Dr. Reddy's Laboratories Q2 23/24 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2023

There are 11 speakers on the call.

Operator

And gentlemen, good day, and welcome to the Doctor. Reddy's Q2 FY 'twenty four Earnings Conference Call. As a reminder, all participant lines will be in the listen only mode. There will be an opportunity for you to ask questions after the presentation concludes. Please note that this conference is being recorded.

Operator

I now hand the conference over to Ms. Rita Periwal. Thank you and over to you, ma'am.

Speaker 1

Thank you, Dorvin. A very good morning and good evening to all of you and thank you for joining us today for the Doctor. Reddy's earnings conference call for the quarter ended September 30, 2023. Earlier during the day, we've released our results and the same is also posted on our website. This call is being recorded and the playback and transcript shall be made available on your website soon.

Speaker 1

All the discussions and analysis of this call will be based on the IFRS consolidated financial statements. The discussion today contains certain non GAAP financial measures. For a reconciliation of GAAP to non GAAP measures, please refer to our press release. To discuss the business performance and outlook, we have our CEO, Mr. Erez Rizraili and our CFO, Mr.

Speaker 1

Parag Agarwal along with the Investor Relations team. Please note that today's call is a copyrighted material of Doctor. Reddy's and cannot be rebroadcasted or attributed in press or media outlets without the company's expressed written consent, before I proceed with the call, I'd like to remind everyone that the Safe Harbor contained in today's press release also pertains to this conference call. Now I hand over the call to Mr. Parag Agarwal.

Speaker 1

Over to you, Parag.

Speaker 2

Thank you, Richard, and welcome to our 42 FY 2024 earnings call, and a thank you to everyone joining today. We have built on our positive momentum and delivered another strong quarter of financial results with higher sales and record profitability. In the financial overview section that I will cover today, all the amounts are translated into U. S. Dollar at a convenient translation rate of INR83.08 which is the rate as of 30 September 2023.

Speaker 2

Consolidated revenues for the quarter stood at the growth was driven by the generics business mainly in U. S. And Europe. Consolidated gross profit margin for this quarter has been 58.7%, a decrease of around 40 basis points over previous year and broadly flat sequentially. Gross margins for the Global Generics and PSCI Business were 63.6% and 17.8%, respectively.

Speaker 2

The SG and A expense for the quarter is INR1880 crores, which is US226 million dollars an increase of 13% year on year and increase of 6% quarter on quarter. The year on year increase is primarily on account of investment in sales and digitalization and other business initiatives. The SG and A cost as a percentage of sales were 27.3% and is marginally higher by 106 basis points year on year and 105 basis points quarter on quarter. The R and D expense for the quarter is rupee5.45 gross that is $66,000,000 and is at 7.9% of sales. Our R and D investments are driven by ongoing clinical trials on differentiated assets as well as other developmental efforts we build a healthy pipeline of new products across our market for both small molecules and biosimilars.

Speaker 2

The EBITDA for the quarter is INR2.81 crores that is US262 million dollars and the EBITDA margin is 31.7%. Our profit before tax for the quarter is INR269.13 crores that is $50,000,000 an increase of 19% year on year and 4% over previous quarter. The net finance income for the quarter is INR 1.23 crores. Effective tax rate has been at 2.6% for the quarter. The effective tax rate was lower than the previous year, mainly due to adoption of corporate tax rate under Section 11 5 BAA of the Intertek Act of India, we expect our normal ETR for the year to be in the range of 24% to 25%.

Speaker 2

Profit architects for the quarter stood at INR1480 crores that is US178 million dollars Reported EPS for the quarter is INR 88 point operating working capital reduced by INR598 crores with the year over $72,000,000 against that on June 30, 2020 3 mainly due to decrease in receivables. Our capital investment stood at INR322 gross, which is US39 $1,000,000 in this quarter. The free cash flow generated before acquisition related payout bill this quarter was at INR 1447 crores, which is $1,34,000,000 consequently, we now have a net surplus cash of INR 5,906 crores, which is US711 million dollars as on September 31, 2023. Foreign currency cash flow hedges in the form of derivatives from the U. S.

Speaker 2

Dollar are approximately US648 million dollars largely held around the range of INR 82.9 INR84.5 to the dollar INR 2,475,000,000 at the rate of INR 0.98 to the ruble an Australian dollar $2,700,000 at the rate of $58,060,000 maturing in the next 12 months. With this, I now request Erez to take us through the key business highlights.

Speaker 3

Thank you, Parag, and a warm welcome to everyone participating in our earnings calls today, as always, we appreciate your interest in our company. We are pleased to report the quarter with the highest revenue, EBITDA, profit before tax and profit after tax. We saw growing momentum in our products and businesses. Our geographic diversification, productivity improvement in operations EBITDA operating margin delivery. We continued strategic progress on our various we achieved initiatives to ensure that we are well positioned for differentiated and competitive growth.

Speaker 3

Let me take you through some of the key highlights of the quarter sales for quarter 2 grew 9% and EBITDA grew by 30%, reflecting the portfolio strength and continued momentum in U. S. And Europe. We generated healthy EBITDA at 32% and annualized ROCE at 39%, high cash generation leading to net cash surplus of more than $712,000,000 at the end of the quarter. A few developments in our global biosimilar journey in the quarter includes receiving of GMP certificate indicated closure of inspection by the UK MHRA for our Batchfordi Biologic Facility, a preapproval inspection by the U.

Speaker 3

S. FDA of our biologics facility based in Bajpuri concluded with 9 observations. We will address them within the stipulated time line. CAR T AFFEL DRL 1801 approved for clinical trials in India, the leading financial publication Financial Express an eCUBE in a joint study named OPDIVIS as the leading company in ESG in India across sectors. The company received SA8000, a multisite certification includes CTO's 6 6 CTO units and 10 formulation units at Biologics and has been successfully audited and awarded compliance to 20142017.

Speaker 3

This demonstrates organization commitment to our social goals and accountability. We will confer with the prestigious Golden Peacock Award for Excellence in Corporate Governance of 20 22. Now let me take you through the key business highlights for the quarter. Please note that all references to these numbers in this section are representative local currencies. Our North America generic business recorded sales of 394,000,000 dollar for the quarter with strong year over year growth of 9%, while being broadly flat on sequential basis.

Speaker 3

The growth was supported by market share expansion in certain existing key products and complete integration of main portfolio, which more than offset price erosion. We launched 4 new products during the quarter. Our Europe business recorded sales of €59,000,000 this quarter with a year over year growth of 12% and sequential increase of 4%, the contribution from new product launches and improvement in base business volumes no one will offset price erosion. We launched a total of 20 products across markets during this quarter. Our emerging markets business recorded sales of INR 1012.16 crores, a marginal a year on year decline of 1% and sequential increase of 5%, primarily impacted by seasonality and unfavorable thoughts.

Speaker 3

While we may experience Q on Q volatility, full year outlook is on track. We launched 32 new products during the quarter across various Within the Emerging Markets segment, the Russia business grew by 4% on a year on year basis and 9% on a sequential basis in constant currency, our India business recorded sales of INR11.86 crores Eni reported year on year growth of 3% and sequential increase of 3%. Excluding loss of revenues from NLEM related price reduction, India Business School in mid single digits. Our focus on profitable growth coupled with sales and marketing execution it led to gradual improvement in business performance. We further made following strides to access new growth levers and drive depreciation.

Speaker 3

We signed a new licensing deal with Henry N. C. Pirotinib. We launched NERRIVIO in India, our first digital therapeutic products addressing we launched a direct to consumer platform, celabitaawareness.com for serving the needs of diabetic patients in India. India remains our priority market and will continue to strengthen its presence in core the NERD business we're investing and building the innovation spaces.

Speaker 3

Our PCAI business recorded sales of $85,000,000 with a year over year growth of 8% and sequential increase of 4%. We expect sales to improve over the next couple of quarters on we invested 7.9% of revenue for Empower and Enhance our R and D competency. Our FOS and A are focused on developing value of treated products, including several generic injectable biosimilars where there is a patient need. We have done 6 global generic filings, including 2 ANDAs and 1 NDA signed in the United States during Q3 2 of FY 24 and are on track to accelerate on this in the balance of year FY 24. We remain focused on building best in class capabilities and commercial infrastructure to leverage our portfolio to extend further, our ability to adapt strong execution and financial muscles will enable us to grow our core business and build pipeline of products to meet patient needs.

Speaker 3

I am pleased with the progress that we have made so far this year and that we have a clear plan in place to move forward as a place to deliver on our key objective and support the overall both ambitious of the company. With this, I would like to open the floor for questions and answers.

Operator

Thank you very much. We will now begin the question and answer ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Balaji Prasad from Barclays. Please go ahead.

Speaker 4

Hi, this is Mikaela on for Balaji. Thanks for taking our questions. Given India remains a priority market for you, could you just provide an outlook On your Indian market and just elaborate a bit more on the evolution in your India focus? Thank you.

Speaker 3

So the main focus is and the main effort is actually Licensing on collaborating with the partners to bring innovation to India. This is the most important initiative that we have for India, in addition to that, we identify focused portfolio in which we are growing. And indeed, by the way, this Focus portfolio is growing very, very nicely. Indeed, the overall performance of the portfolio that we have today is growing in the mid single digits. Part of it is also because as per the plans, we have obviously seen most that we have a price erosion as expected when required.

Speaker 3

If it meets our expectation from business case, but naturally has contributed also to this decline. If you wish, the portfolio that we are focusing on actually growing double digit and likely that's what you're going to see for quarter over quarter that we are actually improving our

Speaker 4

Great. And just one follow-up if I can. What kind of innovations What areas are you targeting? And just how willing are partners to launch in India when you approach and without these deals? Thanks.

Speaker 3

There is actually enthusiasm to Naturally, India is an important country, everybody understands that. There is always concern about the price points, about the The adoption of India has certain requirements that are relevant for To localize the product, whether it's local production or local trials or maybe different position of the product. But in general, people understand That India is an important market, important country and they want to have a presence here and they want to work Very much with the reputable company and we are one of them. Sorry, I lost the first part of the question.

Speaker 4

Just what kind of innovations in

Speaker 3

We are targeting primarily areas like cardiovascular, diabetes, CNS oncology, especially in area in which we can find standard of care was something that is better from the current standard of care. So what is driving us is Generally, if we see an innovation that are addressing those areas, this is also the area in which we at least in our analysis we find it in the utmost unmet need.

Operator

Thank you. The next question is from the line of Kunal Damesha from Macquarie. Please go ahead.

Speaker 5

Hi. Thank you for the opportunity. So the first one on the line observations for the biologic plant that we have received. Can you please elaborate what is the nature of these observations and whether we need to undertake some corrective preventive actions here?

Speaker 3

I believe that those observations are addressable. We are I'm going to address all of them in the beginning of November. Some of them will require us to create a capital which means including the producers and products, etcetera, in order to show certain consistent serial data, which will take us to January, But overall, I believe that this is addressed.

Speaker 5

Sure. And second one on the PSCI business. So if I look at the gross margin for that business has gone down, obviously there is some growth on a quarter on quarter basis and year on year basis, but is it primarily due to the unfavorable pricing environment. And if that is the case, do we get the benefit of lower API prices in our global generic business? Is that expect more widespread pricing decline in APIs?

Speaker 3

I don't see such a decline in the API like it was in previous years. Most of the growth is coming when new products And launches that likely to happen by the customer of our API of our PCI business. So if you wish, we are now selling the API that will sell them in the next period of time, the next quarters. What we see now is the impact of the the portfolio that we worked on in the last couple of years, which is replacing the own portfolio from the And as time will go by, we will launch more and more of this product and this product and you'll see acceleration in growth.

Speaker 5

And the gross margin for this business, will it also improve because it has come down to now around 13%?

Speaker 3

So as we grow the sales, we normally grow the gross margins because It kind of have relatively higher level of fixed cost. So as you grow, you're also increasing your margin, that's what is slightly lower than.

Speaker 2

So now to clarify the gross margin for this business We have reported 18% during the quarter, not 13%.

Speaker 5

Okay. Sure. I'll take. And then lastly, Abhinav, we have mentioned the high erosion in U. S.

Speaker 5

As a growth drag, at least on a quarter on quarter basis perhaps, now this price erosion in this quarter, is it limited to few large products such as vasopressin or it is more broad based pricing that you are witnessing.

Speaker 3

The price erosion always affects certain products that have that went into either a bid or RFP or competitive situation in that particular quarter, it's never growth. But let's say relatively to other years, this year it's more moderate than we used in other.

Speaker 5

And lastly, on the same thing, the shortage situation and then some of the short term contracts, etcetera, are those opportunities continuing into quarter 2 and probably in quarter 3? That is what the trend you are seeing?

Speaker 3

Yes, absolutely. Absolutely, the focus in the U. S. On continuity, service And sustainability of supply is absolutely. Thank

Speaker 1

you.

Operator

Thank you. The next question is from the line of Neha Manpuria from Bank of America. Please go ahead.

Speaker 6

Thanks for taking my question. First on the main acquisition, when we announced this acquisition, it had a revenue base of about $65,000,000 $71,000,000 post nearly 5, 6 months of integration to the Reddy's portfolio, have you seen traction in terms of our ability to gain more volume in the product? Because we don't see that in a product like NuvaRing, which is stuck at that 2%, 3% market share? Or how should we look at that acquired portfolio going forward?

Speaker 3

Each one of these products has different timing in which customers are putting their RFP or open for those kind of discussions, I believe that this will grow and will pick up volumes as these timelines will be there. So most of those discussions will likely to happen in the second half of the year. So far, I'm happy with this deal. It's meeting our expectations and likely that we will see growth in the next 2 quarters.

Speaker 6

And on NuvaRing, sir, any reason why it's stuck at about the 2% to 3% market share despite the launch in Feb?

Speaker 3

Timing of the discussions with customers.

Speaker 6

Okay, understood. My second question is on the India business. We have guided to grow higher than the market double digit in this business, but for several quarters now that hasn't been the case, at least if you look at the market data. When do we think we get to that growth trajectory and the collaborations and licensing that we talked about? When do you actually see that materialize and flow through numbers?

Speaker 3

Likely that we are going to see it already this year, this fiscal. And in terms of the innovation, what we see now is the launch of deals that we signed A year ago, so it takes about 12 to 18 months from the time that you sign a deal until you get your products approval, naturally, we need to go to the regulatory process. In some of the cases, we need to do clinical trials And then regulatory process and then it takes a bit longer. And this is also right now the main efforts in terms of building the portfolio in India, in each one of them, it's about to bring the products that are either Going to be the standard of care or better than the current standard of care. In addition, the business, the products that we are focusing on In India, they are growing in double digits and likely that they won't be more dominant in the future In that respect.

Speaker 6

So just to understand this correctly, we are saying that we will be able to achieve double digit growth in India this year?

Speaker 3

I believe that in the end of the year, we should see a double digit growth And to continue on in the quarter last year.

Speaker 6

And how many of the slice and things deals have Just to get a broad sense and is there any monetary value that we can attach to this is the potential market opportunity or market size of these deals?

Speaker 3

So I hope I'm giving you the right numbers, but it should be around 10. And we are normally going for a product that will be at least 100 SEER. And of course, some of them can be much more than that.

Speaker 6

Understood. Thank you so much, sir.

Operator

Thank you. The next question is from the line of Sajan Mukherjee from Nomura. Please go ahead.

Speaker 7

Yes, thanks. Sir, can you tell us on biosimilar rituximab, what's the timeline you're looking at now for the U. S. And European markets,

Speaker 3

we submitted it in April. We just got the pre approval inspections, so we will answer it by November. So now we hope that it will stay on course And let's say, everything will be okay. We will be able to launch it in the beginning of FY 2020.

Speaker 7

Okay. And if I look at quarter to quarter on quarter revenue in the U. S, which is sort of flattish, can you just share the dynamics with respect to main contribution Revlimid and the base business, how each of these buckets have moved quarter on quarter?

Speaker 3

Most of the growth came from volume growth and demand portfolio.

Speaker 7

Okay. And finally, on the U. S, how many launches we are expecting for the full year how much we have done so far in the first half? And how should we think about material launches from your pipeline, if you can guide something in terms of timeline, where you could expect some material launches to happen?

Speaker 3

Sure. So this year, we are still on track with the 25 to 30 launches. And we have identified a group of between something similar 25 to 30 products, Which are materials that will be launched in FY 'twenty five, in FY 'twenty six and FY 'twenty seven.

Speaker 7

How many is it 25 products you're seeing across these 3 years?

Speaker 3

25 to 30 because you know there's some uncertainty about Time of approval, so that's what we think out.

Speaker 7

And yes, I mean, when you say material, what kind of revenue potential typically Our product with material contribution would contribute?

Speaker 3

It has to be at least with the single digit and 1,000,000 of dollar of sales.

Speaker 8

Okay. Yes, thank you.

Operator

Thank you. The next question is

Speaker 8

So first, clarification about the government grants. So in fact, in the previous year, we have seen something around 300 outflows. In the first half, it is more than INR 200 crores that we have already booked. So what is the visibility here and how long this can sustain and This is relating to the PLI only or something else?

Speaker 2

So this includes PLI, but this also has the other export incentives that we are entitled to. Overall, our PRI scheme and the other excluded incentives this year will be marginally higher than last year. But quarter on quarter, there is always a fluctuation because we have to recognize this in line with the entitlement sales growth that we show as per this scheme. So there are quarter on quarter fluctuations, but for the year as a whole, it will be higher than last year. But this is sustainable, sir?

Speaker 2

Yes, it is. For the next several quarters, we expect it to be meaningful.

Speaker 8

Okay, fine. My second question is about the sustainability of the U. S. Business, so basically, having seen the run rate of around $380,000,000 $390,000,000 kind of quarterly run rate And kind of the ramp up what we have witnessed in case in terms of forward agreement. So can we see a kind of progressive performance in the overall U.

Speaker 8

S. Business going ahead, I'm saying progressive because I believe in terms of the volume limit condition whatever that is there in case of credit limit, every 12 months that should see a kind of upward moves. So considering that, how should we see the U. S. Business going ahead In terms of the quarter we generated on that?

Speaker 3

The quarters can fluctuate. We discussed it is in the past because the quarter is very much depends on the ordering part of this product. Okay. But overall, you should see both. Okay.

Speaker 3

Okay. Fine, sir.

Speaker 8

And My second question is about this European business. So in the first half, both the quarters, we have seen a kind of very strong growth, more than 20% kind of growth. What is driving that? And is it the launch of the biosimilars introduction of the new product or even the pricing scenario, any improvement in the pricing scenario there, Demand situation is moving. Could you give some sense about the Europe, why is it delivering this kind of growth And whether it is sustainable even in the subsequent period?

Speaker 3

So it's primarily new product launches. There is also some volume growth of the base business and just more markets are participating in more tenders, Most of our growth is coming from injectables and just winning tablets.

Speaker 8

Okay. Since we are now seeing progress in regulatory point of view as well as the launch point of view in terms of biosimilars, so is it possible to share some update about the pegfilgrastim success in the U. S. And non EBITDA market and or even generally for biosimilar, what is the, let's say, annual or quarterly run rate that we are currently Harry, if you can give some sense, that would be really helpful, sir.

Speaker 3

So just to remind, PEG is not our product. It is a product that was part of the arrangement that was done many years ago in Mexorano. Dave asked that was brought to Fresenius. So they are selling it. We are getting only royalty.

Speaker 3

So by design, it's not a big amount. Most of our activities in the biosimilars today are in emerging markets, primarily rituximab And 5 other products, India, Russia and other emerging markets. We are ramping up that activity is very important to us. We are going to have in the next 2 years or so about 5 Phase 3 of biosimilars to be launched globally, including the United States. And the main ramp up And biosimilars for us will be probably from FY 'twenty seven onwards.

Speaker 8

Okay. Just last one question, sir. See, in fact, obviously,

Speaker 3

there is

Speaker 8

a kind of a strong cash So that we have been seeing also supported by Revlimid. But whatever that gives me, but we have been seeing a quarterly R100 of let's say, R1500 crores kind of cash flow, Free cash flow and already we have a $6,000 outflow kind of cash in book. So could you give some sense of what incremental growth this fund can add to the overall visibility of our growth for next, let's say, next 1 or 2 year or over a period of 3 year?

Speaker 3

No, the beauty of that is that we can use this money for deals. Now it depends what deals we are going to have And then once more, we will have them. I hope I understood the question right. So if it will what we want to do with this money is primarily producing inorganic activities, which can serve us both in the short term like As well as in the longer term, for example, to acquire assets or products that we can launch in years after. Yes, but absolutely this is the main use of the money and this should help us to generate growth.

Speaker 3

But the timing of it of course It's not certain because we don't know what type of deal and when it will impact us. Sure. Sure. Yes.

Speaker 8

Thank you, sir. Wish you all the best.

Speaker 2

Thank you.

Operator

Thank you. The next question is from the line of Aman Veitch from Astute Investment Management.

Speaker 5

Yes. The question is on our diabetic portfolio. So if you can talk about how well are we placed as a company to take the advantage of the upcoming GLP-one opportunity that is coming. So I believe we have some FDA filings in that. So in terms of launch ready, RB ready?

Speaker 5

Whenever the expiry happens, we'll be there. And do you think this product category can be like $300,000,000 to $500,000,000 kind of category for next 5 years?

Speaker 3

So we are going to be there definitely day 1. And as for the size, I don't know, but obviously, I have a great belief in this customer.

Speaker 5

I'm sorry, in terms of the important dosages, Are we present in all of

Speaker 8

them and if you can talk about the same?

Speaker 3

I don't want to discuss specific because We do not make it public, but we should have all the relevant ranges depends on the geography and depends on The country, but we see this category as a global category for us to launch In all the markets that we have in presence.

Speaker 5

And you are saying we are ready in terms of whenever expiry happens, if we have FDA file, we can launch in the next day itself.

Speaker 3

Yes, Hari.

Speaker 5

Sure. My second question is on this other biosimilar, which I think we have on the osteoporosis If you can talk about the opportunity in U. S. Because I believe there's a patent expiry coming up. So are we planning to launch in the U.

Speaker 5

S. Market? And if yes, do you think we can take

Speaker 3

Which product?

Speaker 5

Yes, I was talking about osteoporosis, teriparatide and there are 1 or 2 more products that we have. So I was trying to understand that U. S. Patent, the expiry is coming up. So do you think we can have a good market share in U.

Speaker 5

S. Markets with our biosimilars?

Speaker 3

Yes. So I'm not calling teriparat teriparatide biosimilars. For me, these are still equivalent to small molecules. Biosimilars are not normally For products that are bigger like the Mars, etcetera, but specifically for this product, absolutely, I believe that it will be very nice for us and we will be ready to launch it when it's possible.

Speaker 5

Sorry, on the timeline, so I believe it will be in the next few months only, right, on the U. S. Launch of this product?

Speaker 3

I don't want to speak with it sometime at this stage.

Speaker 5

But we are ready to launch whenever it happens.

Speaker 8

We will be ready. Sure. These are my questions. Thank you.

Operator

Thank you. The next question is from the line of Tushar Manudane from Motilal Oswal Financial Services.

Speaker 2

Yes. Thanks for the opportunity, sir. Just on this e commerce story, so I would like to understand what kind of investment are we thinking

Speaker 3

Investment of what, sorry? In e commerce. In e commerce, it's not a big investment, But it allows us additional channel for our product as well as other pharmaceuticals. And I believe that it's a very nice and other channels and another part of the capabilities that we have now That is not the big investment.

Speaker 2

Okay. But in addition to the intraceutical products, would we be also having this So prescription based product on this platform?

Speaker 3

This specific platform is direct to consumer that you mentioned, which means It's not pharmaceuticals and products that do not require prescription for TC.

Speaker 2

And so secondly, just on the trade receivables, there has been a reasonable reduction if I compare Quarter over quarter, any read through or not? Sorry, Pashar, your voice is not clear. Can you repeat that question?

Speaker 1

Is it better? Is it better? Yes.

Speaker 2

There has been good reduction in the trade receivables quarter over quarter. Any read through over there? It's normal. There's nothing unusual. I think

Speaker 8

it depends on the credit period and

Speaker 2

the cycle and the receipt of orders. So we obviously keep a very tight track of all our receivables and collect on time. So nothing unusual in this. Yes. Okay, sir.

Speaker 2

Thank you. Thank you very much.

Operator

Thank you. The next question is from the line of Devang Sarougi, an individual investor. Please go ahead.

Speaker 2

Devang Sarougi, are we looking at any Is the 545(2) opportunity in the U. S. Market? Sorry, which opportunity

Speaker 3

is this,

Speaker 2

Marty? 505(2) opportunities.

Speaker 3

For which product? Sorry. 505(2) that requires sales force, we will not 505(2) that is interchangeable, we would love to do.

Speaker 2

Okay. And what would be the price erosion for the quarter?

Speaker 3

What is the

Speaker 2

price erosion? Price erosion is Price erosion is Price erosion is Yes, price erosion, we are finding the trends to be stable, Prashant. So if you look at the last few quarters, we have seen price dilution moderating and we are now seeing it around the same level. So but From one quarter to another, it will typically fluctuate between the high single digit to low double digits. Okay.

Speaker 2

And are we going to see any price increases as many suppliers are going out of the market?

Speaker 3

We are not building on

Speaker 2

Or it will be product specific?

Speaker 3

It's normally product specific and we are not building on that. If Quidel is a shortage situation and we will supply it, but We are not building into our motors any price increases.

Speaker 2

Yes, whenever there's an opportunity, it's opportunistic, not strategic.

Speaker 1

Thank you, sir.

Operator

Thank you. The next question is from the line of Damayanti Kirai from HSBC. Please go ahead.

Speaker 9

Hi. Thank you for the opportunity. My question is on India business. So first of all, can you like tell us how much India sales is currently contributed by chronic therapies? And then second part of my question is, how many sales representatives you have for your India business?

Speaker 9

And do you have plan to expand on it?

Speaker 3

The Konec is about 35% of the business and as time goes by because most of what we relaunch, especially in the patient will be more chronic in nature, this will grow. As for the numbers of salespeople, if I remember correctly, it's a little bit more than 6,000 people And we will grow as we will bring the innovations accordingly, we will adjust the numbers.

Speaker 9

Okay. But right now, you do not have any particular need to expand your sales force. As you said, you're focusing more on innovative products. Evan, when you launch, you will decide accordingly.

Speaker 3

I don't see a need to increase It's more about the productivity of the team and the coverage of this team. And but It's not so much about the numbers of the people. But if we need more, we will have more.

Speaker 9

Okay. I think this question was Earlier discussed, so India, despite many efforts from your end, we have been seeing sales largely remain range bound, some will say $12,000,000,000 a quarter or so. So when we can see a significant step up Coming up, so any time line if you can indicate? Because I guess for last 6 to 8 quarters, sales were broadly in this range.

Speaker 3

I think you're going to see an improvement already this year. Indeed, we took 2 decisions about India, just to remind. And this is the effect that comes with it. 1, we decided to focus and we actually made quite a few deals of divesting brands. So we kind of trimmed down the base portfolio because we do not believe that post the changes that will happen with all the challenges that any generics we have in India, this brand is likely to be successful and we It was a good deal for us.

Speaker 3

And second, we also acquired a brand, for example, As it was, which we knew at the time that you will face price erosion, it matched the business case that we had on it. I believe that already the brands that we are focusing on are growing in double digit, plus we are going to launch more and more innovation and have more and more collaborations. So you will start to see this year and as we will add products to the portfolio, it will continue to grow. It's a focused market for us. It's a strategic market for us.

Speaker 3

And we will go ahead.

Speaker 9

Sure. My second question is if you can talk a bit about your progress For the China market, how many approvals you have got and what kind of filings have been done so far?

Speaker 3

We are actually doing this with the progress of O'Hare and Especially since April, the number of approvals start to pick up. And I think that we had the store approvals. And this is Matt. I think we got additional 2 approvals, so 6 altogether. And we are also filing more than 15 products a year now.

Speaker 3

I think we can get even 13, if we everything will go well. And most of our products are among the first wave and normally among the first three. So it's a very interesting area for us in China. We at the time, we thought that the ramp up will be earlier than what we communicated in the past, but COVID, 0 COVID And also our execution and delays, but now it's absolutely very good.

Speaker 9

Sure. So with this Portfolio buildup, should we assume China portfolio could start contributing meaningfully from next fiscal or it will be a bit Long term in nature?

Speaker 2

No, no.

Speaker 3

For next fiscal year, absolutely.

Speaker 9

Okay. That's helpful. And my last question is, how should we look at your R and D spend going ahead as you focus more on differentiated products for your global segments?

Speaker 3

Likely that it will grow because we are investing more and more in biosimilars. So we and we will continue, of course, to invest in the new molecules. So you're going to see a more directed growth, But also the shares will go also, let's say, in terms of percentage, it should be give or take in the range that

Operator

thank you. The next question is from the line of Gugan Thareja from ASK Investment Managers. Please go ahead.

Speaker 10

Yes. Good evening. I hope I'm audible.

Operator

Yes, you're audible.

Speaker 10

Okay. The first question is on the India business. If you knock out the discontinued products from The base quarter 1 or 2Q of FY 2020 I'm sorry

Operator

to interrupt. You are audible, but I think you are too close to the mic.

Speaker 10

Okay. Is it better?

Operator

This is much better, sir. Please go ahead.

Speaker 10

Okay. So my question is that adjusting for The discontinued products, what would have the India sales growth been year on year for the quarter?

Speaker 3

So without these products and without NLEM, we are about Mid single digits for the quarter. Okay.

Speaker 10

And for U. S, From 1Q to 2Q, would there have been a material difference in the Revlimid sales for you?

Speaker 3

I cannot discuss the quantities of the relevant short.

Speaker 10

I don't want you to enumerate the number. I'm just Asking, would it be a reasonable assumption or inference that there won't have been a material change And we have limit sales from the Q1 to the 2nd?

Speaker 2

Most of the growth like Erez said earlier has Come from the base business and also the main

Speaker 10

portfolio. Okay. Right. And India, is it a correct surmise that you're saying that India will exit 2024 with a double digit sort of growth rate, that's Q4, you'll be able to do a double digit sort of a growth rate. And you will probably be improving from 2Q to 3Q and from 3Q to 4Q.

Speaker 10

Is that a correct inference?

Speaker 3

That's what we are trying to do, absolutely. Right. Okay.

Speaker 10

Thank you. I'll get Thank

Operator

you. Thank you. The next question is from the line Sajon Mukherjee from Nomura. Please go ahead.

Speaker 7

Yes. Thanks for the follow-up. My question is around you mentioned about inorganic activities. The cash balance is significant and it could continue to rise. If you look at the acquisitions and deals that you've done, They are much smaller in size.

Speaker 7

So one is that it seems that are you so basically the question is, are you looking at larger deals going ahead, is there more activity that you're seeing on the M and A side? And related to that, what's the level of leverage that as a company you would be comfortable with?

Speaker 3

So we are looking for all deals, small and bigger than usual for us, as needed, but we We are not in a rush. It has to be a good deal. It has to be something that will match our strategy, something that we believe Can contribute to our growth either products that we want or capability that we are missing. We are not in a rush to spend this money. In that respect, also the money is yielding very nicely now by investing it, we are, As we speak, we are participating quite a few processes and we'll see what we need.

Speaker 3

Likely that we will spend eventually this money, but it's important for us that it will be the right strategic deal for us. We are not looking for transformative fees. We are looking for complementary activities to our organic strategy.

Speaker 7

And any view on leverage, Parag, as to what level of leverage you would be comfortable with?

Speaker 2

See, we can I would say 2x EBITDA is what we would be willing to go for? Beyond that, We would not like to take a financial risk.

Operator

The next

Speaker 6

Praagh Sar, on the SG and A expense, that seems to have inched up quarter on quarter. I just wanted to get a sense on where are we investing and how should we look at that number over the next few quarters and probably FY 'twenty five?

Speaker 2

So overall, we have the increase in SG and A to C year on year, I think it's gone up by 30%. Apart from the normal inflation, it's largely because of investments behind our brand. Also we are investing in digitalization. I have spoken about it a few times extensively both in the front end As well as in R and D and in our manufacturing facilities, like last year, SQ3 was named as digital lighthouse. We are now working on Getting more facilities certified as a digital light house because we believe that in the medium term, the digitalization is going to make a big impact by improving quality, reducing quality incidents, improving productivity and costs and so on.

Speaker 2

So these are areas where we are investing. If we look at overall, quarter on quarter, we will see fluctuation. But in aggregate SG and A as a percentage of sales, last year we were around it used to be few years back we were at 30%, 31% And we have been gradually dropping to 29%, 28% kind of a range. So I wouldn't like to comment on quarter on quarter, but for the full year, I would say Yes, that's the range we'll be around.

Speaker 6

Got it. Thank you so much, sir.

Operator

Thank you. The next question is from the line of Kunal Damesh from Macquarie. Please go ahead.

Speaker 5

Hi. Thank you for the opportunity again. So the first one on the in licensing innovation deals that we are doing for India, can you highlight what is the typical payback period for this kind of deals?

Speaker 3

So normally the payout is very good because we hardly Putting down payment for that. So most of the deals have very small down payment. And normally, we are getting healthy margins that enable us to buy in front of us plus investment. So Normally, the payout will be within the 1st 3 years, taking into account the time that it takes To build brands, most of the investment is actually not because of the payout to the partner, but rather the investment in building brands in a country like India, Which nobody thinks about these.

Speaker 5

Sure. And let's say for markets like India, are these deals, some of these innovators would be doing it more on a profit share basis or they are more interested in, let's say, upfront payment and then some royalty?

Speaker 3

So most of the deals will be certain milestones And some royalties and giving us the flexibility to market it in the space that we want and with the right mix of SG and A. So that's normally will be the case, but we will also have case

Speaker 5

Sure. And second question on the biosimilar business, now that we are kind of close to launching our first biosimilar in U. S, we're somewhere in FY25. What type of Rantend Investment, would we be looking for Salesforce or the formulary excess personnel, And how much drag it could be on our SG and A?

Speaker 3

So the product that will be launched, the rituximab that will be launched in the U. S. Will not be launched by us. So this is a sales force that is with our partner. The products that we will launch we'll be from FY27 onwards.

Speaker 3

And for that, we will have to build the sales force. Okay, perfect.

Speaker 5

Thank you and all the best.

Operator

Thank you. The next question is from the line of Surya Patra from Philip Capital. Please go ahead.

Speaker 8

Yes. Thanks for the opportunity. So just one clarification I wanted to have. In terms of the margin profile, let's say, for India, India business and the base U. S.

Speaker 8

Business, let's say excluding the agreement, so what could be the difference in terms of

Speaker 5

the margin profile of these two businesses?

Speaker 2

We don't disclose geography wise margins, but I can confirm that the margin India business would be better than our North American business.

Speaker 8

Okay. And even the Russia would be similar to India or

Speaker 2

Yes, Russia is also a branded genetics market and therefore its margin profile is also quite healthy.

Speaker 3

Okay. Sure, sir. Okay.

Speaker 8

So that means Russia is in between of India and U. S. That is how we should think?

Speaker 2

I'm not ranking the markets. I'm just pointing out that both Russia and India are branded generics business and therefore their margin profile is better Then the unbranded business is in U. S. And Europe.

Speaker 3

Sure. Okay.

Speaker 8

Yes. Thank you, sir.

Operator

Thank you. We have no further questions. I would now like to hand the conference over to Ms. Rita Periwal for closing comments. Over to you, ma'am.

Speaker 1

Thank you all for joining us for today's evening call. In case of any further queries or clarifications, please do not hesitate to get in touch with the Investor Relations team. Thank you once again.

Operator

Thank you. On behalf of Doctor. Reddy's Laboratories Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.

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Earnings Conference Call
Dr. Reddy's Laboratories Q2 23/24
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