Ladies and gentlemen, good day, and welcome to the Dr. Reddy’s Q2 FY '20 Earnings Conference Call. Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Agarwal. Thank you, and over to you, sir.

Very good morning, and good evening, to all of you, and thank you for joining us today for the Dr. Reddy’s earnings conference call for the quarter ended 30th September 2019. Earlier during the day, we have released our results and the same are also posted on our website. This call is being recorded. 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. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's, comprising Mr. Erez Israeli, our CEO; Mr. Saumen Chakraborty, our CFO; and the Investor Relations team. Please note that today's call is a copyrighted material of Dr. Reddy's and cannot be rebroadcast or attributed in press or media outlet without the company's express written consent. Before I proceed with the call, I would like to remind everyone that the safe harbor language contained in today's press release also pertains to this conference call. Now I hand over the call to Mr. Saumen Chakraborty. Over to you, sir.

Thank you. Greetings to everyone. Let me take you through the key financial highlights for the quarter. This quarter, we had certain one-off items impacting revenues, gross profit margin and SG&A, which I would cover as part of the respective section. Herein, all the amounts are translated into US dollars at a convenient translation rate of INR70.64, which is the rate as of 30 September 2019. Consolidated revenues for the quarter are at INR4,801 crores, which is $680 million, registering a growth of 26% year-on-year and 25% on a sequential quarter basis. It includes an amount of INR723 crores, recognized as revenue towards the sale of two neurology brands of our Proprietary Products business. Even after netting off this amount, revenue during this quarter has been the highest ever for Dr. Reddy's. This has been made possible by registering a good growth in the PSAI, Europe, Emerging Markets, and India businesses. However, NAV performance could have been better. Consolidated gross profit margin for the quarter is 57.5% with an improvement of 250 basis points on a year-on-year basis and 590 basis points on a sequential basis. Gross margin for the Global Generics business was 55.5% and for PSAI business was 24.6%. While the overall gross margin is benefited due to revenue recognition of the PP neuro brand, it was impacted due to certain one-offs, including but not restricted to the impacts of the voluntary recall of Ranitidine in the U.S. market. Adjusted for the one-off, the normalized gross profit margin for the quarter is about 51.5%. The SG&A spend for the quarter is INR1,678 crores, that is $238 million. As part of our quarterly impairment testing analysis, we concluded that the carrying value of the intangible asset is not reflective of the current market reality for three of the products namely, Tobramycin, Ramelteon and Imiquimod acquired from Teva. For the first two products, faced increased competition and substantial price dropped during this quarter, we have taken a decision not to launch the third product. Accordingly, an impairment charge of INR355 crores has been considered in the current quarter. Beyond the impairment charge, there have been additional one-off over INR100 crores, including but not restricted to the cost associated with the sale of two neurology brands. Adjusted for the one-off, the normalized SG&A spend is lower on a sequential quarter basis. R&D spend for the quarter is INR366 crores that is $52 million and is at 7.6% of the sales for the quarter. The R&D spend is lower by 11% year-on-year, but higher by 1% on a sequential quarter basis. Considering the current state of activities, we believe that the overall R&D for this fiscal would be in the range of $200 million to $240 million. The EBITDA of the quarter is INR1,434 crores that is $203 million, which is around 29.9% of the revenue. The net tax for this quarter is a benefit of INR326 crores due to recognition of deferred tax asset for INR522 crores, primarily related to MAT credit. Pursuant to the recent amendments in the taxes and laws in India, the MAT rate has been reduced from 21.55% to 17.47%. Consequently, during the quarter, the company has evaluated the recoverability of the unrecognized MAT credit and are certain that it is likely to recover the MAT credit within the stipulated period as per the Income Tax Act. Accordingly, the company has recognized a deferred tax asset of INR499 crores, related to the unrecognized MAT credit in the current quarter. With this development, the ETR for this financial year is expected to be less than 10%. EPS for the quarter is INR65.82. Operating working capital increased by around INR350 crores, which is $49.5 million. This increase is attributable to an increase in receivables in line with the sales intake. The net working capital days have increased by four days against the last quarter. We invested INR108 crores which is $50 million towards capital investment in this quarter. The free cash flow generated during this quarter was INR874 crores, which is $124 million. Consequently, our net debt-to-equity ratio has improved further and is at 0.01 as on 30 September 2019. Foreign currency cash flow hedges for the next six months in the form of derivatives for US dollars are approximately $300 million, largely hedged around the range of INR70.20 to around INR73.95 to the dollar. In addition, we have balance sheet hedges of $564 million. We also have foreign currency cash flow hedges of RUB1,650 million at the rate of INR1.0813 to the ruble, maturing over next six months. With this, I now request Erez to take through the key business highlights.

Thank you, Saumen. Greetings to all. We had a good quarter and are progressing well in implementing our strategy in the focus spaces we have communicated. In this quarter, we generated INR870 crores in cash, which improves our financial strength and enables us additional means to grow in the future. This quarter, we had another one-off in the financial performance, but we believe this is not going to impact our strategy and our future growth. Now let me take you through the key highlights across our businesses. Please note that all the references to the numbers in this section are in the respective local currencies. Our North America generics recorded sales of $202 million for the quarter and declined by 1% year-over-year and 14% on a sequential quarter basis. The sequential decline was primarily driven by certain issues impacting the quarter such as provisions related to nationwide recall of Ranitidine product due to NDMA impurities limits following FDA's caution note regarding the same. We now have completely suspended the sales of Ranitidine OTC and Rx product. And logistics-related challenges leading to temporary disruption in supply, which has been addressed since. We expect the sales run rate to normalize from Q3 onwards. During the quarter, we launched eight new products, including some first-to-market and limited competition products like Carboprost injectable, Pregabalin, Fosaprepitant injectable and OTC Guaifenesin/Pseudoephedrine. Overall, we launched 13 products in the first half of the fiscal. While we continue to work towards ramping up our market share across the key launches, we are on track to launch more than 30 new products in the current fiscal. Our Europe business recorded sales of EUR 35 million with a strong year-on-year growth of 50% and sequential growth of 15%. This great performance was driven by increased contribution from new launches, coupled with base business performing well across all the European markets. We expect this business to continue to perform well during the balance of the year. Our emerging markets business recorded sales of INR820 crores with a year-on-year growth of 10% and sequential growth of 13%. Within EM segment, Russia business grew at 6% year-on-year and 2% sequential in constant currency. New launches and higher volumes contributed towards the overall growth, which were partially offset by lower realization in view of the markets. This quarter, we met a great milestone for our China business. As many of you may be aware, Dr. Reddy successfully emerged as one of the winners for the supply of olanzapine in the centralized drug procurement program, becoming the first Indian generic company to have prevailed in the new tendering process. This award is a testament to our focus and efforts towards building China as one of the key growth drivers for the company. We remain committed to building a healthy pipeline of products to enable us to support Chinese patients with more such opportunities going forward. Our India business recorded sales of INR751 crores with a year-on-year growth of 9% and a sequential growth of 8%. During the quarter, we launched five new brands. As per the secondary sales reported by IQVIA, we registered a healthy growth of 13.4%, ahead of total market growth of 13.1% for the quarter ended September 2019. We continue to focus and strengthen our presence in the Indian market. Our PSAI business recorded sales of $100 million with a year-on-year growth of 16% and sequential quarter growth of 64%. With a strong quarter for the business, we expect to build on this momentum going forward. On the R&D front, we filed one ANDA during this quarter and the filing run rate is expected to ramp up during the balance of the year. As of 30 September 2019, we have 99 cumulative filings pending for approval with the USFDA, including 96 ANDAs and three NDAs. During the quarter, we also filed eight drug master files globally. We continue to strengthen our product portfolio across all of our focus markets. On the quality and regulatory front, we had several audits during the year, carried by USFDA and other agencies. And I'm quite satisfied with the overall audit outcome. We believe that we should be able to appropriately address wherever there are open observations from these audits. As regards to the API, Srikakulam plant, what we call CTO-VI, we are expecting an inspection from the USFDA in the near future. Our proprietary products business, pursuant to the closure of the divestiture of our two neurology brands to Upsher-Smith, we recognized income of $105 million during this quarter, presenting the upfront consideration and discounted value of near-term milestones. Further, we are happy to announce that TOSYMRA brand for international Sumatriptan was launched by Upsher-Smith in the United States in October 2019. Going forward, we remain focused on addressing unmet and under-met medical needs of patients suffering from critical and chronic illnesses globally. We are focusing on our core capabilities in R&D to build a self-sustained business that can consistently deliver high-value, globally relevant, differentiated products that provide meaningful health economic outcomes to patients and payers. The NDA for DFN-15 which is oral celecoxib has been accepted by the USFDA and progress on all of our other R&D programs is on track. While we continue to progress well on the organic growth for each of our focus businesses, we are also evaluating multiple inorganic opportunities, which can accelerate our growth journey further to reach more patients and create value for all stakeholders. I'm pleased with the shift seen in the organization's behavior toward cost consciousness and higher prudence toward cash utilization. We are taking significant effort to improve on multiple self-parameters in addition to financial performance. And I believe that we are progressing well in the right direction. Within this, I would like to open the floor for questions and answers.

[Operator Instructions]. The first question is from the line of Prakash Agarwal from Axis Capital.

Sir, two questions, one is on the U.S. business. Just trying to understand the reasons that you have cited in terms of the logistics, the price erosion, volume erosion and some weight on Ranitidine, if you could just break it down so that we know that what is the normalized -- if things wouldn't have happened, what would have been the normalized U.S. sales run rate? Would it be similar to last quarter, a tad lower or much lower?

It will be a bit lower than the previous quarter, not much lower.

Okay. So are we quantifying the Ranitidine impact and the logistics impact, that would be really helpful.

Ranitidine will be quantified when we are releasing 6K very shortly that you will find out there. Others are not quantified.

Okay. And with respect to going -- coming back to the normalized run rate, do we expect going forward within this new launches to ramp up coming back to Q1 run rate? Or how should we think about the rest of the year?

We are planning to grow and we're not going to disclose specific numbers, as we normally do not do. So, but absolutely, the performance of this quarter was impacted significantly, the main difference by the taxes that we mentioned. On top of this, we had a price decrease on some of the products, so it was not the only reason for that. These two issues naturally will not be there in Q3 and at last, I believe that we'll ramp up, so it's supposed to be better. Overall, we are planning to grow in North America.

Okay. And, sir, second question on the key products. So if you could share any progress on our biosimilar portfolio, which is the XenoPort, rituximab and the PEG?

So on biosimilar, we're talking about rituximab, this is -- the trial is progressing well. On your first question, just to add, and naturally on top of it, we see an opportunity with Suboxone. And there is a certain announcement that the AG will not be there, so naturally, it's opened an opportunity for us which we hope to exploit.

So on XenoPort, I would tell you the status. We successfully completed the Phase IIb study. Now it really does support our belief that this will become the first approved oral prodrug of Monomethyl Fumarate for treatment of moderate to severe plaque psoriasis in the U.S. We are in active dialogue with the USFDA right now for crafting the way forward with respect to the design of the Phase III trials.

Okay. And you are also developing Pegfilgrastim, right?

Fresenius.

That is Fresenius Kabi. We earlier had an agreement with Merck Serono which was acquired by Fresenius Kabi, so they would have done metastasis.

Yes. So Phase III was completed. They are securing that file for filing. We do not know the date but they should be filing.

Okay. And we do have economic interest, right?

Yes, yes.

Absolutely.

The next question is from the line of Anubhav Agarwal from Crédit Suisse.

First question is, can you just elaborate a little bit on this disruption which you mentioned, related to logistic issue? Is this Dr. Reddy's-specific issue or this was an industry issue?

Dr. Reddy's-specific issues. We had issue with the distribution of the products in the U.S. over a certain period of time.

But this was across the basket or this is very few products, you had the issue?

Because of that, it was just issue in the way we distributed products. Nothing is special and we overcame it.

But just -- I'm just trying to understand, so the way it's worded in the press release, it looks like the sales that were lower this quarter is the lost sales. So I'm just trying to understand, let's say x amount of dollar we lost -- we showed as lower sales in this quarter.

We had less days that we could ship product. So naturally, it resulted, but for the quarter, we had lower sales.

But you are right to interpret in terms of that since it has happened in the last month of the quarter, we could not get back to the normalcy during the quarter. Now things have become normal, so there have been some problem in shipping out of the warehouse during the last part of the quarter.

So I'm just trying to understand a very simple question that lets say, x million dollars was the sales in each quarter. Are we going to -- over a period of two, three quarters, are we going to get 3x let's say over three quarters, so or are we going to get 2x because of the supply issues?

We did not lose sales because of the supply issues.

But are we going to get, in the next quarter, is this...

Yes. Whatever, we could not shift in the last quarter, that part of the things we would have been shifted in the last month, I mean in this quarter, only in the month of November -- sorry, October.

So this quarter should show a higher sales for whatever we have done was in the second quarter, right?

This quarter should be better than -- at the end of the second quarter, yes.

Okay, and second question was on generics Suboxone. I just wanted to check that can our capacity support, let's say if our market share were to double, do we have enough capacity to support that?

Yes.

And just one clarity on generic Suboxone. We did not get approval of this product. We were one of the share generics. Is that what -- what was the reason that we did not get approval of this product?

Which product? And what product?

This is generic Uloric -- sorry, Uloric as a brand, generic Febuxostat.

Okay. I don't have the detail, I believe that maybe it's because of the CTO-VI situation, but I'm not sure about it.

Maybe we can check and get back to you.

The next question is from the line of Neha Manpuria from JPMorgan.

Sir, first on the SG&A. On the INR100 crores, I understand some part of it is transaction cost related to proprietary brand sales, but could you give us some color on what the other one-off was? And should we see the SG&A spend continue to decline from the current quarter level, like you've indicated or in the second quarter? Or this is -- adjusted for this INR100 crores is the new level?

So whatever we can disclose and we need to disclose, these are all to be there in the 6-K and there will be certain areas where there could be specific confidentiality and other that we cannot speak so directly. But the crux of the thing is at a normalized level, the SG&A, actually we are improving. And this quarter, at a normalized level is lower than just the previous quarter, that means from the Q1, Q2 we have improved on SG&A, but because of the one-off it is looking higher.

Okay. So sir, if I were to look at our margin trajectory, given that a lot of our growth is now coming from emerging market, India. Is it fair to assume that this growth should help improve EBITDA margins? Is that the right way to look at our margins?

Yes. Over time, yes. Yes, go ahead.

And when you say over time that would be a couple of quarters or do you see that happening more gradually?

So first, we must appreciate that over the last few years there have been continuous pressure of price erosion. And we, at other hand, we have been constantly, continuously trying to improve productivity and have all the cost excellence program to neutralize the impact of so severe prices isn't particularly in the U.S. market. And we have been trying to keep the gross margin at that level. But at an EBITDA level, overall, since multiple things that we are doing, we have come to a level where we are not very far from the right kind of benchmark for the pharma industry what kind of EBITDA we should be having. So that's what dropped for subsequent to the warning letter situation. I think we are recovering -- more or less we've recovered. And as we raised yesterday that if there is no other specific impact, which is dropping down, we hope to continuously insist.

Understood. And my second question is on the use of cash, particularly after the cash flow in this quarter. You mentioned in the opening comments that you are evaluating quite a few opportunities. Again, are these focused on probably India, emerging market, if you could give some areas, where we're looking at deploying this cash in?

No, absolutely. We're looking to invest in our spaces, in all the relevant spaces. The primary focus is on branded generic markets, India, in particular. This is the primary focus. At the same time, the efforts and the discussions are in each one of the spaces in order to support the growth that is required in the strategy. We are doing it with the following amends. One, It has to support the strategy. It's something that will add capability, and it makes sense for economically and it's better for the shareholders, it will -- buy the capability then develop it ourselves. And it's complementary to the organic growth of Indian space. We'll continue to be an organic growth company. So this is a complementary. But naturally, the fact that essentially, we have no debt and this is going to improve even further in the future, if we find the opportunity to increase shareholder value by having a good deal, we'll not hesitate to do so.

The next question is from the line of Damayanti Kerai from HSBC.

Sir, can you elaborate a bit more about our progress in China? So are we targeting mainly that tender market or we're looking into other channels also? And any sales target, or any guidance we're having for China market in the next 3 to 4 years, if you can share that?

Sure. So China is a very important market for us, it's one of our leading spaces. In China, we are working in the following channels. One, our regional channel that is primarily through our partnership or JV in China in KRRP. And this is selling and marketing of branded generic products. This is also progressing well and it is growing double digits, as we speak. In that space, we are 20 years now. And we'll continue to be in that space. What was opened up for us and I discuss it in a couple of investor meetings, given the new regulations in China, two channels are now open for us. One is direct sales of generic product is, well, getting a GA recognition. And when you do that, the idea is to partner -- this is not through the partnership, this is where we partner a company that has relevant sales force to this therapeutic area, but we can compete on the slot of the innovator in that relevant hospitals. The third Channel is this new procurement program. This is a relatively new development in China, which is probably going to be scaled up and in which, if we have a product that means the Strattera will try to participate and win our share as well. And we want to grow in all three channels, not just in the last one. And we are happy that we had -- the olanzapine is the first time that we enter into the third channel that I mentioned. We are already in other two.

Okay. So any target we have in mind, is it set for near to medium term, where we would like to reach?

Not something that we want to share because we are not giving guidance. But it's way, way, way higher than what we have now.

Sure. And do you have any update for our key filings of NuvaRing for Copaxone from what we shared earlier? Or anything, any update there?

On both, we -- on NuvaRing and generic Copaxone, we are on CRL, and we are addressing it. We continue to address it today. And we hope to file a response to that in the next few months.

The next question is from the line of Abhishek Sharma from IIFL.

Can you hear me?

Yes.

Sir, two questions. First, on China tender market. Olanzapine, I was just trying to understand the dynamics of pricing it? How is the pricing for olanzapine in the tender market versus the private market?

We are not telling specific numbers naturally of pricing the product. But as you can imagine, it's a tender process, so it was significantly lower.

And would that mean that you would sort of look at sort of much higher volumes through the tender market? And is that how you're looking at it?

Yes. Yes. It's a higher volume, it's lower prices, but it's still very profitable. And it is only to have the sales and marketing efforts, only to grow, to physicians and use sales efforts, like you need to do for example, in the second channel that I mentioned. So it's more like, if you wish, other tender systems in other countries today.

So net profit is higher on that part.

Right. All right. The other question was on receivables. There's a sharp jump this quarter, despite the fact that there has been a dip in the U.S., so just wanted to understand with respect to that?

See on overall, working capital fund, I already shared that there is only four days increase in the number of days. So we are not concerned about it. Whatever jump in this rule has happened, it is in line with the sales.

The next question is from the line of Surya Patra from PhillipCapital.

Just wanted to have some more clarity on the Suboxone. Recently in the opioid lawsuit settlement, Teva, what has offered to supply and subsidized Suboxone tablet for a longer period. So what is the business dynamic with Suboxone, the films will be releasing? And whether that would really impact the opportunity what we're targeting. Anyway we have so far progressed in terms of a market share around 15% only in the Suboxone. So what is also has restricted our penetration faster? Any -- something on the Suboxone side that you are keeping?

So firstly, I would like to address our market share on Suboxone is higher than 15%. The second, the development that was shared by Indivior, I think even yesterday, about the potential exit of the AG, so naturally this has opened for us an opportunity that we are planning to pursue. As for the Teva deal, naturally, we are not part of that activities. So I'm learning about it, and we are monitoring it in the same way as others, and once we will come, we will try to understand the outcome. I don't know what is the pace and how it will impact the market.

Okay. Sir, is it right that -- hello? Hello?

Yes. Yes. Go ahead.

Yes. Go ahead.

Yes. so it right that -- earlier also it has been commented that way by industry people that hardly there is a difference in Suboxone tablet versus the film versus the sublingual. So is there any practical difference there? Or it is not and hence, there could be a kind of impact, if there is a subsidized supply by a large player?

Naturally, the sale is more advanced version and gives better outcome for the patient that are taking it. So that's why the sale is growing versus the tablets originally. And in the natural course, so that this phenomena will continue. I don't have any visibility on if any other developments in the market will happen. I cannot speculate on it.

Okay. And second thing, one clarification about this $105 million award that you've received from the disposal of the three brands. So initially, you were talking about in two tranches, like, 70-40. So that means it is clear that, okay, the entire of the $110 million something like that is already been factored in this quarter, right?

Yes.

Yes, yes.

And regards the European growth, sir, how should one really look at. I think it has -- on a -- sequentially has improved significantly, but Y-o-Y it is still stronger double-digit kind of. So what is driving, whether it is on a relatively low pace it is growing? Or it is -- any sense on that front?

Sure. First, for many years also we -- we were not performing well in Europe, and we made certain adjustments to the portfolio, to the team, and to the activities and I think now we are starting to bear the fruits of them. Overall, Europe will grow significantly up. But we are announced the growth now is primarily due to launches of a couple of very good products in various markets.

Okay. Just one thing, sir. Is it fair to believe that NuvaRing is a product opportunity for FY '21?

NuvaRing is an important product for us. And once we'll get the approval we'll know. I absolutely hope so.

The next question is from the line of Sameer Baisiwala from Morgan Stanley.

Sir, one question on China is to the extent that you are going to do local manufacturing out there, which I think would be a substantial part of your business. How does it make you more competitive than the other local Chinese players? And second, how do you bring to table India's cost competitiveness, when you're participating in the Chinese market?

Yes. Thank you, Sameer. We are making products now. We have a plant that is making product for China, primarily for the KRRP product, and we took a decision and we are implementing an expansion for that plant. So this will take some of the growth. On top of it, we are moving a few products to a contractor to make in China. There are certain advantages for example, exemptions from certain tests when you do a bio study and make products in China, and we'll exploit that. And some products we will sell out of our Indian facilities. So it's a combination of the three of them.

Okay. Great. And sir, second question is on the U.S. pricing environment. My understanding is over the last two quarters, most companies both manufacturers as well as your customers have come back to say that the base business price erosion is roughly about somewhere around mid-single-digit, call it 5% to 7%, but your commentary seems to be suggesting that it's much worse than that. Is it true? And is this anything specific to Dr. Reddy’s?

Yes. So it's not an overall market dynamics. It's a specific situation in which -- in products that faced new competition, normally for that particular product there is a double-digit decrease in price in which you can either protect your share or drop the product. And now, it depends on what is the mix of those in your mix. In our case, for the quarter, it was relatively higher.

Okay. And going forward, for the base business price erosion, what's the outlook for your portfolio?

The same like we discussed in the past. I don't see any specific outcome for the base. The main erosions, I believe, going forward will be on new launches that naturally, over time is the price that we launch with will be different as more competitors will join the game.

Okay. And sir, just one final one from my side and that's about generic NuvaRing. I remember, in the last call you mentioned that until you get the full response from FDA and see the new queries from them, you would not know what's the timelines and what kind of complexity and what kind of work is required to be done? I'm sure -- I'm pretty much sure that now you've got all that information if you can add any more color to what you had already spoken on the call that would be great, sir?

We got the CRL, if I'm not mistaken, in August, right? In August. And it was related to some specs of the products that we had to address in certain testing. For that, we had to do some experiments and to buy certain equipment. This is the work that will take a few months starting from August. And if everything is successful, we will address and answer the CRL and naturally, will speak directly on this product.

The next question is from the line of Ranvir Singh from IDBI.

Sir, my question is related to the Proprietary Products thereafter divesting this three molecules, what is the outlook there? So what kind of investments we are making? And what we're doing actually there?

Thank you. First, we still have a pipeline of products that we need to finish certain experiments in order to further find the partner to that, is there a licensing in all directions. So we are looking for either get what you call a long-term stream of revenue, which will be more of a licensing in nature of the product, or divestitures which means relatively high level of platforms and lower level of royalties going forward. So both models we're pursuing on the project that we have. In addition to that, we're building this team to be -- to continue to develop product. This time, less dependent on the U.S. market, but it was rather more globally, in which we want to continue to develop products for unmet needs with -- basically, if you wish the desire of the -- if they ask to have a meaningful stream of revenue from each one of this development, we can either develop directly partnering with a potential partner globally or do it after certain milestones if there is an interest. The new model is pretty simple. Stream of revenue in, then it allows certain stream of revenue out and overall, this is going to be going forward a profit center for us rather than an investment for the long term.

Okay. So what portion of our R&D is going towards this Promius Pharma?

Relatively small portion of it.

Okay. Fine. And secondly, on Ranitidine, I think two events that we recalled and then we halted the sale on, I think last week of September. So in this quarter, virtually, what we have factored in is recall value and then the discontinuance of sales. So what I wanted to understand that it's entire Ranitidine issue has been factored in this quarter or part of it is likely to come in subsequent quarter from that.

No. We have covered whatever is the impact of voluntary recall, so we have covered it fully.

Okay. So what I see that a few other regulators like Australia has given go ahead with Ranitidine in present form to some of your competitors. What I wanted to understand that the standard that USFDA came out for this Ranitidine. Is there any further submission or something is happening there to lower their standard to show that the Ranitidine, the content of NDMA can be permissible going forward?

I don't know what eventually will be the right level of NDMA and where it will lead for us. By the way, it's globally. So we'll not Ranitidine. We have one standard with that respect. We will not differentiate between countries as related to safety of patients. But overall, it will be interesting to see if there will be concerns about a certain level that is possible to sell this product. And then it will have the relevant APIs that can meet that, we can always consider going back. But right now, we are not aware of that API and that limit.

Fine, fine. And the last one. I couldn't understand that sharp jump in S&GA, so selling and administration expenses. Could you give some light on it?

Sure. One, of course, is the impairment effect, which we have taken during the quarter. And then I also explained that there are certain one-offs which have contributed to more than INR100 crores during this quarter. And then of course, there is also this cost of sales associated with the PP neuro brand and that amount already we have declared in the press release. So overall, that's why the SG&A has gone up, but I also said that, if you normalize the one-off, actually there is an improvement in the SG&A productivity.

The next question is from the line of Surya Patra from PhillipCapital.

Just one clarification that whether the Carboprost, which is F2F and the sort of exclusive product opportunity, whether we have gained meaningfully there by this quarter? Or the true benefit is yet to be seen?

So this product, we have been able to get our market share. Those will ramp up further going forward. But largely, market share wise we are there.

The next question is from the line of Surajit Pal from Prabhudas Lilladher.

Could you please tell me, there were two events. One is your logistical challenge, one is your recall of Ranitidine. Now these two events, will it lead to some bit of penalty payment going forward as an overhead cost say, in H2?

No.

None of them will lead to any kind of penalty payments?

Whatever had the penalty was already booked in this quarter.

Okay. So if there is any penalty, you have already booked.

Whatever is related to any activities that related to that, including penalties was included in the quarter.

The next question is from the line of Nitin Agarwal from IDFC Securities.

Saumen, on the SG&A, you talked about the adjustment of INR100-odd crores in the current quarter to get a normalized number. So does this reflect a full impact of the discontinuation of the proprietary business from this quarter onwards?

So, of course, when you say Proprietary Products business, there is no discontinuation of Proprietary Products business. And what we have done we...

The marketing part.

There is a commercial arm including the sales and marketing from those neuro franchise now that has been reduced, so that impact is there. That's helping in terms of SG&A reduction.

Okay. Adjusted for that, that's probably reflected in this quarter. Now going forward, how should we really look at the SG&A base. I mean you've done a very decent job on this cost over the last 3, 4 years. Do we still see an opportunity to keep SG&A in absolute terms at these levels, around these levels? Or you -- how one should budget in somewhat more inflation as we go through the years?

So in the sales force part this has been reduced in is North America that is not one-off. So that is unrelated, so that is going to stay. So why should we adjust that. And anyway what -- with the focus that we have for our productivity improvement and cost excellence has given us good results. But we believe that there is still further scope and we're continuing on that focus.

Okay. And secondly, on the U.S. business, in the current quarter, we had about eight odd new launches and despite that you've sort of mentioned that -- even adjusted for the two factors you mentioned, the business was lower on a Q-o-Q basis, the margin is lower on a Q-o-Q basis. So in this context, when you look at the business and you had a reasonable number of launches, what will really be required to move the needle on the business from a revenue growth perspective in the U.S.?

To sell more.

I mean do we need some big blockbuster launches at the other time? They come through, we will not have a meaningful delta on the U.S. sales, or how should one structurally look at this business? The way that this business is in the U.S. right now?

We have a great portfolio. We just need to sell more of it.

We'll be able to take one last question. The last question is from the line of Aditya Khemka from DSP Mutual Funds.

Erez or Saumen, could you just talk about the gross margin. So your adjusted gross margin for the quarter you said is 51.5%. And if I remember correctly, when we were speaking after the FY '19 results, the range that you had cited for your gross margin, over the past several quarters was between 53% and 56%. So clearly, we are lagging our historical range of 53% to 56% gross margin?

So in the same quarter when I spoke, we also said that the way we our business model, we expected to deliver in north of 50%, but it's been fluctuating between these two. And yes, I agree, last couple of quarters, we are outside that range, and we are lower than 53%. But we'll hope to get back to the asset is all I can say.

Sorry. I couldn't catch that last bit. You expect to?

I said we can hope to get back to this range, that's all I can say. You have to also understand there is -- there have been impact of price erosions in the USA and also in Europe. So we have been improving on our cost structures and all. So be in that gross margin range. We're trying to do this impossible, but there is still scope for improvement we'll have to do.

Sure. I understand. My only doubt there was that since we are now more inclining towards branded generic businesses versus Europe and U.S. being more generic businesses. So from that perspective, I believe our gross margin should have already started reflecting improvement versus what it historically was?

But see what happens in this quarter, we had much higher PSAIs. The last quarter, PSAI was lower. So when the mix changes that will also have its impact on the overall gross margin. So there's multiple factors, which contribute to the overall gross margin numbers.

No, that's fair enough. Just another clarification on Ranitidine. Were you selling Ranitidine in Australia?

No, we say that it is categorically fit. We have only one quality system which is global. So we don't go by respective regulators, and they are hoping -- if we have voluntary recall from U.S. market that means we're not selling Ranitidine anywhere in the globe.

No, my question was before the voluntary recall, were you selling Ranitidine in Australia?

No, no. We were not.

Okay. So sir, just last question then on R&D expenses. So could you help us with the budget number there for FY '20, '21, anywhere you want to guide?

FY '20, '21?

Yes. Your R&D budget for FY '20 and '21 if you could or percentage of sales or an absolute number.

We have -- I've not even started our budgeting process for FY '21. So it may happen maybe in the next couple of quarters, we'll complete that.

And FY '20?

FY '20, as I said today that given the current set of activities in most likelihood in this fiscal, R&D will be anywhere between $200 million to $240 million.

We'll take that as the last question. I would now like to hand the conference over to Mr. Amit Agarwal for closing comments.

Thank you, everyone, for joining us today for the earnings call. In case of any further queries, please reach out to the Investor Relations team. Thank you.

Thank you very much. On behalf of Dr. Reddy's, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.