March 2009, the Company has also extended advances aggregating
 to Rs. 3,355 to Lacock. The Company participates in the German generics
 business through step-down subsidiaries of Lacock, i.e. Reddy Holdings
 GmbH and betapharm Arzneimittel GmbH (‘betapharm’).
 
 During the year, there have been certain signifcant changes in the
 German generics market such as reference price cuts, increased presence
 of discount contracts, announcement of large sales tender from AOK etc.
 Pursuant to these changes, including the outcome of the AOK sales
 tender (in which betapharm had participated), the proftability of
 betapharm is expected to get impacted. In view of the above, management
 has initiated the process of restructuring its European operations.
 These efforts inter alia include operational restructuring of the
 German betapharm business through reduction of sales force, etc. and
 deriving synergies from consolidation of other European operations at
 the Lacock level. In view of the above, management believes that the
 advances granted to Lacock would be recovered and that there is no
 diminution other than temporary in the value of the investment in
 Lacock as at 31 March 2009. Accordingly, the Company’s advances to and
 investment in Lacock have been carried at cost.
 
 6. SEgmENT INFORmaTION
 
 In accordance with AS-17 Segment Reporting, segment information has
 been given in the consolidated fnancial statements of DRL and therefore
 no separate disclosure on segment information is given in these
 fnancial statements.