Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Q3 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 December 31, 2019. Earlier during the day, we have released our results and the same are also posted on our website. 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. 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 rebroadcasted or attributed in press or media outlets without the company's expressed written consent. Before I proceed with the call, I would 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. Saumen Chakraborty. Over to you, sir.

Thank you, Amit. Greetings to everyone. The current quarter's financial performance has been quite good, with the highest-ever quarterly sales without any one-off cited. An improvement in both the gross margin and EBITDA margin and end cash generation. However, the profit is impacted by a significant amount of impairments occurring due to specific figures during the quarter. Let me take you through these and other major items in some more detail. Consolidated revenues for the quarter are at INR 4,384 crores, which is $614 million, raising a growth of 14% on a year-on-year basis. The growth has been supported by a good performance across all our businesses. On a sequential quarter basis, our reported revenue declined by 9%. In Q2 FY '20, we had an amount of INR 723 crores recognized as revenue towards the sale of 2 neurology brands of our proprietary products business. Adjusted for this, the sequential quarter growth would have been 7%. The consolidated gross profit margin for this quarter is 54.1%, with an improvement of 20 basis points on a year-on-year basis. On a quarter-on-quarter basis, while there is a decline of 340 basis points in the reported gross margin, after adjusting for the one-offs in Q2 FY '20, the normalized gross profit margin has improved by about 260 basis points. The SG&A spend for the quarter is INR 1,267 crores, that is $178 million, which is 28.9% of sales. In this quarter, we have taken an impairment charge of INR 1,320 crores, led by specific figures. In December 2019, due to a generic launch and an authorized generic launch for the product NuvaRing, we had to take an impairment charge of INR 1,114 crores, which is $156.5 million. In addition to this, we have taken an impairment charge of INR 206 crores on other intangible assets. R&D spend for this quarter is INR 395 crores, which is $55 million, accounting for 9% of sales for the quarter. The EBITDA for the quarter is INR 1,074 crores, that is $150 million, around 24.5% of revenue. Consequently, we now have a net surplus cash of INR 414 crores as of December 31, 2019.

Thank you, Saumen. Greetings to all. I'm very pleased with the continued improvement in all of our business spaces and our ability to enhance our performance this quarter. We have seen strong growth in revenues across our key businesses, coupled with improvement in gross margins and achievement of a healthy EBITDA margin. During the quarter, we also turned to a net cash surplus and further improved the benefits of our balance sheet due to sustained and focused efforts around our businesses. We are progressing well in implementing our strategy across the markets under the guiding principles of creating more opportunities with less risk. Now let me take you through the key business highlights. Our North America Generics recorded sales of $225 million for the quarter with a growth of 8% year-on-year and 12% on a sequential quarter basis. We launched 5 new products in the quarter and relaunched 22 products, including 4 relaunches of previously discontinued products. We expect the new launch momentum to continue with about 30 product launches during this year. Our Europe business recorded sales of EUR 39 million with a year-on-year growth of 52% and sequential growth of 11%. This strong performance was driven by new product counts and improvement in base business performance. Our emerging markets business recorded sales of INR 920 crores with a year-on-year growth of 19% and sequential growth of 11%. During the quarter, we launched 17 products across these markets. Our India business reported sales of INR 764 crores with strong year-on-year growth of 13% and sequential growth of 2%. During the quarter, we launched 8 new brands, including the launch of our first brand, Celevida, in the growing generic space. Overall, we continue to make steady progress on our transformation journey. As we continue to reduce our dependency on a limited number of products or markets for growth, we are expanding and leveraging our pipeline and assets across the global markets, providing us with good visibility for long-term, sustainable growth for the company.

[Operator Instructions]. The first question is from the line of Aditya Khemka from DSP Mutual Fund.

So firstly, on the cost management. So for the past 4, 5 years now, we have been seeing low single-digit growth in most of our cost components, which includes R&D expense and SG&A expenses and I understand this has come from a lot of efficiency and hard work from your end. Could you sort of give us some flavor on if there was, let's say, 100 is the scale of which cost optimization could have been done when you joined Dr. Reddy's, where are you in that journey? Are you at 50? Are you at 80? Are you at 99? How close are we to achieving the optimal cost structure that you would have desired?

I cannot quantify these numbers but there is still a lot of room to be better. We strive to be the most efficient company on earth in our space, and at this juncture, we are still quite far from that goal. So I will continue to see these efforts also going forward.

Okay. And just in terms of your commentary in some of your calls where you said that the ideal metrics that you want to target is a 25% EBITDA with a 25% ROCE. Do you think that's something achievable over the next 2, 3 years? Or you would target that for the next year itself? How would you think about that goal?

We achieved already for this quarter 24.5% on the EBITDA overall. So we are very close, and I believe that it's achievable. I believe that it's not just as another goal, but it's relevant for every activity that we want to do, meaning that the average can be even higher in the future. I don't have a time frame or guidance on that because we need to be cautious, but this is the indication.

Fair enough. On the revenue side, if you could just guide us on what the domestic business has achieved in terms of growth?

We decided that we want to win in this market. I think this is the main change, and we've substantiated this by putting relevant R&D for those products, by opening UTAs, and by changing the team leaders for better management. It's a multiple effort across various activities. But I attribute the main success for what we do to the fact that we, as a management team, decided that India is a priority for us.

Sure. Just one last question. So now that your balance sheet is a net cash balance sheet, what's the outlook on any inorganic opportunities?

We are always looking for opportunities, and we are very active on this front. The priority is on emerging markets and India, in particular. I want to use the opportunities that we see as complementary moves. We will not grow more than 2x EBITDA for acquisitions. The primary growth of Dr. Reddy’s will be organic.

The next question is from the line of Vishal Gada from Aviva Insurance.

Sir, could you guide us on how has the China business performed in the third quarter?

China did well, and it is growing. We are not giving specific numbers for the market, but overall, I am very pleased with the performance.

Okay. Could you help us with the kind of launches you're planning for Europe and EM in the coming quarters?

What we're doing now is primarily leveraging the U.S. portfolio in Europe. Most of the launches in Europe will primarily be injectables. The overall expectation and our strategy in Europe is to build a healthy organization with better clinical critical mass.

Okay. Lastly, could you help us to understand what helped in containing the SG&A costs?

It's primarily due to commercial excellence. We are selling more, but we've been able to do it with the same or even fewer resources, which has helped with the cases. It's just more disciplined.

I'll come back in the queue for the questions. Thank you.

The next question is from the line of Prakash Agarwal from Axis Capital.

Thanks for the opportunity. Just one question on the $11 billion write-off that you've taken for the NuvaRing product, and you kept $3 billion pending. Could you explain whether the value with 1 or 2 players has come off that significantly? Are we being ultra-conservative?

These are all triggered impairments that we do. Given the nature of this gain, we will take an independent valuator, beyond what team management will consider. So, of course, there will be various scenarios with possible eventual outcomes, and we attach probabilities on tax indicators in terms of the impairment outcome. It's pure accounting treatment.

What's our current understanding of the product in terms of a CRL in the past? When do we plan to get this resolved and get an approval?

We are planning to submit this in the next few months.

Okay. And any color on the expectation on approval, sir?

The review will go through with 6 months without inspection and 10 months for more extensive inquiries. From that submission, we need to expect some time frame as it can go through another cycle.

Understood. Fair enough. And you're focusing more on the emerging market. Is high single-digit or early teens the right metrics for future cost escalations?

We did not finish the efficiency activities. We will keep looking for ways to optimize. Bottom line will always grow faster than the top line.

What are your expectations on Copaxone as well as REVLIMID?

We will submit for Copaxone in the next few months. As for REVLIMID, yes, we expect it to be an outstanding product.

We can move to the next person.

Next question is from the line of Anubhav Aggarwal from Crédit Suisse.

Yes, my question is on the Russian market. It was quite a strong quarter in this geography. Can you explain what led to such a strong result?

This has also been helped by the tender of rituximab that we won in this quarter.

It's a combination of both. We outperformed in retail and won tenders. I attribute it primarily to our commercial excellence program which has yielded better results with fewer people.

So was the retail performance better than what we've been doing for the last 2, 3 quarters?

The only significant factor attributed was rituximab. There wasn't a single act that led to the improved performance.

Just one question on the PSAI business. How come our top line was largely similar sequentially, but margins were significantly better?

The main reason for that is a combination of product mix. We are doing better on costs as well.

Just one clarity on the earlier question on NuvaRing. Do you typically do all probability adjusted scenarios in accounting?

The accounting standard does not allow you to be extra conservative, and we have to have a nice balance.

The next question is from the line of Neha Manpuria from JP Morgan.

On the U.S. business, our revenue does not seem to reflect the resolution of logistical issues or the launches. Am I missing something?

Firstly, logistics issues are behind us. This quarter, we did not sell Ranitidine, and the combination of new products and price erosion is affecting the results.

Is it fair to assume that we're still seeing high single-digit price erosion in our portfolio?

Our portfolio is indeed seeing price erosion, and the mix of new products typically reflects a higher erosion percentage during their first year. But we are working to improve our product mix.

Could you give us some color about our MR on the ground in India, especially the reduction in the number of MRs?

Primarily, the sales force productivity has improved considerably, and profitability in India has grown significantly.

Do you see more scope for improvement there?

Yes, there is room for improvement. We are focused on enhancing performance.

The next question is from the line of Kunal Mehta from Vallum Capital.

Are there any sites where the utilization is below what you would like to have?

Yes, there are sites where utilization is still low. We need to improve our FX capital turnover.

What sort of precautions are we taking to ensure satisfactory inspection outcomes?

Since 2015, we've taken strict measures to ensure compliance. Our quality organization has greatly improved, and we've digitized many activities to bolster compliance.

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

Could you provide insight into the U.S. market pricing erosion that you've mentioned?

The primary reason for erosion has been new entrants. When new entrants come, we either defend our share or lose it. This affects pricing.

Is it right to assume that the North American market pricing environment has improved to lower levels of erosion?

We are not giving specific numbers. It's more about what portion of our portfolio is affected by these pricing mechanisms. We still see pricing pressures.

Do you expect EBITDA margins to expand substantially over the next couple of years?

Absolutely, I believe we can improve our EBITDA significantly.

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

On rituximab, is this just a one-time bump or will it be consistent?

Rituximab has been sold long back in Russia, but it doesn’t happen consistently every quarter. Tendering will vary.

On Reditux, how are we looking in terms of biosimilars in emerging markets?

We have Rituximab in many markets and are focused on optimizing our product pipeline.

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

Is it fair to believe that currency played a role in the expansion of gross margin sequentially this quarter?

Constant currency has had no impact on sales or profit growth year-on-year basis. Overall, it remained consistent.

What about the CapEx trend and R&D expenses trend along with cost containment efforts?

The level of CapEx that we need to do has reduced significantly compared to the past years.

Our U.S. business performance: Are you planning to chase growth at any cost?

Absolutely, we will not grow costs at the expense of quality. Quality is non-negotiable.

The next question is from the line of Nikhil Mathur from AMBIT Capital.

Were there any cost savings from the out-licensing of proprietary products?

There will be cost associated but we have seen some benefits from that out-licensing. We can expect to see full benefits in the upcoming financial year.

What kind of proportion of product launches are expected to be injectables?

Most of the product launches will come from our U.S. facility, with a push towards injectables.

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

Do you have any update on Suboxone and any updates on the Duvvada observations?

Regarding Suboxone, we are still in the legal process. As for Duvvada, we are waiting on an update.

What products can we expect in the coming quarters?

We cannot single out products as each has value, but our pipeline continues to grow.

We'll take one last question. The last question is from the line of Shyam Srinivasan from Goldman Sachs.

Can you provide any learnings from olanzapine's first round? How does this shape your China strategy?

We're leveraging our strategy using our U.S. products to meet Chinese criteria. Each launch aims for profitability, even if we don’t win every tender.

Has the coronavirus impacted our Chinese operations?

It did not impact the quarter because it's recent. I hope nothing happens as a result.

What are the upcoming dates for REVLIMID trials?

I'm not aware of a specific date scheduled. Further updates will be given as they arise.

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 Laboratories Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.