20-F 1 y62892e20vf.htm FORM 20-F 20-F
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2008
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
     
o   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report                     
For the transition period from                      to                     
Commission File Number: 1-15182
DR. REDDY’S LABORATORIES LIMITED
(Exact name of Registrant as specified in its charter)
     
Not Applicable   ANDHRA PRADESH, INDIA
(Translation of Registrant’s name   (Jurisdiction of incorporation or
into English)   organization)
7-1-27, Ameerpet
Hyderabad, Andhra Pradesh 500 016, India
+91-40-23731946

(Address of principal executive offices)
Saumen Chakraborty, Chief Financial Officer, +91-40-2373 1946, saumenc@drreddys.com
7-1-27, Ameerpet, Hyderabad, Andhra Pradesh, India
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
     
Title of Each Class   Name of Each Exchange on which Registered
American depositary shares, each representing one equity share
  New York Stock Exchange
 
   
Equity Shares*
  New York Stock Exchange
 
*   Not for trading, but only in connection with the registration of American depositary shares, pursuant to the requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act. None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
168,172,746 Equity Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ       No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o       No þ
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ       No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP þ
  International Financial Reporting Standards as issued o   Other o
 
  by the International Accounting Standards Board    
     If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o       Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes o       No þ
 
 

 


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Currency of Presentation and Certain Defined Terms
     In this annual report on Form 20-F, references to “$” or “U.S.$” or “dollars” or “U.S. dollars” are to the legal currency of the United States and references to “Rs.” or “rupees” or “Indian rupees” are to the legal currency of India. Our financial statements are presented in Indian rupees and translated into U.S. dollars and are prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”). References to “Indian GAAP” are to Indian Generally Accepted Accounting Principles. References to a particular “fiscal” year are to our fiscal year ended March 31 of such year. References to our “ADSs” are to our American Depositary Shares.
     References to “U.S.” or “United States” are to the United States of America, its territories and its possessions. References to “India” are to the Republic of India. References to “EU” are to the European Union. All references to “we,” “us”, “our”, “DRL”, “Dr. Reddy’s” or the “Company” shall mean Dr. Reddy’s Laboratories Limited and its subsidiaries. “Dr. Reddy’s” is a registered trademark of Dr. Reddy’s Laboratories Limited in India. Other trademarks or trade names used in this annual report on Form 20-F are trademarks registered in the name of Dr. Reddy’s Laboratories Limited or are pending before the respective trademark registries.
     Except as otherwise stated in this report, all translations from Indian rupees to U.S. dollars are based on the noon buying rate in the City of New York on March 31, 2008 for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York, which was Rs.40.02 per U.S.$1.00. No representation is made that the Indian rupee amounts have been, could have been or could be converted into U.S. dollars at such a rate or any other rate. As of July 11, 2008, that rate was Rs.42.8 per U.S.$1.00.
     Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.
     Information contained in our website, www.drreddys.com, is not part of this Annual Report and no portion of such information is incorporated herein.
Forward-looking and Cautionary Statement
     IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE “EXCHANGE ACT”). THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTIONS ENTITLED “RISK FACTORS” AND “OPERATING AND FINANCIAL REVIEW AND PROSPECTS” AND ELSEWHERE IN THIS REPORT. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT’S ANALYSIS ONLY AS OF THE DATE HEREOF. IN ADDITION, READERS SHOULD CAREFULLY REVIEW THE OTHER INFORMATION IN THIS ANNUAL REPORT AND IN OUR PERIODIC REPORTS AND OTHER DOCUMENTS FILED AND/OR FURNISHED WITH THE SECURITIES AND EXCHANGE COMMISSION (“SEC”) FROM TIME TO TIME.

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EX-8: SUBSIDIARIES
EX-23.1: CONSENT OF KPMG
EX-99.1: CERTIFICATION
EX-99.2: CERTIFICATION
EX-99.3: CERTIFICATION
EX-99.4: CERTIFICATION
 EX-8: LIST OF SUBSIDIARIES
 EX-23.1: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 EX-99.1: CERTIFICATION
 EX-99.2: CERTIFICATION
 EX-99.3: CERTIFICATION
 EX-99.4: CERTIFICATION

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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
     Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
     Not applicable.
ITEM 3. KEY INFORMATION
3.A. Selected financial data
     The selected consolidated financial data should be read in conjunction with the consolidated financial statements, the related notes and operating and financial review and prospects, which are included elsewhere in this annual report. The selected consolidated statements of income data for the five years ended March 31, 2008 and balance sheet data as of March 31, 2004, 2005, 2006, 2007 and 2008 in Indian rupees have been prepared and presented in accordance with U.S. GAAP and have been derived from our audited consolidated financial statements, the unaudited convenience translation and related notes except for cash dividend per share. The selected consolidated financial data presented below for fiscal year 2006 reflects the acquisition of Industrias Quimicas Falcon de Mexico effective December 30, 2005 and beta Holding GmbH effective March 3, 2006 and therefore the results for fiscal year 2006 are not comparable to the results of other fiscal years. The selected consolidated financial data presented below for fiscal years 2007 and 2008 reflects the acquisition of Industrias Quimicas Falcon de Mexico and beta Holding GmbH for the full year and therefore is not comparable with results for prior fiscal years.
                                                 
    Fiscal Year Ended March 31,  
Income Statement Data   2004     2005     2006     2007     2008  
    (Rs. in millions, U.S.$ in millions, except share and per share data)  
                                            Convenience  
                                            translation into  
                                            U.S.$  
Product sales
  Rs. 20,081.2     Rs. 19,126.2     Rs. 24,077.2     Rs. 64,185.4     Rs. 49,230.6     U.S.$ 1,230.1  
License fees
          345.7       47.5       27.5       34.8       0.9  
Services income
    22.3       47.5       142.3       882.2       740.2       18.5  
                             
Total revenues
    20,103.5       19,519.4       24,267.0       65,095.1       50,005.6       1,249.5  
Cost of revenues
    9,337.3       9,385.9       12,417.4       34,219.5       24,597.6       614.6  
                             
Gross profit
    10,766.2       10,133.5       11,849.6       30,875.6       25,408.0       634.9  
Operating expenses:
                                               
Selling, general and administrative expenses
    6,542.5       6,774.6       8,028.9       14,051.1       15,175.2       379.2  
Research and development expenses, net
    1,991.6       2,803.3       2,153.0       2,462.7       3,532.9       88.3  
Amortization expenses
    382.9       349.9       419.9       1,570.9       1,614.8       40.4  
Write-down of intangible assets
                      1,770.2       2,488.5       62.2  
Impairment of Goodwill
                            90.4       2.3  
Foreign exchange (gain)/loss, net
    (282.5 )     488.8       126.3       (136.8 )     (744.9 )     (18.6 )
Other operating (income)/expenses, net
    83.2       6.0       (327.7 )     (174.0 )     (106.6 )     (2.7 )
                             
Total operating expenses
    8,717.7       10,422.6       10,400.4       19,544.1       22,050.3       551.0  
                             
Operating income/(loss)
    2,048.5       (289.1 )     1,449.2       11,331.5       3,357.7       83.9  
Equity in (loss)/gain of affiliates
    (44.4 )     (58.1 )     (88.2 )     (62.7 )     1.8       0.0  
Other (expense)/income, net
    535.9       454.2       526.3       (768.5 )     78.6       2.0  
                             
Income before income taxes and minority interest
    2,540.0       107.0       1,887.3       10,500.3       3,438.1       85.9  
                             
Income taxes (expense)/benefit
    (69.2 )     94.3       (258.3 )     (1,176.9 )     1,229.4       30.7  
Minority interest
    3.4       9.9       (0.1 )     3.4       10.5       0.3  
Net income
  Rs. 2,474.2     Rs. 211.2     Rs. 1,628.9     Rs. 9,326.8     Rs. 4,678.0     U.S.$ 116.9  
                             
Earnings per equity share:
                                               
Basic
  Rs. 16.17     Rs. 1.38     Rs. 10.64     Rs. 58.82     Rs. 27.83     U.S.$ 0.69  
Diluted
  Rs. 16.16     Rs. 1.38     Rs. 10.62     Rs. 58.56     Rs. 27.73     U.S.$ 0.69  
Weighted average number of equity shares used in computing earnings per equity share:*
                                               
Basic**
    153,027,528       153,037,898       153,093,316       158,552,422       168,075,840       168,075,840  
Diluted**
    153,099,196       153,119,602       153,403,846       159,256,476       168,690,774       168,690,774  
Cash dividend per share (excluding dividend tax)
  Rs. 2.50     Rs. 2.50     Rs. 2.50     Rs. 2.50     Rs. 3.75     U.S.$ 0.09  
 
*   Each ADR represents one equity share.
 
**   On August 30, 2006, we approved a one-for-one stock split effected in the form of a stock dividend for each equity share and ADS issued and outstanding as of August 29, 2006. The number of equity shares and per share information presented in the above selected consolidated financial data reflect the effect of this one-for-one stock split effected in the form of a stock dividend for all periods presented.

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    Fiscal Year Ended March 31,
    2004   2005   2006   2007   2008
    (Rs. in millions, U.S.$ in millions)
                                            Convenience
                                            translation into
                                            U.S.$
Cash Flow Data:
                                               
Net cash provided by/(used in):
                                               
Operating activities
  Rs. 3,999.2     Rs. 2,291.6     Rs. 1,696.5     Rs. 11,960.6     Rs. 6,122.6     U.S.$ 153.0  
Investing activities
    (6,506.1 )     632.9       (34,577.8 )     436.4       (9,599.9 )     (239.9 )
Financing activities
    (376.1 )     1,931.3       27,210.9       1,753.7       (6,827.6 )     (170.6 )
Effect of exchange rate changes on cash
    (14.2 )     55.8       95.1       118.2       (278.2 )     (7.0 )
Expenditure on property, plant and equipment
    (2,415.6 )     (1,749.2 )     (1,873.3 )     (4,477.1 )     (6,348.1 )     (158.6 )
                                                 
    As of March 31,
    2004   2005   2006   2007   2008
    (Rs. in millions, U.S.$ in millions)
                                            Convenience
                                            translation into
                                            U.S.$
Balance Sheet Data:
                                               
Cash and cash equivalents
  Rs. 4,376.2     Rs. 9,287.9     Rs. 3,712.6     Rs. 17,981.4     Rs. 7,398.3     U.S.$ 184.9  
Working capital*
    11,103.3       10,770.9       1,345.1       18,933.0       15,227.9       380.5  
Total assets
    26,619.3       29,288.4       68,768.1       85,919.1       85,445.1       2,135.1  
Total long-term debt, excluding current portion
    31.0       25.1       20,937.1       17,871.0       12,864.2       321.4  
Total stockholders’ equity
    21,039.4       20,953.2       22,271.7       41,578.2       47,066.6       1,176.1  
 
*   - Working capital equals current assets less current liabilities.
Exchange Rates
     The following table sets forth, for the fiscal years indicated, information concerning the number of Indian rupees for which one U.S. dollar could be exchanged based on the average of the noon buying rate in the City of New York on the last business day of each month during the period for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York. The column titled “Average” in the table below is the average of the daily noon buying rate on the last business day of each month during the year.
                                     
Fiscal Year Ended                
March 31,   Period End   Average   High   Low
  2004  
 
  43.40       45.96       47.46       43.40  
  2005  
 
  43.62       44.86       46.45       43.27  
  2006  
 
  44.48       44.17       46.26       43.05  
  2007  
 
  43.10       45.06       46.83       42.78  
  2008  
 
  40.02       40.13       43.05       38.48  

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     The following table sets forth the high and low exchange rates for the previous six months and is based on the average of the noon buying rate in the City of New York on the last business day of each month during the period for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York:
                 
Month   High   Low
October 2007
    39.72       38.48  
November 2007
    39.68       39.11  
December 2007
    39.55       39.29  
January 2008
    39.55       39.13  
February 2008
    40.11       39.12  
March 2008
    40.46       39.76  
On July 11, 2008 the noon buying rate in the city of New York was Rs.42.8 per U.S. dollar.
3.B. Capitalization and indebtedness
     Not applicable.
3.C. Reasons for the offer and use of proceeds
     Not applicable.
3.D. Risk factors
     You should carefully consider all of the information set forth in this Form 20-F and the following risk factors that we face and that are faced by our industry. The risks below are not the only ones we face. Additional risks not currently known to us or that we presently deem immaterial may also affect our business operations. Our business, financial condition or results of operations could be materially or adversely affected by any of these risks. This Form 20-F also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere. See “Forward-Looking Statements.”
RISKS RELATING TO OUR COMPANY AND OUR BUSINESS
Failure of our research and development efforts may restrict introduction of new products, which is critical to our business.
     Our future results of operations depend, to a significant degree, upon our ability to successfully commercialize additional products in our active pharmaceutical ingredients and intermediates, generics, formulations and drug discovery businesses, as well as our most recent business focus, specialty pharmaceuticals. We must develop, test and manufacture generic products as well as prove that our generic products are the bio-equivalent of their branded counterparts. All of our products must meet and continue to comply with regulatory and safety standards and receive regulatory approvals; we may be forced to withdraw a product from the market if health or safety concerns arise with respect to such product. The development and commercialization process, particularly with respect to innovative products, is both time consuming and costly and involves a high degree of business risk. Our products currently under development, if and when fully developed and tested, may not perform as we expect, necessary regulatory approvals may not be obtained in a timely manner, if at all, and we may not be able to successfully and profitably produce and market such products.
     To develop our products pipeline, we commit substantial efforts, funds and other resources to research and development, both through our own dedicated resources and our collaborations with third parties. Our ongoing investments in new product launches and research and development for future products could result in higher costs without a proportionate increase in revenues. Our overall profitability depends on our ability to continue developing commercially successful products.
     Our dependence on research and development makes it highly important that we recruit and retain high quality researchers and development specialists. Should we fail in our efforts, this could adversely affect our ability to continue developing commercially successful products and, thus, our overall profitability.

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If we cannot respond adequately to the increased competition we expect to face in the future, we will lose market share and our profits will go down.
     Our products face intense competition from products commercialized or under development by competitors in all our business segments based in India and overseas. Many of our competitors have greater financial resources and marketing capabilities than we do. Some of our competitors, especially multinational pharmaceutical companies, have greater experience than we do in clinical testing and human clinical trials of pharmaceutical products and in obtaining regulatory approvals. Our competitors may succeed in developing technologies and products that are more effective, more popular or cheaper than any we may develop or license. These developments could render our technologies and products obsolete or uncompetitive, which would harm our business and financial results. We believe some of our competitors have broader product ranges, stronger sales forces and better segment positioning than us, which enables them to compete effectively.
     To the extent that we succeed in being the first to market a generic version of a significant product, and particularly if we obtain the 180-day period of market exclusivity provided under the Hatch-Waxman Act of 1984, as amended, our sales and profit can be substantially increased in the period following the introduction of such product and prior to a competitor’s introduction of the equivalent product or the launch of an authorized generic. Selling prices of generic drugs typically decline, sometimes dramatically, as additional companies receive approvals for a given product and competition intensifies. Our ability to sustain our sales and profitability of any product over time is dependent on both the number of new competitors for such product and the timing of their approvals.
     Our generics business is also facing increasing competition from brand-name manufacturers who do not face any significant regulatory approvals or barriers to entry into the generics market. These brand-name companies sell generic versions of their products to the market directly or by acquiring or forming strategic alliances with our competitor generic pharmaceutical companies or by granting them rights to sell “authorized generics.” Moreover, brand-name companies continually seek new ways to delay the introduction of generic products and decrease the impact of generic competition, such as filing new patents on drugs whose original patent protection is about to expire, developing patented controlled-release products, changing product claims and product labeling, or developing and marketing as over-the-counter products those branded products which are about to face generic competition.
If we cannot maintain our position in the Indian pharmaceutical industry in the future, we may not be able to attract co-development, outsourcing or licensing partners and may lose market share.
     In order to attract multinational corporations into co-development and licensing arrangements, it is necessary for us to maintain the position of a leading pharmaceutical company in India. Multinational corporations have been increasing their outsourcing of both active pharmaceutical ingredients and generic formulations to highly regarded companies that can produce high quality products at low cost that conform to standards set in developed markets. If we cannot maintain our current position in the market, we may not be able to attract outsourcing or licensing partners and may lose market share.
If we fail to comply fully with government regulations applicable to our research and development activities or regarding the manufacture of our products, it may delay or prevent us from developing or manufacturing our products.
     Our research and development activities are heavily regulated. If we fail to comply fully with applicable regulations, then there could be a delay in the submission or approval of potential new products for marketing approval. In addition, the submission of an application to a regulatory authority does not guarantee that a license to market the product will be granted. Each authority may impose its own requirements and/or delay or refuse to grant approval, even when a product has already been approved in another country. In the United States, as well as many of the international markets into which we sell our products, the approval process for a new product is complex, lengthy and expensive. The time taken to obtain approval varies by country but generally takes from six months to several years from the date of application. This registration process increases the cost to us of developing new products and increases the risk that we will not be able to successfully sell such new products.
     Also, governmental authorities, including the U.S. Food and Drug Administration (“U.S. FDA”), heavily regulate the manufacture of our products. If we or our third party suppliers fail to comply fully with such regulations, then there could be a government-enforced shutdown of production facilities, which in turn could lead to product shortages. Failure to comply fully with such regulations could also lead to a delay in the approval of new products.

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Reforms in the health care industry and the uncertainty associated with pharmaceutical pricing, reimbursement and related matters could adversely affect the marketing, pricing and demand for our products.
     Increasing expenditures for health care has been the subject of considerable public attention in almost every jurisdiction where we conduct business. Both private and governmental entities are seeking ways to reduce or contain health care costs. In many countries in which we currently operate, including India, pharmaceutical prices are subject to regulation. The existence of price controls can limit the revenues we earn from our products. In the United States, numerous proposals that would affect changes in the United States health care system have been introduced or proposed in Congress and in some state legislatures, including the enactment in December 2003 of expanded Medicare coverage for drugs, which became effective in January 2006. In Germany, an important market for us, the government has introduced several healthcare reforms in order to control healthcare spending and promote the prescribing of generic drugs. As a result, the prices of generic pharmaceutical products in Germany have declined, impacting our revenues, and may further decline in the future. Similar developments may take place in our other key markets. We cannot predict the nature of the measures that may be adopted or their impact on the marketing, pricing and demand for our products.
     In addition, governments throughout the world heavily regulate the marketing of our products. Most countries also place restrictions on the manner and scope of permissible marketing to physicians, pharmacies and other health care professionals. The effect of such regulations may be to limit the amount of revenue that we may be able to derive from a particular product. Moreover, if we fail to comply fully with such regulations, then civil or criminal actions could be brought against us.
If a regulatory agency amends or withdraws existing approvals to market our products, this may cause our revenues to decline.
     Regulatory agencies may at any time reassess the safety and efficacy of our products based on new scientific knowledge or other factors. Such reassessments could result in the amendment or withdrawal of existing approvals to market our products, which in turn could result in a loss of revenue, and could serve as an inducement to bring lawsuits against us.
If we are sued by consumers for defects in our products, it could harm our reputation and thus our profits.
     Our business inherently exposes us to potential product liability. From time to time, the pharmaceutical industry has experienced difficulty in obtaining desired amounts of product liability insurance coverage. Although we have obtained product liability coverage with respect to products that we manufacture, if any product liability claim sustained against us were to be not covered by insurance or were to exceed the policy limits, it could harm our business and financial condition. This risk is likely to increase as we develop our own new-patented products in addition to making generic versions of drugs that have been in the market for some time.
     In addition, product liability coverage for pharmaceutical companies is becoming more expensive. As a result, we may not be able to obtain the type and amount of coverage we desire at an acceptable price. Furthermore, the severity and timing of future claims are unpredictable. Our customers may also bring lawsuits against us for alleged product defects. The existence, or even threat of a major product liability claim could also damage our reputation and affect consumers’ views of our other products, thereby negatively affecting our business, financial condition and results of operations.
If we are unable to patent new products and processes or to protect our intellectual property rights or proprietary information, or if we infringe on the patents of others, our business may be materially and adversely impacted.
     Our overall profitability depends, among other things, on our ability to continuously and timely introduce new generic as well as innovative products. Our success will depend, in part, on our ability in the future to obtain patents, protect trade secrets, intellectual property rights and other proprietary information and operate without infringing on the proprietary rights of others. Our competitors may have filed patent applications, or hold issued patents, relating to products or processes that compete with those we are developing, or their patents may impair our ability to successfully develop and commercialize new products.

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     Our success with our innovative products depends, in part, on our ability to protect our current and future innovative products and to defend our intellectual property rights. If we fail to adequately protect our intellectual property, competitors may manufacture and market products similar to ours. We have been issued patents covering our innovative products and processes and have filed, and expect to continue to file, patent applications seeking to protect our newly developed technologies and products in various countries, including the United States. Any existing or future patents issued to or licensed by us may not provide us with any competitive advantages for our products or may even be challenged, invalidated or circumvented by competitors. In addition, such patent rights may not prevent our competitors from developing, using or commercializing products that are similar or functionally equivalent to our products.
     We also rely on trade secrets, unpatented proprietary know-how and continuing technological innovation that we seek to protect, in part by confidentiality agreements with licensees, suppliers, employees and consultants. It is possible that these agreements will be breached and we will not have adequate remedies for any such breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Furthermore, our trade secrets and proprietary technology may otherwise become known or be independently developed by our competitors or we may not be able to maintain the confidentiality of information relating to such products.
Changes in the regulatory environment may prevent us from utilizing the exclusivity periods that are important to the success of our generic products.
     The policy of the U.S. FDA regarding the award of 180 days of market exclusivity to generic manufacturers who challenge patents relating to specific products continues to be the subject of extensive litigation in the United States. During this 180-day market exclusivity period, nobody other than the generic manufacturer who won exclusivity relating to the specific product can market that product. The U.S. FDA’s current interpretation of the Hatch-Waxman Act of 1984 is to award 180 days of exclusivity to the first generic manufacturer who files a Paragraph IV certification under the Hatch-Waxman Act challenging the patent of the branded product, regardless of whether that generic manufacturer was sued for patent infringement.
     The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Prescription Drug Act”) amended the Hatch-Waxman Act and provides that the 180-day market exclusivity period is triggered by the commercial marketing of the product, as opposed to the old rule under which the exclusivity period was triggered by a final, non-appealable court decision. However, the Medicare Prescription Drug Act also contains forfeiture provisions, which, if met, will deprive the first Paragraph IV filer of exclusivity. As a result, under certain circumstances, we may not be able to exploit our 180-day exclusivity period since it may be forfeited prior to our being able to market the product.
     In addition, legal and administrative disputes with respect to triggering dates and shared exclusivities may also prevent us from fully utilizing the exclusivity periods.
If we are unable to defend ourselves in patent challenges, we could be subject to injunctions preventing us from selling our products, resulting in a decrease in revenues, or we could be subject to substantial liabilities that would lower our profits.
     There has been substantial patent related litigation in the pharmaceutical industry concerning the manufacture, use and sale of various products. In the normal course of business, we are regularly subject to lawsuits and the ultimate outcome of litigation could adversely affect our results of operations, financial condition and cash flow. Regardless of regulatory approval, lawsuits are periodically commenced against us with respect to alleged patent infringements by us, such suits often being triggered by our filing of an application for governmental approval, such as a new drug application. The expense of any such litigation and the resulting disruption to our business, whether or not we are successful, could harm our business. The uncertainties inherent in patent litigation make it difficult for us to predict the outcome of any such litigation.
     If we are unsuccessful in defending ourselves against these suits, we could be subject to injunctions preventing us from selling our products, resulting in a decrease in revenues, or to damages, which may be substantial. An injunction or substantial damages resulting from these suits could adversely affect our consolidated financial position, results of operations or liquidity.

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If we elect to sell a generic product prior to the final resolution of outstanding patent litigation, we could be subject to liabilities for damages.
     At times we seek approval to market generic products before the expiration of patents for those products, based upon our belief that such patents are invalid, unenforceable, or would not be infringed by our products. As a result, we are involved in patent litigation, the outcome of which could materially adversely affect our business. Based upon a complex analysis of a variety of legal and commercial factors, we may elect to market a generic product even though litigation is still pending. This could be before any court decision is rendered or while an appeal of a lower court decision is pending. To the extent we elect to proceed in this manner, if the final court decision is adverse to us, we could be required to cease the sale of the infringing products and face substantial liability for patent infringement. These damages may be significant as they may be measured by a royalty on our sales or by the profits lost by the patent owner and not by the profits we earned. Because of the discount pricing typically involved with generic pharmaceutical products, patented brand products generally realize a significantly higher profit margin than generic pharmaceutical products. In the case of a willful infringer, the definition of which is unclear, these damages may even be trebled. In April 2006, we launched, and continue to sell, generic versions of Allegra® (fexofenadine) despite the fact that litigation with the company that holds the patents for and sells this branded product is still pending. This is the only product that we have launched prior to the resolution of outstanding patent litigation.
If we do not maintain and increase our arrangements for overseas distribution of our products, our revenues and net income could decrease.
     As of March 31, 2008, we market our products in approximately 90 countries. Our products are marketed in most of these countries through our subsidiaries as well as joint ventures. Since we do not have the resources to market and distribute our products ourselves in all our export markets, we also market and distribute our products through third parties by way of marketing and agency arrangements. These arrangements may be terminated by either party providing the other with notice of termination or when the contract regarding the arrangement expires. We may not be able to successfully negotiate these third party arrangements or find suitable joint venture partners in the future. Any of these arrangements may not be available on commercially reasonable terms. Additionally, our marketing partners may make important marketing and other commercialization decisions with respect to products we develop without our input. As a result, many of the variables that may affect our revenues and net income are not exclusively within our control when we enter into arrangements like these.
If we fail to comply with environmental laws and regulations or face environmental litigation, our costs may increase or our revenues may decrease.
     We may incur substantial costs complying with requirements of environmental laws and regulations. In addition, we may discover currently unknown environmental problems or conditions. In all countries in which we have production facilities, we are subject to significant environmental laws and regulations which govern the discharge, emission, storage, handling and disposal of a variety of substances that may be used in or result from our operations. If any of our plants or the operations of such plants are shut down, we may continue to incur costs in complying with regulations, appealing any decision to close our facilities, maintaining production at our existing facilities and continuing to pay labor and other costs which may continue even if the facility is closed. As a result, our overall operating expenses may increase and our profits may decrease.
Our equity shares and our ADSs may be subject to market price volatility, and the market price of our equity shares and ADSs may decline disproportionately in response to adverse developments that are unrelated to our operating performance.
     Market prices for the securities of Indian pharmaceutical companies, including our own, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as the following can have an adverse effect on the market price of our ADSs and equity shares:
    general market conditions,
 
    speculative trading in our shares and ADSs,
 
    changes in the weight given to our shares in the Bombay Stock Exchange Limited (BSE) and National Stock Exchange of India Limited (NSE) indices, and
 
    developments relating to our peer companies in the pharmaceutical industry.

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If the world economy is affected due to terrorism, wars or epidemics, it may adversely affect our business and results of operations.
     Several areas of the world, including India, have experienced terrorist acts and retaliatory operations recently. For example, Mumbai was the target of serial railway bombings in July 2006. Hyderabad, the city in which we are headquartered was also subjected to terrorist acts in May and August 2007. In May 2008, the city of Jaipur in the state of Rajasthan was subjected to a series of co-ordinated bombings. If the economy of our major markets is affected by such acts, our business and results of operations may be adversely affected as a consequence.
     In recent years, Asia has experienced outbreaks of avian influenza and Severe Acute Respiratory Syndrome, or SARS. If the economy of our major markets is affected by such outbreaks or other epidemics, our business and results of operations may be adversely affected as a consequence.
If we have difficulty in identifying acquisition candidates or consummating acquisitions, our competitiveness and our growth prospects may be harmed.
     In order to enhance our business, we frequently seek to acquire or make strategic investments in complementary businesses or products, or to enter into strategic partnerships or alliances with third parties. It is possible that we may not identify suitable acquisition, strategic investment or strategic partnership candidates, or if we do identify suitable candidates, we may not complete those transactions on terms commercially acceptable to us or at all. We compete with others to acquire companies, and we believe that this competition has intensified and may result in decreased availability or increased prices for suitable acquisition candidates. Even after we identify acquisition candidates and/or announce that we plan to acquire a company, we may ultimately fail to consummate the acquisition. For example, we may be unable to obtain necessary acquisition financing on terms satisfactory to us or may be unable to obtain necessary regulatory approvals, including the approval of antitrust regulatory bodies. The inability to identify suitable acquisition targets or investments or the inability to complete such transactions and the management and financial resources required to pursue such transactions may affect our competitiveness and our growth prospects.
If we acquire other companies, our business may be harmed by difficulties in integration and employee retention, unidentified liabilities of the acquired companies, or obligations incurred in connection with acquisition financings.
     All acquisitions involve known and unknown risks that could adversely affect our future revenues and operating results. For example:
    We may fail to successfully integrate our acquisitions in accordance with our business strategy.
 
    Integration of acquisitions may divert management’s attention away from our primary product offerings, resulting in the loss of key customers and/or personnel, and may expose us to unanticipated liabilities.
 
    We may not be able to retain the skilled employees and experienced management that may be necessary to operate the businesses we acquire. If we cannot retain such personnel, we may not be able to locate or hire new skilled employees and experienced management to replace them.
 
    We may purchase a company that has contingent liabilities that include, among others, known or unknown patent or product liability claims.
 
    Our acquisition strategy may require us to obtain additional debt or equity financing, resulting in additional leverage, or increased debt obligations as compared to equity, and dilution of ownership.
 
    We may purchase companies located in jurisdictions where we do not have operations and as a result we may not be able to anticipate local regulations and the impact such regulations have on our business.
     In addition, if we make one or more significant acquisitions in which the consideration includes equity shares or other securities, equity interests in us held by holders of the equity shares may be significantly diluted. If we make one or more significant acquisitions in which the consideration includes cash, we may be required to use a substantial portion of our available cash or incur a significant amount of debt or otherwise arrange additional funds to complete the acquisition, which may result in a dilution of earnings per equity share.

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Our principal shareholders control us and, if they take actions that are not in your best interests, the value of your investment in our ADSs may be harmed.
     Our full time directors together with members of their immediate families, in the aggregate, beneficially own 25.14% of our issued shares as at March 31, 2008. As a result, these people, acting in concert, are likely to have the ability to exercise significant control over most matters requiring approval by our shareholders, including the election and removal of directors and significant corporate transactions. This control by these directors and their family members could delay, defer or prevent a change in control of us, impede a merger, consolidation, takeover or other business combination involving us, or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, even if that was in our best interest. As a result, the value of your ADSs may be adversely affected or you might be deprived of a potential opportunity to sell your ADSs at a premium.
If we improperly handle any of the dangerous materials used in our business and accidents result, we could face significant liabilities that would lower our profits.
     We handle dangerous materials including explosive, toxic and combustible materials like sodium azide, acrolein and acetyl chloride. If improperly handled or subjected to the wrong conditions, these materials could hurt our employees and other persons, cause damage to our properties and harm the environment. This, in turn, could subject us to significant litigation, which could lower our profits in the event we were found liable.
If there is delay and/or failure in supplies of materials, services and finished goods from third parties, it may adversely affect our business and results of operations.
     In some of our businesses, we rely on third parties for the timely supply of active pharmaceutical ingredients (“API”), specified raw materials, equipment, formulation or packaging services and maintenance services. For instance, we rely on third party manufacturers for our substantial supply of finished dosages sold in Germany. Although, we actively manage these third party relationships to ensure continuity of supplies and services on time and to our required specifications, events beyond our control could result in the complete or partial failure of supplies and services or in supplies and services not being delivered on time. Any such failure could adversely affect our results of business and results of operations.
     In the event that we experience a shortage in our supply of raw materials, we might be unable to fulfill all of the API needs of our generics and formulations segments, which could result in a loss of production capacity for these segments. In addition, this could result in a conflict between the API needs of our generics and formulations segments and the needs of customers of our active pharmaceutical ingredients and intermediates segment, some of whom are also our competitors in the formulations segment. In either case, we could potentially lose business from adversely affected customers and we could be subjected to lawsuits.
If as we expand into new international markets we fail to adequately understand and comply with the local laws and customs, these operations may incur losses or otherwise adversely affect our business and results of operations.
     Currently, we operate our business through subsidiaries and equity investees in other countries. In those countries where we have limited experience in operating subsidiaries, and in reviewing equity investees we are subject to additional risks related to complying with a wide variety of national and local laws, including restrictions on the import and export of certain intermediates, drugs, technologies and multiple and possibly overlapping tax structures. In addition, we may face competition in other countries from companies that may have more experience with operations in such countries or with international operations generally. We may also face difficulties integrating new facilities in different countries into our existing operations, as well as integrating employees that we hire in different countries into our existing corporate culture. If we do not effectively manage our operations in these subsidiaries and review equity investees effectively, we may lose money in these countries and it may adversely affect our business and results of operations.
Fluctuations in exchange rates and interest rate movements may adversely affect our business and results of operations.
     Our principal subsidiaries are located in the United States, United Kingdom, Germany and Russia and each has significant local operations. A significant portion of our revenues are in other currencies, especially the U.S. dollar, euro, rouble and pound sterling, while a significant portion of our costs are in Indian rupees. As a result, if the value of the Indian rupee appreciates relative to these other currencies, our revenues measured in rupees may decrease.

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     We have entered into borrowing arrangements in connection with our acquisition of betapharm. In the future, we may enter into additional borrowing arrangements in connection with acquisitions or for general working capital purposes. In the event interest rates increase, our costs of borrowing will increase and our results of operations may be adversely affected.
Our success depends on our ability to retain and attract key qualified personnel and, if we are not able to retain them or recruit additional qualified personnel, we may be unable to successfully develop our business
     We are highly dependent on the principal members of our management and scientific staff, the loss of whose services might significantly delay or prevent the achievement of our business or scientific objectives. In India, it is not our practice to enter into employment agreements with our executive officers and key employees that are as extensive as are generally used in the United States, and each of those executive officers and key employees may terminate their employment upon notice and without cause or good reason. Currently we are not aware that any executive officer or key employee is planning to leave or retire. Competition among pharmaceutical companies for qualified employees is intense, and the ability to retain and attract qualified individuals is critical to our success. There can be no assurance that we will be able to retain and attract such individuals currently or in the future on acceptable terms, or at all, and the failure to do so would have a material adverse effect on our business, financial condition and results of operations. In addition, we do not maintain “key person” life insurance on any officer, employee or consultant.
We operate in a highly competitive and rapidly consolidating industry.
     We operate in a highly competitive and rapidly consolidating industry. Our competitors, which include major multinational corporations, are consolidating, and the strength of the combined companies could affect our competitive position in all of our business areas. Furthermore, if one of our competitors or their customers acquire any of our customers or suppliers, we may lose business from the customer or lose a supplier of a critical raw material.
RISKS RELATING TO INVESTMENTS IN INDIAN COMPANIES
     We are an Indian company and a substantial part of our operations are conducted, and most of our assets are located, in India. In addition, approximately 20.9% of our total revenues for fiscal 2008 were derived from sales in India. As a result, the following additional risk factors apply.
A slowdown in economic growth in India may adversely affect our business and results of operations.
     Our performance and the quality and growth of our business are necessarily dependent on the health of the overall Indian economy. The Indian economy has grown significantly over the past few years. Any future slowdown in the Indian economy could harm us, our customers and other contractual counterparties. In addition, the Indian economy is in a state of transition. The share of the services sector of the economy is rising while that of the industrial, manufacturing and agricultural sector is declining. It is difficult to gauge the impact of these fundamental economic changes on our business.
A significant change in the Indian Government or in its economic liberalization and deregulation policies may adversely affect the Indian economy, the health of which our business depends upon.
     The Indian Government has traditionally exercised and continues to exercise a dominant influence over many aspects of the economy. The present Government is a multi-party coalition and therefore there is no assurance that it will be able to generate sufficient cross-party support to implement economic policies or that the existing economic policies will continue. Any significant change in the Government’s economic policies could have a significant effect on private-sector entities, including us, and on market conditions and prices of Indian securities, including our shares and our ADSs. India’s trade relationships with other countries can also influence Indian economic conditions, which in turn can affect our business.
If communal disturbances or riots erupt in India, or if regional hostilities increase, this would adversely affect the Indian economy, which our business depends upon.
     India has experienced communal disturbances, terrorist attacks and riots during recent years. If such disturbances continue or are exacerbated, our operational, sales and marketing activities may be adversely affected. Additionally, India has from time to time experienced hostilities with neighboring countries. The hostilities have continued sporadically. The hostilities between India and Pakistan are particularly threatening, because both India and Pakistan are nuclear powers. Hostilities and tensions may occur in the

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future and on a wider scale. These hostilities and tensions could lead to political or economic instability in India and harm our business operations, our future financial performance and the price of our shares and our ADSs.
If wage costs or inflation rise in India, it may adversely affect our competitive advantages over higher cost countries and our profits may decline.
     Wage costs in India have historically been significantly lower than wage costs in developed countries and have been one of our competitive strengths. However, wage increases in India may increase our costs, reduce our profit margins and adversely affect our business and results of operations.
     Due to various macro-economic factors, the inflation level in the recent period has increased in India. According to the economic report released by the Department of Economic Affairs, Ministry of Finance in India, the annual inflation rate in India, as measured by the benchmark wholesale price index, Base 1993-94=100 was 11.05% for the week ended June 7, 2008, which is one of the highest in the recent years. This trend may continue and the rate of inflation may further rise. We may not be able to pass these costs on to our customers by increasing the price we charge for our products. If this occurs, our profits may decline.
In the event that a natural disaster should occur in India, including drought, floods and earthquakes, it could adversely affect our production operations and cause our revenues to decline.
     Our main facilities are situated around Hyderabad, India. This region has experienced earthquakes, floods and droughts in the past and has experienced droughts in recent years. In the event of a drought so serious that the drinking water in the region is limited, the government could cut the supply of water to all industries, including our facilities. This would adversely affect our production operations and reduce our revenues. Even if we take precautions to provide back-up support in the event of such a natural disaster, the disaster may nonetheless affect our facilities, harming production and ultimately our business.
Stringent labor laws may adversely affect our ability to have flexible human resource policies; labor union problems could negatively affect our production capacity and overall profitability.
     Labor laws in India are more stringent than in other parts of the world. These laws may restrict our ability to have human resource policies that would allow us to react swiftly to the needs of our business. Approximately 10% of our employees belong to a number of different labor unions. If we experience problems with our labor unions, our production capacity and overall profitability could be negatively affected.
Indian law imposes certain restrictions that limit a holder’s ability to transfer the equity shares obtained upon conversion of ADSs and repatriate the proceeds of such transfer, which may cause our ADSs to trade at a premium or discount to the market price of our equity shares.
     Under certain circumstances, the Reserve Bank of India must approve the sale of equity shares underlying ADSs by a non-resident of India to a resident of India. The Reserve Bank of India has given general permission to effect sales of existing shares or convertible debentures of an Indian company by a resident to a non-resident, subject to certain conditions, including the price at which the shares may be sold. Additionally, except under certain limited circumstances, if an investor seeks to convert the rupee proceeds from a sale of equity shares in India into foreign currency and then repatriate that foreign currency from India, he or she will have to obtain an additional approval from the Reserve Bank of India for each such transaction. Required approval from the Reserve Bank of India or any other government agency may not be obtained on terms favorable to a non-resident investor or at all.
There are limits and conditions to the deposit of shares into the ADS facility.
     Indian legal restrictions may limit the supply of our ADSs. The only way to add to the supply of our ADSs will be through a primary issuance because the depositary is not permitted to accept deposits of our outstanding shares and issue ADSs representing those shares. However, an investor in our ADSs who surrenders an ADS and withdraws our shares will be permitted to redeposit those shares in the depositary facility in exchange for our ADSs. In addition, an investor who has purchased our shares in the Indian market will be able to deposit them in the ADS program, but only in a number that does not exceed the number of underlying shares that have been withdrawn from and not re-deposited into the depositary facility. Moreover, there are restrictions on foreign institutional ownership of our shares as opposed to our ADSs.
There may be less company information available in Indian securities markets than securities markets in developed countries.

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     There is a difference between the level of regulation and monitoring of the Indian securities markets over the activities of investors, brokers and other participants, as compared to the level of regulation and monitoring of markets in the United States and other developed economies. The Securities and Exchange Board of India is responsible for improving disclosure and other regulatory standards for the Indian securities markets. The Securities and Exchange Board of India has issued regulations and guidelines on disclosure requirements, insider trading and other matters. There may, however, be less publicly available information about Indian companies than is regularly made available by public companies in developed countries, which could affect the market for our equity shares.
Indian stock exchange closures, broker defaults, settlement delays, and Indian Government regulations on stock market operations could affect the market price and liquidity of our equity shares.
     The Indian securities markets are smaller than the securities markets in the United States and Europe and have experienced volatility from time to time. The regulation and monitoring of the Indian securities market and the activities of investors, brokers and other participants differ, in some cases significantly, from those in the United States and some European countries. Indian stock exchanges have at times experienced problems, including temporary exchange closures, broker defaults and settlement delays and if similar problems were to recur, they could affect the market price and liquidity of the securities of Indian companies, including our shares. Furthermore, any change in Indian Government regulations of stock markets could affect the market price and liquidity of our shares.
Financial instability in other countries, particularly emerging market countries in Asia, could affect our business and the price and liquidity of our shares and our ADSs.
     The Indian markets and the Indian economy are influenced by economic and market conditions in other countries, particularly emerging market countries in Asia. Although economic conditions are different in each country, investors’ reactions to developments in one country can have adverse effects on the securities of companies in other countries, including India. Any worldwide financial instability or any loss of investor confidence in the financial systems of Asian or other emerging markets could increase volatility in Indian financial markets or adversely affect the Indian economy in general. Either of these results could harm our business, our future financial performance and the price of our shares and ADSs.
If you are not able to exercise preemptive rights available to other shareholders, your investment in our securities may be diluted.
     A company incorporated in India must offer its holders of shares preemptive rights to subscribe and pay for a proportionate number of shares to maintain their existing ownership percentages prior to the issuance of any shares, unless these rights have been waived by at least 75.0% of the company’s shareholders present and voting at a shareholders’ general meeting. U.S. investors in our ADSs may be unable to exercise preemptive rights for the shares underlying our ADSs unless a registration statement under the Securities Act of 1933 is effective with respect to the rights or an exemption from the registration requirements of the Securities Act is available. Our decision to file a registration statement will depend on the costs and potential liabilities associated with a registration statement as well as the perceived benefits of enabling U.S. investors in our ADSs to exercise their preemptive rights and any other factors we consider appropriate at the time. We might choose not to file a registration statement under these circumstances. If we issue any of these securities in the future, such securities may be issued to the depositary, which may sell them in the securities markets in India for the benefit of the investors in our ADSs. We cannot assure you as to the value, if any, the depositary would receive upon the sale of these securities. To the extent that you are unable to exercise preemptive rights, your proportional interests in us would be reduced.
If there is a change in tax regulations, it may increase our tax liabilities and thus adversely affect our financial results.
     Currently, we enjoy various tax benefits and exemptions under Indian tax laws. Any changes in these laws, or their application in matters such as tax exemption on exportation income and transfer pricing, may increase our tax liability and thus adversely affect our financial results.

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ITEM 4. INFORMATION ON THE COMPANY
4.A. History and development of the company
     Dr. Reddy’s Laboratories Limited was incorporated in India under the Companies Act, 1956, by its promoter and our current Chairman, Dr. K. Anji Reddy as a Private Limited Company on February 24, 1984. We were converted to a Public Limited Company on December 6, 1985 and listed on the Indian Stock Exchanges in August 1986 and on the New York Stock Exchange on April 11, 2001. We are registered with the Registrar of Companies, Andhra Pradesh, Hyderabad, India as Company No. 4507 (Company Identification No. U85195AP1984PTC004507). Our registered office is situated at 7-1-27, Ameerpet, Hyderabad — 500 016, Andhra Pradesh, India and the telephone number of our registered office is +91-40-23731946. The name and address of our registered agent in the United States is Dr. Reddy’s Laboratories, Inc. 200 Somerset Corporate Boulevard (Bldg II), Bridgewater, New Jersey 08807.
     Key business developments:
     In April 2007, we launched Reditux™, our brand of rituximab, a monoclonal antibody (MAb) used in the treatment of Non-Hodgkin’s Lymphoma. We launched our social initiative called “Sparsh”, an assistance program for cancer patients undergoing treatment, at the same time. Qualified patients identified by doctors in connection with the program are provided Reditux™ free of cost. Reditux™ is the second product from our Biologics portfolio.
     In April 2007, we terminated all of our over-the-counter (“OTC”) agreements with Leiner Health Products, LLC (“Leiner”). This action was taken after receipt of notice that, on March 16, 2007, Leiner had been served with a list of Inspection Observations on a Form 483 from the U.S. FDA inspectors and, in response thereto, on March 20, 2007, suspended all of its packaging, production and distribution of OTC products manufactured, packaged or tested at its facilities in the United States. Under the terminated agreements, we had supplied Leiner with finished dosages tablets and API to produce OTC products, and also granted Leiner access to certain OTC products under development. Subsequently, on March 10, 2008, Leiner filed for Chapter 11 bankruptcy proceedings. During fiscal 2008, we launched our own private label OTC business.
     In August 2007, we, together with Rheoscience, the Denmark based innovator pharmaceutical company, announced that the first patient had received Balaglitazone (DRF 2593), which is an insulin sensitizer that acts as a partial PPAR (peroxisome proliferator-activated receptor) gamma agonist in a Phase III trial study. The study is the first in a series of planned Phase III trials to investigate the safety and efficacy of Balaglitazone as an oral anti-diabetic drug. In the trial, Balaglitazone will be tested in a six month double-blind, randomized, placebo-controlled multicenter trial, whereby type 2 diabetes patients will be given daily doses of either 10 or 20 mg of Balaglitazone versus the active comparator Actos® (45 mg/day) as a supplement to stable insulin treatment. Balaglitazone is being developed under a co-development agreement between us and Rheoscience.
     In November 2007, we signed an exclusive 10 year agreement with SYGNIS Pharma AG (“SYGNIS”) for the supply of the active pharmaceutical ingredient AX200, a biological molecule in development by SYGNIS for the treatment of strokes and other neurodegenerative disorders. The agreement secures the supply of AX200 far beyond the clinical development phase and provides a solid basis for our anticipated marketing of the compound. SYGNIS successfully completed a Phase IIa clinical trial of AX200 in September 2007 that demonstrated safety and efficacy in patients who have suffered an acute stroke. In the second half of 2008, SYGNIS plans to start a Phase IIb efficacy trial in patients who have suffered an acute stroke. Strokes affect over 5 million patients worldwide every year and are the third leading cause of death worldwide, presenting a major socio-economic burden.
     In November 2007, we, along with Argenta Discovery Limited (“Argenta”), a U.K. based respiratory drug discovery and development company, announced a major milestone in our development program targeting a novel disease-modifying approach to treat the underlying cause of certain chronic respiratory diseases including chronic obstructive pulmonary disease (“COPD”) and severe asthma. Within 18 months of initiating the collaboration, the team has already selected the first candidate drug to proceed into pre-clinical development. Under the terms of the licensing agreement announced in February 2006, we are collaborating with Argenta both in the identification of clinical candidates by analyzing an undisclosed but proven anti-inflammatory drug target and in the development of these candidates for Phase II clinical trials proof-of-concept.
     In January 2008, we entered into a settlement agreement with Novartis Pharma AG (“Novartis”) which resulted in Novartis stipulating to the dismissal of the lawsuits in the United States relating to the Abbreviated New Drug Applications (the “ANDA”) filed by us for a generic version of rivastigmine tartrate capsules, which are indicated for the treatment of mild-to-moderate dementia relating to Alzheimer’s disease and are sold under the trade name Exelon® by Novartis. Under the terms of the agreement, we will not

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launch our generic rivastigmine tartrate capsules until a specified time before the expiry of the Orange Book patents claiming rivastigmine tartrate. In October 2007, we received the final approval from the U.S. FDA on our ANDA for rivastigmine tartrate capsules. According to IMS Health Inc.’s (“IMS”) June 2007 Moving Annual Total Report, the annual sales of this product in the United States were U.S.$199 million.
     In February 2008, we entered into an agreement with SkyePharma PLC (“SkyePharma”) to undertake a feasibility study of a product utilizing two of SkyePharma’s proprietary drug delivery systems, for which SkyePharma received an upfront payment from us. We will pay for the costs of this study. If the feasibility study is successful, full development activities will begin later in fiscal 2009.
     In March 2008, we signed a drug discovery collaboration agreement with 7TM Pharma for selected drug targets in the area of metabolic disorders. Under the terms of the agreement, we will collaborate with 7TM Pharma to identify clinical candidates for pre-selected drug targets. The parties will jointly develop these candidates from the pre-clinical stage up to Phase IIa clinical trials (proof-of-concept). Upon successful completion of a Phase IIa clinical trial, the Company and 7TM Pharma may either develop and commercialize the candidate jointly or license the candidate for further development and commercialization to a larger pharmaceutical company.
     In order to build a robust generics and API pipeline, in fiscal 2008, we filed 19 ANDAs in the United States, including 10 Paragraph IV filings. Additionally, in fiscal 2008, the U.S. FDA granted us 13 final ANDA approvals and seven tentative ANDA approvals. With respect to APIs, we filed 54 Drug Master Files (“DMF”) in fiscal 2008 worldwide, 23 of which were filed in the United States, nine in Canada, 13 in Europe and nine in other countries. With these filings, we have a total of 127 U.S. DMFs filed as of March 31, 2008. Including the United States filings, as of March 31, 2008, we have made a total of 281 DMF filings worldwide: with 49 filings in Canada, 64 filings in Europe and 41 filings in other countries.
     In our branded formulations division, during fiscal 2008, we filed a total of 307 dossiers for product registrations in various countries.
     During fiscal 2008, we received 202 product approvals in various countries, including 18 approvals in Romania, 13 approvals in South Africa, 13 approvals in Venezuela, 11 approvals in Ukraine, seven approvals in Kazakhstan, seven approvals in Middle Eastern countries and five approvals in Brazil. As of March 31, 2008, we had 21 certificates of suitability granted by European authorities. For most of these, we are already supplying either commercial quantities or development quantities of API to various generic formulators.
     During fiscal 2008, we invested Rs.6,348.0 million on capital expenditures for manufacturing, research and development facilities and other assets, which is our highest level of investment in a single financial year to date. These investments will create the capacity to support our strategic growth agenda.
     During fiscal 2006, fiscal 2007 and fiscal 2008, no third party made any public takeover offers in respect of our shares and we did not make any public offers to take over any other company.
4.B. Business overview
     We are an emerging global pharmaceutical company with proven research capabilities. We produce active pharmaceutical ingredients and intermediates and finished dosage forms and biologics products and market them globally, with a focus on India, the United States, Europe and Russia. We are vertically integrated and use our active pharmaceutical ingredients and intermediates in our own finished dosage products. We conduct basic research in the areas of cancer, diabetes, metabolic disorders, cardiovascular disease, inflammation and bacterial infection.
     Our total revenues for fiscal 2008 were Rs.50,005.6 million (U.S.$1,249.5 million). We derived 20.9% of these revenues from sales in India, 22.7% from the United States and Canada (“North America”), 11.1% from Russia and other countries of the former Soviet Union, 31.7% from Europe and 13.6% from other countries. Our net income for fiscal 2008 was Rs.4,678.0 million (U.S.$116.9 million).

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OUR STRATEGY
As a global pharmaceutical company, our core purpose is to help people lead healthier lives by maximizing their access to affordable generic medicines and new and improved pharmaceuticals that address unmet medical needs. Our strategy through which we intend to achieve this goal is as follows:
  Our core businesses of active pharmaceutical ingredients and intermediates and branded formulations are well established with a track record of consistent growth and profitability. We will continue to make appropriate investments to strengthen our capabilities and infrastructure and in turn address future growth opportunities. We are focused on expanding our product portfolio, enhancing our cost competitiveness, improving our position in existing markets and expanding into selected new markets in an effort to continue this growth and profitability.
 
  In our global generics business, we continue to build a product pipeline that will help drive medium-term growth in North America and Europe. Our strategic markets include United States and Germany, which are two of the largest generic markets in the world and where we intend to build an industry-leading market presence. In addition, we continue to focus on additional markets such as Canada in North America, and the United Kingdom, Spain, Italy, France and Portugal in Europe. We intend to leverage our existing global platforms of product development, manufacturing, and supply chain management to address the growing needs of our customers in each of these markets.
 
  We are positioning our custom pharmaceutical services business as a partner of choice for the strategic outsourcing needs of our customers. We market process development and manufacturing services to customers primarily consisting of innovator pharmaceutical and biotechnology companies. The focus is to leverage our skills in process development, analytical development, formulation development and cGMP manufacturing to serve the customer needs.
 
  In addition, we are focusing our investments on innovation-driven businesses. The drug discovery business has a goal of building a robust and unique New Chemical Entity (“NCE”) pipeline. The specialty pharmaceuticals business is positioning to launch an internal sales and marketing operation for in-licensed and co-developed dermatology products while continuing to advance internal product development. The biologics business continues to launch products in the key markets of India, Russia, and Latin America, while developing a product pipeline and infrastructure to address the global biologics opportunity. These businesses, while being investment intensive and having long lead times, have the potential to provide significant growth as well as sustained revenues and consistent profitability over the long-term due to commercial differentiation and patent protection.
 
  To supplement our internal growth initiatives for each of these businesses, we are actively pursuing external business development opportunities, including acquisitions and alliances.

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OUR PRINCIPAL AREAS OF OPERATIONS
     The following table shows our revenues and percentage of total revenues of our formulations, active pharmaceutical ingredients and intermediates, generics, custom pharmaceutical services and drug discovery segments for fiscal 2006, 2007 and 2008, respectively:
                                                         
    Fiscal Year Ended March 31,  
Segment   2006   2007   2008  
    (Rs. in millions, U.S.$ in millions)  
Formulations
  Rs. 10,587.6       43.6 %   Rs. 13,086.6       20.1 %   Rs. 15,241.1       30.5 %   U.S.$ 380.8  
Active pharmaceutical ingredients and intermediates
    8,267.5       34.1       11,883.0       18.3       11,804.8       23.6       295.0  
Generics
    4,055.8       16.7       33,224.2       51.0       17,781.5       35.6       444.3  
Drug discovery
                136.8       0.2       39.2       0.1       1.0  
Custom pharmaceutical services
    1,326.8       5.5       6,599.8       10.1       4,817.6       9.6       120.4  
Others
    29.3       0.1       164.7       0.3       321.4       0.6       8.0  
 
                                         
Total revenues
  Rs. 24,267.0       100.0 %   Rs. 65,095.1       100.0 %   Rs. 50,005.6       100.0 %   U.S.$ 1,249.5  
 
                                         
Formulations Segment
     Formulations, also referred to as branded finished dosages, are finished pharmaceutical products ready for consumption by the patient. Branded means we package the formulations for sale under our brand name. We sell branded formulations in India, Russia and other emerging markets. Formulations accounted for 30.5% of our revenues in fiscal 2008. Effective April 1, 2007, our critical care and biotechnology segment was merged into our formulations segment. Accordingly, disclosures relating to the previous period have been restated to conform to current period presentation.
Markets
     We export our branded formulations to over 40 countries worldwide. Our major markets in this segment are India, Russia and other countries of the former Soviet Union, Central Eastern Europe, Southeast Asian countries and Latin America. We have also expanded our presence in emerging markets, such as Romania, Albania, South Africa, Venezuela and the Middle East region. We have progressively increased the number of countries in which we market our formulations by registering our products in various markets around the world. During fiscal 2008, we filed 307 new product dossiers in various countries around the world. Our formulations portfolio includes brands covering several therapeutic segments.

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     The following table sets forth formulations revenues by geographic area for fiscal 2006, 2007 and 2008, respectively:
                                                         
Fiscal Year Ended March 31,
    2006   2007   2008
    Revenues in   % of   Revenues in   %        
Country   millions   Total(1)   millions   Total(1)   Revenues in millions   % Total(1)
India
  Rs. 5,968.1       56.4 %   Rs. 6,964.5       53.2 %   Rs. 8,059.6       U.S.$201.4       52.9 %
Russia
    2,676.8       25.3 %     3,587.3       27.4 %     4,064.4       101.6       26.7 %
Ukraine
    447.0       4.2 %     604.3       4.6 %     767.0       19.1       5.0 %
Romania
    192.2       1.8 %     337.1       2.6 %     465.4       11.6       3.1 %
Kazakhstan
    240.5       2.3 %     319.4       2.4 %     368.3       9.2       2.4 %
Belarus
    178.4       1.7 %     205.1       1.6 %     258.8       6.5       1.7 %
Venezuela
    59.1       0.6 %     152.9       1.2 %     256.3       6.4       1.7 %
South Africa
    142.0       1.3 %     178.8       1.4 %     179.6       4.5       1.2 %
Myanmar
    84.7       0.8 %     105.1       0.8 %     100.5       2.5       0.7 %
Vietnam
    105.3       1.0 %     67.6       0.5 %     81.8       2.0       0.5 %
Others
    493.5       4.6 %     564.5       4.3 %     639.4       16.0       4.1 %
 
                                           
Total
  Rs. 10,587.6       100.0 %   Rs. 13,086.6       100.0 %   Rs. 15,241.1       U.S.$380.8       100.0 %
 
                                           
 
(1)   Refers to our revenues from formulations sales in the applicable country expressed as a percentage of our total revenues from formulations sales throughout the world.
     India. Our revenues from sales of formulations in India were 52.9% of our total formulations sales in fiscal 2008. In India, our formulations business focuses mainly on the therapeutic categories of cardiovascular, diabetes management, gastro-intestinal and pain management. As of March 31, 2008, we had a total of 151 brands. Our top ten brands together accounted for 46.2% of our formulations revenues in India in fiscal 2008. According to Operations Research Group International Medical Statistics (“ORG IMS”) in its March Moving Annual Total (“MAT”) report for the 12-month period ending March 2008, our secondary sales of formulations in India grew 13.4% in fiscal 2008 as compared to the industry average growth of 14.8%. According to ORG IMS, as of March 2008, we had 43 brands that were ranked either first or second in terms of sales in India in their respective product categories. According to the Center for Marketing and Advertising Research Consultancy (“CMARC”) report for the period November 2007 to February 2008, which measures doctors’ prescriptions, we were ranked seventh in terms of the number of prescriptions generated in India.
     New product launches during fiscal 2008 accounted for 3.9% of our revenues from sales of formulations in India. Key product launches included Reditux, our brand of rituximab; Etura, our brand of etodolac; Gemone, our brand of gemifloxacin; Pemgem, our brand of pemetrexed; Mintop 10, our brand of minoxidil and Supanac, our brand of diclofenac potassium.

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     The following table provides a summary of our sales in India in our therapeutic categories for fiscal 2006, 2007 and 2008, respectively:
                                                                                 
Fiscal Year Ended March 31,
    2006   2007   2008
Therapeutic   No. of   Revenues   %   No of   Revenues   %   No of                   %
Category(1)   Products   in millions   Total(2)   Products   in millions   Total(2)   Products   Revenues in Millions   Total(2)
Gastrointestinal
    45     Rs. 1,274.3       21.4 %     49     Rs. 1,527.8       21.9 %     47     Rs. 1,811.7       U.S.$  45.3       22.5 %
Cardiovascular
    36       1,108.5       18.6 %     46       1,234.4       17.7 %     50       1,467.5       36.7       18.2 %
Pain management
    19       872.0       14.6 %     21       1,050.6       15.1 %     24       1,069.9       26.7       13.3 %
Oncology
    28       442.7       7.4 %     32       549.1       7.9 %     37       747.0       18.7       9.3 %
Anti-Infective
    18       347.3       5.8 %     26       462.5       6.6 %     26       543.5       13.6       6.7 %
Vitamins/ Minerals/ Nutrients
    18       424.1       7.1 %     21       430.2       6.2 %     20       450.5       11.3       5.6 %
Diabetes management
    18       315.2       5.3 %     18       359.1       5.2 %     22       446.5       11.2       5.5 %
Respiratory
    15       233.8       3.9 %     17       285.1       4.1 %     17       336.8       8.4       4.2 %
Dermatology
    18       265.1       4.4 %     17       283.2       4.1 %     18       313.2       7.8       3.9 %
Dental
    21       216.1       3.6 %     23       235.5       3.4 %     21       278.2       7.0       3.5 %
Others
    38       469.0       7.9 %     44       547.0       7.8 %     42       594.8       14.9       7.3 %
 
                                                             
Total
    274     Rs. 5,968.1       100.0 %     314     Rs. 6,964.5       100.0 %     324     Rs. 8,059.6       U.S.$201.4       100.0 %
 
                                                             
 
(1)   The categorization into therapeutic segments is based on current marketing practice and focuses on therapies.
 
(2)   Refers to the therapeutic category’s revenues from sales in India expressed as a percentage of our total revenues from sales in all of our therapeutic categories in India.

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     The following tables summarize the position of our top 10 brands in the Indian market for fiscal 2006, 2007 and 2008, respectively:
                                 
                       
            Rank of our product   Market Share of our    
    Therapeutic   Therapeutic Sub-   within Product   Brand within Product   Brand
Brand **   Category   Category(1)   Category(1)   Category (2)   Growth(3)
Omez
  Gastro-intestinal   Anti-ulcerant     1       50.7       9.6  
Nise
  Pain management   Non-steroidal anti-inflammatory     1       47.2       (2.6 )
Stamlo
  Cardiovascular   Anti-hypertensive     1       23.1       13.6  
Stamlo beta
  Cardiovascular   Anti-hypertensive     2       15.2       7.9  
Razo
  Gastro-intestinal   Anti-ulcerant     1       12.1       27.7  
Atocor
  Cardiovascular   Lipid lowering agent     4       7.6       27.4  
Enam
  Cardiovascular   Anti-hypertensive     2       25.2       5.9  
Mintop
  Dermatology   Alopecia     1       57.2       26.8  
Reclimet
  Diabetes management   Sulphonylurea anti-diabetic     2       13.1       6.4  
 
(1)   Therapeutic sub-categories are the specific groups within each therapeutic category and product categories are the compound groups within each therapeutic sub-category. Source: Derived from Operations Research Group March 2008.
 
(2)   Refers to our brand’s revenues from sales in India expressed as a percentage of total revenues from sales in respective product categories in India. Source: Derived from ORG IMS in its Moving Annual Total report for the 12 month period ending March 2008.
 
(3)   Revenue growth determined based on retail sales over the corresponding 12-month period for the previous year. Source: Derived from ORG IMS in its Moving Annual Total report for the 12 month period ending March 2008.
 
**   Market data is not available for our Reditux (No. 8) brand in the Oncology therapeutic category and therefore it is not included above.

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Fiscal Year Ended March 31,
    2006   2007   2008
    Revenues in           Revenues in            
BRAND   millions   % Total(1)   millions   % Total(1)   Revenues in millions   % Total(1)
Omez
  Rs. 690.7       11.6 %   Rs. 829.7       11.9 %   Rs. 965.9       U.S.$  24.1       12.0 %
Nise
    736.0       12.3 %     873.1       12.5 %     879.5       22.0       10.9 %
Stamlo
    339.7       5.7 %     370.0       5.3 %     405.9       10.1       5.0 %
Stamlo beta
    262.8       4.4 %     267.5       3.8 %     305.0       7.6       3.8 %
Razo
    127.3       2.1 %     211.2       3.0 %     291.4       7.3       3.6 %
Atocor
    167.2       2.8 %     188.9       2.7 %     243.9       6.1       3.0 %
Enam
    172.7       2.9 %     174.2       2.5 %     179.6       4.5       2.2 %
Reditux
    0.0       0.0 %     0.0       0.0 %     153.9       3.8       1.9 %
Mintop
    109.2       1.8 %     118.8       1.7 %     149.5       3.7       1.9 %
Reclimet
    123.7       2.1 %     138.0       2.0 %     149.0       3.7       1.8 %
Others
    3,238.8       54.3 %     3,793.1       54.6 %     4,336.0       108.3       53.9 %
Total
  Rs. 5,968.1       100.0 %   Rs. 6,964.5       100.0 %   Rs. 8,059.6       U.S.$201.4       100.0 %
 
                                           
 
(1)   Refers to the brand’s revenues from sales in India expressed as a percentage of our total revenues from sales in all of our therapeutic categories in India.
     Russia. Russia is our largest international market in our formulations business and our sales of formulations in this market accounted for 26.7% of our revenues in the formulations segment in fiscal 2008. Pharmexpert, a market research firm, ranked us 14th in sales in Russia with a market share of 1.24% as of March 2008 in its moving annual total report for first quarter 2008 (the “Pharmexpert MAT Q1 2008 Report”). Pharmexpert also reported that market growth during fiscal 2008 was 17.5%. All of the companies ranked ahead of us by Pharmexpert were either multinational corporations or of European origin. Accordingly, we were the top ranked Indian pharmaceutical company in Russia.

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     The following table provides a summary of our revenues in Russia by therapeutic category for fiscal 2006, 2007 and 2008, respectively:
                                                                                 
Fiscal Year Ended March 31,
    2006   2007   2008
Therapeutic   No of   Revenues   %   No of   Revenues   %   No of     %
Area   Products   in millions   Total(1)   Products   in millions   Total(1)   Products   Revenues in millions   Total(1)
Pain management
    9     Rs. 899.1       33.6 %     8     Rs. 1,327.1       37.0 %     8     Rs. 1,647.6     U.S.$ 41.2       40.5 %
Gastrointestinal
    3       590.0       22.0 %     3       843.2       23.5 %     3       882.5       22.1       21.7 %
Anti-infective
    6       530.7       19.8 %     6       603.2       16.8 %     7       645.8       16.1       15.9 %
Cardiovascular
    4       280.2       10.5 %     6       266.5       7.4 %     8       262.2       6.6       6.5 %
Respiratory
    3       86.4       3.2 %     1       166.4       4.6 %     1       199.0       5.0       4.9 %
Dermatology
    4       138.1       5.2 %     5       192.6       5.4 %     5       191.0       4.8       4.7 %
Others
    5       152.3       5.7 %     13       188.3       5.3 %     16       236.3       5.9       5.8 %
 
                                                             
Total
    34     Rs. 2676.8       100.0 %     42     Rs. 3,587.3       100.0 %     48       R.s.4,064.4     U.S.$ 101.6       100.0 %
 
                                                             
 
(1)   Refers to the therapeutic category’s revenues from sales in Russia expressed as a percentage of our total revenues from sales in all of our therapeutic categories in Russia.
     The following table provides a summary of our top 10 Brands in the Russian market for fiscal 2006, 2007 and 2008, respectively:
                                                         
Fiscal Year Ended March 31,
    2006   2007   2008
    Revenues in           Revenues in            
Brand   millions   % Total(1)   millions   % Total(1)   Revenues in millions   % Total(1)
Omez
  Rs. 585.1       21.9 %   Rs. 821.2       22.9 %   Rs. 848.6     U.S.$ 21.2       20.9 %
Nise
    367.8       13.7 %     666.4       18.6 %     798.6       20.0       19.6 %
Ketorol
    496.4       18.5 %     634.1       17.7 %     796.6       19.9       19.6 %
Ciprolet
    471.6       17.6 %     544.8       15.2 %     549.5       13.7       13.5 %
Enam
    280.2       10.5 %     266.2       7.4 %     255.1       6.4       6.3 %
Cetrine
    86.4       3.2 %     166.4       4.6 %     199.0       5.0       4.9 %
Exifine
    114.3       4.3 %     140.8       3.9 %     139.7       3.5       3.4 %
Mitotax
    90.2       3.4 %     86.8       2.4 %     104.5       2.6       2.6 %
Bion
    0.0       0.0 %     29.8       0.8 %     62.3       1.6       1.5 %
Mycoflucan
    23.9       0.9 %     51.8       1.4 %     51.3       1.3       1.3 %
Others
    160.9       6.0 %     179.0       5.1 %     259.2       6.5       6.4 %
 
                                           
Total
  Rs. 2,676.8       100.0 %   Rs. 3,587.3       100.0 %   Rs. 4,064.4     U.S.$ 101.6       100.0 %
 
                                         
 
(1)   Refers to the brand’s revenues from sales in Russia expressed as a percentage of our total revenues from all formulation sales in Russia.

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     Our top four brands, Omez, Nise, Ketorol and Ciprolet, accounted for 73.6% of our formulations revenues in Russia in fiscal 2008. Omez, (anti-ulcerant product), Nise and Ketorol (pain management product) and Ciprolet (anti-infective product) are ranked as the 48th, 55th, 64th and 97th best selling formulation brands respectively, in the Russian market as of March 2008 by Pharmexpert in its MAT Q1 2008 Report.
     Our strategy in Russia is to focus on the therapeutic areas of gastro-intestinal, pain management, anti-infectives and cardiovascular. Our focus is on building brand leaders in these therapeutic segments. Omez, Ciprolet, Nise and Ketorol continued to be brand leaders in their respective categories, as reported by the Pharmexpert MAT Q1 2008 Report.
     Growth during the year was driven by sales and marketing initiatives to target specialists through field sale forces focused on these specialists, increased participation in hospital business and an OTC initiative for certain brands.
     During fiscal 2008, we further expanded our Russian sales force. The hospital division has 26 hospital specialists and 9 key account managers, and is focused on expanding our present network of relationships with hospitals and institutes. The OTC division has 43 medical representatives, and is focused on establishing a network of relationships with OTC distributors in preparation for future OTC product launches.
     Other Markets: We have operations in former Soviet Union countries other than Russia, including Ukraine, Kazakhstan, Belarus and Uzbekistan. We also have operations in other emerging markets, such as Venezuela, Vietnam, South Africa, Romania and Myanmar. Our export of formulations to these countries accounted for 16.7% of the revenues in our formulations segment in fiscal 2008.
     In South Africa, we market through our partially owned subsidiary, Dr. Reddy’s Laboratories (Proprietary) Limited (DRSA). As of March 31, 2008, we held a 60% equity interest in DRSA. We currently market 9 products through DRSA in South Africa and have 5 registered products scheduled to be launched in fiscal 2009. Apart from these, we have 24 products pending registration. During fiscal 2008, we launched fexofenadine tablets and finasteride tablets in South Africa.
     In China, we market through our equity investee, Kunshan Rotam Reddy Pharmaceuticals Co. Limited (“KRRP” or “Reddy Kunshan”). As of March 31, 2008, we held a 51.33% equity interest in KRRP. We currently market twelve formulation products through KRRP in China and have two products under registration. We have applied for registration of thirteen products from our China representative office for which applications are pending approval.
Sales, marketing and distribution network
     India. We generate demand for our products by promoting them to doctors who prescribe them, and meeting with pharmacists to ensure that the pharmacists stock our brands. Our focus on brand building is thus primarily driven through efforts to build relationships with the medical community. While we do not sell directly to doctors or pharmacists, our approximately 1,950 sales representatives and front line managers frequently visit doctors and pharmacists throughout the country to promote our products. In addition, we sponsor medical conferences in different parts of the country and conduct seminars for doctors. During fiscal 2008, we increased our total sales personnel in India by approximately 250.
     We sell our formulations primarily through clearing and forwarding agents to approximately 2,050 stockists who decide which brands to buy based on demand. The stockists pay for our products in an agreed credit period and in turn sell these products to retailers. Our clearing and forwarding agents are responsible for transporting our products to the stockists and ensuring that the stockists maintain adequate supplies of our products. We pay our clearing and forwarding agents on a commission basis. We have insurance policies that cover our products during shipment and storage at clearing and forwarding locations.
     Russia. In Russia, we sell our formulations to some of the principal national distributors directly as well as through our wholly-owned subsidiary located in Russia, OOO Dr. Reddy’s Laboratories, Russia. Our sales and marketing efforts are driven by a team of 255 marketing representatives, 23 regional managers, 4 zone managers and 18 key account managers to promote our products to doctors in 48 cities in Russia. During fiscal 2008, we increased our sales personnel in Russia by approximately 70.
In the Russian market, credit is generally extended only to customers after they have established a satisfactory history of payment with us. The credit ratings of these customers are based on turnover, payment record and the number of the customers’ branches or pharmacies and are reviewed on a periodic basis. During fiscal 2008, the credit period for our distributors Protek and SIA was

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increased from 60 days to 90 days and 45 days to 75 days respectively. There were no material changes in the credit terms for other distributors.
     Other Markets. Our other key focus markets are South Africa, Brazil, China, Kazakhstan, Uzbekistan, Ukraine, Belarus, Vietnam, Romania, Venezuela and Myanmar, where we have our own sales personnel to promote our products. In South Africa, we sell our products to wholesale distributors, dispensing doctors and retail pharmacies. In China, where we market through KRRP, as of March 31, 2008, we have 95 marketing representatives covering hospitals. In several of these markets, we market and distribute through local distributors. We also have representative offices in several of these countries.
Manufacturing and Raw Materials
     We have four facilities for the manufacture of formulation products, all of which are situated in India, as of March 31, 2008. We manufacture most of our finished products at these facilities and also use third-party manufacturing facilities as we determine necessary. We also purchase some products from approved third parties based on the necessity and requirement of our markets. For each of our products, we endeavor to identify alternate suppliers of our products and the processes applicable to our products. The main difference between active pharmaceutical ingredients as compared to formulations and generics is the form in which they are produced and the way they are packaged. Active pharmaceutical ingredients are manufactured and distributed in bulk. In formulations and generics, these bulk ingredients are converted into finished dosages by adding other ingredients, called excipients, and packaged into individual doses that are ready for consumption by the patient. In fiscal 2008, our active pharmaceutical ingredients and intermediates business provided 70.4% of the active pharmaceutical ingredients and intermediates requirements of our formulations business, with the balance coming from various other suppliers.
     Our manufacture of formulations is subject to strict quality and contamination controls throughout the manufacturing process. Each production line consists of a series of rooms through which the product passes at different stages of its conversion to a finished dosage. In our facilities, we manufacture formulations in various dosage forms including tablets, capsules, injections and liquids. These dosage forms are then packaged and quarantined to be tested for quality and contamination. One of our facilities also has the approval of the U.K. Medicines and Health Care Products Regulatory Agency (“MHRA”) apart from other country specific approvals. The Ministries of Health of Brazil, Ukraine, Romania, Gulf Co-operation Council group, Indonesia, Nigeria, Kirgystan and World Health Organization have visited during the year and approved our facilities.
     We manufacture our key brands for our domestic market at our facility in Baddi to take advantage of certain fiscal benefits, which include exemption from income tax and excise duty for a specified period, offered by the Government of India to encourage industrial growth in the state of Himachal Pradesh.
Competition
     We compete with different companies in different countries, depending upon therapeutic and product categories, and within each category upon dosage strengths and drug delivery. On the basis of sales, we are the tenth largest pharmaceutical seller in India, with a market share of 2.33% according to the ORG IMS March Moving Annual Total report for the 12-month period ending March 2008. Of the top ten participants in the Indian formulations market, three are multinational corporations and the rest are Indian corporations.
We believe growth opportunities in India continue to exist. The Indian pharmaceutical business environment underwent considerable changes in fiscal 2008. Some of the most significant changes in the industry are as follows:
  The Industry recorded growth of 14.8% after moderate performance for the past couple of years.
  Growth driven by successful new product launches in chronic therapeutic areas (TA), increased spending on health care due to rising disposable income, increased penetration of health insurance, changing disease profile and penetration into semi-urban and rural areas.
  Change in market dynamics, including emergence of organized retail chains, boom in hospital sector, target of tier II markets i.e., semi urban and rural areas, by most companies.
  Multi-national corporations launched more of their patented products.
  Promotion of special purpose vehicle and innovative funding models to address higher investment demands in research and development.
  Contract research and manufacturing services gained more prominence.

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  Active promotion of health tourism, and
  Emergence of bio-similars to cater to needy population in Oncology therapeutic area.
     Our formulation segment’s principal competitors in the Indian market are Cipla Limited, Glaxo SmithKline Pharmaceuticals Limited, Ranbaxy Laboratories Limited, Nicholas Piramal India Limited, Sun Pharmaceuticals Industries Limite, Zydus-Cadila and Lupin.
Our formulation segment’s principal competitors in the Russian market include Berlin Chemi AG, Gedeon Richter Limited, Krka, Pliva, Lek, Ranbaxy, Nycomed and Egis Pharmaceuticals Limited.
     In our export markets, we compete with local companies, multinational corporations and companies from other emerging markets. In Russia and in most of our export markets, we believe our products occupy a niche position between the less expensive local products and the more expensive products of the multinational corporations.
Government regulations
     All pharmaceutical companies that manufacture and market products in India are subject to various national and state laws and regulations, which principally include the Drugs and Cosmetics Act, 1940, the Drugs (Prices Control) Order, 1995 (DPCO), various environmental laws, labor laws and other government statutes and regulations. These regulations govern the testing, manufacturing, packaging, labeling, storing, record-keeping, safety, approval, advertising, promotion, sale and distribution of pharmaceutical products.
     In India, manufacturing licenses for drugs and pharmaceuticals are generally issued by state drug authorities. Under the Drugs and Cosmetics Act, 1940, the state drug administrations are empowered to issue manufacturing licenses for drugs if they are approved for marketing in India by the Drug Controller General of India (“DCGI”). Prior to granting licenses for any new drugs or combinations of new drugs, DCGI clearance has to be obtained in accordance with the Drugs and Cosmetics Act, 1940.
     Pursuant to the amendments in May 2005 to the Schedule Y of the Drugs and Cosmetics Act, 1940, manufacturers of finished dosages are required to submit additional technical data to the DCGI in order to obtain a no-objection certificate for conducting clinical trials as well as to manufacture new drugs for marketing.
     All pharmaceutical manufacturers that sell products in any country are subject to regulations issued by the ministry of health (“MoH”) of the respective country. These regulations govern, or influence the testing, manufacturing, packaging, labeling, storing, record-keeping, safety, approval, advertising, promotion, sale and distribution of products.
     Our facilities and products are periodically inspected by various regulatory authorities such as the U.K. MHRA, the South African Medicines Control Council, the Brazilian National Agency of Sanitary Surveillance (also known as “ANVISA”), the Romanian National Medicines Agency, and the World Health Organization, all of which have extensive enforcement powers over the activities of pharmaceutical manufacturers operating within their jurisdiction.
     MoH approval of an application is required before a generic equivalent of an existing or referenced brand drug can be marketed. When processing a generics application, the MoH waives the requirement of conducting complete clinical studies, although it normally requires bioavailability and/or bioequivalence studies. “Bioavailability” indicates the rate and extent of absorption and levels of concentration of a drug product in the blood stream needed to produce a therapeutic effect. “Bioequivalence” compares the bioavailability of one drug product with another, and when established, indicates that the rate of absorption and levels of concentration of the active drug substance in the body are the equivalent for the generic drug and the previously approved drug. A generic application may be submitted for a drug on the basis that it is the equivalent of a previously approved drug. Before approving a generic product, the MoH also requires that our procedures and operations conform to Current Good Manufacturing Practice (“cGMP”) regulations, relating to good manufacturing practices as defined by various countries. We must follow the cGMP regulations at all times during the manufacture of our products. We continue to spend significant time, money and effort in the areas of production and quality testing to help ensure full compliance with cGMP regulations.
     The timing of final MoH approval of a generic application depends on various factors, including patent expiration dates, sufficiency of data and regulatory approvals.

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     Under the present drug policy of the Government of India, certain drugs have been specified under the DPCO as subject to price control. The Government of India established the National Pharmaceutical Pricing Authority (“NPPA”) to control pharmaceutical prices. Under the DPCO, the NPPA has the authority to fix the maximum selling price for specified products. At present, more than 70 drugs and their formulations are categorized as specified products under the DPCO. A limited number of our formulation products fall in this category. Adverse changes in the DPCO list or in the span of price control can affect pricing, and hence, our Indian revenues.
     On March 22, 2005, the Government of India passed the Patents (Amendment) Bill 2005 (the “Amendment”), introducing a product patent regime for food, chemicals and pharmaceuticals in India. The Amendment specifically provides that new medicines (patentability of which is not specifically excluded) for which a patent has been applied for in India on or after January 1, 1995 and for which a patent is granted cannot be manufactured or sold in India by other than the patent holder and its assignees and licensees. This will result in a reduction of the new product introductions in India, as well as other countries where similar legislation has been introduced, for all Indian pharmaceutical companies engaged in the development and marketing of generic finished dosages and APIs. Processes for the manufacture of APIs and formulations were patentable in India even prior to the Amendment, so no additional impact is anticipated from patenting of such processes.
     The biotechnology sector in India is governed by the guidelines and rules formulated by the Department of Biotechnology (“DBT”), under the Indian Government’s Ministry of Science and Technology. The guidelines cover the entire requirements of various other related ministries/statutory departments of the Government of India.
     A business which intends to manufacture and market biotechnology products is required to form an Institutional Bio Safety Committee (“IBSC”) consisting of internal experts on related fields as well as a nominee of the DBT and Central Pollution Control Board (“CPCB”). The IBSC reviews, verifies and approves the product application before submitting it to the Review Committee of Genetic Manipulation (“RCGM”) under the Indian Government’s Ministry of Science and Technology. The RCGM verifies and approves all the data included in the application including the protocol and final reports on animal toxicity and human clinical trials.
          Once clearance is obtained from the RCGM, the business is required to obtain clearance from the Genetic Engineering Approval Committee (“GEAC”) under the Ministry of Environment and Forest, Government of India. The GEAC forwards its recommendation to the DBT and DCGI. Upon receipt of a “No Objection Certificate” from the Drugs Controller General of India (“DCGI”), the business is required to obtain a manufacturing license from the State Drugs Authority and, thereafter, can commence commercial marketing.
          We are making required investments for scaling up our manufacturing infrastructure and enhancing our development capabilities to leverage the global opportunity available in biogenerics.
Active Pharmaceutical Ingredients and Intermediates Segment
     Our active pharmaceutical ingredients and intermediates business contributed 23.6% of our total revenues for fiscal 2008. Active pharmaceutical ingredients are the principal ingredients for finished dosages and are also known as bulk actives or bulk drugs. Active pharmaceutical ingredients become formulations when the dosage is prepared for human consumption in the form of a tablet, capsule or liquid using additional inactive ingredients. Intermediates are the compounds from which active pharmaceutical ingredients are prepared. We produce and market more than 100 different active pharmaceutical ingredients and intermediates in several markets. We export active pharmaceutical ingredients to emerging as well as developed markets covering 78 countries. Our principal markets in this business segment include North America and Europe, which together contributed 40.8% of this segment’s revenues. Our active pharmaceutical ingredients and intermediates business is operated independently from our formulations and generics businesses and, in addition to supplying API to our formulations and generics businesses, we sell APIs to third parties for use in creating generic products, subject to any patent rights of other third parties. Our active pharmaceutical ingredients business also manufactures and supplies all of the API required in our custom pharmaceutical services business. The research and development group within the active pharmaceutical ingredients and intermediates segment contributes to our business by creating intellectual property (principally with respect to novel and non-infringing manufacturing processes and intermediates), providing research intended to reduce the cost of production of our products and developing approximately 15-20 new products every year.

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     The following table sets forth active pharmaceutical ingredients and intermediates revenues by geographic area for fiscal 2006, 2007 and 2008, respectively:
                                                         
    Fiscal Year Ended March 31,  
    2006     2007     2008  
    Revenues     % Total(1)     Revenues     % Total(1)     Revenues     % Total(1)  
    (in millions)             (in millions)             (in millions)          
    Rs.             Rs.             Rs.     U.S.$          
Emerging markets
                                                       
India
    2,300.4       27.8 %     2,077.4       17.5 %     2,351.7       58.8       19.9 %
Bangladesh
    265.7       3.2 %     155.0       1.3 %     183.6       4.6       1.6 %
Other countries
    2,584.4       31.3 %     5,397.8       45.4 %     4,174.2       104.3       35.4 %
 
                                         
Total emerging markets
    5,150.5       62.3 %     7,630.2       64.2 %     6,709.5       167.7       56.8 %
 
                                         
Developed markets
                                                       
North America
    1,655.0       20.0 %     2,029.7       17.1 %     2,288.6       57.2       19.4 %
Europe
    1,420.9       17.2 %     2,116.8       17.8 %     2,520.7       63.0       21.4 %
Japan
    41.1       0.5 %     106.3       0.9 %     286.0       7.1       2.4 %
Total developed markets
    3,117.0       37.7 %     4,252.8       35.8 %     5,095.3       127.3       43.2 %
 
                                         
Total
    8,267.5       100.0 %     11,883.0       100.0 %     11,804.8       295.0       100.0 %
 
                                         
 
(1)   Refers to our revenues from API sales in the applicable country expressed as a percentage of our total revenues from API sales throughout the world.
     The following table sets forth the sales of our key active pharmaceutical ingredients and intermediates for fiscal 2006, 2007 and 2008, respectively:
                                                                 
            Fiscal Year Ended March 31,
            2006   2007   2008
Product   Category   Sub-Category   Revenues   % Total(1)   Revenues   % Total(1)   Revenues   U.S.$   % Total(1)
            (in millions)                                        
Finasteride
  Prostatic inhibition   Benign prostatic hyperplasia     98.3       1.2 %     580.8       4.9 %     952.3       23.7       8.1 %
Ramipril
  Cardiovascular   Anti-hypertensive     642.5       7.8 %     760.7       6.4 %     933.2       23.3       7.9 %
Ciprofloxacin Hcl
  Anti-infective   Anti-bacterial     778.5       9.5 %     739.6       6.3 %     818.3       20.4       6.9 %
Olanzapine
  Neurophychiatry   Schizophernia     82.5       1.0 %     156.6       1.3 %     721.3       18.0       6.1 %
Clopidogrel
  Cardiovascular   Anti-platelet agent     139.9       1.7 %     384.2       3.2 %     681.5       17.0       5.8 %
Naproxen
  Pain management   Anti-inflammatory     375.0       4.6 %     408.0       3.4 %     636.7       15.9       5.4 %
Sertraline hydrochloride
  Cardiovascular   Anti-hypertensive     494.1       6.0 %     2,461.5       20.8 %     600.9       15.0       5.1 %
Ranitidine HCl
  Gastro-intestinal   Anti-ulcerant     552.8       6.7 %     523.5       4.4 %     553.3       13.8       4.7 %
Terbinafine HCl
  Anti-infective   Anti-fungal     537.2       6.5 %     483.9       4.1 %     457.4       11.4       3.9 %
 
                                                               
Amlodipine besylate
  Cardiovascular   Anti-hypertensive     40.9       0.5 %     83.0       0.7 %     403.8       10.1       3.4 %
Nizatidine
  Gastro-intestinal   Anti-ulcerant     160.9       2.0 %     223.6       1.9 %     381.0       9.5       3.2 %
Montelukast
  Respiratory   Anti-allergic     241.1       2.9 %     285.2       2.4 %     319.1       8.0       2.7 %
Losartan potassium
  Cardiovascular   Anti-hypertensive     172.7       2.1 %     234.4       2.0 %     315.8       7.9       2.7 %
Ibuprofen
  Pain management   Analgesic     502.3       6.1 %     328.9       2.8 %     304.8       7.6       2.6 %
Naproxen sodium
  Pain management   Anti-inflammatory     380.4       4.6 %     521.2       4.4 %     268.1       6.7       2.3 %
 
(1)   Refers to our revenues from key API sales expressed as a percentage of our total API revenues.
Sales, Marketing and Distribution
     Emerging Markets. India is an important emerging market, contributing 19.9% to the segment’s revenues in fiscal 2008. In India, we market our active pharmaceutical ingredients to Indian and multinational companies who are also our competitors in our formulations segment.
     In India, our top six products are ciprofloxacin, ranitidine, clopidogrel, ramipril, losartan potassium and fexofenadine. The market in India is highly competitive with severe pricing pressure and competition from cheaper Chinese imports in several products.
     In India, our sales team works closely with our sales agents to market our products. We market our products through these sales agents, commonly referred to as “indenting agents,” with a focus on regional sales and marketing. The sales are made directly from the factory and to a limited extent through clearing and forwarding agents. Distribution through clearing and forwarding agents is done to give better service to the customer.

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     Our sales to other emerging markets were Rs.4,357.8 million for fiscal 2008. Our other key emerging markets include Israel, Turkey, South Korea, Mexico, Brazil, Bangladesh, Hong Kong, Argentina, Jordan, China, Saudi Arabia, Poland, Indonesia, Egypt, Pakistan, Japan, Thailand, Peru and Chile. While we work through our agents in these markets, our zonal marketing managers also interact directly with our key customers in order to service their requirements. Our strategy is to build relationships with top customers in each of these markets and partner with them in product launches by providing timely technical and analytical support.
     Developed Markets. Our principal markets are North America and Europe. In the United States and Europe, over the next five years, a large number of products are expected to lose patent protection, providing growth opportunities for our active pharmaceutical ingredients and intermediates business. We have been marketing APIs in the United States for over a decade. We market through our subsidiaries in the United States and Europe. These subsidiaries are engaged in all aspects of marketing activity and support our customers’ pursuit of regulatory approval for their products focusing on building long-term relationships with the customers.
     We filed 54 Drug Master Files (“DMF”) in fiscal 2008: 23 were filed in the United States, nine in Canada, 13 in Europe and nine in other countries. With these filings, we have filed a total of 127 U.S. DMFs through March 31, 2008. Including the U.S. filings, as of March 31, 2008 we have filed a total of 281DMFs worldwide: 49 filings in Canada, 64 filings in Europe and 41 filings in other countries. For most of these, we are either already supplying commercial quantities or development quantities of API to various generic formulators.
Manufacturing and Raw Materials
     We have seven facilities for the manufacture of our APIs. Six of these facilities have been inspected by the U.S. FDA and follow cGMP. All of these facilities are situated in the state of Andhra Pradesh, India. Six of these facilities have ISO 9001 certification, which is valid until December 5, 2009, at which time we will be reinspected. With over 650 reactors of different sizes offering 2.3 million litres of reaction volume annually, we have the flexibility to produce quantities that range from a few kilograms to several metric tons. The manufacturing process consumes a wide variety of raw materials that we obtain from sources that comply with the requirements of regulatory authorities in the markets to which we supply our products. We procure raw materials on the basis of our requirement planning cycles. We utilize a broad base of suppliers in order to minimize risk arising from dependence on a single supplier. Our formulations and generics businesses source approximately 70.4% and 70.9%, respectively, of their API purchases from our active pharmaceutical ingredients and intermediates segment. We also outsource the manufacturing of some of our APIs to third-party manufacturers. The active pharmaceutical ingredients and intermediates segment also sources several APIs from third party suppliers for the emerging markets to optimally utilize the in-house manufacturing capacities for the developed markets, which are more profitable relative to the emerging markets. During fiscal 2008, 5.0% of our total revenues resulted from sale of APIs procured from third-party suppliers. We maintain stringent quality controls when procuring materials from third-party suppliers.
Competition
     The global API market can broadly be divided into regulated and less regulated markets. The less regulated markets offer low entry barriers in terms of regulatory requirements and intellectual property rights. The regulated markets, like the United States and Europe, have high entry barriers in terms of intellectual property rights and regulatory requirements, including facility approvals. As a result, there is a premium for quality and regulatory compliance along with relatively greater stability for both volumes and prices.
     During fiscal 2008, the competitive environment for the API industry underwent significant changes. These changes included increasing consolidation in the global generics industry and vertical integration of some key generic pharmaceutical companies.
     As an API supplier, we compete with a number of manufacturers within and outside India, which vary in size. Our main competitors in this segment are Hetero Drugs Limited, Divi’s Laboratories Limited, Shasun Chemicals and Drugs Limited, Aurobindo Pharma Limited, Ranbaxy Laboratories Limited, Cipla Limited, Matrix Laboratories Limited, Sun Pharmaceutical Industries Limited and MSN Laboratories Limited, all based in India. In addition, we experience competition from European and Chinese manufacturers, as well as from Teva Pharmaceuticals Industries Limited, based in Israel.
Government regulations
     All pharmaceutical companies that manufacture and market products in India are subject to various national and state laws and regulations, which principally include the Drugs and Cosmetics Act, 1940, the Drugs (Prices Control) Order, 1995, various environmental laws, labor laws and other government statutes and regulations. These regulations govern the testing, manufacturing, packaging, labeling, storing, record-keeping, safety, approval, advertising, promotion, sale and distribution of pharmaceutical products.

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     In India, manufacturing licenses for drugs and pharmaceuticals are generally issued by state drug authorities. Under the Drugs and Cosmetics Act, 1940, the state drug administrations are empowered to issue manufacturing licenses for drugs if they are approved for marketing in India by the DCGI. Prior to granting licenses for any new drugs or combinations of new drugs, the DCGI clearance has to be obtained in accordance with the Drugs and Cosmetics Act, 1940.
     Our active pharmaceutical ingredients and intermediates segment is subject to a number of government regulations with respect to pricing and patents as discussed above under our formulations segment.
     We submit a DMF for active pharmaceutical ingredients to be commercialized in the United States. Any drug product for which an Abbreviated New Drug Application (“ANDA”) is being filed must have a DMF in place with respect to a particular supplier supplying the underlying active pharmaceutical ingredient. The manufacturing facilities are inspected by the U.S. FDA to assess cGMP compliance. The manufacturing facilities and production procedures utilized at the manufacturing facilities must meet U.S. FDA standards before products may be exported to the United States. Six of our manufacturing facilities have been inspected by the U.S. FDA and found “Acceptable.” For European markets, we submit a European DMF and, where applicable, obtain a certificate of suitability from the European Directorate for the Quality of Medicines.
Generics Segment
     Generic drugs are the chemical and therapeutic equivalents of reference brand drugs, typically sold under their generic chemical names at prices below those of their brand drug equivalents. Generic drugs are finished pharmaceutical products ready for consumption by the patient. Our generic products are marketed principally in North America and Europe. These drugs are required to meet governmental standards that are similar to those applicable to their brand-name equivalents and must receive regulatory approval prior to their sale in any given country.
     Our generics operations started in the second half of fiscal 2001. This segment accounted for 35.6% of our total revenues for fiscal 2008, contributing Rs.17,781.5 million. In fiscal 2008, revenues in this segment were Rs.9,714.9 million from sales in Europe, Rs.8,024.3 million from sales in North America and Rs.42.3 million from sales in the rest of the world.

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The following table sets forth the sales of our principal generics finished dosages for fiscal 2006, 2007 and 2008, respectively.
                                                                 
            Fiscal Year Ended March 31,  
            2006     2007     2008  
    Therapeutic   Therapeutic   Revenues     %     Revenues     %     Revenues     Revenues     %  
Region / Product   Category   Sub-Category   (Rs. millions)     Total(1)(2)     (Rs. millions)     Total(1)     (Rs. millions)     (U.S.$ millions)     Total(1)  
North America
                                                               
Fluoxetine capsules
  Central nervous system   Anti-psychotic   Rs. 373.8       9.2 %   Rs. 249.8       0.8 %   Rs. 363.3     U.S.$ 9.1       2.0 %
Ibuprofen tablets
  Pain management   Analgesic     235.1       5.8       86.1       0.3       22.0       0.6       0.1  
Ranitidine tablets
  Gastro-intestinal   Anti-ulcerant     225.9       5.6       206.0       0.6       206.3       5.2       1.2  
Famotidine tablets
  Gastro-intestinal   Anti-ulcerant     156.1       3.8       172.1       0.5       99.9       2.5       0.6  
Citalopram tablets
  Central nervous system   Anti-psychotic     143.4       3.5       289.9       0.9       365.6       9.1       2.1  
Ciproflaxacin tablets
  Anti-infective   Anti-bacterial     135.3       3.3       259.5       0.8       242.1       6.0       1.4  
Tizanidine tablets
  Spasticity   Muscle relaxant     62.8       1.5       108.7       0.3       89.5       2.2       0.5  
Ranitidine capsules
  Alimentary tract   Stomach ulcer     27.9       0.7       36.1       0.1       21.8       0.5       0.1  
Simvastatin AG
  Cardiovascular   Cholesterol regulator                 13,899.4       41.8       253.7       6.3       3.5  
Ondansetron
  Gastro-intestinal   Antiemetic antinausient solids                 2,890.1       8.7       480.1       12.0       2.7  
Fexofinadine
  Respiratory   Antihistamine systemic                 2,429.3       7.3       2,181.9       54.5       12.3  
Finasteride AG
  Urology   Benign prostate hyperlesian                 1,913.6       5.8       1,720.9       43.0       9.7  
Pravastatin
  Cardiovascular   Statins                 158.2       0.5       174.8       4.4       1.0  
Simvastatin
  Cardiovascular   Cholesterol regulator                 164.3       0.5       729.9       18.2       4.1  
Carvedilol
  Cardiovascular   Cholesterol regulator                             111.7       2.8       0.6  
Finasteride
  Urology   Benign prostate hyperlesian                             91.8       2.3       0.5  
Omeprazole
  Gastro-intestinal   Anti-ulcerant                             90.2       2.3       0.5  
 
                                                 
Total
            1,360.3       33.5       22,863.1       68.8       7,245.4       181.0       43.4  
 
                                                 
 
                                                               
Europe
                                                               
Simvastatin
  Cardiovascular   Cholestrol regulator     119.0       2.9       1,370.6       4.1       1,265.4       31.6       7.1.3  
Omeprazole
  Gastro- Intestinal   Anti-ulcerant     786.3       19.4       976.6       2.9       899.8       22.5       5.1.1  
Alendronate
  Women’s health   Bone calcium regulator     21.5       0.5       676.2       2.0       465.3       11.6       2.6.7  
Amlodipine
  Cardiovascular   Anti-hypertensive     371.5       9.2       525.1       1.6       531.7       13.3       3.0.0  
Oxycodon
  Central Nervous System   Narcotic Analgesic                                     362.8       9.1       2.0.1  
 
                                                 
Total
          Rs. 1,298.3       32.0 %   Rs. 3,548.5       10.7 %   Rs. 3,525.0     U.S.$ 88.1       19.8.1  
 
                                                 
 
(1)   Refers to our revenues from generics sales in the applicable region expressed as a percentage of our total revenues from generics sales throughout the world.

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     Generic drugs may be manufactured and marketed only if relevant patents on their brand name equivalents and any additional government-mandated market exclusivity periods have expired, been challenged and invalidated, or otherwise validly circumvented.
     Generic pharmaceutical sales have increased significantly in recent years, due in part to an increased awareness and acceptance among consumers, physicians and pharmacists that generic drugs are the equivalent of brand-name drugs. Among the factors contributing to this increased awareness are the passage of legislation permitting or encouraging substitution and the publication by regulatory authorities of lists of equivalent drugs, which provide physicians and pharmacists with generic drug alternatives. In addition, various government agencies and many private managed care or insurance programs encourage the substitution of generic drugs for brand-name pharmaceuticals as a cost-savings measure in the purchase of, or reimbursement for, prescription drugs. We believe that these factors, together with the large volume of branded products losing patent protection over the coming years, should lead to continued expansion of the generic pharmaceuticals market as a whole. We intend to capitalize on the opportunities resulting from this expansion of the market by leveraging our product development capabilities, manufacturing capacities inspected by various international regulatory agencies and access to our own APIs, which offer significant supply chain efficiencies.
     Through the coordinated efforts of our teams in the United States, Europe and India, we constantly seek to expand our pipeline of generic products. In fiscal 2008, we filed 19 ANDAs including 10 Paragraph IV filings with the U.S. FDA. In fiscal 2008, the U.S. FDA granted 13 final ANDA approvals and seven tentative approvals. In addition, in fiscal 2008, we filed nine Marketing Authorization Applications (“MAAs”) in Europe. During the fiscal 2008, we received seven product approvals in the United Kingdom, one in Italy and one in Spain. In addition, we obtained 54 marketing authorizations in Germany for products in varying dosage strengths.
     During fiscal 2005, we entered into an agreement with I-VEN Pharma Capital Limited (“I-VEN”) for the joint development and commercialization of generic drug products for the U.S. markets. The agreement gives I-VEN the right to fund up to fifty percent of the project costs (development, registration and legal costs) related to these products and the related U.S. Abbreviated New Drug Applications (“ANDA”). Under this agreement, we received Rs.985.4 million in March 2005 which were applied, in part to our research and development costs for the fiscal years 2005, 2006 and 2007. During fiscal 2007, we signed an amendment to the agreement with I-VEN to reflect a change in the product portfolio and the royalty rate.
Sales, Marketing and Distribution Network
     North America. Dr. Reddy’s Laboratories, Inc., our wholly-owned subsidiary in the United States, is engaged in the marketing of our generic products in North America. In early 2003, we commenced sales of generic products under our own label. We have our own sales and marketing team to market these generic products. During fiscal 2008, we launched carvedilol tablets, meprobamate tablets, omeprazole, finasteride, ceterizine OTC, ranitidine OTC, zolpidem tablets, terbinafine and ciprofloxacin ER tablets. Key account representatives for generic products call on purchasing agents for chain drug stores, drug wholesalers, health maintenance organizations and pharmacy buying groups.
     In January 2006, we entered into an agreement with Merck & Co., Inc. allowing us to distribute and sell generic versions of finasteride and simvastatin (sold by Merck under the brand names Proscar® and Zocor®), upon the expiration of Merck’s patents covered by these products, provided that some other company obtains 180-day exclusivity after the expiration of the patents for either product. Subsequently, the patents for both of these products expired and other companies obtained 180-day exclusivity. Accordingly, we launched sales of these products on June 19, 2006 and June 23, 2006, respectively. After expiration of the period of exclusivity, we continue to distribute and sell these products, and in fiscal 2008 we earned revenue of Rs 1,974.6 million from sales of these products.
     On March 13, 2006, we acquired trademark rights to three off-patent products, along with all the physical inventories of the products, from PDL Biopharma, Inc (“PDL”) for a total consideration of Rs.122.7 million. PDL was a company focused on the development and commercialization of novel therapies for treatment of inflammation and autoimmune diseases, acute cardiac conditions and cancer. As a result of the acquisition, we acquired an opportunity to sell these products using their existing brand names through our generics sales and marketing network. In the twelve months ended March 31, 2008, we earned revenue of Rs.151 million from sales of these products.
     In 2001, we entered into a profit sharing marketing alliance with Par Pharmaceuticals, Inc. to market certain prescription generic formulations, none of which are over-the-counter products. As of March 31, 2008, we marketed six generic products through Par Pharmaceuticals, Inc.

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     We formerly marketed generic versions of famotidine (Pepcid®) tablets, ranitidine (Zantac®) tablets and naproxen sodium (Aleve®) tablets/caplets, through Leiner Health Products, LLC (“Leiner”). In 2002, we entered into a 15-year exclusive agreement with Leiner to market these and additional OTC products in the United States pursuant to which we launched our first new OTC product under this agreement, ibuprofen/pseudoephedrine, during fiscal 2007. However, we terminated our OTC product agreements with Leiner on April 18, 2007. This action was taken by us after receiving notice that, on March 16, 2007, Leiner had been served with a list of inspection observations on a Form 483 from the U.S. FDA and, in response thereto, on March 20, 2007, had suspended all of its packaging, production and distribution of over-the-counter products manufactured, packaged or tested at its facilities in the United States. Under terms of the agreement, we had provided Leiner with supplies of API to produce OTC products as well as finished dosage tablets with the rights to market certain of our OTC products under development. In fiscal 2008, we launched our own OTC products division and successfully introduced ranitidine 150mg OTC in September 2007 and cetirizine 10mg OTC in January 2008.
     During fiscal 2008, we have also initiated the supply to U.S. governmental agencies of veteran affairs and department of defense. As a result of this, we have become an authorized supplier to the U.S. government. The first product to be supplied is finasteride 5 mg.
     In Canada, in fiscal 2002, we entered into a profit sharing arrangement with Cobalt Pharmaceuticals Inc. and Pharmascience Inc. to market certain of our generic products.
     United Kingdom. Dr. Reddy’s Laboratories (U.K.) Limited, which we acquired in fiscal 2003, is engaged in the marketing of our generic products in the United Kingdom and other European Union countries. We currently market approximately 26 generic products representing over 87 dosage strengths. New product launches in fiscal 2008 included the generic versions of finasteride and risperidone. We also seek to expand our presence to the other European countries either directly or through strategic alliances.
     Germany. In March 2006, we acquired 100% of beta Holding GmbH (“betapharm”) from 3i Group plc, a European private equity house. This acquisition allowed us to enter the German generics market. During fiscal 2008, the German pharmaceutical market underwent a significant change. The new healthcare reform (the Statutory Health Insurance — Competition Strengthening Act or Wettbewerbsstärkungsgesetz (“GKV – WSG”) (an act to strengthen the competition in public health insurance) which was effective as of April 1, 2007, has significantly increased the power of insurance companies and statutory health insurance funds (“SHI funds”) to influence dispensing of medicines. Pursuant to the new law, pharmaceutical products covered by rebate contracts with insurance companies have to be prescribed by physicians and dispensed by pharmacies. This has increased the power of insurance funds. As a result, several SHIs have entered into rebate contracts with pharmaceutical companies, which has caused pressure on margins. Allgemeinen Ortsrankenkassen (“AOK”) one of the largest SHI funds with 18.2 million members and a further 7 million dependents ,covering around 40% of the market, sought tender from pharmaceutical companies. However due to legal issues the tender has been cancelled. Regardless of the legal dispute, AOK has been able to sign the binding contracts for approximately 23 products with several companies for next two years.
     betapharm has been a pioneer in partnering with SHI funds since 2005 and has a large number of contracts with major SHI funds. Traditionally these contracts had the elements of basic rebate and incremental rebates on additional prescriptions generated through these SHI funds. Since the new healthcare reforms, the SHI funds have been aggressive in negotiating rebates for their contracts. Consequently in the recent months they have negotiated higher discounts.
     Through our national German sales force, we sell a broad and diversified range of generic pharmaceutical products, under the “beta” brand. The sales force targets primary care physicians and pharmacists and the key account management team targets insurance companies, various doctors and pharmacist associations. These efforts are supported by a direct marketing team and an active public relations program. Value-added services provided by the beta institut gemeinnützige GmbH, also known as the beta Institute for Sociomedical Research, are fully integrated into the sales and marketing effort and provide a unique differentiation point for our sales calls. The beta Institute for Sociomedical Research is a non-profit organization engaged in research and development in order to seek means of improving the healthcare process in ways which promote the psychological welfare of patients.
     Our sales force promotes products to physicians and pharmacies by emphasizing product-specific factors, contracts with insurance companies, promoting our reputation and other promotional and customer relationship activities.
     With the abovementioned discount contracts being effective, the long term changes in the structural framework conditions are ongoing. betapharm is in the process of a comprehensive restructuring of sales force. Negotiations have been recently concluded with Works Council of betapharm for implementation of social plan, which is aimed at reduction and re-organization of sale force to evolve a sustainable sales force structure to adapt to the current market situation.

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Manufacturing and Raw Materials
     As with formulations, generics are packaged in individual doses for consumption by the patient. In fiscal 2008, our generics segment procured 70.9% of its API requirements from our active pharmaceutical ingredients and intermediates segment.
     For a majority of the products we sell in the United States and the United Kingdom, we manufacture our finished products at our plant in Bachupally, Andhra Pradesh, India. The facility in Andhra Pradesh, India is designed for the manufacture of tablets and hard gelatin capsules. We are also dependent on third parties for the supply of the inactive pharmaceutical ingredients used in our products.
     For our manufacturing operations in India, we source most of the raw material requirements with respect to the active pharmaceutical ingredients internally from our active pharmaceutical ingredients and intermediates segment. We are required to identify the suppliers of all the raw materials for our products in the drug applications that we file with the U.S. FDA. If raw materials for a particular product become unavailable from an approved supplier specified in a drug application, we would be required to qualify a substitute supplier with the U.S. FDA, which would likely interrupt manufacturing of the affected product. To the extent practicable, we attempt to identify more than one supplier in each drug application. However, some raw materials are available only from a single source and, in some of our drug applications, only one supplier of raw materials has been identified, even in instances where multiple sources exist. In addition, we obtain a significant portion of our inactive pharmaceutical ingredients from foreign suppliers. Arrangements with international raw material suppliers are subject to, among other things, U.S. FDA regulations, various import duties and other government clearances.
     Our facility in the United Kingdom is located at Beverley. This facility is designed for the packaging and warehousing of pharmaceutical products in a variety of dosage forms, including tablets, capsules, liquids and creams. The facility holds all relevant licenses and authorizations required to conduct all necessary activities, including the supply of materials for use in clinical studies. In addition, the quality systems for ensuring product quality planning and control are ISO 9000 accredited. We closed our other U.K. facility, which had been located at Battersea, in fiscal 2007. We transferred the manufacturing of most of the products manufactured at the Battersea facility to our facilities in India.
     We have completed the expansion of our facility at Bachupally, Andhra Pradesh to manufacture tablets and capsules. We are in the process of expanding the manufacture and packing of pellet formulations. We have also established a facility to manufacture oral solid and injectable forms of cyto-toxic and hormonal formulations at a Special Economic Zone located in Visakhapatnam, India. After the commercialization of these products, the facility will cater to the requirements of our key markets for the concerned products.
     In Germany, manufacturing of betapharm’s products is now partly through our facilities in Bachupally India and also outsourced to third party manufacturers. As of March 31, 2008, we have shifted manufacturing of nine key product groups to India. In fiscal 2009, we intend to continue such shifting of manufacturing of betapharm products to our facilities in India. The logistics services for storage and distribution in Germany is outsourced to a third party service provider.
Competition
     Revenues and gross profit derived from the sales of generic pharmaceutical products are affected by certain regulatory and competitive factors. As patents and regulatory exclusivity for brand name products expire, the first off-patent manufacturer to receive regulatory approval for generic equivalents of such products is generally able to achieve significant market penetration. As competing off-patent manufacturers receive regulatory approvals on similar products, market share, revenues and gross profit typically decline, in some cases significantly. Accordingly, the level of market share, revenues and gross profit attributable to a particular generic product is normally related to the number of competitors in that product’s market and the timing of that product’s regulatory approval and launch, in relation to competing approvals and launches. Consequently, we must continue to develop and introduce new products in a timely and cost-effective manner to maintain our revenues and gross margins. In addition, the other competitive factors critical to this business include price, product quality, prompt delivery, customer service and reputation. Many of our competitors seek to participate in sales of generic products by, among other things, collaborating with other generic pharmaceutical companies or by marketing their own generic equivalent to their branded products. Our major competitors in the U.S. market include Ranbaxy Laboratories Limited, Teva Pharmaceutical Industries Limited, Barr Laboratories Inc., Mylan Laboratories Inc., Andrx Corporation, Watson Laboratories Inc., and Sandoz, a division of Novartis Pharma A.G.
     Brand-name manufacturers have devised numerous strategies to delay competition from lower cost generic versions of their

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products. One of these strategies is to change the dosage form or dosing regimen of the brand product prior to generic introduction, which may reduce the demand for the original dosage form as sought by a generic ANDA dossier applicant or create regulatory delays, sometimes significant, while the generic applicant, to the extent possible, amends its ANDA dossier to match the changes in the brand product. In many of these instances, the changes to the brand product may be protected by patent or data exclusivities, further delaying generic introduction. Another strategy is the launch by the innovator or its licensee of an “authorized generic” during the 180-day generic exclusivity period, resulting in two generic products competing for the market rather than just the product that obtained the generic exclusivity. This may result in reduced revenues for the generic company which has been awarded the generic exclusivity period. In January 2006, we entered into an agreement with Merck & Co., Inc., allowing us to distribute and sell generic versions of finasteride and simvastatin (sold by Merck under the brand names Proscar® and Zocor®), upon the expiration of Merck’s patents covered by these products, provided that some other company obtains 180-day exclusivity after the expiration of the patents for either product. Subsequently, the patents for both of these products expired and other companies obtained 180-day exclusivity. Accordingly, we launched sales of these products on June 19, 2006 and June 23, 2006, respectively.
     In Germany, the companies with the largest generics market shares are losing their generics market shares to companies having rebate contracts with SHI funds. The top five generics companies (including their subsidiaries) in Germany hold an aggregate market share of approximately 52.3%, according to Insight Health’s NPI-Gx (Sales March 2008) report. Our key competitors within the German generics market include Sandoz (including its Hexal, Sandoz and 1A Pharma subsidiaries), a division of Novartis Pharma A.G., Ratiopharm GmbH and Stada Arzneimittel AG (including its Stada and Aliud subsidiaries).
     With the discount contracts with SHI funds becoming effective, long term structural changes are ongoing in the German market. Some companies have decided to cut their sales force to reduce fixed costs; others still believe that sales representatives remain a useful differentiating factor in this fiercely competitive environment.
Government regulations
U.S. Regulatory Environment
     All pharmaceutical manufacturers that sell products in the United States are subject to extensive regulation by the U.S. federal government, principally pursuant to the Federal Food, Drug and Cosmetic Act, the Hatch-Waxman Act, the Generic Drug Enforcement Act and other federal government statutes and regulations. These regulations govern or influence the testing, manufacturing, packaging, labeling, storing, record-keeping, safety, approval, advertising, promotion, sale and distribution of products.
     Our facilities and products are periodically inspected by the U.S. FDA, which has extensive enforcement powers over the activities of pharmaceutical manufacturers. Non-compliance with applicable requirements can result in fines, criminal penalties, civil injunction against shipment of products, recall and seizure of products, total or partial suspension of production, sale or import of products, refusal of the U.S. government to enter into supply contracts or to approve new drug applications and criminal prosecution. The U.S. FDA also has the authority to deny or revoke approvals of drug active ingredients and dosage forms and the power to halt the operations of non-complying manufacturers. Any failure by us to comply with applicable U.S. FDA policies and regulations could have a material adverse effect on the operations in our generics business.
     U.S. FDA approval of an ANDA is required before a generic equivalent of an existing or referenced brand drug can be marketed. The ANDA process is abbreviated because when processing an ANDA, the U.S. FDA waives the requirement of conducting complete clinical studies, although it normally requires bio-availability and/or bio-equivalence studies. An ANDA may be submitted for a drug on the basis that it is the equivalent of a previously approved drug or, in the case of a new dosage form, is suitable for use for the indications specified.
     An ANDA applicant in the United States is required to review the patents of the innovator listed in the U.S. FDA publication entitled Approved Drug Products with Therapeutic Equivalence Evaluations, popularly known as the “Orange Book,” and make an appropriate certification. There are several different types of certifications that can be made. A Paragraph IV filing is made when the ANDA applicant believes its product or the use of its product does not infringe on the innovator’s patents listed in the Orange Book or where the applicant believes that such patents are not valid or enforceable. The first generic company to file a Paragraph IV filing may be eligible to receive a six-month marketing exclusivity period from the date a court rules the patent is invalid or not infringed. A Paragraph III filing is made when the ANDA applicant does not intend to market its generic product until the patent expiration. A Paragraph II filing is made where the patent has already expired. A Paragraph I filing is made when the innovator has not submitted the required patent information for listing in the Orange Book. Another type of certification is made where a patent claims a method of

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use, and the ANDA applicant’s proposed label does not claim that method of use. When an innovator has listed more than one patent in the Orange Book, the ANDA applicant must file separate certifications as to each patent. Generally, Paragraph IV and Paragraph III filings are made before the product goes off patent, and Paragraph II and Paragraph I filings are made after the patent has expired.
     Before approving a product, the FDA also requires that our procedures and operations conform to Current Good Manufacturing Practice (“cGMP”) regulations, relating to good manufacturing practices as defined in the U.S. Code of Federal Regulations. We must follow cGMP regulations at all times during the manufacture of our products. We continue to spend significant time, money and effort in the areas of production and quality testing to help ensure full compliance with cGMP regulations.
     The timing of final U.S. FDA approval of an ANDA depends on a variety of factors, including whether the applicant challenges any listed patents for the drug and whether the brand-name manufacturer is entitled to one or more statutory exclusivity periods, during which the U.S. FDA may be prohibited from accepting applications for, or approving, generic products. In certain circumstances, a regulatory exclusivity period can extend beyond the life of a patent, and thus block ANDAs from being approved on the patent expiration date. For example, in certain circumstances the U.S. FDA may now extend the exclusivity of a product by six months past the date of patent expiration if the manufacturer undertakes studies on the effect of their product in children, a so-called pediatric extension.
     In June 2003, the U.S. FDA announced reforms in its generic drug review program with the goal of providing patients with greater and more predictable access to effective, low cost generic alternatives to brand name drugs.
     The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act of 2003”) has modified certain provisions of the Hatch-Waxman Act. In particular, significant changes have been made to provisions governing 180-day exclusivity and forfeiture thereof. The new statutory provisions governing 180-day exclusivity may or may not apply to an ANDA, depending on whether the first Paragraph IV certification submitted by any applicant for the drug was submitted prior to the enactment of the Medicare Amendments on December 8, 2003.
     Where the first Paragraph IV certification was submitted on or after December 8, 2003, the new statutory provisions apply. Under these provisions, 180-day exclusivity is awarded to each ANDA applicant submitting a Paragraph IV certification for the same drug with regard to any patent on the first day that any ANDA applicant submits a Paragraph IV certification for the same drug. The 180-day exclusivity period begins on the date of first commercial marketing of the drug by any of the first applicants. However, a first applicant may forfeit its exclusivity in a variety of ways, including, but not limited to (a) failure to obtain tentative approval within 30 months after the application is filed or (b) failure to market its drug by the later of two dates calculated as follows: (x) 75 days after approval or 30 months after submission of the ANDA, whichever comes first, or (y) 75 days after each patent for which the first applicant is qualified for 180-day exclusivity is either (1) the subject of a final court decision holding that the patent is invalid, not infringed, or unenforceable or (2) withdrawn from listing with the U.S. FDA (court decisions qualify if either the first applicant or any applicant with a tentative approval is a party; a final court decision is a decision by a court of appeals or a decision by a district court that is not appealed). The foregoing is an abbreviated summary of certain provisions of the Medicare Act, and accordingly it should be consulted for a complete understanding of both the provisions described above and other important provisions related to 180-day exclusivity and forfeiture thereof.
Where the first Paragraph IV certification was submitted prior to enactment of the Medicare Act, the statutory provisions governing 180-day exclusivity prior to the Medicare Act still apply. The U.S. FDA interprets these statutory provisions to award 180-day exclusivity to each ANDA applicant submitting a Paragraph IV certification for the same drug on the same day with regard to the same patent on the first day that any ANDA applicant submits a Paragraph IV certification for the same drug with regard to the same patent. The 180-day exclusivity period begins on the date of first commercial marketing of the drug by any of the first applicants or on the date of a final court decision holding that the patent is invalid, not infringed, or unenforceable, whichever comes first. A final court decision is a decision by a court of appeals or a decision by a district court that is not appealed.
European Union Regulatory Environment
     The activities of pharmaceutical companies within the European Union are governed by Directive 2001/83EC as amended. This Directive outlines the legislative framework, including the legal basis of approval, specific licensing procedures, and quality standards including manufacture, patient information and pharmaco-vigilance activities.
     Our U.K. facilities are licensed and periodically inspected by the U.K. MHRA Inspectorate, which has extensive enforcement powers over the activities of pharmaceutical manufacturers. Non-compliance can result in product recall and closure. In addition, the

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U.K. MHRA Inspectorate has approved and periodically inspected our manufacturing facility based in Andhra Pradesh, India for the manufacture of generic tablets and capsules for supply to Europe.
     All pharmaceutical companies that manufacture and market products in Germany are subject to the rules and regulations defined by the German drug regulator, the Bundesinstitut für Arzneimittel und Medizinprodukte (“BfArM”) and the Federal Drug Authorities. All the licensed facilities of pharmaceutical companies in Germany are periodically inspected by the Federal Drug Authorities, which has extensive enforcement powers over the activities of pharmaceutical companies. Non-compliance can result in closure of the facility.
     Prior approval of a Marketing Authorization is required to supply products within the European Union. Such Marketing Authorizations may be restricted to one member state then recognized in other member states or can cover the whole of the European Union, depending upon the form of registration elected. In Germany, Marketing Authorizations have to be submitted for approval to the BfArM.
     Generic or abridged applications omit full non-clinical and clinical data but contain limited non-clinical and clinical data, depending upon the legal basis of the application or to address a specific issue. The majority of our generic applications are made on the basis of essential similarity although other criteria may be applied. In the case of an essentially similar application, the applicant is required to demonstrate that its generic product contains the same active pharmaceutical ingredients in the same dosage form for the same indication as the innovator product. Specific data is included in the application to demonstrate that the proposed generic product is essentially similar to the innovator product with respect to quality, safe usage and continued efficacy. The applicant is also required to demonstrate bioequivalence with the reference product. Once all these criteria are met then a Marketing Authorization may be considered for grant.
     Unlike in the United States, there is no regulatory mechanism within the European Union to challenge any patent protection. Nor is any period of market exclusivity conferred upon the first generic approval. In situations where the period of exclusivity given to the branded product expires before their patent expires, the launch of our product would then be delayed until patent expiration.
     In Germany, the government is currently focused on reducing health care spending. During fiscal 2007, the German government passed the Economic Optimization of Pharmaceutical Care Act (“Arzneimittelversorgungs-Wirtschaftlichkeisgestz” or “AVWG”) which became effective as of May 1, 2006, which is designed to contain increased pharmaceutical costs. The AVWG’s provisions include, among other things: prohibitions on the provision of free goods to health professionals (including wholesalers, pharmacists, medical institutions, physicians etc.); limitations on the payment of rebates to wholesalers and pharmacists; prohibitions on price increases for medicinal products prior to March 31, 2008; implementation of additional mandatory rebates of 10% if pharmaceutical prices are not 30% below the reference prices as published by the Federal Associations of Healthcare Insurance funds; and empowering the statutory health insurance funds to waive copayments by patients. Due to the AVWG, insurance companies operating in Germany have the power to influence prices, and they have done so by releasing several products from co-payment.
     Further, the government passed a new healthcare reform, the Statutory Health Insurance - Competition Strengthening Act or Wettbewerbsstärkungsgesetz (“WSG”), which became effective as of April 1, 2007. Highlights of this new act are:
    private insurance funds cannot refuse to provide health insurance to anyone who is without private health insurance coverage or who wants to switch from the public system; for these patients, private insurance funds need to offer basic rates in the future;
 
    insurance funds are encouraged to enter into contracts with doctors, pharmacies and the pharmaceutical industry designed to lower the costs for the supply of patients with medicinal products (e.g., rebate agreements with the pharmaceutical industry and pharmacists) and integrating different fields of care to lower medical treatment costs.;
 
    insurance funds can cause drugs that are covered by rebate contracts with the pharmaceutical industry to be exempt from co-payments by patients;
 
    in filling prescriptions, pharmacists are required to give preference to drugs subject to rebates, unless the physician has explicitly excluded replacement of the prescribed drug;
 
    rebated medicinal products might, depending on individual agreements with physicians, be exempted from individual prescribing limits of the physicians (in Germany, physicians are given prescribing limits by insurance funds based on their

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      number of patients, and if those limits are exceeded, the physicians can be penalized);
 
    patients included in integrated care routes (see above) shall preferably receive rebated medicinal products; and
 
    in making decisions pertaining to the prescription of drugs or filling of prescriptions, drugs will be evaluated not only from a benefit perspective but also from a cost perspective.
Canada and South Africa Regulatory Environment
     In Canada and South Africa, we are required to file product dossiers with the particular country’s regulatory authority for permission to market the generic formulation. The regulatory authorities may inspect our manufacturing facility before approval of the dossier.
Drug Discovery Segment
     Drug discovery is a key segment of our business. In this segment, we are actively pursuing discovery and development of new molecules, sometimes referred to as “New Chemical Entities” or “NCEs.” Our research programs focus on the following therapeutic areas:
    Metabolic disorders
 
    Cardiovascular disorders
 
    Bacterial infections
 
    Inflammation
 
    Cancer
     Our research laboratories are based in Hyderabad, India and Atlanta, Georgia, U.S. As of March 31, 2008, we employed a total of 198 scientists, including approximately 40 scientists who held Ph.D. degrees. We pursue an integrated research strategy with our laboratories in the United States focusing on discovery of new molecular targets and designing of screening assays to screen for promising lead molecules followed by selection and optimization of lead molecules and further clinical development of those optimized leads at our laboratories in India. By establishing a research facility in the United States, we have better access to research scientists in the United States, enhancing our screening abilities for new molecular targets and access to high technology platforms.
     While we continue to seek licensing and development arrangements with third parties to further develop our pipeline products, we also conduct clinical development of some of the candidate drugs ourselves where it is economically and technically feasible. Our long-term strategy for drug discovery is to increasingly undertake clinical testing ourselves, as we believe that this will enable us to derive higher value for our compounds. Our goal is to balance internal development of our own product candidates with in-licensing of promising compounds that complement our strengths. We also pursue licensing and joint development of some of our lead compounds with companies looking to implement their own product portfolio.
     In September 2005, we entered into a co-development and commercialization agreement with Denmark based Rheoscience A/S for the joint development and commercialization of Balaglitazone (DRF 2593), a partial PPAR-gamma agonist, for the treatment of type 2 diabetes. Under the terms of the agreement, Rheoscience will fund all the costs associated with the Phase III clinical trials of DRF 2593 and we will pay Rheoscience a pre-determined amount towards its share of the development costs. Rheoscience has exclusive marketing rights in the European Union and China, and we have exclusive marketing rights in the rest of the world. Rheoscience is obligated to obtain all necessary regulatory approvals on our behalf in the United States. Upon receiving final approval from the U.S. FDA, we are obligated to make a pre-determined milestone payment to Rheoscience. The agreement is valid for a period of ten years from the date of commercialization. Under the terms of the agreement, if either party chooses to commercialize the product without the other, then the other party will be entitled to a milestone-based royalty on sales. However, if the parties choose to commercialize the product through a third party, then each of the parties is entitled to share a pre-determined percentage of the net proceeds of commercialization received. We also retain the right to supply clinical development and commercial quantities of the requisite active pharmaceutical ingredients on arms-length basis to the party that commercializes DRF 2593. DRF 2593 commenced Phase III clinical trials in August 2007, with such clinical trials scheduled to continue until middle of fiscal 2011.

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     In September 2005, we announced the formation of an integrated drug development company, Perlecan Pharma Private Limited (“Perlecan Pharma”), as a joint venture with Citigroup Venture Capital International Growth Partnership Mauritius Limited (“CVC”) and ICICI Venture Funds Management Company (“ICICI Venture”). The terms of the joint venture were amended in March 2006. Under the terms of the joint venture agreement, CVC and ICICI Venture each contributed Rs.1,018 million and we contributed Rs.170 million towards Perlecan’s initial equity capital. Furthermore, the agreement grants us the first right to conduct product development and clinical trials on behalf of Perlecan Pharma on an arm’s length basis, subject to the final decision by the board of directors of Perlecan Pharma. During fiscal 2007, we entered into a Research Services Agreement with Perlecan Pharma pursuant to which we provide Perlecan Pharma with clinical development support and services.
     Perlecan Pharma has certain development rights with respect to additional NCE assets that we discover and we have certain commercialization rights with respect to products that Perlecan Pharma develops. In addition, as part of this arrangement, we transferred all rights and title, including the development and commercialization rights, of four NCE assets to Perlecan Pharma. As a result, we own approximately 14.31% of the equity of Perlecan Pharma and we have the right to designate three out of seven directors on the board of Perlecan Pharma. In addition, Perlecan Pharma has issued warrants to us to purchase 45,000,000 equity shares of Perlecan Pharma, the exercise of which is contingent upon the success of certain research and development milestones. If the warrants are fully exercised, then we will own approximately 62.5% of the equity shares of Perlecan Pharma. During fiscal 2007, Perlecan Pharma discontinued the development of DRL 11605. Perlecan Pharma is exploring out-licensing opportunities for DRF 10945 instead of developing it within Perlecan Pharma. Development of the remaining two molecules, RUS 3108 and DRL 16536, has been discontinued within Perlecan Pharma and back-up molecules are being researched.
     In September 2006, we entered into an agreement with ClinTec International for the joint development of an anti-cancer compound, DRF 1042, belonging to the topoisomerase inhibitors class of compounds for use as potential treatment of various types of cancer. We have completed Phase I clinical trials for DRF 1042 in India. Under the terms of the agreement, we and ClinTec International will co-develop DRF 1042, undertaking Phase II and Phase III clinical trials, with the aim of securing U.S. FDA and EMEA approvals. ClinTec International is granted the commercialization rights for most of Europe, including major European markets, and we retain the commercialization rights for the rest of the world, including the United States. Upon commercialization of the product, we will receive a royalty on sales by ClinTec International in its designated territories and ClinTec International will receive a royalty on sales by us in the United States. In the event either party out-licenses the drug product, the proceeds from such an arrangement will be shared by both the parties in a pre-determined ratio (excluding the proceeds from out-licenses of the drug product to our territories outside the United States). We will also retain the exclusive, worldwide rights to supply commercial quantities of the drug product. During fiscal 2008, preclinical studies were carried out to confirm that the molecule was ready to begin Phase II clinical trial studies for solid tumors.
     As part of our research program, we pursue collaborations with leading institutions and laboratories all over the world. We enter into these collaborations to utilize the expertise and facilities these institutions and laboratories provide. We have collaborated with the National Cancer Institute in Maryland, which is a part of the United States National Institutes of Health. In February 2006, we entered into an agreement with Argenta Discovery Limited (“Argenta”) for the joint development and commercialization of a novel approach to the treatment of Chronic Obstructive Pulmonary Disease (“COPD”). Under the terms of the agreement, the parties agreed to collaborate to identify clinical candidates from a certain class of our compounds for use as potential treatments for COPD. Both parties agreed to jointly develop the selected candidates from the pre-clinical stage up to Phase IIa (proof-of-concept). Upon successful completion of a Phase IIa trial, the parties may either license-out the candidate for further development and commercialization to a larger pharmaceutical company or continue the further co-development and commercialization themselves. We and Argenta have agreed to fund the joint collaboration up to proof-of-concept and share the development expenses equally and profits at a predetermined ratio. DRF 2546 was identified as candidate that could be developed for COPD, and Good Laboratory Practices toxicity studies are ongoing for this molecule.
     In March 2008, we entered into an agreement with 7TM Pharma for drug discovery collaboration on selected drug targets. We will collaborate with 7TM Pharma to identify clinical candidates for pre-selected targets and will jointly develop these candidates from the pre-clinical stage up to Phase IIa (proof-of-concept). Upon successful completion of a Phase IIa trial, the parties may either license out the candidate for further development and commercialization to a larger pharmaceutical company or continue the further co-development and commercialization themselves. Denmark based 7TM Pharma is a biotech company focusing on discovery and development of new drugs targeting 7TM receptors. 7TM Pharma’s primary therapeutic area is metabolic diseases, including obesity, Type 2 diabetes and cardiovascular diseases.

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     Our investments into research and development of NCEs have been consistently focused towards developing promising therapeutics. In fiscal 2006, 2007 and 2008, we spent Rs.814.5 million, Rs.774.6 million and Rs.901.1, respectively, towards drug discovery activities. In fiscal 2006, 2007 and 2008, we received Rs.0, Rs.136.8 million and Rs.39.2 million in revenues, respectively, from our drug discovery segment activities.
     The compounds currently under development in our pipeline include:
                 
Compound   Therapeutic Area   Status   Development partner   Remarks
DRF 2593
  Metabolic disorders   Phase III   Rheoscience   In Phase III clinical testing for type 2 diabetes
 
               
DRF 1042
  Oncology   Phase I   ClinTec   Scheduled to enter Phase II clinical testing for solid tumors
 
               
COPD
  Respiratory disorders   Pre-clinical Development   Argenta   Targeted for Chronic Obstructive Pulmonary Disease
     Patents. The status of our patents filed and issued as of March 31, 2008 is summarized below:
                                         
Category   USPTO(1)   USPTO(1)   PCT(2)   India   India
    (Filed)   (Granted)   (Filed)   (Filed)   (Granted)
Anti-diabetic
    74       44       60       116       38  
Anti-cancer
    17       8       14       45       14  
Anti-bacterial
    7       5       8       21       3  
Anti-inflammation/Cardiovascular
    34       12       18       15       1  
Anti-ulcerant
    1       1             1          
Miscellaneous
    4       1       3       23       8  
TOTAL
    137       71       103       221       64  
 
(1)   “USPTO” means the United States Patent and Trademark Office.
 
(2)   “PCT” means the Patent Cooperation Treaty, an international treaty that facilitates foreign patent filings for residents of member countries when obtaining patents in other member countries.
     Stages of Testing Development. The stages of testing required before a pharmaceutical product can be marketed in the United States are generally as follows:
     
Stage of Development   Description
 
Preclinical  
Animal studies and laboratory tests to evaluate safety and efficacy, demonstrate activity of a product candidate and identify its chemical and physical properties.
Phase I  
Clinical studies to test safety and pharmacokinetic profile of a drug in humans.
Phase II  
Clinical studies conducted with groups of patients to determine preliminary efficacy, dosage and expanded evidence of safety.
Phase III  
Larger scale clinical studies conducted in patients to provide sufficient data for statistical proof of efficacy and safety.
     For ethical, scientific and legal reasons, animal studies are required in the discovery and safety evaluation of new medicines. Preclinical tests assess the potential safety and efficacy of a product candidate in animal models. The results of these studies must be submitted to the U.S. FDA as part of an Investigational New Drug (“IND”) application before human testing may proceed.
     U.S. law further requires that studies conducted to support approval for product marketing be “adequate and well controlled.” In general, this means that either a placebo or a product already approved for the treatment of the disease or condition under study must

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be used as a reference control. Studies must also be conducted in compliance with good clinical practice requirements, and adverse event and other reporting requirements must be followed.
     The clinical trial process can take five to ten years or more to complete, and there can be no assurance that the data collected will be in compliance with good clinical practice regulations, will demonstrate that the product is safe or effective, or, in the case of a biologic product, pure and potent, or will provide sufficient data to support U.S. FDA approval of the product. The U.S. FDA may place clinical trials on hold at any point in this process if, among other reasons, it concludes that clinical subjects are being exposed to an unacceptable health risk. Trials may also be terminated by institutional review boards, who must review and approve all research involving human subjects. Side effects or adverse events that are reported during clinical trials can delay, impede, or prevent marketing authorization.
Competition
     The pharmaceutical and biotechnology industries are highly competitive. We face intense competition from organizations such as large pharmaceutical companies, biotechnology companies and academic and research organizations. The major pharmaceutical organizations competing with us have greater capital resources, larger overall research and development staff and facilities and considerably more experience in drug development. Biotechnology companies competing with us may have these advantages as well. In addition to competition for collaborators and investors, these companies and institutions also compete with us in recruiting and retaining highly qualified scientific and management personnel.
Government regulations
     Virtually all pharmaceutical and biologics products that we or our collaborative partners develop will require regulatory approval by governmental agencies prior to commercialization. The nature and extent to which these regulations apply varies depending on the nature of the products and also vary from country to country. In particular, human pharmaceutical products are subject to rigorous pre-clinical and clinical testing and other approval procedures by the relevant regulatory agency. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country.
     In India, under the Drugs and Cosmetics Act, 1940, the regulation of the manufacture, sale and distribution of drugs is primarily the concern of the state authorities while the Central Drug Control Administration is responsible for approval of new drugs, clinical trials in the country, laying down the standards for drugs, control over the quality of imported drugs, coordination of the activities of state drug control organizations and providing expert advice with a view of bringing about the uniformity in the enforcement of the Drugs and Cosmetics Act, 1940.
     For marketing a drug in the United States, we or our partners will be subject to regulatory requirements governing human clinical trials, marketing approval and post-marketing activities for pharmaceutical products and biologics. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record-keeping and marketing of these products. The process of obtaining these approvals and the subsequent compliance with applicable statutes and regulations is time consuming and requires substantial resources, and the approval outcome is uncertain.
     Generally, in order to gain U.S. FDA approval, a company first must conduct pre-clinical studies in the laboratory and in animal models to gain preliminary information on a compound’s activity and to identify any safety problems. Pre-clinical studies must be conducted in accordance with U.S. FDA regulations. The results of these studies are submitted as part of an IND application that the U.S. FDA must review before human clinical trials of an investigational drug can start. If the U.S. FDA does not respond with any questions, a drug developer can commence clinical trials thirty days after the submission of an IND.
     In order to eventually commercialize any products, we or our collaborator first will be required to sponsor and file an IND and will be responsible for initiating and overseeing the clinical studies to demonstrate the safety and efficacy that are necessary to obtain U.S. FDA marketing approval. Clinical trials are normally done in three phases and generally take several years, but may take longer to complete. The clinical trials have to be designed taking into account the applicable U.S. FDA guidelines. Furthermore, the U.S. FDA may suspend clinical trials at any time if the U.S. FDA believes that the subjects participating in trials are being exposed to unacceptable risks or if the U.S. FDA finds deficiencies in the conduct of the trials or other problems with our product under development.
     After completion of clinical trials of a new product, U.S. FDA marketing approval must be obtained. If the product is classified as a new pharmaceutical, we or our collaborator will be required to file a New Drug Application (“NDA”), and receive approval before

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commercial marketing of the drug. The testing and approval processes require substantial time and effort. NDAs submitted to the U.S. FDA can take several years to obtain approval and the U.S. FDA is not obligated to grant approval at all.
     Even if U.S. FDA regulatory clearances are obtained, a marketed product is subject to continual review. If and when the U.S. FDA approves any of our or our collaborators’ products under development, the manufacture and marketing of these products will be subject to continuing regulation, including compliance with cGMP, adverse event reporting requirements and prohibitions on promoting a product for unapproved uses. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of pharmaceutical products.
Our research and development processes involve the controlled use of hazardous materials and controlled substances. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and waste products.
Custom Pharmaceutical Services
     Our Custom Pharmaceutical Services (“CPS”) segment markets process development and manufacturing services to customers primarily consisting of innovator pharmaceutical and biotechnology companies. This segment accounted for 9.6% of our total revenues for fiscal 2008, contributing Rs.4,817.6 million.
     The CPS segment was established in 2001 to leverage our strength in process chemistry to serve the niche segment of the pharmaceutical and fine chemicals industry. Over the years, our CPS business strategy has evolved to focus on the marketing of process development and manufacturing services. The objective of our CPS segment is to be the preferred partner for innovator pharmaceutical companies, providing a complete range of services that are necessary to take their innovations to the market speedily and more efficiently. The focus is to leverage our skills in process development, analytical development, formulation development and cGMP manufacture to serve various needs of innovator pharmaceutical companies. We have positioned our CPS segment to be the partner of choice for large and emerging innovator companies across the globe, with service offerings spanning the entire value chain of pharmaceutical services.
Sales, Marketing and Distribution Network.
     We have focused business development teams dedicated to our key geographies of North America, the European Union and Asia Pacific targeting large and emerging innovator companies to build long-term business relationships focused on catering to their outsourcing needs.
Manufacturing and Materials
     Our CPS segment has well-resourced synthetic organic chemistry laboratories, analytical laboratories and kilo laboratories at our technology development centers at Miyapur and Jeedimetla in Hyderabad. We have added a new crystallisation laboratory which enhances our technical capability to study finishing stages of API manufacturing and process safety. Our chemists and engineers understand cGMP manufacturing and regulatory requirements for synthesis, manufacture and formulation of an NCE from pre-clinical stage to commercialization. With our increased focus on formulation development services, we now have facilities for pre-formulation and formulation development, analytical development, clinical trial supplies, pilot scale and product regulatory support. Larger quantities of APIs and intermediates are sourced internally from our API segment in India and from our plant in Mexico, which we acquired from Roche during fiscal 2006. In addition to manufacturing the active pharmaceutical ingredients naproxen and naproxen sodium and a range of intermediates, the Mexico facility synthesizes steroids for use in pharmaceutical and veterinary products. During fiscal 2008, in the first half, our Mexico business faced raw material constraints and as a result, we were not able to fully service the customer requirements. To address this, a manufacturing facility has been commissioned in India to supply the key ingredients.
     Our CPS segment is uniquely positioned in the market where it utilizes assets (both in terms of its physical assets and know-how) of a vertically integrated pharmaceutical company and combines this with the service model built in the last few years.

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Competition
     Globally, the pharmaceutical manufacturing services industry is estimated to generate sales of U.S.$45 billion and is set to grow to sales of U.S.$70 billion by 2010. Contract manufacturing is a significant opportunity for Indian pharmaceutical companies based on their low-cost manufacturing infrastructure. Key competitors in India include Torrent Pharmaceuticals Limited, Shasun Chemicals & Drugs Limited, Divis’s Laboratories Limited, Matrix Laboratories Limited, Dishman Pharmaceuticals & Chemicals Limited, Syngene Limited, Jubilant Organosys Limited and Nicholas Piramal India Limited. Key competitors from outside India include Lonza Group Limited, Koninklijke DSM N.V., Albany Molecular Research, Inc., Patheon, Inc. and Cardinal Health, Inc. Our CPS segment distinguishes itself from its key competitors by offering a wider range of services spanning the entire pharmaceutical value chain.
     Growth in contract manufacturing is likely to be driven by increasing outsourcing of late-stage and off-patent molecules by large pharmaceutical companies to compete with generics. India is emerging as an alliance and outsourcing destination of choice for global pharmaceutical companies. Companies such as Roche, Bayer, Aventis, Novartis, Eli Lilly and GlaxoSmithKline are all executing plans to make India the regional hub for API and supply of bulk drugs.
Government Regulations
The regulations applicable to our CPS segment are similar to those as discussed in our formulations, API and generics segments.
4.C. Organizational structure
     Dr. Reddy’s Laboratories Limited is the parent company in our group. We had the following subsidiary companies where our direct and indirect ownership was more than 50% as of March 31, 2008:
         
        Percentage of Direct/
    Country of   Indirect Ownership
Name of Subsidiary   Incorporation   Interest
DRL Investments Limited
  India   100%
Reddy Pharmaceuticals Hong Kong Limited
  Hong Kong   100%
OOO JV Reddy Biomed Limited
  Russia   100%
Reddy Antilles N.V.
  Netherlands   100%
Reddy Netherlands B.V.
  Netherlands       100%(1)
Reddy US Therapeutics, Inc.
  U.S.A.       100%(1)
Dr. Reddy’s Laboratories, Inc.
  U.S.A.   100%
Dr. Reddy’s Farmaceutica do Brasil Ltda
  Brazil   100%
Cheminor Investments Limited
  India   100%
Aurigene Discovery Technologies Limited
  India   100%
Aurigene Discovery Technologies, Inc.
  U.S.A.       100%(3)
Kunshan Rotam Reddy Pharmaceutical Co. Limited
  China     51.33%(4)
Dr. Reddy’s Laboratories (EU) Limited
  United Kingdom   100%
Dr. Reddy’s Laboratories (U.K.) Limited
  United Kingdom       100%(5)
Dr. Reddy’s Laboratories (Proprietary) Limited
  South Africa     60%
Reddy Cheminor S.A.
  France       100%(2)
OOO Dr. Reddy’s Laboratories Limited
  Russia   100%
Dr. Reddy’s Bio-sciences Limited
  India   100%
Promius Pharma LLC (earlier Reddy Pharmaceuticals, LLC).
  U.S.A.       100%(6)
Trigenesis Therapeutics, Inc.
  U.S.A.   100%
Industrias Quimicas Falcon de Mexico, SA de CV
  Mexico   100%
Reddy Holding GmbH
  Germany       100%(7)
Lacock Holdings Limited
  Cyprus   100%
betapharm Arzneimittel GmbH
  Germany       100%(8)
beta Healthcare Solutions GmbH
  Germany       100%(8)
beta institut fur sozialmedizinische Forschung und Entwicklung GmbH
  Germany       100%(8)

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        Percentage of Direct/
    Country of   Indirect Ownership
Name of Subsidiary   Incorporation   Interest
Reddy Pharma Iberia SA
  Spain   100%
Reddy Pharma Italia SPA
  Italy       100%(7)
Dr. Reddy’s Laboratories (Australia) Pty Ltd.
  Australia     70%
Dr. Reddy’s Laboratories SA
  Switzerland   100%
Eurobridge Consulting B.V.
  Netherlands       100%(1)
OOO DRS Limited
  Russia       100%(9)
Aurigene Discovery Technologies(Malaysia) Sdn, Bhd
  Malaysia       100%(3)
Affordable Healthcare Limited
  New Zealand       100%(10)
Macred India Private Limited
  India   100%
Dr. Reddy’s Laboratories Ilac Ticaret Limited
  Turkey   100%
 
(1)   Indirectly owned through Reddy Antilles N.V.
 
(2)   Subsidiary under liquidation.
 
(3)   Indirectly owned through Aurigene Discovery Technologies Limited.
 
(4)   Kunshan Rotam Reddy is a subsidiary as we hold a 51.33% stake; however, we account for this investment by the equity method and do not consolidate it in our financial statements.
 
(5)   Indirectly owned through Dr. Reddy’s Laboratories (EU) Limited.
 
(6)   Indirectly owned through Dr. Reddy’s Laboratories Inc.
 
(7)   Indirectly owned through Lacock Holdings Limited.
 
(8)   Indirectly owned through Reddy Holding GmbH.
 
(9)   Indirectly owned through Eurobridge Consulting B.V.
 
(10)   Indirectly owned through Dr. Reddy’s Laboratories SA.
4.D. Property, plants and equipment
     The following table sets forth current information relating to our principal facilities:
                         
    Approximate   Built up       Installed   Actual
Location   Area   Area   Certification   Capacity   Production
    (Square feet)   (Square feet)            
Formulations
                  3,440 (6)(7)   4,062 (6)   
Bollaram, Andhra Pradesh, India
    217,729     103,894   (1)        
Bachupally, Andhra Pradesh, India
    1,306,372     357,909   (2)        
Yanam, Pondicherry, India
    457,000     26,226   None        
Baddi, Himachal Pradesh, India
    765,542     247,028   None        
Bachupally, Andhra Pradesh, India
    798,982     132,436   (1)   13,852 (9)       3,697 (9)   
 
                       
Active Pharmaceutical Ingredients & Intermediates
                  3,901 (8)       3,453 (8)   
Bollaram, Andhra Pradesh, India
    734,013     191,558   U.S. FDA and EuGMP        
Bollaram, Andhra Pradesh, India
    648,173     286,193   U.S. FDA and EuGMP        
Bollaram, Andhra Pradesh, India
    285,235     210,630   U.S. FDA and EuGMP        
Jeedimetla, Andhra Pradesh, India
    228,033     101,474   U.S. FDA and EuGMP        
Miryalaguda, Andhra Pradesh, India
    2,787,840     409,553   U.S. FDA and EuGMP        
Pydibheemavaram, Andhra Pradesh, India
    8,523,466     905,612   U.S. FDA and EuGMP        
Pydibheemavaram, Andhra Pradesh, India (4)
    737,134     53,854            
 
                       
Generics
                       
Bachupally, Andhra Pradesh, India (4)
    783,823     328,644   (3)   9,200 (6)       3,591 (6)   
Beverley, East Yorkshire, United Kingdom
    81,000     32,500   U.K. Medicine Control Agency, ISO 9001: 2000        
 
                       
Drug Discovery(10)
                       
Miyapur, Andhra Pradesh, India
    576,941     234,591   None        
Georgia, United States (5)
    24,733     24,733   None        

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    Approximate   Built up       Installed   Actual
Location   Area   Area   Certification   Capacity   Production
    (Square feet)   (Square feet)            
Custom Pharmaceutical Services
                  3,428 (9)(11)   1,978 (9)(11)
Miyapur, Andhra Pradesh, India
    113,211     85,767   None        
Jeedimetla, Andhra Pradesh, India
    68,825     16,597   None        
Cuernavaca, Mexico
    2,774,378     1,345,488   U.S.FDA,TGA (Australia), TKMA(Denmark), PDMA, MHLW(Japan),SSA (Mexico)        
 
(1)   Ministry of Health, Sudan; Ministry of Health, Uganda; ANVISA, Brazil; National Medicines Agency, Romania; Ministry of Health, Ukraine; GCC group of countries.
 
(2)   Medicine Control Council, Republic of South Africa; The State Company for Marketing Drugs and Medical Appliances, Ministry of Health, Iraq; Sultanate of Oman, Ministry of Health, Muscat; Ministry of Health, Sudan; Ministry of Health, State of Bahrain; State Pharmaceutical Inspection, Republic of Latvia; Pharmaceutical and Herbal Medicines, Registration and Control Administrations, Ministry of Health, Kuwait; National Medicines Agency, Romania; Ministry of Health, Ukraine; Ministry of Health, Indonesia; Health Authorities, Nigeria; Ministry of Health, Kirgystan; WHO, GMP; ANVISA, Brazil; Medicines and Health Care Products Regulatory Agencies (“MHRA”), U.K.
 
(3)   U.S. FDA; Medicines and Healthcare Products Regulatory Agency, U.K.; Ministry of Health, UAE; Medicines Control Council, South Africa; ANVISA, Brazil; National Medicines Agency, Romania; Environmental Management System ISO 14001; Occupational Health and Safety Management System — OHSAS 18001; Quality Management System-ISO 9001:2000.
 
(4)   100% Export Oriented Units. However the income tax benefits under the Indian Income tax Act were exhausted as of the end of fiscal 2008 for our Generics facility at Bachupally.
 
(5)   Leased facilities.
 
(6)   Million units.
 
(7)   On a single shift basis.
 
(8)   Tonnes.
 
(9)   Grams.
 
(10)   Laboratories only.
 
(11)   Mexico only.
     Except as indicated in the notes above, we own all of our facilities. All properties mentioned above, including leased properties, are either used for manufacturing and packaging of pharmaceutical products or for research and development activities. In addition, we have sales, marketing and administrative offices, which are leased properties. We believe that our facilities are optimally utilized.
     Our facility for the manufacture of formulations at Baddi, Himachal Pradesh, India was completed in April 2006. This project was initiated to take advantage of certain financial benefits, which include exemption from income tax and excise duty for a specified period, offered by the government of India to encourage industrial growth in the state of Himachal Pradesh, India. Global Distribution Centre (“GDC”) is constructed at Bachupally, Hyderabad, Andhra Pradesh, India, which we put in service during fiscal 2008. An Integrated Product Development (“IPD”) facility has been constructed at Bachupally, Hyderabad, Andhra Pradesh, India and commenced its operations in fiscal 2008.
     An expansion project in our Generics plant at Bachupally, Hyderabad, Andhra Pradesh, India was completed in fiscal 2008, which helped to increase the production capacity to manage high demand periods.
     We have completed construction of a facility at Special Economic Zone at Visakhapatnam, Andhra Pradesh, India for manufacture of oral and injectible cytotoxic finished dosages for Generics segment. We are in the process of obtaining certification for this facility from the U.S. FDA. During the initial visit to our facility, the U.S. FDA inspectors have given us a Notice in Form 483 for certain deficiencies. This is a part of the regular pre-ANDA approval inspection that the U.S. FDA conducts for all potential U.S. ANDA

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filers and pursuant to which the entire manufacturing site is audited. We have promptly responded to this Notice and expect to receive approval for the facility after completion of the U.S. FDA review. Subject to receipt of the approval, commercial production is expected to be initiated in fiscal 2009.
     We are in the process of setting up a plant in a Special Economic Zone in Medak District, Andhra Pradesh. Preliminary steps for this are already taken.
     We are also in the process of establishing a plant in a Special Economic Zone in Andhra Pradesh, India for the manufacture of APIs.
     We have working capital facilities with banks and, in order to secure those facilities, we have created encumbrance charges on certain of our immovable and movable properties.
     We are subject to significant national and state environmental laws and regulations which govern the discharge, emission, storage, handling and disposal of a variety of substances that may be used in or result from our operations at the above facilities. Non-compliance with the applicable laws and regulations may subject us to penalties and may also result in the closure of our facilities.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
     We are an emerging global pharmaceutical company with proven research capabilities. We derive our revenues from the sale of finished dosage forms, active pharmaceutical ingredients and intermediates, with a focus on India, the United States, Europe and Russia; from development and manufacturing services provided to innovator pharmaceutical and biotechnology companies; and from license fees from our drug discovery operations.
     As of March 31, 2008, we had the following business segments:
  Formulations. In this segment we derive revenues from the sale of finished dosage forms, primarily in India, Russia and other emerging markets. Key drivers of profitability in this segment are the volume and price of products sold, which in turn are dependent upon the popularity of our branded products in the relevant markets. Increases in this segment in recent periods have been on account of our increased marketing efforts and expansion of our markets.
  Active pharmaceutical ingredients and intermediates. In this segment we derive revenues from our sales to third parties of the principal ingredients for finished dosages. Our principal markets are Europe, the United States and India. Revenues in this segment are dependent upon the number of products that lose patent protection in any given period, and the price of those products, which tends to decline over time. Since these products ultimately become commoditized products, our ability to set prices is limited, while the cost of revenues generally remains stable. Thus, in any given period, different products will contribute varying amounts to our revenues and our gross profits.
  Generics. In this segment we derive revenues from the sale of therapeutic equivalents of branded drugs, primarily in Europe and the United States. Revenues from our sale of generics are highly cyclical. In the event that we obtain 180-day exclusivity for a particular product in the United States, we generally experience significantly increased revenues for this period, particularly at the beginning of the period, with sales prices decreasing toward the end of the 180 days as other manufacturers enter the market. Cost of sales remains generally constant, however, and thus products coming off patent contribute significantly to gross margins for a limited period, tending to increase volatility in this segment. In fiscal 2007, we launched two products pursuant to an agreement for “authorized generics” in the United States, which the innovator company licensed us to distribute generic versions of their branded product and sell it in competition with the companies that have 180-day exclusivity. In these cases, while sales volumes increase significantly (again, more significantly in the early part of the 180-day period), profit-sharing agreements with the innovator company mean that gross margins are much lower than would be the case if we were distributing the product under 180-day exclusivity. Additionally, the existence of “authorized generic” arrangements by innovator companies with other

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  manufacturers in cases where we have obtained 180-day exclusivity could adversely affect overall sales revenues during the 180-day period.
 
  Drug discovery. Revenues in this segment are derived from licensing fees for new molecules that we discover. Thus, revenues are dependent upon the success of our research activities, and may vary significantly from period to period depending upon whether specified milestones in licensing agreements are reached. We did not have any significant revenues from out-licensing arrangements during fiscal 2006, 2007 and 2008. In September, 2005, we formed Perlecan Pharma Private Limited as a joint venture with Citigroup Venture Capital International Growth Partnership Mauritius Limited and ICICI Venture Funds Management Company and contributed capital and four NCE assets to Perlecan. During fiscal 2007, Perlecan Pharma discontinued the development of DRL 11605. Perlecan Pharma is exploring out-licensing opportunities for DRF 10945 instead of developing it within Perlecan Pharma. Development of the remaining two molecules, RUS 3108 and DRL 16536, has been discontinued within Perlecan Pharma and back-up molecules are being researched.
  Custom pharmaceutical services. In this segment we derive revenues from service fees for process development and manufacturing services provided to innovator pharmaceutical and biotechnology companies. The key driver of revenue in this segment is likely to be the increasing outsourcing of late-stage and off-patent molecules by large pharmaceutical companies to compete with generic products.
     Our total revenues for fiscal 2008 were Rs.50,005.6 million (U.S.$1,249.5 million). We derived 20.9% of these revenues from sales in India, 22.7% from North America, 11.1% from Russia and other countries of the former Soviet Union, 31.7% from Europe and 13.6% from other countries. Our net income for fiscal 2008 was Rs.4,678.0 million (U.S.$116.9 million).
Critical Accounting Policies
     Critical accounting policies are those most important to the portrayal of our financial condition and results and that require the most exercise of our judgment. We consider the policies discussed under the following paragraphs to be critical for an understanding of our financial statements. Our significant accounting policies and application of these are discussed in detail in Note 2 to the Consolidated Financial Statements.
     Accounting estimates
     While preparing financial statements we make estimates and assumptions that affect the reported amount of assets, liabilities, disclosure of contingent liabilities at the balance sheet date and the reported amount of revenues and expenses for the reporting period. Financial reporting results rely on our estimate of the effect of certain matters that are inherently uncertain. Future events rarely develop exactly as forecast and the best estimates require adjustments, as actual results may differ from these estimates under different assumptions or conditions. We continually evaluate these estimates and assumptions based on the most recently available information. Specifically, we make estimates of:
    the useful life of property, plant and equipment and intangible assets;
 
    impairment of long-lived assets, including identifiable intangibles and goodwill;
 
    our future obligations under employee retirement and benefit plans;
 
    allowances for doubtful accounts receivable;
 
    inventory write-downs;
 
    allowances for sales returns; and
 
    valuation allowance in respect of deferred tax assets.
     We depreciate property, plant and equipment over their useful lives using the straight-line method. Estimates of useful life are subject to changes in economic environment and different assumptions. Assets under capital leases are amortized over their estimated useful life or lease term as appropriate. We review long-lived assets, including identifiable intangibles and goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure

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recoverability of assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual outcomes could vary significantly from such estimates. Factors such as changes in the planned use of buildings, machinery or equipment or lower than anticipated sales for products with capitalized rights could result in shortened useful lives or impairment.
     In accordance with applicable Indian laws, we provide a defined benefit retirement plan (“Gratuity Plan”) covering certain categories of employees. The Gratuity Plan provides a lump sum payment to vested employees at retirement or termination of employment, at an amount based on the respective employee’s last drawn salary and the years of employment with us. Liability with regard to the Gratuity Plan is determined by an actuarial valuation, based upon which we make contributions to the Gratuity Fund. In calculating the expense and liability related to this plan, assumptions are made about the discount rate, expected rate of return on plan assets, withdrawal and mortality rates and rate of future compensation increases as determined by us, within certain guidelines. The assumptions used may differ materially from actual results, resulting in a significant impact on the amount of expense recorded by us.
     We make allowance for doubtful accounts receivable, based on the present and financial condition of the customer and ageing of the accounts receivable after considering historical experience and the current economic environment. Actual losses due to doubtful accounts may differ from the allowances made. However, we believe that such losses will not materially affect our consolidated results of operations.
     We write down inventory for obsolescence, expired inventory and inventories with carrying values in excess of realizable values based on our assessment of future demands, market conditions and our specific inventory management initiatives. If the market conditions and actual demands are less favorable than our estimates, additional inventory write-downs may be required. In all cases, inventory is carried at the lower of historical costs or realizable value.
     Revenue recognition
          Product sales
     Revenue is recognized when significant risks and rewards in respect of ownership of products are transferred to customers, generally, the stockists or formulations manufacturers and when the following criteria are met:
    Persuasive evidence of an arrangement exists;
 
    The price to the buyer is fixed and determinable; and
 
    Collectibility of the sales price is reasonably assured.
     Revenue from domestic sales of formulation products is recognized on delivery of the product to the stockist by our consignment and clearing and forwarding agent. Revenue from domestic sales of active pharmaceutical ingredients and intermediates is recognized on delivery of products to customers, from our factories. Revenue from export sales is recognized when significant risks and rewards in respect of ownership of products are transferred to customers, which is based on terms of the contract. Revenue from product sales includes excise duty and is recorded net of sales tax and applicable discounts and allowances.
     Sales of formulations in India are made through clearing and forwarding agents to stockists. Significant risks and rewards in respect of ownership of formulation products are transferred by us when the goods are delivered to stockists from clearing and forwarding agents. Clearing and forwarding agents are generally compensated on a commission basis as a percentage of sales made by them.
     Sales of active pharmaceutical ingredients and intermediates in India are made directly to the end customers generally, formulation manufacturers, from our factories. Sales of formulations and active pharmaceutical ingredients and intermediates outside India are made directly to the end customers, generally stockists or formulations manufacturers, from us or our subsidiaries.
     We have entered into marketing arrangements with certain marketing partners for sale of goods. Under such arrangements, we sell generic products to our marketing partners at a price agreed in the arrangement. Revenue is recognized on these transactions upon delivery of products to our marketing partners as all the conditions under Staff Accounting Bulletin No.104 (“SAB 104”) are met.

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Subsequently, our marketing partners remit to us an additional amount based on the sale proceeds of sales made by them to the end customer. Such amount is determined as per the terms of the marketing arrangement and is recognized by us when the realization is certain under the guidance given in SAB 104.
     Revenue from sales of generic products is recognized as revenue when products are delivered and significant risks and rewards in respect of ownership of products passes on to the customer. Provisions for chargeback, rebates and medicaid payments are estimated and provided for in the year of sales and recorded as reduction of revenue. A chargeback claim is a claim made by the wholesaler for the difference between the price at which the product is initially invoiced to the wholesaler and the net price at which it is agreed to be procured from us. Provision for such chargebacks are accrued and estimated based on historical average chargeback rate actually claimed over a period of time, current contract prices with wholesalers/other customers and average inventory holding by the wholesaler. Such provisions are disclosed as a reduction of accounts receivable.
     We account for sales returns in accordance with SFAS 48, “Revenue Recognition when Right to Return Exists” by recording an accrual based on our estimate of expected sales returns.
      We deal in various products and operate in various markets and our estimates of sales returns are determined primarily by our experience in these markets. In respect of established products, we determine an estimate of sales returns accrual primarily based on historical experience of such sales returns. Additionally, other factors that we consider in determining the estimate include levels of inventory in the distribution channel, estimated shelf life, product discontinuances, price changes of competitive products and introductions of competitive new products, to the extent each of these factors impact on our business and our markets. We consider all of these factors and adjust the sales returns accrual to reflect our actual experience.
      With respect to new products introduced, those are either extensions of an existing line of product or in a general therapeutic category where we have historical experience. Our new product launches have historically been in therapeutic categories where established products exist and are sold either by us or our competitors. We have not yet introduced products in a new therapeutic category where the sales return experience of such products is not known. The amount of sales returns for our newly launched products do not significantly differ from sales return experience of current products marketed by us or competitors (as we understand based on industry publications). Accordingly, we do not expect sales returns for new products to be significantly different from expected sales returns of current products. We evaluate the sales returns of all of our products at the end of each reporting period and record necessary adjustments, if any. To date, no significant revision has been determined to be necessary.
          Service income
     Income from services, which primarily relates to contract research, is recognized as the related services are performed in accordance with the terms of the contract and when all the conditions under SAB 104 are met. Arrangements with customers for contract research and other related services are either on a fixed price or a time and material basis.
          License fees
     Non-refundable milestone payments are recognized in the consolidated statement of operations when earned, in accordance with the terms of the license agreement, and when we have no future obligations or continuing involvement pursuant to such milestone payments. Non-refundable up-front license fees are deferred and recognized when the milestones are earned, in proportion to the amount of each milestone earned bears to the total milestone payments agreed in the license agreement. Where the upfront license fees are a composite amount and cannot be attributed to a specific molecule, they are amortized over the development period. The milestone payments increase during the development period as the risk involved decreases. The agreed milestone payments reflect the progress of the development of the molecule and may not be spread evenly over the development period. Accordingly, the milestone payments are a fair representation of the extent of progress made in the development of these underlying molecules. In the event the development of a molecule is discontinued, the corresponding amount of deferred revenue is recognized in the consolidated statement of operations in the period in which the project is terminated.
     We have entered into certain dossier sales, licensing and supply arrangements that include certain performance obligations. Based on an evaluation of whether or not these obligations are inconsequential or perfunctory, we defer the upfront payments received under these arrangements. Such deferred revenue is recognized in the consolidated statement of operations in the period in which we complete our remaining performance obligations.

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     Derivative and hedge accounting
     We purchase foreign currency forward contracts/option contracts to mitigate the risk of changes in foreign exchange rates on accounts receivable and forecasted cash flows denominated in certain foreign currencies. We also purchases zero-cost collars, which qualify as net purchased options, to hedge the exposure to variability in expected future foreign currency cash inflows due to exchange rate movements beyond a defined range.
     In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, we recognize all derivatives as assets or liabilities measured at their fair value, regardless of the purpose or intent of holding them. In respect of derivatives designated and effective as cash flow hedges, gains or losses resulting from changes in the fair value are deferred and recorded as a component of accumulated other comprehensive income within stockholder’s equity until the hedged transaction occurs and are then recognized in the consolidated statement of operations together with the hedged item. We assess hedge effectiveness based on overall change in fair value of derivative instrument.
     Changes in fair value of derivatives not designated as hedges and the ineffective portion of the hedging instruments are recognized in the consolidated statements of operations of each period and are reported within foreign exchange gain/(loss), net under operating expenses.
     In respect of derivatives designated as hedges, we formally document all relationships between the hedging instrument and the hedged item, as well as its risk management objective and strategy for undertaking the hedge transaction. We also formally assess both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair value or cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, we prospectively, discontinue hedge accounting with respect to that derivative.
     Stock-based compensation
     Generally, we use the Black-Scholes option pricing model to determine the fair value of each option grant. We also use the Binomial model in certain instances as further discussed below. Upon adoption of SFAS 123(R), the Company elected to continue estimating the fair value of stock options using the Black-Scholes option pricing model. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected terms and risk free interest rates. In respect of Par Value Options, the expected term of an option is estimated based on the vesting term, contractual term, as well as expected exercise behavior of the employees receiving the option. With respect to Fair Market Value options, the expected term of an option is estimated based on the simplified method. Expected volatility of the option is based on historical volatility, during a period equivalent to the expected term of the option, of the observed market prices of the Company’s publicly traded equity shares. Dividend yield of the options is based on recent dividend activity. Risk-free interest rates are based on the government securities yield in effect at the time of the grant. These assumptions reflect management’s best estimates, but these assumptions involve inherent market uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used in the current period, stock-based compensation expense could have been materially impacted. Further, if we use different assumptions in future periods, stock based compensation expense could be materially impacted in future years.
     The estimated fair value of stock options is charged to income on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards.
     The fair value of each option is estimated on the date of grant using the Black-Scholes model with the following assumptions:
                         
    Fiscal Year Ended March 31,  
    2006     2007     2008  
Dividend yield
    0.5 %     0.5 %     0.75 %
Expected term
  12-78 months     12-48 months     12-48 months  
Risk free interest rates
    5.7-7.5 %     6.5-7.4 %     7.8-8.2 %
 
Volatility
    23.4-36.9 %     30.5-33.6 %     28.4% – 32.7%  

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     At March 31, 2008, we had four equity -based employee compensation plans, which are described more fully in Section 6.E. under “Employee Stock Incentive Plans”. Our parent company and our subsidiary, Aurigene Discovery Technologies Limited, have two equity based employee compensation plans each.
     A recent amendment to the Indian tax regulations requires us to pay a Fringe Benefit Tax on exercise of employee stock options. The Fringe Benefit Tax is computed based on the fair market value of the underlying equity share on the date of vesting of an option as reduced by the amount actually paid by the employee for exercise of the options. Our obligation to pay the Fringe Benefit Tax arises only upon exercise of options and is recorded as compensation expense in the statement of operations at that time.
     With respect to the grants where we propose to recover the Fringe Benefit Tax amount from the employee, the fair value of each option has been determined using the Binomial option pricing model.
     The Binomial model includes assumptions regarding dividend yields, expected volatility, expected terms, risk free interest rates and expected Fringe Benefit Tax recovery. These assumptions reflect management’s best estimates, but these assumptions involve inherent market uncertainties based on market conditions generally outside of Company’s control. As a result, if other assumptions had been used in the current period, stock-based compensation expense could have been materially impacted. Further, if management uses different assumptions in future periods, stock based compensation expense could be materially impacted in future years.
     The fair value of each option is estimated on the date of grant using the Binomial model with the following assumptions:
         
    Fiscal Year Ended  
    March 31, 2008  
Dividend yield
     
Expected term
  36-72 months
Risk free interest rates
    7.42-7.47 %
Volatility
    57.38 %
     Functional Currency
     Our foreign subsidiaries have different functional currencies, determined based on the currency of the primary economic environment in which they operate. For subsidiaries that operate in a highly inflationary economy, the functional currency is determined as the Indian rupee. Due to various subsidiaries operating in different geographic locations, a significant level of judgment is involved in evaluating the functional currency for each subsidiary.
     In respect of our foreign subsidiaries which market our products in their respective countries/regions, the functional currency has been determined as the Indian rupee, based on an individual and collective evaluation of the various economic factors listed below.
     The operations of these foreign subsidiaries are largely restricted to importing finished goods from us in India, sale of these products in the foreign country and remitting the sale proceeds to us. The cash flows realized from sale of goods are readily available for remittance to us and cash is remitted to us on a regular basis. The costs incurred by these subsidiaries are primarily the cost of goods imported from us. The financing of these subsidiaries is also done directly or indirectly by us.
     In respect of other subsidiaries, the functional currency is determined as the local currency, being the currency of the primary economic environment in which the subsidiary operates.
     Income Taxes
     As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We are subject to tax assessments in each of these jurisdictions. A tax assessment can involve complex issues, which can only be resolved over extended time periods. Additionally, the provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws. Although we have considered all these issues in estimating our income taxes, there could be an unfavorable resolution of such issues that may affect our results of operations.

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     We also assess the temporary differences resulting from differential treatment of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recognized in our consolidated financial statements. Deferred taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. In assessing the likelihood of realizing of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We consider the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategy in making this assessment. If we estimate that the deferred tax assets cannot be realized at the recorded value, a valuation allowance is created with a charge to the statement of operations in the period in which such assessment is made.
     We account for uncertainty in income taxes in the financial statements in accordance with FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, Accounting for Income Taxes. The accounting and disclosures of tax positions taken or expected to be taken on a tax return are based on the recognition threshold and measurement attribute as prescribed by FIN 48. We recognize penalties and interest related to unrecognized tax benefits as a component of income taxes.
     Litigation
     We are involved in various patent challenges, product liability, commercial litigation and claims, governmental and/or regulatory inspections, inquiries, investigations and other legal proceedings, including patent and commercial matters that arise from time to time in the ordinary course of our business. We assess in consultation with our counsel, the need to accrue a liability for such contingencies and record a reserve when we determine that a loss related to a matter is both probable and reasonably estimable. Because litigation and other contingencies are inherently unpredictable, our assessment can involve judgments about future events.

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5.A. Operating results
Financial Data
     The following table sets forth, for the periods indicated, our consolidated net operating revenues by segment:
                                 
    Revenues for the Fiscal Year Ended March 31,  
    2006     2007     2008     2008  
Segment   (Rs. in millions)     (Rs. in millions)     (Rs. in millions)     U.S.$ in millions)  
 
Formulations
    10,587.6       13,086.6       15,241.1       380.8  
Active pharmaceutical ingredients and intermediates
    8,267.5       11,883.0       11,804.8       295.0  
Generics
    4,055.8       33,224.2       17,781.5       444.3  
Drug discovery
          136.8       39.2       1.0  
Custom pharmaceutical services
    1,326.8       6,599.8       4,817.6       120.4  
Others
    29.3       164.7       321.4       8.0  
 
 
Total revenues
    24,267.0       65,095.1       50,005.6       1,249.5  
 
     The following table sets forth, for the periods indicated, our gross profit by segment:  
 
    Gross Profit for the Fiscal Year Ended March 31,  
    2006     2007     2008     2008  
Segment   (Rs. in millions)     (Rs. in millions)     (Rs. in millions)     U.S.$ in millions)  
 
Formulations
    7,297.0       9,163.1       11,202.1       279.9  
Active pharmaceutical ingredients and intermediates
    2,321.4       4,640.7       3,979.5       99.4  
Generics
    1,887.0       15,125.6       8,470.4       211.7  
Drug discovery
          15.3       3.1       0.1  
Custom pharmaceutical services
    327.4       1,937.2       1,665.5       41.6  
Others
    16.8       (6.3 )     87.4       2.2  
 
Total revenues
    11,849.6       30,875.6       25,408.0       634.9  
 

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     The following table sets forth, for the periods indicated, financial data as percentages of total revenues and the increase (or decrease) by item as a percentage of the amount over the comparable period in the previous year.
                                         
    Percentage of Sales     Percentage  
    Fiscal Year Ended March 31,     Increase/(Decrease)  
    2006     2007     2008     2006 to 2007     2007 to 2008  
 
Revenues
    100.0       100.0       100.0       168.2       (23.2 )
Gross profit
    48.8       47.4       50.8       160.6       (17.7 )
 
                                       
Selling, general and administrative expenses
    33.1       21.6       30.3       75.0       8.0  
Research and development expenses, net
    8.9       3.8       7.1       14.4       43.5  
Amortization expenses
    1.7       2.4       3.2       274.1       2.8  
Write-down of intangible assets
          2.7       5.0             40.6  
Impairment of goodwill
                0.2              
Foreign exchange (gain)/loss, net
    0.5       (0.2 )     (1.5 )           444.5  
 
Operating income
    6.0       17.4       6.7       681.9       (70.4 )
 
Other (expense)/income, net
    2.2       (1.2 )     0.2       (246.0)        
Income before income taxes
    7.8       16.1       6.9       456.4       (67.3 )
 
Income tax benefit/(expenses)
    (1.1 )     (1.8 )     2.5       355.5        
Net income
    6.7       14.3       9.4       472.6       (49.8 )
 
The following table sets forth, for the periods indicated, our consolidated revenues and gross profits by segment:
                                                                 
    Fiscal Year Ended March 31, 2007     Fiscal Year Ended March 31, 2008  
    Revenues     Revenues     Gross profit     Gross profit     Revenues     Revenues     Gross profit     Gross profit  
    Rs. millions     % to total     Rs. millions     % to sales     Rs. millions     % to total     Rs. millions     % to sales  
         
Formulations
  Rs. 1,3086.6       20.1 %   Rs. 9,163.1       70.0 %   Rs. 15,241.1       30.5 %   Rs. 11,202.1       73.5 %
Active pharmaceutical ingredients and intermediates
    11,883.0       18.3 %     4,640.7       39.1 %     11,804.8       23.6 %     3,979.5       33.7 %
Generics
    33,224.2       51.0 %     15,125.6       45.5 %     17,781.5       35.6 %     8,470.4       47.6 %
Drug discovery
    136.8       0.2 %     15.3       11.2 %     39.2       0.1 %     3.1       7.9 %
Custom pharmaceutical services
    6,599.8       10.1 %     1,937.2       29.4 %     4,817.6       9.6 %     1,665.5       34.6 %
Others
    164.7       0.3 %     (6.3 )     (3.9 %)     321.4       0.6 %     87.4       27.2 %
         
Total
  Rs. 65.095.1       100.0 %   Rs. 30,875.6       47.4 %   Rs. 50,005.6       100.0 %   Rs. 25,408.0       50.8 %
 
                                               

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Fiscal Year Ended March 31, 2008 Compared to Fiscal Year Ended March 31, 2007
Revenues
     Total revenues decreased by 23.2% to Rs.50,005.6 million in the year ended March 31, 2008, from Rs.65,095.1 million in the year ended March 31, 2007. Excluding the revenues from the sales of authorized generics from both years, revenues in the year ended March 31, 2008 declined by 2.5% to Rs.48,031.3 million in the year ended March 31, 2008 compared to Rs.49,282.3 million in the year ended March 31, 2007.
  Revenues from our Formulations segment increased by 16.5% compared to year ended March 31, 2007. This increase was primarily driven by increase in revenues from India, Russia, Romania, Venezuela, Vietnam and former CIS countries.
 
  Revenues from our Active Pharmaceutical Ingredients (API) segment were largely at the same level at Rs.11,804.8 million compared to Rs.11,883.0 million in the year ended in March 31, 2007.
 
  Revenues from our Generics segment decreased by 46.5% compared to the year ended March 31, 2007. Revenues in the year ended March 31, 2007, included revenues from sale of authorized generics of Rs.15,812.8 million. Excluding authorized generics sales from both the years, revenues decreased by 9.2%.
 
  Revenues in our CPS segment decreased by 27.0% compared to the year ended March 31, 2007. This decrease was primarily on account of a decrease in sales of key products such as epoxide, naproxen and naproxen sodium.
     In the year ended March 31, 2008, we received 22.7% of our revenues from North America (United States and Canada), 31.7% of our revenues from Europe, 11.1% of our revenues from Russia and other CIS countries, 20.9% of our revenues from India and 13.6% of our revenues from other countries. Significant weakening of the United States dollar as compared to the Indian rupee by approximately 11.0% on average for the year ended March 31, 2008 compared to average for the year ended March 31, 2007 had a negative impact on our sales because of the decline in rupee realization on sales made in United States dollars.
Segment analysis
     Formulations. In the year ended March 31, 2008 our formulations segment contributed 30.5% of our total revenues, as compared to 20.1% in the year ended March 31, 2007. Revenues in this segment increased by 16.5% to Rs.15,241.1 million in the year ended March 31, 2008, as compared to Rs.13,086.6 million in the year ended March 31, 2007.
     Revenues from sales of formulations in India constituted 52.9% of our total formulations revenues in the year ended March 31, 2008 compared to 53.2% in the year ended March 31, 2007. Revenues from India increased by 15.7% to Rs.8,059.6 million in the year ended March 31, 2008 from Rs.6,964.5 million in the year ended March 31, 2007. The increase in revenues was on account of an increase in sales volumes of key brands such as Razo, our brand of rabeprazole, Stamlo, our brand of amlodipine, Omez, our brand of omeprazole and Keterol our brand of ketorolac.
     Revenues from sale of formulations outside India increased by 17.3% to Rs.7,181.5 million in the year ended March 31, 2008 from Rs.6,122.1 million in the year ended March 31, 2007. Revenues from sales of formulations in Russia increased by 13.3% to Rs.4,064.4 million in the year ended March 31, 2008 from Rs.3,587.3 million in the year ended March 31, 2007. This increase was on account of higher sales volumes of our key brands such as Nise, our brand of nimesulide, Ketorol, our brand of ketorolac and Mitotax, our brand of paclitaxel. Revenues from other countries of the former Soviet Union increased by 25.3% to Rs.1,461.4 million in the year ended March 31, 2008 as compared to Rs.1,166.4 million in the year ended March 31, 2007, primarily driven by an increase in revenues from sales of formulations in Ukraine, Belarus, Uzbekistan and Kazakhstan. Other key markets grew by 20.8% to Rs.1,655.7 million in the year ended March 31, 2008 compared to Rs.1,365.0 million in the year ended March 31, 2007 driven by growth of revenues in Vietnam, Venezuela and Romania.
     Active Pharmaceutical Ingredients and Intermediates. In the year ended March 31, 2008, this segment contributed 23.6% of our total revenues compared to 18.2% in the year ended March 31, 2007. Revenues in this segment were largely at the same level at Rs.11,804.8 million in the year ended March 31, 2008, as compared to Rs.11,883.0 million in the year ended March 31, 2007.

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     During the year ended March 31, 2008, revenues from sales of API in India accounted for 19.9% of our revenues from this segment compared to 17.5% in the year ended March 31, 2007. Revenues from sales of API in India increased by 13.2% to Rs.2,351.7 million in the year ended March 31, 2008, as compared to Rs.2,077.3 million in the year ended March 31, 2007.
     Revenues from sale of API outside India decreased by 3.6% to Rs.9,453.1 million in the year ended March 31, 2008 from Rs.9,805.7 million in the year ended March 31, 2007. Revenues from North America increased by 12.8% to Rs.2,288.6 million in the year ended March 31, 2008 from Rs.2,029.8 million in the year ended March 31, 2007. The increase was driven by an increase in revenues of both our commercial and development products portfolio. Revenues from Europe increased by 19.1% to Rs.2,520.8 million in the year ended March 31, 2008 from Rs. 2,116.8 million in the year ended March 31, 2007. Revenues from other markets decreased by 17.9% to Rs.4,643.7 million in the year ended March 31, 2008 from Rs.5,659.1 million in the year ended March 31, 2007 primarily due to decrease in sales to Israel and South Africa, which was partially offset by an increase in sales to Japan, Turkey and Mexico.
     Generics. In the year ended March 31, 2008, this segment contributed 35.6% of our total revenues compared to 51.0% in the year ended March 31, 2007. Revenues decreased by 46.5% to Rs.17,781.5 million in the year ended March 31, 2008 from Rs.33,224.2 million in the year ended March 31, 2007.
     Revenues from sales of generic products in North America decreased by 66.0% to Rs.8,024.3 million in the year ended March 31, 2008 from Rs.23,617.1 million in the year ended March 31, 2007. Excluding the revenues from sales of authorized generics, the revenues in this segment decreased by 22.5% to Rs.6,049.8 million. This decrease was primarily due to a decrease in revenues from sales of fexofenadine, launched in April 2006, and ondansetron, launched in December 2006 (under 180 day exclusivity) caused largely by lower sales prices. During the fiscal year ended March 31, 2008, we launched our own OTC business with the launch of two products: ranitidine and cetirizine. Sales of these products contributed Rs.262.9 million in revenues in the fiscal year ended March 31, 2008.
     Revenues from sales of generic products in Europe increased by 1.2% to Rs.9,714.9 million in the year ended March 31, 2008, as compared to Rs.9,603.3 million in the year ended March 31, 2007. Revenues of betapharm increased from Rs.8,003.7 million in the year ended March 31, 2007 to Rs.8,188.9 million in the year ended March 31, 2008 primarily on account of an increase in revenues from sales of Oxcycodon HCL beta, our brand of oxycodone, Omebeta, our brand of omeprazole and Ramipril beta Comp, our brand of ramipril+hct, partially offset by a decrease in revenues from sales of Diclofen beta, our brand of diclofenac and Simvabeta our brand of simvastatin. The increase at betapharm was despite of significant stock-outs for a substantial part of the year due to the supply constraints. Revenues from sales of products in the United Kingdom decreased by 3.6% to Rs.1,474.8 million from Rs.1,538.2 million primarily on account of a decrease in the sales volumes of omeprazole, which was partially offset by an increase in the sales volumes of amlodipine maleate.
     Custom Pharmaceutical Services (“CPS”).Revenues from our CPS segment decreased by 27.0% to Rs.4,817.6 million in the year ended March 31, 2008 from Rs.6,599.8 million in the year ended March 31, 2007. This decrease was primarily on account of decrease in revenue from sales of our key products naproxen and naproxen sodium due to supply chain constraints at the beginning of the year ended March 31, 2008.
     Cost of Revenue
     As a result of the trends described in “Revenues” above and “Gross Margin ” below, our cost of revenues decreased by 28.1% to Rs.24,597.6 million in the year ended March 31, 2008 from Rs.34,219.5 million in the year ended March 31, 2007. Cost of revenues, as a percentage of revenues was 49.2% in the year ended March 31, 2008, as compared to 52.6% in the year ended March 31, 2007.
     Cost of revenue of the formulations segment decreased to 26.5% in the year ended March 31, 2008, as compared to 30.0% in the year ended March 31, 2007. The cost of revenue for our active pharmaceutical ingredients segment increased to 66.3% in the year ended March 31, 2008, as compared to 60.9% in the year ended March 31, 2007. The cost of revenue for our generics segment decreased to 52.4% in the year ended March 31, 2008, as compared to 54.5% in the year ended March 31, 2007. The cost of revenue of our custom pharmaceuticals services segment was 65.4% in the year ended March 31, 2008, as compared to 70.6% in the year ended March 31, 2007. The cost of revenue in other segments was 74.9% in the year ended March 31, 2008, as compared to 97.0% in the year ended March 31, 2007.

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  Gross Margin
     Total gross margin as a percentage of total revenues is 50.8% in the year ended March 31, 2008 compared to 47.4% in the year ended March 31, 2007. Total gross margin decreased to Rs.25,408.0 million in the year ended March 31, 2008 from Rs.30,875.6 million in the year ended March 31, 2007.
     Formulations. Gross margin of this segment was 73.5% of this segment revenues in the year ended March 31, 2008 compared to 70.0% of this segment revenues in the year ended March 31, 2007. The increase in gross margin as percentage of revenues was mainly due to decrease in excise duty expense on account of the benefit of the full operation of a new plant situated at baddi, the sales from which are exempt from payment of excise duties. This increase in gross margin was partially offset by an unfavorable impact from the depreciation of the United States Dollar as compared to the Indian Rupee.
     Active Pharmaceutical Ingredients and Intermediates. Gross margin of this segment decreased to 33.7% of this segment’s revenues in the year ended March 31, 2008, as compared to 39.1% of this segment’s revenues in the year ended March 31, 2007. The decrease was primarily on account of an unfavorable impact from the depreciation of the United States dollar as compared to the Indian rupee, which was partially offset by sales of high margin products such as olanzapine in North America and amlodipine in rest of the world markets.
     Generics. Gross margin of this segment was 47.6% of this segment’s revenues in the year ended March 31, 2008 compared to 45.5% of this segment’s revenues in the year ended March 31, 2007. The increase in gross margin as a percentage of revenues was primarily due to a decrease in revenues from sales of authorized generics, which earn a gross margin significantly below the average gross margin of this segment. Sales of authorized generics contributed 11.1% of this segment’s revenues in the year ended March 31, 2008 as compared to 47.6% of this segment’s revenues in the year ended March 31, 2007.
     Custom Pharmaceutical Services (CPS). Gross margin of this segment increased to 34.6% of this segment’s revenues in the year ended March 31, 2008 as compared to 29.4% in the year ended March 31, 2007. This increase was on account of an increase in the proportion of revenues from our contract research services business, which was partially offset by a decrease in revenues from sales of high margin products naproxen and naproxen sodium and an unfavorable impact from the depreciation of the United States dollar as compared to the Indian rupee.
Selling, general and administrative expenses
     Selling, general and administrative expenses as a percentage of total revenues were 30.3% in the year ended March 31, 2008 as compared to 21.6% in the year ended March 31, 2007. Selling, general and administrative expenses increased by 8.0% to Rs.15,175.2 million in the year ended March 31, 2008 from Rs.14,051.1 million in the year ended March 31, 2007. This increase was largely on account of an increase in employee costs by 11.6% due to an increase in the number of employees and annual increments. Marketing expenses increased by 6.7% primarily on account of an increase in advertisement expenses due to advertisements undertaken for key products in Ukraine, Russia and Belarus, and an increase in shipping cost in line with increase in sales volumes. General expense largely remained at the same level as previous year.
Research and development expenses
     Research and development costs increased by 43.5% to Rs.3,532.9 million in the year ended March 31, 2008 from Rs.2,462.7 million in the year ended March 31, 2007. Research and development expenditure accounted for 7.1% of total revenue in the year ended March 31, 2008 as compared to 3.8% in the year ended March 31, 2007. Under the terms of our research and development partnership with I-VEN Pharma Capital Limited (“I-VEN”), we received Rs.985.4 million in March 2005 to be applied to research and development costs in our Generics segment, of which Rs.452.8 million was recognized as a reduction in research and development expenses in the year ended March 31, 2007. There was no benefit from the I-VEN agreement in the year ended March 31, 2008. Excluding the impact of above arrangement with I-VEN, expenses have increased by 10.2%. The increase in expenses was primarily on account of an increase in expenses for clinical trial and toxicity studies and product development studies expenses in our formulation and generics segments.
Amortization expenses
     Amortization expenses increased by 2.8% to Rs.1,614.8 million in the year ended March 31, 2008 from Rs.1,570.9 million in the year ended March 31, 2007. Amortization increased primarily on account of increased amortization expense at betapharm for a beneficial toll manufacturing contract, the useful life of which was revised downwards as of February 2007. Amortization also

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increased marginally on account of the increase in the value of the Euro as compared to the Indian Rupee. The impact of these movements on amortization expenses was partially off-set by the reduced amortization at betapharm for certain product related intangibles due to write-downs recorded in fiscal 2007 and fiscal 2008.
Write-down of intangible assets
     During the year ended March 31, 2008 we recorded a write-down of intangible assets for an aggregate amount of Rs.2,488.5 million as compared to Rs.1,770.2 million in the year ended March 31, 2007. The write-down during the year ended March 31, 2008 consisted of:
    Rs.2,361 million associated with impairment of certain product related intangibles of betapharm arising out of adverse market conditions in Germany such as decreases in the market price, increases in the value of rebate and supply constraints faced by us; and
 
    Rs.127.5 million of Litaphar S.A.’s (“Litaphar”) product related intangibles arising out of adverse market conditions such as a reduction in sales and margins and an increase in the supply costs.
     The write-down during the year ended March 31, 2007 consisted of:
    Rs.213.5 million associated with core technology rights and other product related intangible assets acquired through Trigenesis Therapeutics, Inc. The write-down was recorded because commercialization of these intangible assets was deemed to be economically unviable because of further regulatory and approval process requirements and unfeasible partnering prospects; and
 
    Rs.1,556.7 million, associated with impairment of betapharm’s intangibles and the beta brand due to legislative reforms in Germany designed to control healthcare spending, including the WSG and the AVWG, severe pricing pressures thereafter, and the impact of the contract amendment with our toll-manufacturer Salutas.
Foreign exchange gain/loss
     Foreign exchange gain was Rs.744.9 million in the year ended March 31, 2008 as compared to Rs.136.8 million in the year ended March 31, 2007. In the year ended March 31, 2008, the rupee appreciated by Rs.3.35 per U.S.$1.00. Our gain primarily resulted from realized gains on derivative contracts (taken to hedge exchange risk on our foreign currency receivables) and translation gains arising out of foreign currency loans. These gains were partially offset by translation and realization loss on foreign currency receivables.
     In the year ended March 31, 2007 the rupee appreciated by Rs.1.145 per U.S.$1.00. Our gain was on account of gain on derivative contracts taken to hedge exchange risk on foreign currency receivables and deposits partially offset by loss on translation and realization loss on foreign currency deposits and debtors.
Other operating income/expense, net
     Other operating income was Rs.106.6 million in the year ended March 31, 2008 as compared to income of Rs.174.1 million in the year ended March 31, 2007.
Operating income
     As a result of the foregoing, our operating income decreased to Rs.3,357.7 million in the year ended March 31, 2008, as compared to Rs.11,331.5 million in the year ended March 31, 2007.
Other (expense)/income, net
     In the year ended March 31, 2008, our other income, net of other expense was Rs.78.6 million, as against other expense, net of other income of Rs.(768.5) million in the year ended March 31, 2007. This was primarily due to a decrease in the net interest expense to Rs.328.4 million in the year ended March 31, 2008 from Rs.1,054.7 million in the year ended March 31, 2007. Net interest expense

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in the current year decreased on account of lower interest expense primarily due to repayment of Rs.7,733.3 million (140 million) in borrowings and lower working capital borrowings and higher interest income in the current year on account of higher rates of return earned on fixed deposits.
     We also earned Rs.110.3 million from our short-term investments in mutual funds.
Income before income taxes and minority interest
     As a result of the foregoing, income before income taxes and minority interest decreased to Rs.3,438.1 million in the year ended March 31, 2008 as compared to Rs.10,500.3 million in the year ended March 31, 2007.
Income tax benefit/expense
     We had an income tax benefit of Rs.1,229.4 million in the year ended March 31, 2008 as compared to an expense of Rs.1,176.9 million in the year ended March 31, 2007. The benefit in the year ended March 31, 2008 was primarily on account of the deferred tax benefit of Rs.1,505.2 million, which was due to reduction in tax rates in Germany, and a release of deferred tax liability of Rs.733.1 million, which was due to write-down of intangibles amounting to Rs.2,361 million recorded in the year ended March 31, 2008. Eliminating the impact of the deferred tax benefits recognized on account of changes in tax laws and on impairment write downs recorded, the annual effective tax rate for fiscal 2008 was 16.8% as compared to 14.6% for fiscal 2007. The adjusted effective tax rate increased during fiscal 2008 primarily on account of higher amounts of expenses not deductible for tax purposes, higher amount of valuation allowance created during the year and significantly lower profit before taxes in fiscal 2008 as compared to fiscal 2007.
Net income
     As a result of the above, our net income decreased to Rs.4,678.0 million in the year ended March 31, 2008 as compared to Rs.9,326.8 million in the year ended March 31, 2007.

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Fiscal Year Ended March 31, 2007 Compared to Fiscal Year Ended March 31, 2006
Certain amounts in the fiscal 2007 and fiscal 2006 have been reclassified / regrouped to conform to the presentation of fiscal 2008. The explanations below have been suitably modified in line with such reclassifications.
Revenues
     Total revenues increased by 168.2% to Rs.65,095.1 million in fiscal 2007, as compared to Rs.24,267.0 million in fiscal 2006, primarily due to revenues from sales of authorized generics, revenues from Falcon (acquired December 30, 2005) and betapharm (acquired March 3, 2006), and an increase of revenues across our other business segments. Excluding revenues from sales of authorized generics and revenues from Falcon and betapharm, revenues increased by 57.7% to Rs.35,881.2 million in fiscal 2007. In fiscal 2007, we received 43.5% of our revenues from North America (United States and Canada), 14.1% of our revenues from India, 7.3% of our revenues from Russia and other countries of the former Soviet Union, 22.8% of our revenues from Europe and 12.3% of our revenues from other countries.
     Revenues from sales to Russia and other former Soviet Union countries increased by 33.5% to Rs.4,752.1 million in fiscal 2007, as compared to Rs.3,559.5 million in fiscal 2006. The increase was primarily due to an increase in sales of our major brands such as Nise, our brand of nimesulide, Keterol, our brand of ketorolac tromethamine, Ciprolet, our brand of ciprofloxacin, Cetrine, our brand of cetrizine, and Omez, our brand of omeprazole. Revenues from sales in India increased by 11.0% to Rs.9,178.6 million in fiscal 2007, as compared to Rs.8,272.5 million in fiscal 2006, primarily due to an increase in revenues in our formulations segment and partially offset by a decline in revenues of our active pharmaceutical ingredients and intermediates segment. Revenues from sales to Europe increased by 243.0% to Rs.14,839.1 million in fiscal 2007, as compared to Rs.4,326.4 million in fiscal 2006, primarily as a result of an increase in revenues from sales in our generics, custom pharmaceuticals services and API segments, as well as revenues from betapharm. Revenues from sales to North America increased by 611.3% to Rs.28,336.5 million in fiscal 2007, as compared to Rs.3,983.9 million in fiscal 2006. Excluding the revenues from sale of authorized generics, revenues increased by 214.4% to Rs.12,523.7 in fiscal 2007, primarily due to increases in sales in our generics, CPS and API segments.
     Formulations. In fiscal 2007, we received 20.1% of our total revenues from the formulations segment, as compared to 43.6% in fiscal 2006. Revenues in this segment increased by 23.6% to Rs.13,086.6 million in fiscal 2007, as compared to Rs.10,587.6 million in fiscal 2006.
     Revenues in India constituted 53.2% of our total formulations revenues in fiscal 2007 as compared to 56.4% in fiscal 2006. Revenues from sales of formulations products in India increased by 16.6% to Rs.6,964.5 million in fiscal 2007, as compared to Rs.5,968.1 million in fiscal 2006. This was driven by increased sales volumes of our key brands such as Omez, our brand of omeprazole, Nise, our brand of nimesulide, Stamlo, our brand of amlodipine, Razo, our brand of rabeprazole, and Recliment, our brand of gliclazide and metformin. The revenue increase was led by special marketing initiatives and other product specific initiatives and focused promotion with specialist physicians. The revenue increases were also attributable to the launch of extensions of current product lines such as Omez D and Razo D. New products launched in fiscal 2007 contributed revenues of Rs.247 million (4% of revenues in India).
     Revenues from sales of formulations products outside India increased by 32.6% to Rs.6,122.1 million in fiscal 2007, as compared to Rs.4,619.5 million in fiscal 2006. Revenues from sales of formulations products in Russia accounted for 58.5% of our formulation revenues outside India in fiscal 2007, as compared to 58.0% in fiscal 2006. Revenues from sales of formulations products in Russia increased by 33.9% to Rs.3,587.3 million in fiscal 2007, as compared to Rs.2,676.8 million in fiscal 2006. The increase was primarily due to an increase in revenues from the sale of key brands such as Nise, our brand of nimesulide, Omez, our brand of omeprazole, and Cetrine, our brand of cetrizine. This increase in revenues was primarily driven by an increase in our sales volumes to hospitals, as well as increased prescription sales due to various advertising campaigns. Revenues from sales to other countries of the former Soviet Union increased by 32.2% to Rs.1,166.4 million for fiscal 2007, as compared to Rs.883.5 million for fiscal 2006, primarily driven by an increase in revenues from sales in Ukraine, Uzbekistan, Kazakhstan and Belarus.
     Revenues from sales of formulations products in Europe increased by 45.3% to Rs.376.1 million in fiscal 2007 as compared to Rs.259.1 million in fiscal 2006, primarily due to an increase in revenues from sales in Romania. The increase in revenues from Romania was primarily due to an increase in sales volume attributable to an increase in Romanian Government spending on medical reimbursement to comply with EU standards, as well as promotional campaigns.

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     Revenues from sales to the rest of the world increased by 24.7% to Rs.992.3 million in fiscal 2007, as compared to Rs.796.1 million in fiscal 2006. This increase was primarily due to an increase in revenues from sales of products in South Africa, Myanmar, Venezuela and Jamaica, and was offset by a decrease in revenues from sales of products in Vietnam.
     Active Pharmaceutical Ingredients and Intermediates. In fiscal 2007, we received 18.2% of our total revenues from this segment, as compared to 34.1% in fiscal 2006. Revenues in this segment increased by 43.7% to Rs.11,883.0 million in fiscal 2007, as compared to Rs.8,267.5 million in fiscal 2006.
     During fiscal 2007, revenues from sales in India accounted for 17.5% of our revenues from this segment, as compared to 27.8% in fiscal 2006. Revenues from sales in India decreased by 9.7% to Rs.2,077.3 million in fiscal 2007, as compared to Rs.2,300.4 million in fiscal 2006. This decrease was primarily due to a decrease in revenues from sales of quinolones (antibiotics), due to a significant decline in prices resulting from increased competition.
     Revenues from sales outside India increased by 64.3% to Rs.9,805.7 million in fiscal 2007, as compared to Rs.5,967.1 million in fiscal 2006. Revenues from sales in Europe increased by 49.0% to Rs.2,116.8 million in fiscal 2007, as compared to Rs.1,420.9 million in fiscal 2006, primarily due to an increase in revenues from sales of sertraline, finasteride, losartan and ramipril. Revenues from sales of API in North America (United States and Canada) increased by 22.6% to Rs.2,029.7 million in fiscal 2007, as compared to Rs.1,655.0 million in fiscal 2006, primarily due to an increase in sales volumes of naproxen sodium, ibuprofen, naproxen and sertraline, as well as increase in sales volumes of API used by our customers in the development of their formulations. Revenues from sales of API in the rest of the world increased from Rs.2,891.3 million in fiscal 2006 to Rs.5,659.2 in fiscal 2007, driven primarily by the growth of revenues from Israel, South Korea, Brazil and Japan.
     Generics. In fiscal 2007, we received 51.0% of our total revenues from this segment, as compared to 16.7% in fiscal 2006. This segment’s revenues increased by 719.2% to Rs.33,224.2 million in fiscal 2007, as compared to Rs.4,055.8 million in fiscal 2006. Revenues from sales of products in North America increased to Rs.23,619.4 million in fiscal 2007, as compared to Rs.1,630.6 million in fiscal 2006. The increase was primarily due to revenues of Rs.15,812.8 million from sales of simvastatin and finasteride (our authorized generic versions of Merck’s Zocor® and Proscar®, respectively), launched in June 2006; revenues of Rs.2,429.3 million from sales of fexofenadine (our generic version of Allegra ®), launched in April 2006; and revenues of Rs.2,890.1 million from sales of ondansetron (our generic version of Zofran®), launched at the end of December 2006 with 180 day marketing exclusivity. Excluding revenues from authorized generics, fexofenadine and ondansetron, revenues from sales of generic products increased by 52.5% to Rs.2,487.1 million, primarily on account of an increase in sales volumes as well as the launch of new products, such as pravastatin and simvastatin (a non-authorized generic product).
     Revenues from sales of generic products in Europe and other markets increased by 296.6% to Rs.9,604.8 million in fiscal 2007, as compared to Rs.2,425.2 million in fiscal 2006. Revenues of betapharm (in its first full year of consolidation) and sales of products acquired from Litaphar in Spain (in fiscal 2007) together contributed Rs.8,065.0 million to revenues in fiscal 2007, as compared to revenues contributed by betapharm of Rs.704.9 million in fiscal 2006 (which represented less than one month of revenues, as it was acquired on March 3, 2006). In the United Kingdom, we experienced a decline in the prices of some of our key generics products, amlodipine and omeprazole. As a result, our U.K. generics revenues declined by 10.5% to Rs.1,539.8 million in fiscal 2007 from Rs.1,716.6 million in fiscal 2006.
     Custom Pharmaceutical Services. Revenues from custom pharmaceutical services, including revenues from our subsidiary Falcon, grew to Rs.6,599.8 million in fiscal 2007 as compared to Rs.1,326.8 million in fiscal 2006. Revenues contributed from Falcon increased from Rs.804.9 in fiscal 2006 (this represents approximately three months of revenues, as it was acquired on December 30, 2005 in the fiscal year ended March 31, 2006) to Rs.5,396.8 million (this represents the first full year of consolidation of Falcon’s revenues). Revenues in Falcon were driven by sales of naproxen sodium, naproxen and epoxide. Excluding revenues from Falcon, revenues in this segment grew to Rs.1,203.0 million in fiscal 2007, from Rs.521.9 in fiscal 2006, driven by growth in our customer base and product portfolio.
Cost of revenues
     Total cost of revenues increased by 175.6% to Rs.34,219.5 million for fiscal 2007, as compared to Rs.12,417.3 million for fiscal 2006. As a percentage of total revenues, total cost of revenues was 52.6% for fiscal 2007, as compared to 51.2% for fiscal 2006.

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     Formulations. Cost of revenues in this segment increased by 19.2% to Rs.3,923.5 million in fiscal 2007, as compared to Rs.3,290.6 million in fiscal 2006. Cost of revenues in this segment was 30.0% of revenues for fiscal 2007, as compared to 31.1% of revenues for fiscal 2006. As a percentage of revenues, cost of revenues decreased by 1.1% primarily on account of a decrease in excise duties in fiscal 2007. This decrease in excise duties was due to our new formulations facility at Baddi (operational from July 2006), which enjoys excise duty exemption.
     Active Pharmaceutical Ingredients and Intermediates. Cost of revenues increased by 21.8% to Rs.7,242.3 million in fiscal 2007, as compared to Rs.5,946.1 million in fiscal 2006. Cost of revenues in this segment as a percentage of revenue decreased to 60.9% of this segment’s revenues in fiscal 2007, as compared to 71.9% of this segment’s revenues in fiscal 2006. One reason for this decrease was an increase in the proportion of higher margin revenues from sales outside of India from 72.1% of total revenues in fiscal 2006 to 82.5% of total revenues in fiscal 2007. Another reason for this decrease was an increase of sales of high gross margin products, such as our generic version of sertraline (launched in June, 2006).
     Generics. Cost of revenues in this segment increased by 734.5% to Rs.18,098.6 million in fiscal 2007, as compared to Rs.2,168.8 million in fiscal 2006. Cost of revenue was 54.5% of this segment’s revenues in fiscal 2007, as compared to 53.5% in fiscal 2006. The increase in cost of revenues as a percentage of sales in this segment was primarily as a result of revenues from newly launched authorized generics, which contributed 47.6% to total revenues of this segment and have gross margins which are significantly below the average gross margin of this segment. The increase in cost of revenues associated with sales of these lower margin products was substantially offset by increased sales of ondansetron and fexofenadine, which have gross margins which are significantly above the average gross margin of this segment.
     Custom Pharmaceutical Services. Cost of revenues in this segment increased by 366.5% from Rs.999.4 million in fiscal 2006 (this represents approximately three months of revenues from Falcon, as it was acquired on December 30, 2005 and the fiscal year ended March 31, 2006) to Rs.4,662.5 million in fiscal 2007 (this represents the first full year of consolidation of the cost of Falcon’s revenues). Cost of revenues was 70.6% of this segment’s revenues in fiscal 2007, as compared to 75.3% in fiscal 2006. This decrease was primarily on account of increased sales of naproxen sodium and naproxen, which are higher margin products.
Gross profit
     As a result of the trends described in “Revenues” and “Cost of revenues” above, our gross profit increased by 160.6% to Rs.30,875.6 million for fiscal 2007 from Rs.11,849.7 million for fiscal 2006. Gross margin percentage was 47.4% in fiscal 2007, as compared to 48.8% in fiscal 2006.
     Gross profit of the formulations segment increased to 70.0% in fiscal 2007, as compared to 68.9% in fiscal 2006. The gross profit for our active pharmaceutical ingredients segment increased to 39.1% in fiscal 2007, as compared to 28.1% in fiscal 2006. The gross profit for our generics segment decreased to 45.5% in fiscal 2007, as compared to 46.5% in fiscal 2006. The gross profit for our custom pharmaceutical services segment was 29.4% in fiscal 2007, as compared to 24.7% in fiscal 2006.
Selling, general and administrative expenses
     Selling, general and administrative expenses, as a percentage of total revenues, were 21.6% for fiscal 2007 as compared to 33.1% for fiscal 2006. The decrease in these expenses as a percentage of revenues was due to an increase in our total revenues with no commensurate increase in costs. Selling, general and administrative expenses increased by 75.0% to Rs.14,051.1 million in fiscal 2007, as compared to Rs.8,028.9 million in fiscal 2006.
     The increase in selling, general and administrative expenses as a whole was largely due to the full year consolidation of expenses of betapharm and Falcon, as well as an increase in employee costs and marketing costs. After excluding expenses of betapharm and Falcon, employee costs increased by 41.1% in fiscal 2007, primarily due to annual compensation increases and market corrections as well as an increase in the number of employees. Marketing expenses increased by 33.2% in fiscal 2007, primarily on account of higher selling expenses and higher shipping costs, all incurred in connection with the increase in total revenues.
Research and development expenses
     Research and development costs increased by 14.4% to Rs.2,462.7 million for fiscal 2007, as compared to Rs.2,153.0 million for fiscal 2006. As a percentage of total revenue, research and development expenses were 3.8% of our total revenue in fiscal 2007 as compared to 8.9% in fiscal 2006.

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     Under the terms of our research and development partnership agreement with I-VEN Pharma Capital Limited (“I-VEN”), we received Rs.985.4 million (U.S.$22.5 million) in March 2005 to be applied to research and development costs in our generics segment, of which Rs.452.8 million (U.S.$10.5 million) was recorded as a reduction in the research and development expense in fiscal 2007 as compared to Rs.384.5 million (U.S.$8.6 million) recognized in fiscal 2006. Furthermore, in fiscal 2007, our research and development expenses in our drug discovery segment were lower on account of our receipt of Rs.372.6 million from Perlecan Pharma Private Limited (“Perlecan”) as reimbursement of expenses incurred by us in the development of New Chemical Entities (“NCEs”) assigned to Perlecan under the terms of our research and development partnership agreement. This reimbursement payment was recorded as a reduction in research and development expenses. Excluding the impact of the above arrangements with I-VEN and Perlecan, expenses increased to Rs.3,288.1 million in fiscal 2007 as compared to Rs.2,537.5 million in fiscal 2006. The increase in expenses was primarily on account of an increase in product development studies in our formulations and generics segments, as well as an increase in clinical trials expenses in our discovery segment.
Amortization expenses
     Amortization expenses increased by 274.1% to Rs.1,570.9 million in fiscal 2007 from Rs.419.9 million in fiscal 2006. The increase was primarily on account of amortization of intangibles acquired in the acquisition of betapharm and Falcon amounting to Rs.1,247.8 million and Rs.26.8 million, respectively, in fiscal 2007.
Write-down of Intangible Assets
     During fiscal 2007, we wrote-down certain intangible assets in an aggregate amount of Rs.1,770.2 million. These write-downs primarily consisted of:
  Write-down expense amounting to Rs.213.5 million associated with core technology rights and other product related intangible assets acquired through Trigenesis Therapeutics, Inc. During the fourth quarter ended March 31, 2007, we completed our detailed review of business opportunities against each of the core technology rights, licenses and marketing rights. As a result of this review, we determined that the further commercialization of the intangible assets that are being carried forward may not be economically viable because of further regulatory and approval process requirements and unfeasible partnering prospects, and therefore discontinued our efforts to further develop these assets.
 
  Due to legislative reforms in Germany designed to control healthcare spending, including the WSG and the AVWG, severe pricing pressures thereafter, and impact of the Salutas contract amendment, certain product-related intangibles and the beta brand were tested for impairment. Consequently, an impairment charge of Rs.1,556.7 million was recorded.
Foreign exchange gain/loss
     Foreign exchange gain was Rs.136.8 million for fiscal 2007, as compared to a loss of Rs.126.3 million for fiscal 2006. In fiscal 2007, the rupee appreciated by 2.57%. The fiscal 2007 foreign exchange gain was primarily on account of our marking to market of our outstanding forward foreign exchange contracts (entered into in order to hedge our receivables exchange risk) and foreign currency loans, which gains were partially offset by our marking to market of our U.S.$ deposits and receivables. In contrast to this, the rupee depreciated by 1.99% in fiscal 2006. Foreign exchange loss in fiscal 2006 was primarily on account of our marking to market of our forward foreign exchange contracts and foreign currency loans.
Other operating expense/(income), net
     Other operating income, net, amounted to Rs.174.1 million in fiscal 2007, as compared to Rs.327.7 million in fiscal 2006. This includes a profit of Rs.387.3 million in fiscal 2006 resulting from the sale of our finished dosages manufacturing facility located in Goa, India.
Operating income
     As a result of the foregoing, our operating income was Rs.11,331.5 million in fiscal 2007, as compared to operating income of Rs.1,449.2 million in fiscal 2006. Operating income as a percentage of total revenues was 17.4% in fiscal 2007, as compared to 6.0% in fiscal 2006.

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Other income (expense), net
     For fiscal 2007, our net other expense was Rs.768.5 million, as compared to net other income of Rs.526.3 million for fiscal 2006. This was primarily on account of net interest expense of Rs.1,054.7 million in fiscal 2007 compared to net interest income Rs.418.8 million in fiscal 2006. Net interest expense was primarily on account of interest expense incurred on a loan in the original principal amount of 400 million (Rs.21,598.30 million) taken for the acquisition of betapharm in fiscal 2006, partially offset by interest income on fixed deposits.
Equity in loss of affiliates
     Equity in loss of affiliates was Rs.62.7 million for fiscal 2007, a decline from Rs.88.2 million for fiscal 2006. The fiscal 2007 loss consists of a loss pick-up from Perlecan Pharma Private Limited of Rs.63.3 million offset by a gain pick-up from Kunshan Rotam Reddy Pharmaceuticals of Rs.0.7 million. In fiscal 2006, equity in loss of affiliates consisted of a Rs.40.0 million loss pick-up from Perlecan Pharma Private Limited plus a Rs.48.2 million loss pick-up from Kunshan Rotam Reddy Pharmaceuticals.
Income before income taxes and minority interest
     As a result of the foregoing, income before income taxes and minority interest increased to Rs.10,500.3 million in fiscal 2007, as compared to Rs.1,887.3 million in fiscal 2006. As a percentage of revenues, income before income taxes and minority interest was 16.1% of revenues in fiscal 2007, as compared to 7.8% of revenues in fiscal 2006.
Income tax expense
     Income tax expense for fiscal 2007 was Rs.1,176.9 million as compared to an income tax expense of Rs.258.3 million for fiscal 2006. As a percentage of income before taxes and minority interest, income tax expense decreased from 13.7% for fiscal 2006 to 11.2% for fiscal 2007. In absolute terms, the income tax expense increased primarily a result of significantly higher income from operations in fiscal 2007 as compared to fiscal 2006. The effective tax rate decreased primarily on account of increased sales in generics business, which in India enjoys tax exemptions. Further, whilst a significant portion of the increased profitability has been out of North America generics operations, the corresponding tax expense has been lower since the business had net operating losses, which were utilized in the current year. The Company had recorded a full valuation allowance on the deferred tax assets on net operating losses, which was reversed in the current year.
Minority interest
     Minority interest for fiscal 2007, was a gain of Rs.3.5 million resulting from the allocation of our minority’s share in the losses of Dr. Reddy’s Laboratories (Proprietary) Limited, our partially owned subsidiary in South Africa. During fiscal 2006, we realized a loss of Rs.0.1 million representing our minority share in the profits of this partially owned subsidiary.
Net income
     As a result of the above factors, our net income increased to Rs.9,326.8 million in fiscal 2007, as compared to Rs.1,628.9 million in fiscal 2006. Net income as a percentage of total revenues increased to 14.3% in fiscal 2007 from 6.7% in fiscal 2006.

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Recent Accounting Pronouncements
     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This Statement establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements but provides guidance on determination of fair value and lays down the fair value hierarchy to classify the source of information used in fair value measurements. Upon adoption of the Statement, difference between the carrying amounts and the fair values of instruments should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. SFAS 157-2 (“FSP FAS 157-2”) which delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP FAS 157-2 partially defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for items within the scope of FSP FAS 157-2. We will be required to adopt this new standard for the fiscal year beginning April 1, 2008. We are currently evaluating the requirements of SFAS 157 and have not yet determined the impact adoption of this standard will have on our consolidated financial statements.
     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to measure eligible financial assets and liabilities, firm commitments and other eligible items at fair value, on an instrument-by-instrument basis, that is otherwise not permitted under other generally accepted accounting principles. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. At the effective date, on adopting this irrevocable fair value option for eligible items that exist on that date, the effect of such re-measurement to fair value should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. We will be required to adopt this new standard for the fiscal year beginning April 1, 2008. We have evaluated the impact of this Statement and believe that adoption of SFAS 159, prospectively, on April 1, 2008, will not have a material effect on our consolidated financial statements.
     In December 2007, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements (“EITF 07-1”). EITF 07-1 provides guidance concerning: determining whether an arrangement constitutes a collaborative arrangement within the scope of the Issue; how costs incurred and revenue generated on sales to third parties should be reported in the income statement; how an entity should characterize payments on the income statement; and what participants should disclose in the notes to the financial statements about a collaborative arrangement. We will be required to apply this issue for all collaborative arrangements retrospectively for financial statements issued for fiscal years beginning after December 15, 2008. We are in the process of evaluating the impact of adopting EITF 07-01 on our consolidated financial statements.
     In June 2007, the EITF issued EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to be Used in Future Research and Development Activities (“EITF 07-3”). EITF 07-3 provides guidance concerning the accounting for non-refundable advance payments for goods and services that will be used in future research and development activities and requires that they be expensed when the research and development activity has been performed and not at the time of payment. The provisions of EITF 07-3 are effective for fiscal years beginning after December 15, 2007, with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. We are currently evaluating the impact of adopting EITF 07-3 on our consolidated financial statements, however we do not expect EITF 07-3 to have a material impact on our consolidated financial statements.
     In December 2007, FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R replaces SFAS No. 141, Business Combinations, and requires an acquirer to recognize the assets acquired, the liabilities assumed including contingencies and non-controlling interest in the acquiree, at the acquisition date, measured at their fair value, with limited exceptions specified in the statement. With respect to a business combination achieved in stages, SFAS 141R requires the acquirer to recognize the identifiable assets and liabilities as well as the non-controlling interest in the acquiree at full amounts of their fair values. SFAS 141R requires the acquirer to recognize contingent consideration at the acquisition date, measured at its fair value at that date. We will be required to apply this new Statement prospectively to business combinations consummated in fiscal years beginning after December 15, 2008.  Early adoption is prohibited.  
     In December 2007, FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires the recognition of a non-controlling interest as

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equity in the consolidated financial statements and separate from the parent’s equity. Purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions.  We will be required to adopt this new Statement prospectively to all non-controlling interest, including any that arose before the effective date, for fiscal years, beginning after December 15, 2008. Early adoption is prohibited. We are currently evaluating the requirements of SFAS 160 and have not yet determined the impact this Statement may have on our consolidated financial statements.
     In March 2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced disclosures on derivative and hedging activities by requiring objectives to be disclosed for using derivative instruments in terms of underlying risk and accounting designation. SFAS 161 requires disclosures on the need of using derivative instruments, accounting of derivative instruments and related hedged items, if any, under FASB Statement No. 133 and the effect of such instruments and related hedge items, if any, on financial position, financial performance and cash flows. We will be required to adopt this new Statement prospectively, for fiscal years beginning after November 15, 2008. We are currently evaluating the requirements of SFAS 161 and have not yet determined the impact that the adoption of this standard will have on our consolidated financial statements.
     In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for non-governmental entities. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We do not expect the adoption of SFAS No. 162 to have a material impact on our consolidated financial statements.
5.B. Liquidity and capital resources
Liquidity
     We have primarily financed our operations through cash flows generated from operations and through short-term borrowings for working capital. Our principal liquidity and capital needs are for making investments, the purchase of property, plant and equipment, regular business operations and drug discovery.
     Our principal sources of short-term liquidity are internally generated funds and short-term borrowings, which we believe are sufficient to meet our working capital requirements and currently anticipated capital expenditures over the near term. As part of our growth strategy, we continue to review opportunities to acquire companies, complementary technologies or product rights. To fund the acquisition of betapharm in Germany in fiscal 2006, we borrowed 400 million under a bank loan facility with a maturity period of five years. If our future acquisitions involve significant cash payments, rather than the issuance of shares, we may need to further borrow from banks or raise additional funds from the debt or equity markets.
     The following table summarizes our statements of cash flows for the periods presented:
                                 
    Fiscal Year Ended March 31,  
    2006     2007     2008     2008  
    (Rs. in million, U.S.$ in millions)  
Net cash provided by /(used in):
                               
Operating activities
  Rs. 1,696.5     Rs. 11,960.6     Rs. 6,122.6     U.S.$ 153.0  
Investing activities
    (34,577.8 )     436.4       (9,599.9 )     (239.9 )
Financing activities
    27,210.9       1,753.7       (6,827.6 )     (170.6 )
Net increase / (decrease) in cash and cash equivalents
  Rs. (5,670.3 )   Rs. 14,150.7     Rs. (10,304.9 )   U.S.$ (257.5 )
 
                       
Effect of exchange rate changes on cash
  Rs. 95.1     Rs. 118.2     Rs. (278.2 )   U.S.$ (7.0 )
 
                       
Cash Flow from Operating Activities
     Net cash provided by operating activities decreased from Rs.11,960.6 million in fiscal 2007 to Rs.6,122.6 million in fiscal 2008. This was primarily due to a lower level of operating profit as compared to fiscal 2007. The net income for fiscal 2008 was lower than fiscal 2007 primarily on account of the absence of any significant new product launches in the current year. In fiscal 2007, we had

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significant revenues and profits in our North America generics business from sales of Merck’s authorized generics (simvastatin and pravastatin) and from 180-days exclusivity for ondansetron tablets.
     Net cash provided by operating activities in fiscal 2008 consisted primarily of:
    Net income of Rs. 4,678.0 million (Rs.9,326.8 million in fiscal 2007);
 
    Adjustment for non-cash items amounting to Rs.4,704.1 million (Rs.5,530.1 million in fiscal 2007); and
 
    Increase in net operating assets by Rs.3,249.3 million (Rs.2,896.3 million in fiscal 2007).
Cash Flow from Investing Activities
     While investing activities provided net cash of Rs.436.4 million in fiscal 2007, there was a cash outflow of Rs.9,599.9 million in fiscal 2008. This was primarily on account of:
    Expenditure on property, plant and equipment of Rs.6,348.1 million (Rs.4,477.0 million in fiscal 2007);
 
    Inflows due to the reduction in restricted cash by Rs.583 million (Rs.5,468.9 million in fiscal 2007);
 
    Purchase of investment securities, net, of to Rs.3,382.1 million (Rs.0.9 million in fiscal 2007); and
 
    Acquisition of intangible assets of Rs.507.8 million (Rs.325.9 million in fiscal 2007).
     Cash outflows from investing activities were significant during fiscal 2008 primarily on account of large investments made in facilities/capital projects to enhance our future capacity. Further, during fiscal 2008 we made short term investments in mutual funds. Furthermore, in fiscal 2007, we had significant inflows on account of release in restricted cash which had overall offset all other outflows from investing activities. This was primarily on account of the release of the restriction on cash deposits of Rs.4,468.8 million, pledged against the long-term debt taken from Citibank (Euro loan), on closure of the syndication process and which was accordingly liquidated.
Cash Flows from Financing Activities
     While financing activities provided net cash of Rs.1,753.7 million for fiscal 2007, there was a net cash outflow of Rs.6,827.6 million for fiscal 2008. This was primarily on account of:
    Repayment of long term debt of Rs.7,718.5 million (Rs.1,888.5 million in fiscal 2007);and
 
    Dividend payment of Rs.737.3 million (Rs.437.5 million in fiscal 2007), partially offset by additional bank borrowings amounting to Rs.1,612.9 million (Rs.(5,870.8) million in fiscal 2007).
     In fiscal 2008, we had significant outflows from financing activities primarily on account of the repayment of our long term debt. In fiscal 2007, we had net inflows from the issuance of shares pursuant to a secondary offering in the United States, which was partially offset due to the net repayment of short term borrowings.

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     Principal obligations
     The following table summarizes our principal debt obligations (excluding capital lease obligations) outstanding as of March 31, 2008:
                                         
    Payments due by period (Rs. in millions)    
Financial Contractual           Less than               After    
Obligations   Total   1 year   1-3 years   3-5 years   5 years   Annual Interest Rate
 
Short-term borrowings from banks
    4,862.7       4,862.7                   LIBOR + 100bps for foreign currency denominated loans
 
                                       
Long term debt
                                       
 
                                       
From Indian Renewable Energy
    13.3       5.9       7.4             2%*
                                         
    Payments due by period (Rs. in millions)    
Financial Contractual           Less than               After    
Obligations   Total   1 year   1-3 years   3-5 years   5 years   Annual Interest Rate
 
Development Agency
                                       
 
                                       
Foreign currency loan (for betapharm acquisition)
    14,374.3       1,796.8       7,187.2       5,390.3         EURIBOR + 70 bps LIBOR + 70 bps
 
                                       
 
                                       
Total obligations
    19,250.3       6,665.4       7,194.6       5,390.3        
 
                                       
 
*   Loan received at a subsidized rate of interest from Indian Renewable Energy Development Agency Limited promoting use of alternative sources of energy.
     Subject to obtaining certain regulatory approvals, there are no legal or economic restrictions on the transfer of funds between us and our subsidiaries or for the transfer of funds in the form of cash dividends, loans or advances.
     The maturities of our short-term borrowings from banks vary from one month to approximately six months. Our objective in determining the borrowing maturity is to ensure a balance between flexibility, cost and the continuing availability of funds.
     Cash and cash equivalents are primarily held in Indian rupees, U.S. dollars, U.K. pounds sterling, Brazilian real, Euros, Russian roubles, South African rand, Hong Kong dollars, New Zealand dollars, Malaysian ringgits and Swiss francs.
     As of March 31, 2007 and 2008, we had committed to spend approximately Rs.1,186.0 million and Rs.1,552.4 million, respectively, under agreements to purchase property and equipment and other capital commitments. These amounts are net of capital advances paid in respect of such purchases and we anticipate funding them from internally generated funds.
5.C. Research and development, patents and licenses, etc.
Research and Development
     Our research and development activities can be classified into several categories, which run parallel to the activities in our principal areas of operations:
  Formulations, where our research and development activities are directed at the development of product formulations, process validation, bioequivalence testing and other data needed to prepare a growing list of drugs that are equivalent to numerous brand name products for sale in the emerging markets. Formulations also includes our biologics business, where research and development activities are directed at the development of biologics products for the emerging as well as regulated markets. Our new biologics research and development facility caters to the highest development standards, including cGMP, Good Laboratory Practices and bio-safety level IIA.
 
  Active pharmaceutical ingredients and intermediates, where our research and development activities concentrate on development of chemical processes for the synthesis of active pharmaceutical ingredients for use in our generics and formulations segments and for sales in the emerging and developed markets to third parties.
 
  Generics, where our research and development activities are directed at the development of product formulations, process validation, bioequivalence testing and other data needed to prepare a growing list of drugs that are equivalent to numerous brand name products whose patents and regulatory exclusivity periods have expired or are nearing expiration in the regulated markets of the United States and Europe.
 
  Drug discovery, where we are actively pursuing discovery and development of NCEs. Our research programs focus on the following therapeutic areas:
  o   Metabolic disorders
 
  o   Cardiovascular disorders
 
  o   Bacterial infections
 
  o   Inflammation
 
  o   Cancer

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  Custom pharmaceutical services, where we intend to leverage the strength of our process chemistry and finished dosage development expertise to target innovator as well as emerging pharmaceutical companies. The research and development is directed toward providing services to support the entire pharmaceutical value chain — from discovery all the way to the market.
     In fiscal 2006, 2007 and 2008, we expended Rs.2,153.0 million, Rs.2,462.7 and Rs.3,532.9 million, respectively, on research and development activities.
Patents, Trademarks and Licenses
     We have filed and been issued numerous patents in our principal areas of operations: drug discovery, active pharmaceutical ingredients and intermediates and generics. We expect to continue to file patent applications seeking to protect our innovations and novel processes in several countries, including the United States. Any existing or future patents issued to or licensed by us may not provide us with any competitive advantages for our products or may even be challenged, invalidated or circumvented by our competitors. In addition, such patent rights may not prevent our competitors from developing, using or commercializing products that are similar or functionally equivalent to our products. As of March 31, 2008, we had filed a total of 1,160 trademarks with the Registrar of Trademarks in India, of which 551 are already registered. We also have made application for registration for non-U.S. trademarks in other countries in which we do business. We market several products under licenses in several countries where we operate.
5.D. Trend information
Formulations
     India and Russia are two strategic markets for our formulations business contributing to roughly 80% of the revenues for fiscal 2008 of this segment. In both of these markets, we continue to grow our revenues and our rank in the market consistently year after year as a result of our product franchise and customer relationships built over the years.
     ORG IMS in its report for the year ended March 31, 2008 has noted that the Indian pharmaceutical market continues to be highly fragmented and dominated by Indian companies. The industry recorded retail sales of approximately U.S.$8 billion, representing a growth in value of 14.8 per cent over the previous year on a Moving Annual Total (“MAT”) basis. The Indian pharmaceutical market is projected to grow at 11-13 per cent per annum between 2008 and 2020, achieving a terminal market value of U.S.$ 30 billion. The major growth influencers will be population dynamics, high disease prevalence, increased health care access, changing health care models and greater capacity to spend.
     According to ORG IMS report for the year ended March 31, 2008, the market share of the No. 1 player in Indian retail sales was only 5.1%. In this competitive scenario, we have been listed as one of the top 10 players with a market share of 2.3%. Overall growth during fiscal 2008 was driven by the performance of our key brands as well as new products launched. We also benefited from the launch of our second biologics product in India — Reditux. Even one year after our launch, there are no new entrants in the marketplace and we expect to launch more products from our biologics pipeline in India.
     In Russia, we continue to match the industry growth rate in the retail segment. Revenues in Russia increased by 22% in dollar terms crossing the U.S. $100 million milestone in fiscal 2008. We are among the fastest growing international branded generic company in Russia by product sales volumes. Pharmexpert, a market research firm, ranked us No. 14th in sales in Russia with a market share of 1.24% as of March 2008 in its MAT report for the first quarter of calendar year 2008 (the “Pharmexpert MAT Q1 2008 Report”) based on our strong performance. We also consolidated our new hospitals and OTC segments which are significantly supplementing the growth led by the prescription segment. All of the companies ranked ahead of us were either multinational corporations or of European origin. Accordingly, we were the top ranked Indian pharmaceutical company in Russia.
     The regulatory environment in the developing markets outside of India is changing, with most countries having moved or moving towards recognizing product patents. This implies that gradually these countries will move from being “less-regulated markets” to “semi-regulated markets” wherein the patent regimes and regulatory compliance will start converging with the regulated markets of North America and Europe. Many of the governments in these countries are in the process of implementing various healthcare reforms to promote the consumption of generic drugs in order to contain their healthcare costs. This presents growth opportunities in several of these markets. We continue to experience significant growth from the countries in the former Soviet Union, South Africa, Venezuela

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and China through new product launches. We are also increasing our efforts to expand our business in other markets such as Australia and New Zealand.
Active Pharmaceutical Ingredients and Intermediates
     In this segment, we are focused on acquiring new customers and increasing our level of engagement with existing customers in global key markets by marketing additional products from our product portfolio. We are also focused on identifying unique product opportunities in key markets and protecting them through patenting strategies. As of March 31, 2008, we had a pipeline of 281 drug master filings (“DMFs”) of which 127 were in the United States. With patent expiries in several markets in the next few years, we intend to promote growth in fiscal 2009 and beyond by leveraging our portfolio of markets and products. The success of our API products in our key markets is contingent upon the extent of competition in the generics market, and we anticipate that such competition will continue to be significant.
Generics
     In this segment, we are focused on the regulated markets of North America (the United States and Canada) and Europe. In the United States, our revenues during fiscal 2007 benefited significantly from the launch of fexofenadine, the generic version of Allegra® (launched at risk (i.e., prior to resolution of patent infringement claims) in April 2006), simvastatin, the authorized generic version of Zocor®, finasteride 5 mg, the authorized generic version of Proscar®, and ondansetron, the generic version of Zofran®. The benefit of these high value launches in terms of marketing exclusivity, higher market share and higher pricing was for a limited period and was mostly accrued in fiscal 2007. Similar high value launches were largely absent in the fiscal 2008. In view of this, the overall revenues in North America in fiscal 2008 declined as compared to fiscal 2007.
     Revenues in fiscal 2008 in North America thus represent normalized base business revenues. Continuing with our stated strategy, we intend to expand our portfolio over the next few years by adding solid dosages forms as well as alternate dosage forms by complementing our internal product development effort through business alliances.
     Following the suspension of OTC packaging and distribution activities at Leiner Health Products, Inc., which was our important customer, we entered the private label OTC business in fiscal 2008 by launching two products. The initial response from various customer groups has been positive. We have also initiated the supply to U.S. Government agencies of veteran affairs and department of defense. The first product to be supplied to the U.S. Government was finasteride 5mg.
     Wherever possible, we will continue to explore the possibilities of mutually beneficial settlement of ongoing Paragraph IV litigation cases. As an example, in fiscal 2007, we settled the litigation for sumatriptan, the generic version of Imitrex®, with the innovator GlaxoSmithKline. Similarly, in fiscal 2008, we settled the litigation for rivastigmine, the generic version of Exelon®, with the innovator Novartis.
     Apart from the abovementioned initiatives of diversifying into new channels and lines of businesses and entering into litigation settlements, we are also acting on other fronts to establish our generics business in the U.S. as a profitable business. We are conscious of the extremely competitive nature of the market which continuously causes downward pressure on product selling prices. We have initiated on an ongoing basis a review and execution mechanism to reduce the delivered cost of our products through several cost reduction initiatives. We intend to diversify not only our customer base but our products also by focusing more on difficult-to-make and low competition products to safeguard our margins.
     As of March 31, 2008, we had filed a total of 122 ANDAs with the U.S. FDA. We had 70 ANDAs pending approval with the U.S. FDA as of March 31, 2008, which included 10 tentative approvals.
     In Germany, fiscal 2008 represented the second full year of consolidation of revenues and net income of betapharm Arzneimittel GmbH, which we acquired in March 2006. The German pharmaceutical industry continues to go through health care reforms which have put pressure on prices. As of April 1, 2007, the GKV-WSG Act took effect in Germany with the purpose of strengthening competition in public health insurance to regulate the German health care system. The law has significantly increased the power of the insurance companies and SHI funds by allowing them to enter into direct rebate contracts with suppliers of pharmaceuticals. It further incentivizes doctors to prescribe generic drugs covered by such rebate contracts. The pharmacist is also required to dispense such drugs as are covered by rebate contracts. Thus, successfully concluding rebate contracts with insurance companies is a factor critical to succeeding in the competition for market share in the generic prescription drug market. betapharm has signed for rebate contracts with a large number of SHI funds covering a major part of the insured population in the aggregate. In January 2008, new reference

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prices became effective. Subsequently new co-payment release prices were announced and which were effective June 1, 2008. These health care reforms have resulted in pressure on price realization in Germany. We expect pricing pressures to continue in this market and are watching these trends closely.
     During the fiscal 2008, we have successfully transferred a large number of products to secured supply sources. We remain on track to completely mitigate the risk of the supply situation and expect to realize the full benefits of this transfer in fiscal 2009. The benefits of this transfer include reduced product manufacturing cost and supply assurance. As of March 31, 2008, we had begun to realize the benefits from the easing of the supply situation and the market share of betapharm had recovered sharply to 2.96% in March 2008 as against a low of 1.74% in April 2007.
     We remain committed to building a strong European generics business and consolidating our existing assets and market franchise in the countries of Germany, the United Kingdom, Spain, Italy and others.
Custom pharmaceutical services.
     Our Custom Pharmaceutical Services (“CPS”) business unit markets process development and manufacturing services to customers primarily consisting of innovator pharmaceutical and biotechnology companies with an objective to become their preferred partner of choice. The focus is to leverage our skills in process development, analytical development, formulation development and cGMP manufacture to serve the customer needs.
     In fiscal 2008, the base organic business continued its high growth trajectory, as we expanded the portfolio of relationships and projects with large pharmaceutical companies and emerging pharmaceutical and biotechnology companies. However, our Falcon business in Mexico went through certain challenges. It sustained raw material constraints in the first half of fiscal 2008 and as a result, we were not able to fully service our customer requirements. To address this, a manufacturing facility has been commissioned in India to supply a key ingredient to Falcon.
Drug discovery
     Our investments into research and development of NCEs have been consistently focused towards developing promising therapeutics. Strategically, we continue to seek licensing and development arrangements with third parties to further develop our pipeline products. As part of our research program, we also pursue collaborations with leading institutions and laboratories all over the world. We enter into these collaborations to utilize the expertise and facilities these institutions and laboratories provide.
     Currently, we have a pipeline of 2 NCEs in clinical development and 1 in pre-clinical development. These compounds are being developed in partnership with Rheoscience, ClinTec and Argenta. The status of development and details of the compound are discussed in the Business Overview section of this Annual report. As we make progress in advancing our pipeline through various stages of clinical development we are also building capabilities in drug development. We believe this will help to enhance the value of our NCE assets. We expect to further complement our internal research and development efforts by pursuing strategic partnerships and alliances in our key focus areas.
Specialty
     Building a specialty branded business in the U.S. is one of the important aspects of our innovation strategy. The specialty business is close to launching its own sales and marketing operations for in-licensed products in the dermatology therapeutic area in US while continuing to work on development of new in-house products. This is the result of our continued efforts over the last few years to establish this business through a combination of in-licensing initiatives as well as internal pipeline development programs. While initially this will not be a very significant business in terms of financial parameters, it is an important step in our journey of building a business based on innovative products.
Research and development expenses
     In fiscal 2008, our research and development expenses were Rs.3,532.9 million. Compared to the fiscal year ended March 31, 2007, the benefit of income recognition under the Perlecan and I-VEN agreements was very low in 2008. Excluding the benefit of income under I-VEN and Perlecan agreements from fiscal 2008 and fiscal 2007, expenses have increased by 10.2%. This expense increase resulted from a commitment of additional resources towards to clinical trial and toxicology studies for biologics products and

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an increase in product development studies in our formulation and generics segments. We have also prioritized our development efforts towards key high value opportunities.
5.E. Off-balance sheet arrangements
     Guarantees. We adopted the provisions of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others. The Interpretation requires that we recognize the fair value of guarantee and indemnification arrangements issued or modified by us if these arrangements are within the scope of that Interpretation. In addition, under previously existing generally accepted accounting principles, we continue to monitor the conditions that are subject to the guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under the guarantees and indemnifications when those losses can be estimated.
     Our equity investee, Kunshan Rotam Reddy Pharmaceuticals Co. Limited (“KRRP”) secured a credit facility of Rs.27.0 million from Agricultural Bank of China (“Agricultural Bank”). During the year ended March 31, 2008, we issued a corporate guarantee amounting to Rs.27.2 million in favor of Agricultural Bank to enhance the credit standing of KRRP. The guarantee is required to be renewed every year and our liability may arise in the event of non-payment by KRRP of the amount withdrawn under its credit facility. As of March 31, 2008, we believed that the fair value of such liability was not material.
5.F. Tabular Disclosure of Contractual Obligations
     The following summarizes our contractual obligations as of March 31, 2008 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
                                         
    Payments Due by Period  
    (Rs. in millions)  
            Less than                     More than  
Contractual Obligations   Total     1 year     1-3 years     3-5 years     5 years  
Operating lease obligations
  Rs. 528.4     Rs. 161.5     Rs. 209.7     Rs. 126.2     Rs. 31.0  
 
                             
 
                                       
Capital lease obligations
    291.3       12.1       29.7       16.5       233.0  
 
                             
Current portion
    12.1       12.1                    
 
                             
Non-current portion
    279.2             29.7       16.5       233.0  
 
                             
 
                                       
Purchase obligations
                                       
Agreements to purchase property and equipment and other capital commitments(1)
    1,552.4       1,552.4                    
 
                             
 
                                       
Borrowings from banks
    4,862.7       4,862.7                    
 
                             
 
                                       
Long term debt obligations
    14,387.6       1,802.7       7,194.6       5,390.3        
 
                             
Current portion
    1,802.7       1,802.7                    
Non-current portion
    12,584.9             7,194.6       5,390.3        
 
                                       
Post retirement benefits obligations
    740.1       58.4       109.3       143.2       429.2  
 
                             
 
                                       
Liabilities related to unrecognized tax benefits (2)
                             
 
                                       
Total contractual obligations
  Rs. 21,622.5     Rs. 8,391.4     Rs. 7,434.0     Rs. 5,569.1     Rs. 264.0  
 
(1)   These amounts are net of capital advances paid in respect of such purchases and are expected to be funded from internally generated funds.
 
(2)   As of March 31, 2008, we had total unrecognized tax benefits of Rs. 1,395.3 million. However, we have paid advance taxes with the tax authorities towards liability for such unrecognized tax benefits in the corresponding years and accordingly, no material cash outflows are expected with respect to such unrecognized tax benefits in the future.

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5.G. Safe harbor
     See page 2.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. Directors and senior management
     The list of our directors and executive officers and their respective age and position as of March 31, 2008 was as follows:
Directors
             
Name(1)   Age (in yrs)   Position
Dr. K. Anji Reddy(2)
    69     Chairman
Mr. G.V. Prasad(2),(3)
    47     Chief Executive Officer and Vice Chairman
Mr. Satish Reddy(2),(4)
    40     Chief Operating Officer and Managing Director
Mr. Anupam Puri
    62     Director
Dr. J.P. Moreau
    60     Director
Ms. Kalpana Morparia
    59     Director
Prof. Krishna G. Palepu
    53     Director
Dr. Omkar Goswami
    51     Director
Mr. P.N. Devarajan(5)
    73     Director
Mr. Ravi Bhoothalingam
    62     Director
 
(1)   Except for Dr. K. Anji Reddy, Mr. G.V. Prasad and Mr. Satish Reddy, all of the directors are independent directors under the corporate governance rules of the New York Stock Exchange.
 
(2)   Full-time director.
 
(3)   Son-in-law of Dr. K Anji Reddy.
 
(4)   Son of Dr. K Anji Reddy.
 
(5)   Mr. P.N. Devarajan provided us with a notice of his unwillingness to be re-appointed as a director and ceased to be a director of the Company effective May 20, 2008.
Executive Officers
     Our policy is to classify our officers as “executive officers” if they have membership on our Management Council. Our Management Council consists of various business and functional heads and is our senior management organization. As of March 31, 2008, the Management Council consisted of:
                             
                        Date of    
    Education/           Experience in   commencement of    
Name and Designation   Degrees Held   Age   years   employment   Particulars of last employment
G.V. Prasad(1)
Vice Chairman and
Chief Executive Officer
  B. Sc.(Chem. Eng.), M.S. (Indl. Admn.)     47       24     June 30, 1990   Promoter Director, Benzex Labs Private Limited
 
Satish Reddy (2)
Managing Director and
Chief Operating Officer
  B. Tech., M.S.     40       16     January 18, 1993   Director, Globe Organics Limited
 
Abhijit Mukherjee
President — Custom Pharmaceutical Services
and Chemical Technical Operations
  B. Tech. (Chem.)     49       27     January 15, 2003   President, Atul Limited

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                        Date of    
    Education/           Experience in   commencement of    
Name and Designation   Degrees Held   Age   years   employment   Particulars of last employment
Amit Patel,
Senior Vice President
— Corporate Development and Strategic Planning
  B.A.S, BS (Eco), MBA     34       10     August 6, 2003   V P Corporate Development, CTIS Inc
 
Arun Sawhney
President — Active Pharmaceutical Ingredients
and Intermediates (3)
  B. Com. PGDBM     52       31     June 1, 2001   Chief Executive, Max-GB Ltd.
 
Ashwani Kumar Malhotra Executive Vice President — Formulations Technical Operations
  M. Pharma., PGD-IE&M, PGD-CD     52       28     February 8, 2001   Unit Head, Cipla Limited
 
Dr. C. Cartikeya Reddy,
Senior Vice President and Head Biologics
  B Tech, MS and PhD     38       17     July 20, 2004   Senior Engineer, Genetech Inc
 
Jaspal Singh Bajwa
President — Branded Formulations
(Rest Of the World)(4)
  MBA     56       31     April 10, 2003   Executive Director and COO, Marico Industries Limited
 
Jeffrey Wasserstein
Executive Vice President — Specialty Operations
  B.A., J.D.     49       25     January 31, 2005   EVP & Chief Business Officer -Avigenics, Inc.
 
K. B. Sankara Rao
Executive Vice President — Integrated Product Development
  M. Pharma.     54       30     September 29, 1986   Production Executive, Cipla Limited
 
Mark Hartman
President — North America Generics
  B.Sc. Dairy Science     49       23     January 4, 2002   VP Sales & Marketing - Generics, Watson Laboratories
 
Mr. Prabir Kumar Jha
Senior Vice President and Global Chief of Human Resources
  M.A., PGDM     41       19     November 29, 2002   Regional HR Head-Mahindra British Telecon Ltd
 
Raghu Cidambi
Advisor
  B.Sc., PGDBM, LLB.     57       38     October 1, 2001   Director — Eenadu, Margadarsi Group
 
Dr. Rajinder Kumar
President — Research, Development and Commercialization
  M.Sc., MBBS, PG Dip in Psychiatry & Neurology     53       25     April 30, 2007   CEO and Founding Member, MeRaD Pharmaceuticals Ltd.

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                        Date of    
    Education/           Experience in   commencement of    
Name and Designation   Degrees Held   Age   years   employment   Particulars of last employment
Saumen Chakraborty
Chief Financial Officer and President Information Technology and Business Process Excellence
  PGDM     47       24     July 2, 2001   Vice President, Tecumseh
 
V. S. Vasudevan
President — European Generics Business
  B. Com. ACA     57       34     April 1, 1986   Finance Head, Standard Equity Fund Limited
 
(1)   Son-in-law of Dr. K Anji Reddy.
 
(2)   Son of Dr. K Anji Reddy.
 
(3)   Ceased to be an employee with effect from May 5, 2008
 
(4)   Does not include North America and Europe.
There was no arrangement or understanding with major shareholders, customers, suppliers or others pursuant to which any director or executive officer referred to above was selected as a director or member of senior management.
Biographies
   Directors
     Dr. K. Anji Reddy is our Founder and Chairman of our Board of Directors. He is also the Founder of Dr. Reddy’s Research Foundation and Dr. Reddy’s Foundation. He has an undergraduate degree in Technology of Pharmaceuticals and Fine Chemicals from the University of Bombay and a Ph.D. in Chemical Engineering from National Chemical Laboratories, Pune. He has six years experience with Indian Drugs and Pharmaceuticals Limited in the manufacture and implementation of new technologies in bulk drugs. He is a member of the Board of Trade as well as the Prime Minister’s Task force on pharmaceuticals and knowledge-based industries. The Government of India bestowed the Padmashri Award upon him for his distinguished service in the field of trade and commerce. In addition to positions held in our subsidiaries and joint ventures, he is a Director in Diana Hotels Limited, OOO JV Reddy Biomed Limited, Pathenco APS and GAIN Foundation, Switzerland.
     Mr. G.V. Prasad is a member of our Board of Directors and serves as our Vice-Chairman and Chief Executive Officer. He was the Managing Director of Cheminor Drugs Limited, a Dr. Reddy’s Group Company, prior to its merger with us. He has a Bachelor of Science degree in Chemical Engineering from Illinois Institute of Technology, Chicago, U.S.A. and an M.S. in Industrial Administration from Purdue University, U.S.A. He is also an active member of several associations including the National Committee on Drugs & Pharmaceuticals. In addition to positions held in our subsidiaries and joint ventures, he is a Director of Diana Hotels Limited, Nipuna Services Ltd and Ocimum Bio Solutions Limited.
     Mr. Satish Reddy is a member of our Board of Directors and serves as our Managing Director and Chief Operating Officer. He has a Master of Science degree in Medicinal Chemistry from Purdue University, U.S.A. and a Bachelor of Technology degree in Chemical Engineering from Osmania University, Hyderabad. He is the member of the Confederation of Indian Industries for Andhra Pradesh. In addition to positions held in our subsidiaries and joint ventures, he is also a Director of Diana Hotels Limited and OOO JV Reddy Biomed Limited.
     Mr. Anupam Puri has been a member of our Board of Directors since 2002. He retired from McKinsey & Company in late 2000. He was a Director and played a variety of other leadership roles during his 30-year career there. Before joining McKinsey & Company, he was Advisor for Industrial Development to the President of Algeria, and consultant to General Electric’s Center for Advanced Studies. He holds a Bachelor of Arts degree in Economics from St. Stephen’s College, Delhi University, and Master of Arts and M. Phil. degrees from Oxford University. He is also on the Boards of ICICI Bank Limited, Mahindra & Mahindra Limited and Tech Mahindra Limited.

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     Professor Krishna G. Palepu has been a member of our Board of Directors since 2002. He is the Ross Graham Walker Professor of Business Administration at the Harvard Business School. He holds the title of Senior Associate Dean, Director of Research. Professor Palepu has a Masters degree in physics from Andhra University, an M.B.A. from the Indian Institute of Management and a Ph.D. from the Massachusetts Institute of Technology. He is also a recipient of an honorary M.A. from Harvard, and an honorary Doctorate from the Helsinki School of Economics. He teaches finance, control and strategy in Harvard’s M.B.A. and Executive programs. He has published numerous research papers and is also the co-author of the book titled “Business Analysis & Valuation: Text and Cases.” He serves as a consultant to a wide variety of businesses and is on the boards of Satyam Computer Services Limited, Exetor Group, Enamics Limited and Harvard Business School Publishing Company.
     Dr. Omkar Goswami has been a member of our Board of Directors since 2000. He is a founder and Chairman of CERG Advisory Private Limited, a corporate advisory and economic research and consulting company. He was a senior consultant and chief economist at the Confederation of Indian Industry for six years. He has also served as editor of Business India, associate professor at the Indian Statistical Institute, Delhi, and as an honorary advisor to the Ministry of Finance. He holds a Bachelor of Economics degree from St. Xavier’s College, Calcutta University, a Master of Economics degree from the Delhi School of Economics, Delhi University and a Ph.D. degree from Oxford University. He is also a Director on the Boards of Infosys Technologies Limited, DSP-Merrill-lynch Fund Managers Limited, Crompton Greaves Limited, Infrastructure Development Finance Company Limited, Gujarat Ambuja Cements Limited, Sona Koyo Steering Systems Limited and Cairn India Limited.
     Mr. P.N. Devarajan has been a member of our Board of Directors since 2000. He has previously served as a Director of Cheminor Drugs Limited. He was a member of the Planning Board of Madhya Pradesh, Chairman of Research at the Council of National Environment Engineering Research Institute, member of the Assessment Committee of the Council of Scientific and Industrial Research and a member of the Research Council of National Chemical Laboratory. He has previously served as a Director of the Bank of Baroda, a member of the Central Board of Directors of the Reserve Bank of India and Group President and consultant of Reliance Industries Limited. Currently, he is also a Director on the Board of Kothari Sugars and Chemicals Limited, Shriram EPC Ltd. and Tropical Technologies Pvt Ltd and provided notice to us of his unwillingness to be re-appointed as a director and ceased to be a member of our Board of Directors effective May 20, 2008.
     Mr. Ravi Bhoothalingam has been a member of our Board of Directors since 2000. He has served as the President of The Oberoi Group and was responsible for its worldwide operations. He has also served as the Head of Personnel at BAT Plc, Managing Director of VST Industries Limited, and as a Director of ITC Limited. He holds a Bachelor of Science degree in physics from St. Stephens College, Delhi and a Master of experimental psychology degree from Gonville and Caius College, Cambridge University. He is also a Director of Nicco Internet Ventures Limited and Sona Koyo Steering Systems Limited.
     Dr. J.P. Moreau joined our Board as a member on May 18, 2007. He is presently working as Executive Vice-President and Chief Scientific Officer of the IPSEN Group where he is responsible for the Group’s research and development programs in Paris, London, Barcelona and Boston. Before that, he was IPSEN Group’s Vice-President, Research from April 1994 and has been a member of the Executive Committee of IPSEN Group since that date. Dr. Moreau has a degree in Chemistry from the University of Orléans and a D.Sc in biochemistry. He has also conducted post-doctorate research at the École polytechnique. He has published over 50 articles in scientific journals and is named as inventor or co-inventor in more than 30 patents. He is a regular speaker at scientific conferences and a member of Nitto Denko Scientific Advisory Board. In October 1976, Dr. Moreau founded Biomeasure Incorporated, based near Boston, and has been its President and CEO since then. He was also responsible for establishing Kinerton Ltd. in Ireland in March 1989, a wholesale manufacturer of therapeutic peptides, of which he is currently a Director.
     Ms. Kalpana Morparia joined our Board as a member on June 5, 2007. She is Chief Strategy and Communications Officer of ICICI Group. She was previously the Joint Managing Director of ICICI Bank Limited and was responsible for the Corporate Centre at ICICI Bank Limited, comprising operations, planning and strategy, risk management, human resources management, legal and corporate communications and corporate brand management. A graduate in law from Bombay University, Ms. Morparia joined ICICI Limited in 1975. She worked in the areas of planning, treasury, resources and corporate legal services. In 2001, she led the ICICI Group’s major corporate structuring initiative, the merger of ICICI Limited with ICICI Bank to create India’s second largest bank. Ms. Morparia has served on several committees constituted by the Government of India. In November 2005, she was honored with the Economic Times ‘Business Women of the Year’ award. In September 2006, she was named one of ‘The 100 Most Powerful Women’ by Forbes Magazine. She also serves on the Board of ICICI Prudential Life Insurance Company Limited, ICICI Lombard General Insurance Company Limited, ICICI Prudential Asset Management Company Limited, ICICI Securities Limited, Bennet Coleman & Co Limited, CMC Limited and ICICI Foundation for Inclusive Growth.

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     Executive Officers
     Mr. Abhijit Mukherjee is President of our Custom Pharmaceutical Services business and Chemical Technical Operations . Before joining us, he worked with Atul Limited for 10 years, where he held numerous positions of increasing responsibility. In his last assignment there he was President, Bulk Chemicals and Intermediates Business, and Managing Director, Amal Products Limited. He started his career as a management trainee in Hindustan Lever Limited (“HLL”) and put in 13 years in that company including 3 years in a Unilever company. He was primarily involved in the technical assignments in Aroma chemicals business in HLL and Unilever and also in detergents and sulphonation plants of HLL. He is a graduate in Chemical Engineering from the Indian Institute of Technology, Kharagpur.
     Amit Patel is Senior Vice President of Corporate Development & Strategic Planning. His responsibilities include chairing our Global Business Development Council, pursuing alliances and M&A, and driving global strategic initiatives to accelerate growth in various businesses and regions. He is also responsible for select long-term strategic business planning efforts and for coordination of external relations activities in North America. Prior to joining us in 2003, Amit was co-founder and CEO of a healthcare services startup called MedOnTime that was later acquired by CTIS, at which he served as Vice President of Corporate Development. Earlier, he was a strategy consultant with Marakon Associates where he focused on value-based management and M&A. He received a Bachelor of Science degree in Economics from the Wharton School of Business at the University of Pennsylvania, a Bachelor of Applied Science degree in Systems Engineering from the Moore School at the University of Pennsylvania, and a Master of Business Administration degree from Harvard Business School.
     Mr. Arun Sawhney was President of our Global API businesses. He joined us in 2001 as President of our API business from Max-GB Limited, where he was Chief Executive. Prior to that he headed the Global Business Development function at Ranbaxy Laboratories Limited. He has also had successful stints as Manager Exports with Hindustan Ciba Geigy and as Regional Sales Manager with Bayer India, earlier in his career. He holds an MBA from and was a silver-medalist (an award for being at the top of his class) from the International Management Institute, New Delhi, and a Bachelor’s degree in Commerce from Sydenham College of Commerce and Economics, Mumbai. He resigned from his position effective as of May 5, 2008.
     Mr. Ashwani Kumar Malhotra is Executive Vice President of our Formulations Technical Operations and from March 2004 is responsible for formulation manufacturing operations, supply chain management and projects. He joined us as Vice President in February 2001, and was responsible for the India operations supporting our generics and specialty businesses with new product development filings and manufacturing and supply of products to regulated markets such as the United States, Canada, Europe, the United Kingdom, South Africa, Australia and New Zealand. Prior to joining us, he worked with Cipla Limited for 13 years in various capacities and with Warner Hindustan, a division of Parke Davis in formulations development and manufacturing for 7 years. He holds a postgraduate degree in Pharmacy from the Institute of Technology, Banaras Hindu University. He also holds a Diploma in Industrial Engineering & Management and a Postgraduate Diploma in Computer Systems from the Institute of Public Enterprises, Government of India.
     Cartikeya Reddy is a Senior Vice President and heads our Biologics division that focuses on the development of biosimilar molecules for the Indian and global markets. Prior to joining us in 2004, he worked with Genentech Inc, where he was a Group Leader in the area of Cell Culture Process Development. Before that, he was with the Biotechnology Division of Bayer Corporation, where he successfully led teams in the areas of Bioprocess Development & Pilot Scale Manufacturing. He holds a Master of Science degree and Ph.D. in Chemical Engineering from the University of Illinois, Urbana-Champaign, and was a Visiting Scholar at the Massachusetts Institute of Technology, Cambridge, USA. He also graduated with a Bachelor of Technology degree in Chemical Engineering from the Indian Institute of Technology, Chennai, India.
     Mr. Jaspal Singh Bajwa is President of our Branded Formulations (Rest of the World) business. He joined us from Marico Industries, where he was Executive Director and Chief Operating Officer. He has 27 years of diverse experience in the consumer and healthcare products industries, having worked with Nestlé, S.A. and Bausch and Lomb, Inc. He started his career with Nestlé, S.A. After 15 years with Nestlé, S.A. in Sales and Marketing, his last position was Chief of Marketing in India. Subsequently, he spent over 10 years with Bausch and Lomb, Inc., where he held several senior management positions including those of Managing Director for India/ SAARC, and Head of their Canadian Subsidiary. He has a Bachelor’s degree in Food Technology and an MBA from the Indian Institute of Management, Ahmedabad.
     Mr. Jeffrey Wasserstein is Executive Vice President of our North America Specialty business and head of our North America business. He joined us in January 2005. He focuses on building our specialty business in North America and in addition works with the North American Management Team on selected opportunities for adding value to our other businesses in North America. He is also head of our New Jersey office where he leads our North America Operations function. Immediately prior to joining us he was EVP and Chief Business Officer of Avigenics, Inc., a biotechnology company engaged in the development of therapeutic proteins. He

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had a long career with Schering Plough Corporation where he was Senior Vice President of Corporate Consent Decree Integration. Prior to this role, he was the President of Schering Canada. He also held several positions of increasing responsibility at the Vice President level over Corporate Business Development, Strategic Planning and Internal Consulting and as Associate General Counsel-Commercial. Prior to joining Schering Plough Corporation, he was an Associate Attorney with Wachtell, Lipton, Rosen & Katz. He holds a Bachelor of Arts degree from Franklin & Marshall College and a J.D. degree from New York University School of Law.
     Mr. K.B. Sankara Rao is Executive Vice President responsible for Integrated Product Development for our Branded Formulations, Generics, API and specialty businesses and for formulation development of NCEs. He has been with us since 1986 in various capacities, establishing the manufacturing facilities, quality assurance systems, formulation research and development and managing supply chain for our formulations business. He also upgraded manufacturing facilities to the present day business needs, which resulted in the attainment of various statutory approvals, including U.K. MHRA approval. He is also responsible for the design and implementation of the “Self Managed Team” concept in two of our formulations manufacturing units. He holds a Masters degree in Pharmacy from Andhra University. He is a life member of the Indian Pharmaceutical Association, Indian pharmacy graduates association amongst his other affiliations. He has also been a member of CII-Southern Regional Quality & Productivity Sub-committee.
     Mr. Mark Hartman is President of our North America Generics business. He has 22 years of experience in the pharmaceutical industry. Before joining us, Mark spent five years at Watson Laboratories. His last three positions at Watson were Director of Marketing for Trade and Managed Care, Executive Director, Sales and Marketing — Watson Generics, and Vice President, Sales and Marketing, Watson Generics. He was involved in multiple product and company acquisitions during his tenure with Watson. Before Watson, he was Director of Marketing for Alpharma USPD, Marketing Manager at Geneva Pharmaceuticals, and held various brand and generic sales and marketing positions during his 10 years at Lederle Laboratories. He holds a bachelors degree in Dairy Science from Virginia Tech, Virginia.
     Prabir Jha is our Senior Vice President and Global Chief of Human Resources. He moved to the private sector after almost 10 years in the Indian Government. He has worked for organizations such as Thermax and Mahindra British Telecom prior to joining us, where he has been key to many of the high-end human resources interventions. He has handled all areas in human resources, with special interest in change management, global human resources strategy, employer branding and leadership capability development. He is an alumnus of St. Stephen’s College, Delhi and XLRI Jamshedpur. During his time as a government employee, he handled the entire gamut of human resources and industrial relations issues in the Indian Ordinance Factories. A recipient of several academic and professional awards, he has been on the CII Panel for human resources and industrial relations for Andhra Pradesh.
     Mr. Raghu Cidambi is Advisor and Head of Corporate Intellectual Property Management and Strategic Planning. Prior to joining us, he served with the Eenadu Group, a large south India-based media conglomerate, where he was responsible for its legal affairs. He has graduated from the Indian Institute of Management, Calcutta and thereafter obtained a Bachelor’s Degree in Law from the Osmania University in Hyderabad.
     Dr. Rajinder Kumar is our President — Research, Development and Commercialization. He is a graduate of University of London, University of Birmingham and University of Dundee. After receiving his degree in Medicine and Surgery, he obtained his post-graduate diploma in psychiatry and neurology from The Royal College of Surgeons in Ireland in 1990. He has held various leadership roles in the vision, development and implementation of the overall brand strategies to support the research and development and business development operations across different therapeutic areas within the pharmaceutical industry. He has extensive experience in drug development, regulatory affairs, and commercial strategy in North America, Europe, Japan and Asia. He has presented at various international meetings, has chaired international symposia and scientific advisory boards and has to his credit a range of highly respected publications. He is a member of many international scientific and clinical organizations, including Fellow of the Royal Society of Medicine and is a member of the Institute of Directors in the United Kingdom. He has an extensive history of building and managing strong result-focused teams. With his wide array of experience across research and development, expertise in regulatory affairs across the globe and clinical expertise, coupled with membership in various international forums, Dr. Kumar adds significant strength to our organizational capabilities. Prior to joining us, he was an independent consultant to several organizations in the areas of medical and commercial strategy and in the development of early stage molecules to proof-of-concept.
     Mr. Saumen Chakraborty is currently our Chief Financial Officer and President- Information Technology & Business Process Excellence. Prior to this role he was our Global Chief of HR. He has 23 years of experience in strategic and operational aspects of management. Prior to joining us, he held various positions including line manager and a human resources facilitator, with diverse portfolios such as Senior Manager (Finance and Accounts) in Eicher, and Vice President (Operations) in Tecumseh. A member of various industry forums including the CII and the National HRD Network, he graduated with honors as the valedictorian of his class

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from Visva—Bharati University in Physics, and went on to pursue management from the Indian Institute of Management, Ahmedabad. He continues to be responsible for Information Technology and Business Process Excellence.
     Mr. V.S. Vasudevan is currently the President — European Generics business. Prior to this role he was our Chief Financial Officer. In the position of Chief Financial Officer, he was responsible for managing our finance organization. He also was the head of the Secretarial, Legal, Compliance, Investor Relations and Internal Audit functions. He played an important role in establishment of our corporate governance framework. Under his leadership, we received external recognition for our corporate governance and financial reporting practices from the Institute of Company Secretaries of India and the Institute of Chartered Accountants of India. He played a key role in the integration of Cheminor Drugs Limited with us, the acquisition of betapharm in Germany and in our growth through various other corporate initiatives, including the acquisition of other companies in India and overseas and the acquisition of brands in India. He is a Chartered Accountant by qualification, and a member of the Peer Review Board of the Institute of Chartered Accountants of India.
6.B. Compensation
Directors’ compensation
     Full-Time Directors. The compensation of our Chairman, Chief Executive Officer and Chief Operating Officer (who we refer to as our “full-time directors”) is divided into salary, commission and benefits. They are not eligible to participate in the stock option plan. The compensation committee of the Board of Directors initially recommends the compensation for full-time directors. If the Board of Directors (the “Board”) approves the recommendation, it is then submitted to the shareholders for approval at the general shareholders meeting.
     On July 28, 2006, our shareholders re-appointed Dr. K. Anji Reddy as Chairman with effect from July 13, 2006, Mr. G. V. Prasad as Vice Chairman and CEO with effect from January 30, 2006. On July 24, 2007, our shareholders re-appointed Mr. Satish Reddy as Managing Director and COO with effect from October 1, 2007. Our Managing Director and COO and Vice Chairman and CEO are each entitled to receive a maximum commission of up to 0.75% of our net profit (as defined under the Indian Companies Act, 1956) for the fiscal year. Our Chairman is entitled to receive a maximum commission of up to 1.0% of our net profit (as defined under the Indian Companies Act, 1956) for the fiscal year. The compensation committee, which is composed of independent directors, recommends the commission for our Chairman, Vice Chairman and CEO and Managing Director and COO within the limits of 1%, 0.75% and 0.75%, respectively, of the net profits (as defined under the Indian Companies Act, 1956) for each fiscal year.
     Non-Full Time Directors. Each of our non-full time directors receives an attendance fee of Rs.5,000 (U.S.$124.6) for every Board meeting and Board committee meeting they attend. In fiscal 2008, we paid an aggregate of Rs.365,000 (U.S.$9097.7) to our non-full time directors as attendance fees. Non-full time directors are also eligible to receive a commission on our net profit (as defined under the Indian Companies Act, 1956) for each fiscal year. Our shareholders have approved a maximum commission of up to 0.5% of the net profits (as defined under the Indian Companies Act, 1956) for the fiscal year for all non-full time directors in a year. The Board determines the entitlement of each of the non-full time directors to commission within the overall limit. The non-full time directors were granted stock options under the Dr. Reddy’s Employees Stock Option Scheme, 2002 in fiscal 2008 as provided in the table below.
     For fiscal 2008, the directors were entitled to the following amounts as compensation:
                                                 
            Amount Rs.
(in thousands)
               
Name of Directors   Attendance fees   Commission(2)   Salary   Perquisites   Total   Stock Options
Dr. K. Anji Reddy
          60,310       5,400       497       66,207        
Mr. G.V. Prasad
          45,233       3,600       687       49,520        
Mr. Satish Reddy
          45,233       3,600       695       49,528        
Mr. Anupam Puri
    60       2,848                   2,908       3,000  
Dr. J.P. Moreau
    25       2,588                   2,613       3,000  
Ms. Kalpana Morparia
    30       2,407                   2,437       3,000  
Prof. Krishna G. Palepu
    35       2,648                   2,683       3,000  

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            Amount Rs.
(in thousands)
               
Name of Directors   Attendance fees   Commission(2)   Salary   Perquisites   Total   Stock Options
Dr. Omkar Goswami
    55       2,808                   2,863       3,000  
Mr. P.N. Devarajan(1)
    85       2,608                   2,693       3,000  
Mr. Ravi Bhoothalingam
    75       2,608                   2,683       3,000  
 
(1)   Ceased to be a member of our Board of Directors effective May 20, 2008
 
(2)   The Board of Directors recommended for a fixed commission of Rs.2,407 thousands (U.S.$60,000) per director applicable to all the independent directors, a specific commission of Rs.401 thousands (U.S.$10,000) to the Chairman of the Audit Committee and Rs.200 thousands (U.S.$5,000) to the Chairman of other Committees other than the above, a specific compensation of Rs.60 thousands (U.S.$1,500) was paid towards foreign travel to the directors residing outside India.
     The options granted to directors in fiscal 2008 have an exercise price of Rs.5 per option, vest in one year, and expire five years from the date of vesting.
Executive officers’ compensation
     The initial compensation to all our executive officers is determined through appointment letters issued at the time of employment. The appointment letter provides the initial amount of salary and benefits the executive officer will receive as well as a confidentiality provision and a non-compete provision applicable during the course of the executive officer’s employment with us. We provide salary, certain perquisites, retirement benefits, stock options and variable pay to our executive officers. The compensation committee of the Board reviews the compensation of executive officers on a periodic basis.
     All of our employees at the managerial and staff levels are eligible to participate in a variable pay program, which consists of performance bonuses based on the performance of their function or business unit, and a profit sharing plan through which part of our profits can be shared with our employees. Our variable pay program is aimed at rewarding performance of the individual, business unit/function and the organization, with significantly higher rewards for superior performances.
     We also have two employee stock option schemes: the Dr. Reddy’s Employees Stock Option Scheme, 2002 and the Dr. Reddy’s Employees ADR Stock Option Scheme, 2007. The stock option schemes are applicable to all of our employees and directors and employees and directors of our subsidiaries. The stock option schemes are not applicable to promoter directors, promoter employees and persons holding 2% or more of our outstanding share capital. The compensation committee of the Board of Directors awards options pursuant to the stock option schemes based on the employee’s performance appraisal. Some employees have also been granted options upon joining us.

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     Compensation for executive officers who are full time directors is summarized in the table under “Directors’ compensation,” above. The following table presents the annual compensation paid for services rendered to us for fiscal 2008 and stock options held by all of our other executive officers as of March 31, 2008:
                                         
    Compensation     No. of     Fiscal Year             Expiration  
Name   (Rs.)     options held     of the Grant     Exercise price     date  
Mr. Abhijit Mukherjee
  Rs.13,711,512       1,600       2005       5.00       (1 )
 
            5,000       2006       5.00       (1 )
 
            6,000       2007       5.00       (1 )
 
            8,000       2008       5.00       (1 )
Mr. Amit Patel
    12,639,997       4,000       2005       442.50       (1 )
 
            1,400       2006       5.00       (1 )
 
            1,250       2007       5.00       (1 )
 
            10,650       2008       5.00       (3 )
Arun Sawhney (4)
    15,636,448       4,570       2005       5.00       (1 )
 
            4,000       2006       5.00       (1 )
 
            4,800       2007       5.00       (1 )
 
            8,000       2008       5.00       (1 )
Mr. Ashwani Kumar Malhotra
    10,682,044       3,002       2005       5.00       (1 )
 
            3,500       2006       5.00       (1 )
 
            3,750       2007       5.00       (1 )
 
            6,000       2008       5.00       (1 )
Dr. C. Cartikeya Reddy
    5,927,933       2,400       2006       5.00       (1 )
 
            2,000       2007       5.00       (1 )
 
            4,000       2008       5.00       (1 )
Mr. Jaspal Singh Bajwa
    14,777,682       3,500       2005       5.00       (1 )
 
            5,000       2006       5.00       (1 )
 
            6,000       2007       5.00       (1 )
 
            8,000       2008       5.00       (1 )
Mr. Jeffrey Wasserstein
    21,020,940       22,000       2008       5.00       (3 )
Mr. K.B. Sankara Rao
    10,484,928       6,160       2005       5.00       (1 )
 
            6,000       2006       5.00       (1 )
 
            6,400       2007       5.00       (1 )
 
            6,000       2008       5.00       (1 )
Mr. Mark Hartman
    21,020,943       20,000       2004       441.50       (1 )
 
            12,000       2005       442.50       (1 )
 
            20,000       2008       5.00       (3 )
Mr. Prabir Kumar Jha
    8,215,047       800       2005       5.00       (1 )
 
            1,500       2006       5.00       (1 )
 
            1,950       2007       5.00       (1 )
 
            4,000       2008       5.00       (1 )
Dr. Rajinder Kumar
    21,374,919       7,500       2008       5.00       (2 )
Mr. Raghu Cidambi
    9,200,000       7,000       2005       5.00       (1 )
 
            5,000       2006       5.00       (1 )
 
            3,750       2007       5.00       (1 )
 
            6,000       2008       5.00       (1 )
Mr. Saumen Chakraborty
    14,223,788       5,000       2004       441.50       (1 )
 
            2,550       2005       5.00       (1 )
 
            5,000       2006       5.00       (1 )
 
            6,000       2007       5.00       (1 )
 
            8,000       2008       5.00       (1 )
Mr. V.S. Vasudevan
    18,855,933       11,480       2003       531.51       (1 )
 
            20,000       2004       441.50       (1 )
 
            20,000       2005       442.50       (1 )
 
            50,000       2006       362.50       (1 )
 
            8,000       2007       5.00       (1 )
 
            7,000       2008       5.00       (1 )
 
(1)   The expiration date is five years from the date of vesting. The options vest in annual increments over a period of four years.
 
(2)   The expiration date is five years from the date of vesting. The options vest in one year.
 
(3)   The expiration date is five years from the date of vesting. The options vest in three years.
 
(4)   Ceased to be an employee effective as of May 5, 2008

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Retirement benefits.
     We provide the following benefit plans to our employees:
     Gratuity benefits: In accordance with applicable Indian laws, we provide for gratuity, a defined benefit retirement plan (the “Gratuity Plan”) covering certain categories of employees. The Gratuity Plan provides a lump sum payment to vested employees, at retirement or termination of employment, at an amount based on the respective employee’s last drawn salary and the years of employment with the Company. Effective September 1, 1999, we established Dr. Reddy’s Laboratories Gratuity Fund (the “Gratuity Fund”). Liability with regard to the Gratuity Plan is determined by an actuarial valuation, based upon which we make contributions to the Gratuity Fund. Trustees administer the contributions made to the Gratuity Fund. The amounts contributed to the Gratuity Fund are invested in specific securities as mandated by Indian law and generally consist of federal and state Indian Government bonds and the debt instruments of Indian Government-owned corporations.
     The net periodic benefit costs recognized by us were Rs.52.3 million, Rs.31.5 million and Rs.39.3 million during the years ended March 31, 2006, 2007 and 2008 respectively.
     Superannuation benefits. Apart from being covered under the Gratuity Plan described above, our senior officers also participate in superannuation, a defined contribution plan administered by the Life Insurance Corporation of India. We make annual contributions based on a specified percentage of each covered employee’s salary. We have no further obligations under the plan beyond our annual contributions. We contributed Rs.24.8 million, Rs.28.0 million and Rs.39.9 million to the superannuation plan during the years ended March 31, 2006, 2007 and 2008, respectively.
     Provident fund benefits. In addition to the above benefits, all employees receive benefits from a provident fund, a defined contribution plan. Both the employee and employer each make monthly contributions to the plan equal to 12% of the covered employee’s basic salary. We have no further obligations under the plan beyond our monthly contributions. We contributed Rs. 64.4 million, Rs.113.5 million and Rs.144.5 million to the provident fund plan during the years ended March 31, 2006, 2007 and 2008, respectively.
     Pension plans. All employees of Falcon (Mexico) are governed by a defined benefit pension plan. The pension plan provides a payment to vested employees at retirement or termination of employment. This payment is based on the employee’s integrated salary and is paid in the form of a monthly pension over a period of 20 years computed based on a predefined formula. Liabilities in respect of the pension plan are determined by an actuarial valuation, based on which the Company makes contributions to the pension plan fund. This fund is administered by a third party who is provided guidance by a technical committee formed by senior employees of Falcon.
6.C. Board practices
     Our Articles of Association require us to have a minimum of three and a maximum of 20 directors. As of March 31, 2008, we had ten directors on our Board, of which seven were non-full time independent directors.
     The Companies Act, 1956 and our Articles of Association require that at least two-thirds of our directors be subject to re-election by our shareholders in rotation. At every annual general meeting, one-third of the directors who are subject to re-election must retire and, if eligible for re-election, may be reappointed at the annual general meeting. Our full time directors are not subject to re-election.

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     The terms of each of our directors and their expiration dates are provided in the table below.
             
    Expiration of Current        
Name   Term of Office   Term of Office   Period of Service
Dr. K. Anji Reddy (1)
  July 12, 2011   5 years   24 years
Mr. Satish Reddy (1)(3)
  September 30, 2012   5 years   15 years
Mr. G.V. Prasad (1)
  January 30, 2011   5 years   22 years
Mr. Anupam Puri (2)
  Retirement by rotation   Due for retirement by rotation in 2008   6 years
Dr. J. P. Moreau(2)
  Retirement by rotation   Due for retirement by rotation in 2009   1 year
Ms. Kalpana Morpaira(2)
  Retirement by rotation   Due for retirement by rotation in 2010   1 year
Dr. Krishna G. Palepu (2)
  Retirement by rotation   Due for retirement by rotation in 2008   6 years
Mr. P.N. Devarajan (2)(4)
  Retirement by rotation   Due for retirement by rotation in 2008   7.5 years
Dr. Omkar Goswami (2)(3)
  Retirement by rotation   Due for retirement by rotation in 2010   7.5 years
Mr. Ravi Bhoothalingam (2)
  Retirement by rotation   Due for retirement by rotation in 2009   7.5 years
 
(1)   Full time director.
 
(2)   Non-full time independent director.
 
(3)   Reappointed at the 23rd Annual General Meeting of Shareholders held on July 24, 2007
 
(4)   Director liable to retire by rotation provided us with a notice of his unwillingness to be re-appointed and ceased to be a member of the Board of Directors effective as of May 20, 2008.
     The terms of the contracts with our full-time directors are also disclosed to all the shareholders in the notice of the general meeting. The directors are not eligible for any termination benefit on the termination of their tenure with us.
Committees of the Board
     Committees appointed by the Board focus on specific areas and take decisions within the authority delegated to them. The Committees also make specific recommendations to the Board on various matters from time-to-time. All decisions and recommendations of the Committees are placed before the Board for information or approval. We have six Board-level Committees:
    Audit Committee.
 
    Compensation Committee.
 
    Governance Committee.
 
    Shareholders’ Grievance Committee.
 
    Management Committee.
 
    Investment Committee.
     The details of the Audit Committee, Compensation Committee and Governance Committee are discussed hereunder.
     Audit Committee. Our management is primarily responsible for our internal controls and financial reporting process. Our independent registered public accounting firm is responsible for performing independent audits of our financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and for issuing reports based on such audits. The Board of Directors has entrusted the Audit Committee to supervise these processes and thus ensure accurate and timely disclosures that maintain the transparency, integrity and quality of financial controls and reporting.
     The Audit Committee consists of the following three non-full time independent directors:

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    Dr. Omkar Goswami (Chairman)
 
    Ms. Kalpana Morparia
 
    Mr. Ravi Bhoothalingam
     Our Company Secretary is the Secretary of the Audit Committee. This Committee met on four occasions during fiscal 2008. Our independent registered public accounting firm was present at all Audit Committee meetings during the year.
     The primary responsibilities of the Audit Committee are to:
    Supervise the financial reporting process;
 
    Review the financial results, along with the related public filings, before recommending them to the Board;
 
    Review the adequacy of our internal controls, including the plan, scope and performance of our internal audit function;
 
    Discuss with management our major policies with respect to risk assessment and risk management;
 
    Hold discussions with independent registered public accounting firm on the nature and scope of audits, and any views that they have about the financial control and reporting processes;
 
    Ensure compliance with accounting standards, and with listing requirements with respect to the financial statements;
 
    Recommend the appointment and removal of independent registered public accounting firm and their fees;
 
    Review the independence of our independent registered public accounting firm;
 
    Ensure that adequate safeguards have been taken for legal compliance both for us and for our Indian and foreign subsidiaries;
 
    Review related party transactions; and
 
    Review the functioning of our whistle blower policies and procedures.
     Compensation Committee. The Compensation Committee considers and recommends to the Board the compensation of the full time directors and executives above Vice-President level, and also reviews the remuneration package that we offer to different grades/levels of our employees. The Compensation Committee also administers our Employee Stock Option Scheme.
     The Compensation Committee consists of the following four non-full time, independent directors:
    Mr. Ravi Bhoothalingam (Chairman)
 
    Dr. J.P. Moreau
 
    Ms. Kalpana Morpaira
 
    Mr. P. N. Devarajan
     The Chief of Human Resources is the Secretary of the Committee. The Compensation Committee met four times during fiscal 2008.
     Governance Committee. The primary function of the Governance Committee is to assist the Board of Directors in fulfilling its responsibilities by reviewing and making recommendations to the Board regarding the Board’s composition and structure, establishing criteria for Board membership and evaluating corporate policies relating to the recruitment of Board members and establishing,

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implementing and monitoring policies and processes regarding principles of corporate governance in order to ensure the Board’s compliance with its fiduciary duties.
     The Governance Committee consists of the following three non-full time, independent directors:
    Mr. Anupam Puri (Chairman)
 
    Prof. Krishna G. Palepu
 
    Dr. Omkar Goswami
     Our Company Secretary is the Secretary of the Committee. The Governance Committee met once during fiscal 2008.
Corporate Governance
     Companies listed on the New York Stock Exchange (“NYSE”) must comply with certain standards regarding corporate governance as codified in Section 303A of the NYSE’s Listed Company Manual. Listed companies that are foreign private issuers (as such term is defined in Rule 3b-4 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are permitted to follow home country practice in lieu of the provisions of this Section 303A, except that such companies are required to comply with the requirements of Sections 303A.06, 303A.11 and 303A.12(b) and (c), which are as follows:
  (i)   establish an independent audit committee that has specified responsibilities;
 
  (ii)   provide prompt certification by its chief executive officer of any material non-compliance with any corporate governance rules;
 
  (iii)   provide periodic written affirmations to the NYSE with respect to its corporate governance practices; and
 
  (iv)   provide a brief description of significant differences between its corporate governance practices and those followed by U.S. companies.
     The following table compares our principal corporate governance practices to those required of U.S. NYSE listed companies.
     
Standard for U.S. NYSE Listed Companies   Our practice
Listed companies must have a majority of “independent directors,” as defined by the NYSE.
  We comply with this standard. Seven of our ten directors are “independent directors,” as defined by the NYSE.
 
   
The non-management directors of each listed company must meet at regularly scheduled executive sessions without management.
  We comply with this standard. Our non-management directors meet periodically without management directors in scheduled executive sessions.
 
   
Listed companies must have a nominating/corporate governance committee composed entirely of independent directors. The nominating/corporate governance committee must have a written charter that addresses the committee’s purpose and responsibilities, subject to the minimum purpose and responsibilities established by the NYSE, and an annual evaluation of the committee.
  We have a Governance Committee composed entirely of independent directors which meets these requirements. The committee has a written charter that meets these requirements. We do not have a practice of evaluating the performance of the Governance Committee.
 
   
Listed companies must have a compensation committee composed entirely of independent directors. The compensation committee must have a written charter that addresses the committee’s purpose and responsibilities, subject to the minimum purpose and responsibilities established by the NYSE, and an annual evaluation of the committee.
  We have a Compensation Committee composed entirely of independent directors which meets these requirements. The committee has a written charter that meets these requirements. We do not have a practice of evaluating the performance of our Compensation Committee.
 
   
Listed companies must have an audit committee that satisfies the
  Our Audit Committee satisfies the requirements of Rule 10A-3

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Standard for U.S. NYSE Listed Companies   Our practice
requirements of Rule 10A-3 under the Exchange Act
  under the Exchange Act.
 
   
The audit committee must have a minimum of three members all being independent directors. The audit committee must have a written charter that addresses the committee’s purpose and responsibilities, subject to the minimum purpose and responsibilities established by the NYSE, and an annual evaluation of the committee.
  We have an Audit Committee composed of three members, all being independent directors. The committee has a written charter that meets these requirements. We also have an internal audit function. We do not have a practice of evaluating the performance of our Audit Committee.
 
   
Each listed company must have an internal audit function.
  We have an Internal Audit function.
 
   
Shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, with limited exceptions.
  We comply with this standard. Our Employee Stock Option Plan was approved by our shareholders.
 
   
Listed companies must adopt and disclose corporate governance guidelines.
  We have not adopted corporate governance guidelines.
 
   
All listed companies, U.S. and foreign, must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.
  We comply with this standard. More details on our Code of Business Conduct and Ethics are given under Item 16.B.
 
   
Listed foreign private issuers must disclose any significant ways in which their corporate governance practices differ from those followed by domestic companies under NYSE listing standards.
  This requirement is being addressed by way of this table.
 
   
Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards, qualifying the certification to the extent necessary.
  We filed our most recent written certification on September 26, 2007
 
   
Each listed company CEO must promptly notify the NYSE in writing after any executive officer of the listed company becomes aware of any material non-compliance with any applicable provisions of this Section 303A.
  There are no such instances.
 
   
Each listed company must submit an executed Written Affirmation annually to the NYSE. In addition, each listed company must submit an interim Written Affirmation each time a change occurs to the board or any of the committees subject to Section 303A. The annual and interim Written Affirmations must be in the form specified by the NYSE.
  We filed our most recent written affirmation on September 28, 2007
6.D. Employees
     The following table sets forth the number of our employees during fiscal 2006, 2007 and 2008.
For the Fiscal Year Ended March 31, 2008
                                 
    North America     Europe     Rest of the World   Total  
Manufacturing(1)
          50       3,276       3,326  
Sales and Marketing(2)
    45       261       3,079       3,385  
Research and Development
    18             1,708       1,726  
Others(3)
    46       184       908       1,138  
 
Total
    109       495       8,971       9,575  
 

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For the Fiscal Year Ended March 31, 2007
                                 
    North America     Europe     Rest of the World     Total  
Manufacturing(1)
          29       3,566       3,595  
Sales and Marketing(2)
    21       299       2,546       2,866  
Research and Development
    18             1,381       1,557  
Others(3)
    58       182       920       1,002  
 
Total
    97       510       8,413       9,020  
 
For the Fiscal Year Ended March 31, 2006
                                 
    North America     Europe     Rest of the World     Total  
Manufacturing(1)
          56       2,841       2,897  
Sales and Marketing(2)
    27       291       2,268       2,586  
Research and Development
    19             1,167       1,186  
Others(3)
    32       129       695       856  
 
Total
    78       476       6,971       7,525  
 
 
(1)   Includes quality, technical services and warehouse.
 
(2)   Includes business development.
 
(3)   Includes shared services, corporate business development and the intellectual property management team.
     We have not experienced any material work stoppages in the last three fiscal years and we consider our relationship with our employees and labor unions to be good. Approximately 10% of our employees belong to labor unions. We did not experience any strikes at our manufacturing facilities in fiscal 2008.
6.E. Share ownership
     The following table sets forth, as of March 31, 2008 for each of our directors and executive officers, the total number of our equity shares and options owned by them:
                                                 
            % of                          
    No. of shares     outstanding     No. of     Fiscal Year              
Name   held(1),(3)     capital     options held     of the Grant     Exercise price     Expiration date  
Dr. K. Anji Reddy(2),(4)
    800,956       0.48 %                        
Mr. G.V. Prasad(4)
    1,355,840       0.81 %                        
Mr. Satish Reddy(4)
    1,205,832       0.72 %                        
Mr. Anupam Puri
    1,500               9,000       2007     Rs. 5.00       (6 )
 
                    1500       2007       5.00       (7 )
Dr. J P Moreau
                                       
Ms Kalpana Morparia
                                       
Prof. Krishna G Palepu
    1,500               9,000       2007       5.00       (6 )
 
                    1,500       2007       5.00       (7 )
Dr. Omkar Goswami
    6,000               3,000       2005       5.00       (5 )
 
                    3,000       2007       5.00       (6 )
Mr. P.N. Devarajan
    6,200               3,000       2005       5.00       (5 )
 
                    3,000       2007       5.00       (6 )
Mr. Ravi Bhoothalingam
    6,000               3,000       2005       5.00       (5 )
 
                    3,000       2007       5.00       (6 )
Mr. Abhijit Mukherjee
    11,800               6,600       2005       5.00       (5 )
 
                    6,000       2006       5.00       (5 )
 
                    8,000       2007       5.00       (5 )
Mr. Amit Patel
                    4,000       2004       442.50       (5 )
 
                    1,400       2005       5.00       (5 )

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            % of                
    No. of shares     outstanding     No. of     Fiscal Year              
Name   held(1),(3)     capital     options held     of the Grant     Exercise price     Expiration date  
 
                    1,250       2005       5.00       (5 )
 
                    10,650       2007       5.00       (8 )
Arun Sawhney
    12,740               8,570       2005       5.00       (5 )
 
                    4,800       2006       5.00       (5 )
 
                    8,000       2007       5.00       (5 )
Mr. Ashwani Kumar Malhotra
    16,564               6,502       2005       5.00       (5 )
 
                    3,750       2006       5.00       (5 )
 
                    6,000       2007       5.00       (5 )
Dr. C. Cartikeya Reddy
                    2,400       2005       5.00       (5 )
 
                    2,000       2006       5.00       (5 )
 
                    4,000       2007       5.00       (5 )
Mr. Jaspal Singh Bajwa
    13,500               8,500       2005       5.00       (5 )
 
                    6,000       2006       5.00       (5 )
 
                    8,000       2007       5.00       (5 )
Mr. Jeffrey Wasserstein
                    22,000       2007       5.00       (8 )
Mr. K.B. Sankara Rao
    42,744       0.03       12,160       2005       5.00       (5 )
 
                    6,400       2006       5.00       (5 )
 
                    6,000       2007       5.00       (5 )
Mr. Mark Hartman
                    20,000       2003       441.50       (5 )
 
                    12,000       2004       442.50       (5 )
 
                    20,000       2007       5.00       (8 )
Mr. Prabir Kumar Jha
    4,550               2,300       2005       5.00       (5 )
 
                    1,950       2006       5.00       (5 )
 
                    4,000       2007       5.00       (5 )
Dr. Rajinder Kumar
                    7,500       2007       5.00       (6 )
Mr. Raghu Cidambi
    15,250               12,000       2005       5.00       (5 )
 
                    3,750       2006       5.00       (5 )
Mr. Saumen Chakraborty
    28,850       0.02       5,000       2003       441.50       (5 )
 
                    7,550       2005       5       (5 )
 
                    6,000       2006       5.00       (5 )
 
                    8,000       2007       5.00       (5 )
Mr. V.S. Vasudevan
                  11,480       2002       531.51       (5 )
 
                    20,000       2003       441.50       (5 )
 
                    20,000       2004       442.50       (5 )
 
                    50,000       2005       362.50       (5 )
 
                    8,000       2006       5.00       (5 )
 
                    7,000       2007       5.00       (5 )
 
(1)   Shares held in their individual name only.
 
(2)   Does not include shares held beneficially. See Item 7.A. for beneficial ownership of shares by this individual.
 
(3)   All shares have voting rights.
 
(4)   Not eligible for grant of Stock Options.
 
(5)   The expiration date is five years from the date of vesting. The options vest in annual increments over a period of four years.
 
(6)   The expiration date is five years from the date of vesting. The options vest in one year.
 
(7)   The expiration date is five years from the date of vesting. The options vest in two years.
 
(8)   The expiration date is five years from the date of vesting. The options vest in three years.

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Employee Stock Incentive Plans
Dr. Reddy’s Employees Stock Option Plan-2002 (the “DRL 2002 Plan”)
     The Company instituted the DRL 2002 Plan for all eligible employees in pursuance of the special resolution approved by the shareholders in the Annual General Meeting held on September 24, 2001. The DRL 2002 Plan covers all employees of the Company and all employees and directors of its subsidiaries. The Compensation Committee of the Board (the “Compensation Committee”) shall administer the DRL 2002 Plan and grant stock options to eligible employees of the Company and its subsidiaries. The Compensation Committee shall determine the employees eligible for receiving the options, the number of options to be granted, the exercise price, the vesting period and the exercise period. The vesting period is determined for all options issued on the date of grant. The maximum contractual term for stock options granted pursuant to the DRL 2002 Plan is generally five years. The options issued under the DRL 2002 Plan vest in periods ranging between one and four years.
     The DRL 2002 Plan was amended on July 28, 2004 at the annual general meeting of shareholders to provide for stock option grants in two categories:
Category A: 1,721,700 stock options out of the total of 2,295,478 options reserved for grant having an exercise price equal to the fair market value of the underlying equity shares on the date of grant; and
Category B: 573,778 stock options out of the total of 2,295,478 options reserved for grant having an exercise price equal to the par value of the underlying equity shares (i.e., Rs.5 per option).
     The DRL 2002 Plan was further amended on July 27, 2005 at the annual general meeting of shareholders to provide for stock option grants in two categories:
Category A: 300,000 stock options out of the total of 2,295,478 options reserved for grant having an exercise price equal to the fair market value of the underlying equity shares on the date of grant; and
Category B: 1,995,478 stock options out of the total of 2,295,478 options reserved for grant having an exercise price equal to the par value of the underlying equity shares (i.e., Rs.5 per option).
     Under the DRL 2002 Plan, the exercise price of the fair market value options granted under Category A above is determined based on the average closing price for 30 days prior to the grant in the stock exchange where there is highest trading volume during that period. Notwithstanding the foregoing, the Compensation Committee may, after obtaining the approval of the shareholders in the annual general meeting, grant options with a per share exercise price other than fair market value and par value of the equity shares.
     After the stock split effected in the form of a stock dividend issued by the Company in August 2006, the DRL 2002 Plan provides for stock options granted in the above two categories as follows:
                         
    Number of   Number of Options    
    Options granted   granted Under    
Particulars   Under category A   category B   Total
Options reserved under original Plan
    300,000       1,995,478       2,295,478  
Options exercised prior to stock dividend date (A)
    94,061       147,793       241,854  
Balance of shares that can be allotted on exercise of options (B)
    205,939       1,847,685       2,053,624  
Options arising from stock dividend (C)
    205,939       1,847,685       2,053,624  
Options reserved after stock dividend (A+B+C)
    505,939       3,843,163       4,349,102  
     In April 2007, certain employees surrendered their par value options under category B of the DRL 2002 Plan in exchange for par value options under category B of the DRL 2007 Plan (discussed below). The incremental cost due to such modifications was insignificant.
     At its meeting in October, 2007, the Compensation Committee proposed that the Company should absorb the full liability of Fringe Benefit Tax on exercise of all stock options granted until the date of this resolution. Further, in respect of new grants to be made by the Company subsequent to the date of this resolution, Fringe Benefit Tax will be recovered from employees upon exercise of stock options.

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     The above amendment is to be proposed at the next Annual General Meeting of the shareholders, which is currently proposed to be held in July 2008.
     Stock option activity under the DRL 2002 Plan for the two categories of options was as follows:
Category A — Fair Market Value Options
                                 
    Fiscal Year Ended March 31, 2006  
                            Weighted  
                    Weighted     average  
                    average     remaining  
    Shares arising     Range of     exercise     contractual  
    out of options     exercise prices     price     life (months)  
Outstanding at the beginning of the year
    597,900     Rs. 373.5-574.5     Rs. 488.66       50  
Granted during the year
    65,000       362.5       362.5       81  
Expired/forfeited during the year
    (273,400 )     362.5-574.5       472.18        
Exercised during the year
    (155,000 )     441.5-488.65       471.92        
 
                             
Outstanding at the end of the year
    234,500       362.5-531.51       439.43       64  
 
                             
Exercisable at the end of the year
    75,764     Rs. 362.5-531.51     Rs. 471.93       45  
 
                             
Category A — Fair Market Value Options
                                 
    Fiscal Year Ended March 31, 2007  
                            Weighted  
                    Weighted     average  
                    average     remaining  
    Shares arising     Range of     exercise     contractual  
    out of options     exercise prices     price     life (months)  
Outstanding at the beginning of the year
    234,500       362.5-531.51       439.43       64  
Expired/forfeited during the year
    (11,600 )     441.5-574.5       527.8        
Exercised during the year
    (31,320 )     441.5-531.51       477.4        
 
                             
Outstanding at the end of the year
    191,580       362.5-531.51       427.9       54  
 
                             
Exercisable at the end of the year
    103,680     Rs. 362.5-531.51     Rs. 447.58       38  
 
                             
Category A — Fair Market Value Options
                                 
    Fiscal Year Ended March 31, 2008  
                            Weighted  
                    Weighted     average  
                    average     remaining  
    Shares arising     Range of     exercise     contractual  
    out of options     exercise prices     price     life (months)  
Outstanding at the beginning of the year
    191,580     Rs. 362.5-531.51     Rs. 427.9       54  
Expired/forfeited during the year
    (2,100 )     442.5       442.5        
Exercised during the year
    (30,700 )     441.5-531.51       458.32        
 
                             
Outstanding at the end of the year
    158,780       362.5-531.51       421.79       44  
 
                             
Exercisable /vested at the end of the year
    119,830       362.5-531.51       433.05       36  
 
                             
Expected to vest at the end of the year
    33,030     Rs. 362.5-442.50     Rs. 387.20       67  
 
                             

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Category B — Par Value Options
                                 
  Fiscal Year Ended March 31, 2006
                            Weighted-
                    Weighted-   average
                    average   remaining
    Shares arising           exercise   contractual life
    out of options   Exercise price   price   (months)
Outstanding at the beginning of the year
    759,098     Rs. 5     Rs. 5       84  
Granted during the year
    433,720       5       5       81  
Forfeited during the year
    (266,608 )     5       5        
Exercised during the year
    (196,242 )     5       5        
 
                               
Outstanding at the end of the year
    729,968       5       5       81  
 
                               
Exercisable at the end of the year
    36,272     Rs. 5     Rs. 5       59  
 
                               
Category B — Par Value Options
                                 
    Fiscal Year Ended March 31, 2007
                            Weighted-
                    Weighted-   average
                    average   remaining
    Shares arising           exercise   contractual life
    out of options   Exercise price   price   (months)
Outstanding at the beginning of the year
    729,968     Rs. 5     Rs. 5       81  
Granted during the year
    427,060       5       5       81  
Forfeited during the year
    (76,056 )     5       5        
Exercised during the year
    (191,720 )     5       5        
 
                               
Outstanding at the end of the year
    889,252       5       5       77  
 
                               
Exercisable at the end of the year
    43,256     Rs. 5     Rs. 5       51  
 
                               
Category B — Par Value Options
                                 
    Fiscal Year Ended March 31, 2008
                            Weighted-
                    Weighted-   average
                    average   remaining
    Shares arising           exercise   contractual life
    out of options   Exercise price   price   (months)
Outstanding at the beginning of the period
    889,252     Rs. 5     Rs. 5       77  
Granted during the period
    386,060       5       5       91  
Forfeited during the period
    (133,240 )     5       5        
Surrendered by employees during the period
    (138,418 )     5       5        
Exercised during the period
    (229,866 )     5       5        
 
                               
Outstanding at the end of the period
    773,788       5       5       74  
 
                               
Exercisable/vested at the end of the period
    72,364       5       5       50  
 
                               
Expected to vest at the end of the year
    594,808     Rs. 5     Rs. 5       76  
 
                               
     The weighted average grant date fair value of options granted during the year ended March 31, 2006 under category A – Fair market value options was Rs.293.42. The weighted average grant date fair value of options granted during the years ended March 31, 2006, 2007 and 2008 under category B par value options was Rs.705.88, Rs.575.36 and Rs.549.57, respectively. The aggregate intrinsic value of options exercised under the DRL 2002 Plan (both category A and B) during the years ended March 31, 2006, 2007 and 2008 was Rs.142 million, Rs.145 million and Rs.151 million, respectively. As of March 31, 2008, options outstanding and exercisable/vested under the DRL 2002 Plan (both category A and B) had an aggregate intrinsic value of Rs.481 million and Rs.61 million, respectively. As of March 31, 2008, the intrinsic value of options expected to vest under the DRL 2002 plan (both category A and B) had an aggregate intrinsic value of Rs. 355 million.

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Dr. Reddy’s Employees ADR Stock Option Plan-2007 (the “DRL 2007 Plan”):
     The Company instituted the DRL 2007 Plan for all eligible employees in pursuance of the special resolution approved by the shareholders in the Annual General Meeting held on July 27, 2005. The DRL 2007 Plan came into effect on approval of the Board of Directors on January 22, 2007. The DRL 2007 Plan covers all employees of DRL and all employees and directors of its subsidiaries. The Compensation Committee administers the DRL 2007 Plan and grants stock options to eligible employees of the Company and its subsidiaries. The Compensation Committee determines the employees eligible for receiving the options, the number of options to be granted, the exercise price, the vesting period and the exercise period. The vesting period is determined for all options issued on the date of grant. The maximum contractual term for aforementioned stock option plan is generally five years. The options issued under DRL 2007 plan vest in periods ranging between one and four years.
     The DRL 2007 Plan provides for grant of stock options in two categories:
Category A: 382,695 stock options out of the total of 1,530,779 stock options reserved for grant having an exercise price equal to the fair market value of the underlying equity share on the date of grant; and
Category B: 1,148,084 stock options out of the total of 1,530,779 stock options reserved for grant having an exercise price equal to the par value of the underlying equity share (i.e., Rs.5 per option).
     Stock option activity under the DRL 2007 Plan during the year ended March 31, 2008 was as follows:
Category B — Par Value Options
                                 
    Fiscal Year Ended March 31, 2008
                            Weighted-
                    Weighted-   average
                    average   remaining
    Shares arising           exercise   contractual life
    out of options   Exercise price   price   (months)
Granted during the year
    206,818     Rs. 5     Rs.