Dr. Reddy's Laboratories Q1 23/24 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 3 speakers on the call.

Operator

Ladies and gentlemen, good day, and welcome to the Doctor. Reddy's Q1 FY 'twenty four Earnings 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. On your touchtone phone.

Operator

Please note that this conference is being recorded. I now hand the conference over to Ms. Richa Periwal from Investor Relations team. Thank you, and over to you, ma'am.

Speaker 1

Thank you, Dorvin. Thank you. 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 June 30, 2023. Earlier during the day, we have released our results and the tape is also posted on our website.

Speaker 1

This call is being recorded and the playback and transcript shall be made available on our website soon. 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.

Speaker 1

Ezej Zaiduwaidi and our CFO, Mr. Faraz Agarwal, along with the Investor Relations team. Please note that today's call is a copyrighted material of Doctor. Reddy and cannot be re broadcasted 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.

Speaker 1

Now I hand over the call to Mr. Farag Avidwar. Over to you, Farag.

Operator

Thank you, Rita. Greetings to everyone and a warm welcome to our Q1 FY twenty twenty four call. We had a strong start to the year with robust sales and record profitability. I'll start today with an overview of our financials for the quarter. For this section, all the amounts are translated into U.

Operator

S. Dollar at a convenience translation rate of and by 7% on a sequential quarter basis. Adjusted for line divestment income on a DBS competitor, The underlying growth was higher at 35% on Y o Y basis and 12% sequentially. The growth was driven by the generic business mainly in U. S, emerging markets and Europe.

Operator

Excluding the one off gains from brand divestment, Loss of revenue from the divested portfolio and NSEM related price reduction, India business registered our high single digit growth. Consolidated gross profit margin for this quarter has been 58.7%, an increase of 8 80 basis points over previous years and 150 basis points over previous quarter. The improvement in gross margin was primarily driven by favorable product mix, supply productivity savings, Better manufacturing grades were partially offset by brand divestment income during previous periods. Gross margin for the Global Genetics and CSEI were at 60.9% and 15% for the quarter, respectively. The SG and A spend for the quarter is INR1770 crores which is less than 2.15000000, An increase of 13% year on year by a decline of 2% quarter on quarter.

Operator

The year on year SG and A is in line with business growth and is on account of investment in sales and marketing, digitalization and other business initiatives. The SG and A cost as a percentage of sales was only 6.3% and is lower by 3 40 basis points year on year And 2 30 basis points quarter on quarter due to better operating leverage. The R and D expense for the quarter is INR 4.98 crores that is And is at 7.4% of sales. Our R and D efforts are focused towards building the healthy pipeline of new products across our markets, including biosimilar development. The EBITDA for the quarter is INR 2,137 crores That is US2.16 dollars and the EBITDA margin is 31.7 percent.

Operator

This is largely driven by gross margin expansion and productivity initiatives Our profit reported for the quarter stood at INR1846 crores That is year 1225,000,000 and an increase of 26% year on year and 39% over previous quarters. Effective tax rate has been 24% for the quarter. The effective tax rate was higher than the previous year mainly due to changes in the company's very efficient mix of earnings. We expect our ETR to be in the range of 24% to 25%. Profit after tax for quarter stood at INR 14.3 crores that is $171,000,000 Reported EPS for Our total debt is $7,000,000 against debt on March 31, 2023, mainly due to an increase in receivables and inventory.

Operator

Our capital investments today at $362,000,000 it is just $44,000,000 in this quarter. The free cash flow generated Before executing the weighted payout, during this quarter, RMB674 crores which is RMB82 1,000,000. Consequently, we now have a net surplus cash of INR 4,985 crores that is US608 million dollars At approximately $7,000,000 to $3,000,000 largely head around the range of INR 82.7 Rupees 64.4 to the dollar, RUB 6,775,000,000 at the rate of rupees 1.02 to the ruble And A300 dollars 3,700,000 at the rate of rupees 67.9 to Australian dollar maturing in the next 12 months.

Speaker 2

As always, we appreciate the interest in our company. We have commenced fiscal 2024 with the robust first quarter performance. Our sales for quarter 1 grew 29% And EBITDA grew 20%, reflecting the strength of our portfolio and well diversified geographic growth. Adjusted for settlement income in the current and base period and rent divestment in base period, Our sales for quarter 1 grew 35% and our EBITDA grew 111%. We improved the drivers in our core business for sustainable growth through productivity improvement, market share gains And new product launches.

Speaker 2

We are making considerable progress across our strategic priorities. Let me take you through some of the key highlights of the quarter. 1, sustained strong revenue growth driven by momentum in the U. S. And Russia markets To generate healthy EBITDA at 32% and annualized ROCE at 39%.

Speaker 2

High cash generation leading to net cash surplus of more than $608,000,000 at the end of the quarter After paying the consideration towards main portfolio acquisition. For completion of commercial integration activities And also, Maine Parment acquired generic prescription portfolio. 5th received approval for 4th order in China, Including our partner products since April 'twenty three, a 6 and dark Prajell's in India And launch a dedicated pre generic division. Through this initiative, we will be increasing our participation in retail pharmaceutical markets. 7, entered Child Nutrition space in India with the launch of Cell Health Glide Gummies.

Speaker 2

8, biologics license application for purpose biopsy, a retuximab candidate, brlri, accepted by U. S. FDA, EMA and MHR rate review, This is another key milestone in our global biosimilars journey. 9, for Wave 85, well known to see when you expect in the U. S.

Speaker 2

With the relaunch of recently acquired brand of 3 Mama, a portfolio of high quality dietary supplements designed to support The entire Mother Ridge earnings and collaborating with mass fusion cost plus for our company Ending an increasing access to central medication for Wilson disease patients and entering to in license agreement with Tenshi Kaizen for launch of loratibin for private adelopics business. Logan

Operator

entered into agreement with Bill

Speaker 2

and Melinda Gates Foundation to develop injectable contraception drug for low- and middle income countries in Asia and Sub Saharan Africa, Including India, this initiative will strengthen our portfolio in the women's healthcare space. 12, Successfully concluded US FDA inspection of the following four facilities recently, our API site CTO-one and CTO-three and at Bolaram, Our formulation site, FQX is at Me2 and our API site, CPL6, at Srivakulam. We continue to maintain a state of constant vigilance and compliance at our manufacturing sites. 13 released our 1st integrated report, which we wedged together the material aspects of our business And they interplay with our purpose, value, strategy, governance, performance and outlook. 14, the Financial Times of London, Naim Darla, the ICF Pacific Climate Year of 2023.

Speaker 2

This award is the accretive company that achieved the greatest reduction in the greenhouse gas emissions and intensity and make further climate related commitments. Now let me take you through the key business highlights for the quarter. Please note that all references to the numbers in these sections are in Active local currencies. Our North America generic business recorded sales of $389,000,000 For the quarter, we had a strong year of year growth of 69% and a 25% increase on sequential basis. The process was bolstered by linodilamide sales, new product launches such as In regard to Denazone, injectable Sacralose rinse capsule integration of main portfolio And market share expansion in certain key existing products, which more than offset price erosion.

Speaker 2

We launched 18 products during the quarter and Our Europe business recorded sales of $57,000,000 this quarter and a year on year growth of 13% while working flat sequentially. The growth is attributable to increase in base business volumes and supported by new product launches. We launched 10 new products during the quarter and expect the launch impetus to continue during the balance of the year. Our emerging market business recorded sales of INR1155 crores with a strong year over year growth Of 28% and sequential increase of 4%. We launched 27 new products during the quarter across various countries of emerging markets.

Speaker 2

Within the emerging market segment, the Russia business grew by 77% on year on year basis and 7% on sequential basis In constant currency, the growth is driven by pickup in allergy season and further aided by lower base. Our India business recorded the sales of INR1148 crores and reported the growth of 40%. Excluding revenue from brand divestment, loss of revenue from divestment portfolio and NMM related price Reduction is the business grew in a very high single digit. Media remains our priority market and we are progressing well on our innovation model. We have signed 2 innovative deals in this quarter and expect this to be an important growth driver in the years ahead.

Speaker 2

We are creating several growth engines for the new business, including ramping up growth of existing portfolio, Skilling recently acquired brands, continuous improvement of inflow productivity and for any interplay generics. Our PCI business recorded sales of $82,000,000 below with a year over year decline of 11% and sequential decline of 14%. This has been due to lower volume pickup by customers for some products during the quarter. We expect sales to improve over the next couple of quarters On the back of increasing volume pickup, launch of new products and collaboration opportunities. Our R and D efforts focused on developing value of AT products including federal generic injectable biosimilars that where there is a patient need.

Speaker 2

We have filed 4 NDS in the U. S. During Q1 of FY 'twenty four and we are on track to accelerate on this balance We are improving our operation and processes to increase efficiency and overall productivity. Our strong balance sheet provides financial flexibility to support future growth and we will continue to maintain a disciplined approach to cash management and acquisitions. I'm confident we will continue to grow the growth momentum, strengthen the core business and build the pipeline of products to shape the LPA award.

Speaker 2

And 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 session. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Kunal Damesha from Macquarie. Please go ahead.

Operator

Hi, good evening. Thank you for the opportunity and congratulations on the good set of numbers.

Speaker 2

First on the U. S. Revenue growth. So on a sequential basis, we have

Operator

seen a significant uptick as well.

Speaker 2

Would you

Operator

be able to give us some, I don't know, color as to which were the primary driver? Was it the acquisition? Was it the lenalidomide uptake? In order of So there, quantum, if you can provide even qualitatively would be very helpful.

Speaker 2

Yes. So this quarter, we had several growth engines, so it's not just in and the dilemma. With raw market share in key products, this was, let's say, More than previous quarters, we saw relatively less price erosion that we normally do. We had the main acquisitions that contributed that and LENA. So it's a combination of all of them.

Speaker 2

Even without LENA, was a very healthy growth in the U. S.

Operator

Sure. And I'm just continuing on that. In terms of price erosion, I think across companies, there is now consensus that The price erosion has reduced. But do you see that there's reduced price erosion to continue for some time? Or is it more of a transitory phenomena I don't know which is kind of COVID.

Speaker 2

The model hasn't changed. So in terms of heterogeneous, it's Obviously, a function of how many how much competition you brought for your baseline on products that did not yet, If you wish, erode to their potential. So I believe that in our case, we probably will see something similar as in the next

Operator

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

Speaker 1

Hi. Thank you for the opportunity. Continuing in the U. S. Business, so as you mentioned, even without LENA, The base business has grown very well for you sequentially.

Speaker 1

So can you elaborate a bit more whether you are seeing lot of supply opportunities Emerging in the market due to problems that come up with competitors, etcetera. And do you believe these opportunities will sustain for next few quarters? That's my first question.

Speaker 2

It's a combination of timing of other things, combination of Set of situation, the second to products in which we could supply more, Not necessarily a supply shortage, but it could be service or other supply disruption situation That happens. And also activities that we did with certain customers As well. So overall, let's say it's primarily a volume based growth that Based on agreements with early customers.

Speaker 1

And do you believe this volume based growth Opportunity will continue in at least in near term?

Speaker 2

I believe that the trends will continue, yes.

Speaker 1

Okay. My second question is on the R and D initiative. So biosimilars you mentioned. Can you Talk about updating your global portfolio, which is for all the markets where you're focusing.

Speaker 2

So biosimilars global initiative for us. We are planning to be in all the markets, including the United States With our portfolio, we are working on about 11 biosimilars as we speak in the Some will be launched before 2030 and some after 2030, starting probably in the beginning of 2027. At the time, I don't want to discuss specific products, but let's say that it is a very important initiative for us And we believe that it's at least that we want to be a serious bloke.

Speaker 1

Sure. And my last question is, how do you see your EBITDA margins moving up in next few years, Excluding Revlimid, if you can provide some color on that.

Speaker 2

So I'm maintaining and for me, we've been in this discussion in the past, I'm not putting This product out in other products because every year we have those products that contribute more To our performance, I'm still maintaining the long term Average of the 25.5, but right now with the lenodilamide, we will probably be above it. And but overall, this is the area that I'm still maintaining that it is very comfortable that will allow us To fully finance all of our growth aspirations of the future. So what we are moderating now Is the level of investment that we want to put naturally the more we have the more we can invest into the future, Which what we are saying to this point. But let's say in the next coming quarter as long as we have this limited volume If anything, please likely that it will be above the threshold of this 25%.

Speaker 1

Okay. Thank you. I'll get back in with you.

Operator

Thank you. We have the next question from the line of Balaji Prasanth from Barclays. Please go ahead.

Speaker 1

Hi, this is Mikaela on for Balaji. Thanks for taking our questions. Can you just talk a bit more about what led to the growth seen in Russia and how sustainable this growth is? Thanks.

Speaker 2

In Russia, we grew part of it is seasonal. We have Most of our business is in retail and we are also playing in the biosimilars. So in this specific quarter, we enjoyed the seasonality of the allergy as I think a good year in that respect. We are also seeing so far H2L on the ruble and protectivity Well, so in that respect, the combination of investing in our brands And enjoy the growth momentum in the transform. The relevant product that we have plus a good difference on the Ooyalty Health Pass through this result.

Operator

There is also impact of a low base in the growth that we have reported this quarter. And as you know, by its very nature, Russian market is volatile. So there will be fluctuations from one quarter to another, but We are going ahead of the

Speaker 1

market. Thanks so much.

Operator

Thank you. The next question is from the line of Surya Narayan Patra from Philip Capital India Private Limited. Please go ahead. Yes. Thanks for the opportunity and congratulations for the great set of numbers.

Speaker 1

So my first question is

Operator

On this managed portfolio that has been acquired, so what is the kind of size that we would have seen this quarter out of that? And also if you can give some clarity about the profitability of this portfolio. I'm asking this question because it looks like excluding the RedLumet performance, your base business has seen a sequential improvement. So from that angle, I'm just trying to understand the contribution from the acquired operation in U. S.

Operator

And Its profitability versus the company's standard base business profitability?

Speaker 2

So indeed, our base business did well and without Lina Diliman. Main, we closed the deals and practically started So it's a sale in the end of April and we are actually We're launching product after product through this period of time. I believe that the main pickup will be in the next Coming months when customers will open their bid and we will be able to bid more. So Overall, let's say that the contribution of Maine will be more significant the next quarter of Kham than it came in this quarter.

Operator

Okay. So is it kind of still a $100,000,000 annualized hike? Yes, in that range. Okay. Sure.

Operator

So second question is that Regards to linoleum mine. So we have almost kind of approaching to finish the 1st year of supply. And obviously, as per the prescription trends, we see that, okay, we have already kind of receiving 6% kind of volume share now. So is it fair to believe this is the kind of 1st year number and we should see a progressive So improvement in the volume share going ahead?

Speaker 2

So, you know, we cannot share a specific number on these

Operator

But This is there in the public domain in terms of the Rx volume, so that is why I'm asking the question.

Speaker 2

No, no, I appreciate the question, but I cannot share. I have the full knowledge of the quantity, but I'm not sure if I ask our agreement. But what I can say is that This kind of level of sales of linodilamide likely to continue and it's likely from a quarter Okay. Based on the supplier based on orders and based on preference of customers, But we believe that it will continue to play to be an important selling products Until the end of the agreement, which is likely to be in January 'twenty six.

Operator

Sure. So first one, the next last question is about PSI business. We have seen sequential correction in the revenue as well as the margins there. So and you have also mentioned in your opening remarks that there is inventory personalization And that is ongoing. So do you think this is a kind of a couple of quarters more kind of a situation?

Operator

And Generally, the APIs and the manufacturing supply opportunity kind of business are likely to face this So inventory destocking kind of a trend and could have impact on the margin generally in the near term?

Speaker 2

I think we in during the quarter, we had a certain pickup that is related to timing Of taking up the orders primarily, so I believe that it will cost itself actually relatively fast Already for next quarter completed. So overall, I'm confident that our API business will grow this year.

Operator

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

Speaker 1

Thanks for taking my question. My first question is on the India business. I look at the number that we reported in Q4 and strip out the Brand divestment. Based on that, we've seen a pretty sharp increase on that base in the Q1. Did the Trade Generic I know we officially announced the launch in July, but was there any contribution at all of the trade generic business in the Q1 or if you could give us some color in terms of what's driving the improvement that we are seeing and how much more can this Continue to I know you talked about a bunch of initiatives, but how should we look at growth in this business from the high single digit that You pointed in your opening remarks.

Speaker 2

Yes, thank you for that. The Trello Genel did not yet Not because we just recently launched it. And so most of the growth happens from our branded mix, our Key brands that we are focusing on. These trends are likely to continue also further than actually going to improve. The activity that I mentioned and we discussed in quite a few occasions On our journey for top 5, it's a combination of both the innovation as well as the investment in the So most of the deals that we signed and want to be signed, we have actually Quite a few deals that are in discussions is to bring innovation to India.

Speaker 2

Actually Horizon 2 that we have discussed in the past It's all about to bring innovation to India, mostly licensing in some Product acquisitions and some potential partnerships with Adeptel. These partnerships and definitely likely to have an impact From FY 'twenty five, FY 'twenty six onwards, FY 'twenty four, which I believe will grow Signature will come primarily by the current branded generics focused brands that we have. 24, they don't answer that. Yes.

Speaker 1

Yes, understood. Thank you so much, sir, for that. 2nd on in the in your remarks, you also mentioned approvals in China. Now if I look at my ROW business, excluding Russia and CIS, we are pretty much In the range that we've been doing for the last 4, 5 quarters, given the INR 400 crores range, when do we see meaningful contribution Scott from China, when do we see it how does the step up from this level happen in the emerging market business?

Speaker 2

Yes. So all the EM markets are actually growing In double digit, obviously, Russia being a very big market in that space when it's grown 77% or they share The adult so all of them will grow double digits, not just with Russia. As specifically for pickup in China, we are now starting to See the results are likely that these trends of COVID will continue. Most of the values we will start to see, If you call it, a little more significant growth in April 'twenty 1, but we will see already in April 'twenty four A certain growth. Okay.

Speaker 2

The lessons that we have discussed in the past with regards to Russia and in China, likely that we'll start to see for next year.

Speaker 1

Understood. And my last question, Paraz, in terms of our investments in the business, Should we expect our absolute SG and A and R and D spend to trend up from the current spend that we are seeing For FY 'twenty four, I understand this will obviously continue to increase. But is this level of investment, what that we've In the quarter, enough to sort of sustain the growth that we have envisaged? Or should I expect an increase from the current levels?

Operator

We are continuing to invest behind multiple levers as we have been talking in digitalization, behind our brand, business and marketing. I would expect a slightly higher trend in absolute terms. As a percentage, the sales of course, it will remain very positive because of our top line growth. We'll see the benefits of operating leverage. But in absolute sense, we will see a marginally upward trend.

Speaker 1

Understood. That's helpful. Thank you so much, sir.

Operator

Thank you. The next question is from the line of Cinderella Garvalho from JM Financial. Please go ahead.

Speaker 1

Yes. Thank you so much for taking my question and congratulations on great set of numbers. Bringing question back to India. You mentioned about the innovative products, 2 products that you have signed for India. You mentioned about mother and child.

Speaker 1

You spoke about gamma. So if Handy generic division, so what kind of investment Are we envisaging in all these 3 different categories that we are talking, whether it's consumer health, generic gender business And getting the in licensed product. And in what range should we see this over coming 2 to 3 years?

Speaker 2

So we are not going to see no investment that we see already and that are just A little bit maybe a slight up. Some of it is what we call balance sheet money, meaning That we will sign a deal or acquire a product and it will be a balance sheet move rather than PMM. So it's relatively to relatively it's not expensive or not going to Requirement and I'll try to explain why. Most of the stuff that we are doing to India is the late stage generation, The product is already there. The product will sequenced itself in other markets.

Speaker 2

In most of the cases, It's got approval already either by the U. S. FDA or European authorities. So the activity that requires are either License mix fee, some trial, local trial registrations And we are mostly going to leverage our teams in India for doing that. So if you wish, it's a marginal investment That give or take, we are already spending the last couple of quarters and maybe marginally up and more deals that we will do.

Speaker 2

But I don't anticipate a major use of cash cost In the element, it's actually pretty straightforward in that respect.

Operator

So the returns will be

Speaker 1

fairly high is What you're trying to tell you on with the minimal investment, like in terms of revenue, how should we see these, like if we divide into 3 segments, How sizable these each segment could be for us, the agentic, generic, innovators in license? So how big these Could be. From a brand perspective, I understand you have something like INR 150 crores per gram size in your mind over 3 to 4 years. But what could be it what it could mean to the entire India business?

Speaker 2

The intent is to bring a significant number of products in the market in the next coming years. If everything will be successful, we are talking about 10th of agreements guided, which we believe will be the main leader to bring us to 5. So it's the fact that we need to develop our sales growth back in the next coming years. That's the expectation that The innovation will bring the most of that value come into play and the rest will come From the normal growth of the brands that we will have as well as the credit generic. So the innovation It will be the key focus and the main role for our jobs.

Speaker 2

In terms of timing, as we sign the bill, then, course, we need to allow some time for clinical trial, registration time and then of course the pickup of the brands As we are introducing it to the healthcare community, so it will be kind of a pickup of a brand. So Every one of these brands will take a few years before it will come to speak sales, but the beauty about it, these are Innovation, they are not switchable and are bringing a real A real solution for places that we believe that there is no such a solution or the solution and we are doing much better.

Speaker 1

Okay. Thank you. And just one last question. We've seen a lot of Doctor. Reddy's name in terms of Shrottis' products in U.

Speaker 1

S. Are you seeing some opportunities meaningfully for us over coming few quarters? Or are you planning to participate in some of them, which could be potentially large for us?

Speaker 2

I mean, just from time to time, but to be honest, I don't enjoy When we are growing on the expense of others, I actually want the supply to be there for the patients. So whenever it comes, we are taking it. But I don't see that the strategic growth is there. I'm happy to supply if it helps patients. I actually wish that all the companies will be able to say normally and that we'll see the full year growth.

Speaker 2

But it is coming to us as well compared to time.

Speaker 1

Thank you so much, Himaldikar. Thank you.

Operator

We have the next question from the line of Tushar Manodhane from Motila Luspal Financial Services. Please go ahead. Yes. Thanks for the opportunity. Particularly on the Receivables, as I see, there has been a good jump of almost 400, 450 crores, both year over year or even quarter over quarter.

Operator

Is this more or less linked to North America business? And is this more to fill up the channel and so the sales could moderate to some extent in the coming quarters? So increase in receivables will broadly in line with the growth in business and the normal fluctuations that we see Depending on the timing of supply and the credit churn. So there is nothing unusual and it's in line with the business growth. Okay.

Operator

And secondly, on the overall gross margin, I think we used to guide for At least in the past before revenue had in the range of 52% to 55% for the base business. And since launch of revenue had we have seen good at least So, if you could just indicate gross margin guidance for So, yes, see, first of all, we can't describe a certain portion of the gross margin to a Specific product, as you know, we manage the business on a portfolio basis and we are launching new products all the time. This quarter, Again, we have launched a new product. And in the

Speaker 1

next 2 or 3 quarters in this year, we

Operator

are going to launch more products. So Yes. We look at

Speaker 1

the gross margin as a composite.

Operator

Overall, the drivers of gross margin, as you know, are The price erosion obviously brings it down, but we are seeing softening of solvent prices. We have seen Softening of freight rates and so on. And we're also seeing positive product mix. So overall, I expect our gross margin to range between 56% 59% in the next few quarters. Interesting.

Operator

And just on extending to your launch I expect Suri, Paragas, if you would like to call out, which would be interesting, Ron, say, over the next 12 to 15 months in North America, Suri?

Speaker 2

I don't want to call out specific. We're trying to avoid it because after that we have a lot of Question on this product, but what we can say is that We believe that we can sustain also the level of activities in North America Even post the nabilamide because we have quite a few very high value products that we can bring to the market.

Operator

We have the next question from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead. Good evening and thank you for taking my question. I'm just looking at the sales mix for the quarter, when I look at it, 57% of revenue is coming from the U. S.

Operator

Currently, 17% from India. I remember we had some kind of an aspirational goal to narrow this Over time, but we seem to have gone the other way. I know there is an element item there, which is probably skewing things. But there is just a broad guideline Of a more diversified geographic mix and I'm a little also confused with the India Strategy because we keep divesting things, like the Edith Life Sciences or the JB Pharma. So How do we get to top 5 if you keep divesting?

Operator

And you mentioned innovation to kind of help you double, but I'm just wondering what are these opportunities? Shouldn't it be more like a transformative M and A where we acquire assets like our Bokard deal perhaps few years back, right? So That's a small. So just want to understand your thought process on this. Sure.

Operator

Thank you so much for the question.

Speaker 2

Indeed, immunodilamide make the U. S. Obviously in proportion more Again, before I reiterate our commitment to the new market actually being Very important market for us and also redirect the aspiration to VITROV5. Now How should we go to a bigger price? It's not because we are going to buy number 6.

Speaker 2

I wish I could, but Okay. First, it's not available. I think it's still too early. And I don't think our shareholder wants us to do that. The way to do this for us is by launching innovation.

Speaker 2

So we are we saw that in India, There are 2 trends that are coming up. 1, some of the branded generics will have a headwind In the future, either because of the phase of generic, either because of the digital challenge, There will be certain level of potential switches also. And when we look at our portfolio and we saw what brands we believe Long term for us, we decided to focus on them and to divest those that we decided to not to focus on. At the same time, we have a major effort to bring a lot of innovative solution to India. And once this will pick up, this will bring us to the desired level even without acquisitions.

Speaker 2

Acquisition, I'm happy to do with the reasonable With the reasonable price, with the reasonable risk, but we are not building on it. We can be so fast even without. Got it. Helpful.

Operator

My second question is on the cash file, about €50,000,000,000 of net cash Sitting now on the balance sheet. So, Parag, any what are your top priorities in terms of capital allocation At this point of time, where what is the rank out of things that you would be using that cash file for? So obviously, we want to use it for driving business development, M and A. I think in terms of priority, I would say, first of all, it has to be a strategic fit. We have a clear strategy for every segment in our business Sorry, I think geography.

Operator

And secondly, it must come at the right price. So we are not going to chase acquisitions just because we have cash on the balance sheet. Within these boundaries, I would say that acquisitions in India and emerging markets could probably rank higher. I mean, as Dan said, there are good opportunities that come up in Europe also, we will grab them. That looks like the main acquisition that you did recently.

Operator

I think it's a great fit. So yes, we are giving acquisitions. I believe that In terms of seeing the large acquisition, we will probably see a series of smaller acquisitions. So a string of call strategy, But it depends on what kind of opportunities are available at the right time. Got it.

Operator

Thank you and all the best. Thank you. The next question is from the line of Srian Mukherjee from Nomura. Please go ahead. Yes.

Operator

Hi. Thanks. So if you can talk about what's the revenue base in China currently? And you mentioned about the significant growth from FY 'twenty five onwards. So I understand you're getting like 10 to 15 approvals per year now.

Operator

So from a 3 year perspective with 30, 40 products Added to your basket in China, how should we think about revenue in China in 3 years' time? And how does like per product revenue potential you see in China versus, let's say, in U. S? So I'm wondering, can it be like $200,000,000 $300,000,000 more in revenues in China. If you can give some color on how should we think about the growth trajectory in that market?

Speaker 2

So I see any number of around 2x in the next 3 years. So this is the time. The baseline that we are talking, but I'm talking about in market sales, not necessarily the way we report, It's around $180,000,000 a year.

Operator

Okay. So, Erud, it means like additional €180,000,000 is what you would book, let's say, 3 years down the line is a fair number to look at in China?

Speaker 2

It's in this range, could be even more.

Operator

Understood. Okay. And Parag, my second question would be Around R and D, I think you mentioned run rate of around INR 500 crores a quarter, right? Is it possible for you to sort of indicate How is this like how much of this is going into, say, biosimilar development at this point? And secondly, at the time of Analyst Day, you talked about new Horizon initiative, Horizon 2 initiatives Having an impact of 1500 basis points on your EBITDA margin, that's the kind of investment you are doing.

Operator

So what's the number at this point in time, if you have Anything to share on that? Yes. So, Saiyank, on the second question, right now we are in this range, 50 to 100 basis points On an annual basis is what we are investing behind Horizon 2. And of course, going forward, depending on how many of these succeed, It might start hinting us, but we'll obviously discuss that subsequently in the subsequent call. The first question was regarding biosimilar R and D.

Operator

Right now, R and D Behind biosimilars will be approximately 20% of the total. And we expect it to progressively grow up because we are Investing behind biosimilars, one of the products that we've discussed in the past, Naturopathy and possibly the map, Avadacept and so on. So We expect it to grow that in the

Speaker 1

go up.

Operator

Okay. And this 50 to 100 basis points that you mentioned does not include or Does it include the biosimilar investment? Do you consider it as part of Horizon 2 or this is like separate? No, so this 50 to 100 basis The next question is from the line of Binopati Parampil from Elara Capital. Please go ahead.

Speaker 1

Hi, good evening and congrats on a great set of numbers. Just a couple of questions. One on REGARDENESON. Could you please help us understand the competitive landscape there? I know a couple of them a couple of you guys have launched, but there are more approvals.

Speaker 1

How many competitors are there in the market right now? So for Reda Benin Swans, it's a multi player product, Right. We've launched it in April, and we've seen good progression in terms of our market share. We are happy with the way things are progressing for us. Okay.

Speaker 1

And any update on your products which you have out licensed That is pegfil question and the novel product E7777. Any updates regarding time lines?

Speaker 2

So on the first one, it's already launched. And so the PEDR is the consideration We'll come, of course, with the progression of the sale of this product. And as for Eco7, likely that in the next quarter or the third quarter, because It will be December, January, which we would expect to see whether it will get approval or not.

Speaker 1

Okay. And any milestones or any royalties included in

Operator

the current quarter from the first product? Sorry? It's a low single digit number in national terms.

Speaker 1

Okay. Okay. And finally on gendrick rituximab, Now that FDA has accepted your filing, what sort of timeline can we look forward to if everything goes Fine. Would you be looking forward to launching it in 12 months, 18 months or something like that?

Speaker 2

Yes, this is the timeline. So summer will be 12 months, 18 months depends of course on the approval by the US FDA. Once it is getting approved, we will launch it. Now it depends If response data will come or anything like that, but likely in this

Speaker 1

Understood. Thank you.

Operator

Thank you. We have the next question from the line of Ankush Marjan from Axis Securities. Please go ahead.

Speaker 1

Thank you, sir, for providing your opportunity and congrats for a good set of numbers. So This is the extension of the question that our base business is improving and it seems from the number that our base business in the U. S. Market That has improved a lot. Can we say sort of high single digit growth Q1, Q1 in the base business?

Speaker 1

And I would like to really appreciate if you Tell us that what are the factors behind that, that this business is improving? What is happening in the U. S. Market, sir, at this time in the generic?

Speaker 2

So I mentioned the cost of it is timing of RFPs, Agreements with customers, shortage of some product acts and relatively lower It's a normal pass erosion on the day. So it's a combination of all of it.

Speaker 1

And can we expect this trend will continue?

Speaker 2

Yes.

Speaker 1

So this quarter, sir, there were high single digit growth Q on Q on this business?

Operator

I would just say that it is healthy growth even after excluding BBI as well as NIM, It is as it goes, yes.

Speaker 1

Thank you, sir. Thank you very much.

Operator

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

Operator

So just coming back to the in licensing opportunities for the India market or the innovation that we have talked about, how does those opportunity fit into our 25% framework for EBITDA margin and ROC. Are they accretive, neutral or how do you say diluted?

Speaker 2

That's absolutely half of it, but we should reach those margin With the investment, it means it's included. That's why right now we have definitely a very much higher margin than that. And I use the 25 always as a kind of benchmark for where these are composed and that should mean that we must delegate this Q3. Likely that in the next couple of quarters, it will be higher than that, including that investment. And likely that The 25, anyone to include all of that as well.

Speaker 2

So it will not be below just the 25%.

Operator

Sure. And I think you have the great yes. So just to clarify, 25% EBITDA obviously for the entire So there are business segments which should be higher than their business segments that will be lower than that. 25% is our loan on exploration. And that modeling model includes certain part of post COVID-nineteen.

Operator

Sure. Sure. Okay. And secondly, on the trade generic business, can you provide some new details as to We have launched this division. How many people have we kind of hired for this?

Operator

How many products that we are expected to launch, let's say, over the next 2 to 3 years? And which are the geographies that we are targeting or any particular therapy area that we are targeting

Speaker 2

So we are not participating in about 50% of the India markets. When you look at our portfolio today, there are certain therapies and segments that we are not participating, This is about half of the market. So we are targeting, obviously, a place in which we believe There is a meaningful play in those areas that we are not participating. We will launch it all over India. So geography wise, It will be in all the states of India.

Speaker 2

In terms of number of products, it will be I don't have the exact number, but it's few things of products that will be launched in that direction. As for the pickup and staff, We probably need to see the response of the customers that at the moment We can update. We'll call you through as they have a quarter open. Sure. Thank you and all the best.

Operator

Thank you. That was our last question, ladies and gentlemen. I now hand the conference over to Ms. Rita Perrywell 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, please get in touch with the Investor Relations team. Thank you so much.

Operator

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

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Earnings Conference Call
Dr. Reddy's Laboratories Q1 23/24
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