Dr Reddys Laboratories Ltd Q1 FY2024 Earnings Call

Ladies and gentlemen, good day and welcome to the Dr. Reddy's Q1 FY '24 Earnings Call. I now hand the conference over to Ms. Richa Periwal from the Investor Relations team. Thank you, and over to you ma'am.

Thank you Darwin. A 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 June 30, 2023. Earlier during the day, we have released our results and the same is also posted on our website. This call is being recorded and the playback and transcripts 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. Erez Israeli and our CFO, Mr. Parag Agarwal, along with the investor relations team. Please note that today's call is 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'd like to remind everyone that the safe harbor contained in today's press release also pertains to this conference call. Now I hand over the call to Mr. Parag Agarwal. Over to you, Parag.

Thank you, Richa. Greetings to everyone and a warm welcome to our Q1 FY '24 earnings 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 the section, all amounts are translated into USD at a convenience translation rate of INR 82.06, which is the rate as of June 30, 2023. Consolidated revenues for the quarter stood at INR 6,738 crores, that is $821 million and grew by 29% on a year-on-year basis and by 7% on a sequential quarter basis. Adjusted for brand divestment income on a rebate comparator, the underlying growth was higher at 35% on a year-on-year basis and 12% sequentially. The growth was driven by the generic business, mainly in the US MLD markets and Europe. Excluding the one-off gains from brand divestment, the loss of revenue for the divested portfolio and NLEM related price reduction, India business registered high single-digit growth. Consolidated gross profit margin for this quarter has been 58.7%, an increase of 880 basis points over the previous year and 150 basis points over the previous quarter. The improvement in gross margin was primarily driven by favorable product mix, supply productivity savings, and better manufacturing leverage, partially offset by brand diversion income during the previous period. Gross margins for the global generics and PSPI were at 63.9% and 15% for the quarter, respectively. The SG&A spent for the quarter is INR 1770 crores, which is USD 216 million, an increase of 14% year-on-year while a decline of 2% quarter-on-quarter. The year-on-year increase is in line with business growth and is due to investment in sales and marketing, digitalization, and other business initiatives. The SG&A cost as a percentage of sales was 26.3% and is lower by 340 basis points year-on-year and 230 basis points quarter-on-quarter, due to better operating leverage. The R&D spend for the quarter is INR 498 crores, that is USD 61 million and is at 7.4% of sales. Our R&D efforts are focused towards building a healthy pipeline of new products across our markets, including biosimilar development. The EBITDA for the quarter is INR 2137 crores, that is USD 260 million, and the EBITDA margin is 31.7%. This is largely driven by gross margin expansion and productivity initiatives across the value chain. Our profit before tax for the quarter stood at INR 1846 crores, that is USD 225 million, an increase of 26% year-on-year and 39% over the previous quarter. The 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 jurisdictional mix of earnings. We expect our ETR to be in the range of 24% to 25%. Profit after tax for the quarter stood at INR 1403 crores, that is USD 171 million. Reported EPS for the quarter is INR 84.22. Operating working capital increased by INR 710 crores which is approximately $87 million against March 31, 2023 mainly due to an increase in receivables and inventory. Our capital investment stood at INR 362 crores which is approximately USD 44 million in this quarter. The free cash generated before acquisition-related payout during this quarter was at INR 674 crores which is approximately USD 82 million. Consequently, we now have a net surplus cash of INR 4985 crores, that is USD 608 million, as of June 30, 2023. Foreign currency cash flow hedges in the form of derivatives for the USD are approximately USD 783 million largely hedged around the range of INR 82.7 to INR 84.4 to the dollar. RUB 6775 million at the rate of INR 1.2 to the ruble and AUD 3.7 million at the rate of INR 67.9 to AUD maturing in the next twelve months. With this, I now request Erez to take us through the key business highlights.

Thank you, Parag, and a warm welcome to everyone participating in our earnings call today. As always, we appreciate your interest in our company. We have commenced fiscal 2024 with a robust first quarter performance. Our sales for quarter one grew 29% and EBITDA grew 20%. Riding the strengths of our portfolio and well-diversified geographical spread. Adjusted for settlement income in the current and prior periods and brand divestment in the prior period, our sales for quarter one 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, and we're making considerable progress across our strategic priorities. Let me take you through some of the key highlights of the quarter. One sustained strong revenue growth driven by momentum in the US and Russia markets. Two generating healthy EBITDA at 32% and annualized ROCE at 39%. High cash generation leading to net cash shortcuts of more than $608 million at the end of the quarter, after paying the consideration towards the main portfolio acquisition for the completion of commercial integration activities and launch of many pharmacists acquired generic prescription portfolio. Five received approval for four products in China, including our partner products, since April '23. Six embarked on trade generics in India and launched a dedicated trade generic division. Through this initiative, we will be increasing our participation in retail pharmaceutical markets. Seven entered the child nutrition space in India with the launch of Cellar Healthcare Gummies. Eight biologics license application for purpose biochemical Aritucina candidate DRL_Ri accepted by the US FDA, EMA, and MHRA for review. This is a key milestone in our global biosimilars journey. Nine collaborating with Mark Cuban Cost Plus Drug Company to increase access to essential medication for Wilson disease patients and entering into an in-license agreement with Tenshi Kaisen for the launch of Lorapidine for private label offices. Eleven entered into an agreement with Bill and Melinda Gates Foundation to develop injectable contraceptives for low and middle-income countries in Asia and Sub-Saharan Africa, including India. This initiative will strengthen our portfolio in women's healthcare. Twelve successfully concluding the US FDA inspection of the following four facilities: our API site CTO-1 and CTO-3 at Bolaram. Our formulation site FTU 2, and our API site CTO-6 at Srikakulam. We continue to maintain a state of constant vigilance and compliance at our manufacturing sites. Lastly, we released our first integrated report which webbed together the material aspects of our business and their interplay with our purpose, value, strategy, governance, performance, and outlook. The Financial Times of London named us as the ICF Pacific Climate Leader of 2023. This award appreciates companies that have achieved the greatest reduction in their greenhouse gas emissions intensity and made 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 respective local currencies. Our North America generic business recorded sales of $389 million for the quarter with a strong growth of 69% and a 25% increase on a sequential basis. The growth was bolstered by Lina Dolemide sales. New product launches such as Riga Denson injectable Cyclos Rinse capsules, integration of the main portfolio, and market share expansion in certain existing products more than offset price erosion. We launched eight new products during the quarter and expect the launch momentum to continue during FY '24. Our Euro business recorded sales of EUR 57 million this quarter with year-on-year growth of 13%, while remaining flat sequentially. The growth is attributable to increases in base business volumes and supported by new product launches. We launched ten 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 INR 1155 crores with a strong year-over-year growth of 28% and a sequential increase of 4%. We launched 27 new products during the quarter across various countries in emerging markets. Within the emerging market segment, the Russia business grew by 77% on a year-on-year basis and 7% on a sequential basis in constant currency. The growth is driven by a pickup in allergy season and further aided by a lower base. Our India business recorded sales of INR 1140 crores and reported growth of 14%. Excluding revenue from brand divestments, loss of revenue from the diversified portfolio, and NLEM related price reductions, the business grew in a very high single digit. India remains a priority market, and we are progressing well on our innovation model. We have signed two innovative deals in this quarter and expect this to be an important growth driver in the years ahead. We are creating several growth engines for the India business, including ramping up growth of the existing portfolio, scaling up recently acquired brands, continuous improvement of field productivity, and launching trade generics. Our PCI business recorded sales of $82 million 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 based on increasing volume pickup, launch of new products, and collaboration opportunities. Our R&D efforts are focused on developing value-added products, including several generic injectables and biosimilars where there is a patient need. We have filed for 54 new drug applications in the US during Q1 of FY '24 and we are on track to accelerate this balance in FY '24. We are improving our operations 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 am confident we will continue to grow, strengthen our core business, and build a pipeline of products to shape a healthier world. And with this, I would like to open the floor for questions and answers.

Thank you very much. The first question is from Kunal Damesha from Macquarie. Please go ahead.

Hi, good evening. Thank you for the opportunity and congratulations on the good set of numbers. First, on the US revenue growth. So on a sequential basis, we have seen a significant uptick as well. Would you be able to give us some color as to which were the primary drivers? Was it the acquisition? Was it the Lenalidomide uptake, in order of their quantum, if you can provide, even qualitatively would be very helpful.

Yes. So this quarter we had several growth engines. It's not just that we grew market share in key products; this was, let's say, more than previous quarters. We saw relatively less price erosion than we normally do. We had the main acquisitions contributing to that and Lena. So it's a combination of all of them. Even without Lina, it was a very healthy growth in the US.

Sure. And 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 this reduced price erosion to continue for some time? Or is it more of a transitory phenomenon?

The model hasn't changed. So in terms of price erosion, it's obviously a function of how much competition you have for your baseline on products that did not yet erode to their potential. I believe that in our case we will probably see something similar also in the next coming quarter.

Perfect. Thank you. I have more questions and will join this session.

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

Hi, thank you for the opportunity continuing the US business. You mentioned even without Lena, the base business has grown very well for you sequentially. Can you elaborate a bit more whether you are seeing lots of supply opportunities emerging in the market due to problems at some of the competitors, etc.? And do you believe these opportunities will sustain for the next few quarters? That's my first question?

It's a combination of timing of RFPs and a set of situations that happened to products in which we could supply more, not necessarily supply shortages, but could be service or other supply disruption situations that happened and also activities we did with certain customers. So overall, let's say it's primarily volume-based growth based on agreements that we have with customers.

Do you believe this volume-based growth opportunity will continue at least in the near term?

I believe that the trends will continue.

Yes. Okay. My second question is in your R&D initiative, so biosimilars you mentioned, can you talk about updates in your global portfolio, which is for all the markets where you're focusing?

Biosimilars are a 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 eleven biosimilars as we speak that 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 a place we want to be a serious player.

Sure. And my last question is how do you see your EBITDA margins moving up in the next few years excluding revlimid if you can provide some color on it?

I'm maintaining, and for me, we've been in this discussion in the past, I'm not taking this product out or another product because every year we have those products that contribute more to our performance. I'm still maintaining a long-term average of 25-25, knowing that right now with Lenalidomide, we will probably be above it. But overall, this is the area that I'm still maintaining that we feel very comfortable, that will allow us to fully finance all of our growth aspirations. 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 planning to do. But let's say in the next coming quarters, as long as we have this limited volume agreement in place, it is likely that it will be above the threshold.

Okay, thank you. I'll get back in the queue.

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

Hi, this is Michaela 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.

In Russia, we grew part of it. We have most of our businesses in retail and we are also playing in the biosimilars. In these specific quarters, we enjoyed the seasonality of the allergy as part of it as well as the growth of big brands there. I believe that the growth momentum will continue in Russia. We are expecting a good year. In that respect, we are also, I think so far, hedged well on the ruble and protected it well. The combination of investing in our brands and enjoying the growth momentum that comes from the relevant products that we have, plus a good defense on the global help us to achieve these results.

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

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

Yeah, thanks for the opportunity and congratulations for the great set of numbers. My first question is on this managed portfolio that has been acquired. What is the 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 excluding the Revlimid performance, your base business has seen a sequential improvement. So from that angle, I was just trying to understand the contribution from the acquired operation in the US and its profitability versus the company's blended base business profitability.

Indeed, our base business did well even without Lenalidomide. We closed the deals and practically started to sell at the end of April and we are actually 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 bids and we will be able to bid more. Overall, let's say that the contribution of the main portfolio will be more significant in the next quarters than it can in this quarter.

Okay, so is it kind of still a $100 million annualized high?

Yes, in that range.

Sure. The second question is regarding Lenalidomide. We have almost kind of finished the first year of supply. As per the prescription trends, we see that we have already achieved a 6% volume share now. Is it fair to believe this is the kind of first-year number and we should see a progressive improvement in the volume share going ahead?

We cannot share a specific number on these products. We're in agreements in which volume will be subject to that. I appreciate the question, but I cannot share the full knowledge of the quantities, obviously, and I cannot share that as per our agreement. But what I can say is that these kinds of levels of sales of Lenalidomide are likely to continue and fluctuate from quarter to quarter based on orders and based on customer preferences.

Sure. My last question is about the PSI business. We have seen a sequential correction in the revenue as well as the margins there. You have also mentioned in an opening remark that there is an inventory rationalization trend ongoing. So do you think this is a couple of quarters or more kind of situation? Generally, the APIs and manufacturing supply opportunity kind of business are likely to face this inventory destocking trend and could have an impact on the margins generally in the near term?

During the quarter, we have a certain pickup that is related to timing of picking up the orders primarily. I believe that it will normalize itself relatively fast already from next quarter, from Q2. Overall, I'm confident that our API business will grow this year.

Sure, sir. I have a couple more. I'll join this.

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

Thanks for taking my question. My first question is on the India business. I look at the number that we reported in the fourth quarter and strip out the brand divestment. Based on that, we've seen a pretty sharp increase on that base in the first quarter. 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 first quarter? 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 grow? 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 out in your opening remarks?

The trade generics did not yet contribute much because we just recently launched. Most of the growth happened from our branded generics and our key brands that we are focusing on; these trends likely to continue also progress and actually going to improve the activities I mentioned and we discussed on our journey for top five. It's a combination of both innovation as well as the investment in the portfolio that we have, including the private deals. Most of the deals that we've signed and are going to be signed, we have quite a few deals that are in discussions, is to bring innovation to India. The horizon two that we discussed in the past is all about bringing innovation to India, mostly in licensing, in some product acquisitions, and some potential partnerships with other players. These partnerships will likely have an impact from FY '25, FY '26 onward. FY '24 will be significant by the current branded generics focused brands that we have. Sorry for the long answer.

Yeah, understood. Thank you so much, sir, for that. Second, on your remarks, you also mentioned approvals in China. If I look at my row business, excluding Russia CIS, we have pretty much been in the range that we've been doing for the last four or five quarters, the 400 crore range? When do we see meaningful contribution start from China, or when do we see how does the step up from this level happen in the emerging market business?

Yes, all the EM markets are actually growing in double digits. Obviously, Russia being a very big market in that space, when it's growing, 77% overshadow the others. All of them will grow double digits, not just with Russia as specifically for picking up in China. We are now starting to see the results, or likely that these trends of approvals will continue. Most of the values will start to see if you call it a leap or more significant growth in FY '25, but we will see already in FY '24 a certain growth. However, the level that we have discussed in the past of our aspirations in China; likely that we will start to see for next year.

Understood. And my last question in terms of our investments in the business, should we expect our absolute SG&A and R&D spend to trend up from the current spend that we are seeing for FY '24? I understand this will obviously continue to increase, but is this level of investment, what we have seen in the quarter enough to sort of sustain the growth that we have envisaged, or should I expect an increase from the current levels?

We are continuing to invest behind multiple levers, as we have been talking in digitalization, behind our brands, sales and marketing. I would expect a slightly higher trend in absolute terms, as a percentage of 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 terms, you will see a marginally upward trend.

Thank you so much. The next question is from the line of Cinderella Carvalho from GM Financial. Please go ahead.

Thank you so much for taking my question. And congratulations on a great set of numbers. Bringing a question back to India, you mentioned about the innovative products. Two products that you have signed for India. You mentioned mother and child. You spoke about if and the generic division. So what kind of investment are we envisaging in all these three different categories we are talking about which is consumer health, generic, generic business, and getting the enlightened product? And in what range should we see this over the coming two to three years?

We are not going to see more investment than what you see already. Like Parag said, maybe slide 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 move it. So it's relatively not expensive or not going to require much. And I'll try to explain why most of the stuff that we are bringing to India is late-stage innovation. The product is already there. The product has proven itself in other markets. In most cases, it's got approval already either by the US FDA or by European authorities. The activity that requires either licensing fees, some local trials, 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 the more deals that we will do. But I don't anticipate a major use of cash or cost in that element. It's actually pretty straightforward in that respect.

So the returns will be fairly high is what you're trying to tell with the minimal investments. But in terms of revenue, how should we see these like, if we divide into three segments, how sizable could each segment be for us health, generic, innovative, enlightened? How big could they be from a brand perspective? I understand you have something like INR 150 crore per brand size in your mind over three to four years. But what could it mean to the entire India business?

The intent is to bring a significant number of products to the Indian market in the next coming years if everything will be successful. We are talking about tens of agreements like that which we believe will be the main lever to bring us to top five. If top five means that we need to double ourselves, give or take in the next coming years, that's the expectation that the innovation will bring most of that value into play. The rest will come from the normal growth of the brands that we will have as well as the trade genetics. The innovation will be the key focus and the main growth drivers in terms of timing as we sign the deal. We need to allow some time for clinical trials, registration time and then of course the pickup of the brands as we introduce them to the healthcare community. It will be a pickup of a brand. Each of these brands will take a few years before it will come to its peak sales. But the beauty about it is that these are true innovations. They are not interchangeable and are bringing a real solution for places we believe there is no such solution or the solution where we need much better.

Okay, thank you. And just one last question. We've seen a lot of Dr. Reddy's name in terms of shortages products in the US. Are you seeing some opportunities meaningfully for us over the coming few quarters or are you planning to participate in some of them which could be potentially large for us?

We do from time to time, but to be honest, I don't enjoy when we are growing at the expense of others. I actually want the supply to be there for patients, so whenever it comes we are taking it, but I don't see it as a strategic growth lever. I'm happy to supply if it helps patients, but I wish that all the companies would be able to sell normally and not see this as a goal, but it is coming to us as well from time to time.

Thank you. We have the next question from the line of Tushar Manudhane from Motila LOSPAL Financial Services. Please go ahead.

Yeah, thanks for the opportunity. Particularly on the trade receivables, as I see there has been a good jump of almost INR 400 and INR 450 crores both year-over-year or even quarter over quarter. Is this more or less linked to the North America business and is this more to fill up the channel so the sales could moderate to some extent in the coming quarters?

The increase in receivables is broadly in line with the growth in business and the normal fluctuations that we see depending on the timing of supply and the credit terms. There is nothing unusual, and it's in line with the business growth.

Okay, and secondly. On the overall gross margin, you used to guide for at least in the past before Revlimid in the range of 52% to 55% for the base business, and since the launch of revenue we've seen a good at least 250 to 300 basis points improvement in the gross margin. So if you could just indicate the gross margin guidance for '24?

We can't describe a certain portion of a gross margin 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 launched eight new products, and in the next two or three quarters in this year, we are going to launch more products. So we have to look at the gross margin as a composite. Overall, the drivers of gross margin, as we know, are the price erosion, obviously brings it down, but we are seeing softening of solvent prices, we are seeing softening of phrase waste and so on, and we're also seeing favorable product mix. Overall, I expect our gross margin to range between 56% to 59% in the next few quarters.

Interesting. Just on extending to your launch aspect or other two products, if you would like to call out, which could be interesting launches over the next twelve to fifteen months in North America?

I don't want to call out specifics. We're trying to avoid it because after that we have a lot of discussion on these products. What we can say is that we believe that we can sustain also the level of activities in North America, even post-Lenalidomide, as we have quite a few very high-value products that we can bring to the market.

Thank you. 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 US 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 Lenalidomide in there which is probably skewing things, but it is just your broad guidelines of a more diversified geographic mix. I'm a little also confused with the India strategy because we keep divesting things like Eris Life Sciences or JB Pharma. So how do we get to top five if we keep divesting? 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&A where we acquire assets like our workout deal perhaps a few years back? Right. So there are small so just want to understand your thought process on this.

Thank you so much for the question. Indeed, Lenalidomide might make the US proportion more than before. I would like to reiterate our commitment to the new market being a very important market for us and also reaffirm our aspiration to be in the top five. Now, how should we reach the top five? It's not because we are going to buy number six. I wish I could, but first, it's not available. Second, it's too expensive, and I don't think our shareholders want us to do that. The way to do that for us is by launching innovation. In India, we see that there are two trends that are coming up. One, some branded generics will have headwinds in the future either because of the trade generics or because of the digital channels; there will be certain levels of potential switches. When we looked at our portfolio and we saw what brands we believe are long-term for us, we decided to focus on them and to divest those that we chose not to focus on. At the same time, we have a major effort to bring a lot of innovative solutions to the market. Once this picks up, it will bring us to the desired level. Even without acquisitions, I am happy to do with a reasonable price and reasonable risk, but we are not building on it. We can be top five even without.

Got it. Helpful. My second question is on the cash pile. About $50 billion of net cash is sitting on the balance sheet. What are your top priorities in terms of capital allocation at this point in time? What is the rank of things that you would be using that cash pile for?

We want to use it for driving business development. M&A, I think in terms of priority, it has to be a strategic fit first. We have a clear strategy for every segment in our business, for every geography. Secondly, it must come at the right price. 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 would probably rank higher. Having said that, if there are good opportunities that come up in the US or Europe, we will grab them, like the main acquisition we did recently; I think it's a great fit. Instead of seeing a large acquisition, we will probably see a series of smaller acquisitions, a string of false strategy, but it depends on what kind of opportunities are available at the right price.

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

Hi, thanks. If you can talk about what's the revenue base in China currently? You mentioned about the significant growth from FY '25 onwards. I understand you're getting, like, 10 to 15 approvals per year now. So, from a three-year perspective, with 30 to 40 products added to your basket in China, how should we think about revenue in China in three years' time? How does per product revenue potential you see in China versus, let's say, in the US? Can it be like $200, $300 million more in revenues in China? If you could give some color on how we should think about the growth trajectory in that market?

I see any number around 2X in the next three years. This is the time frame we are talking about, but I'm talking about market sales, not necessarily the way we report, which is around $180 million a year.

Okay, so it means like additional $180 million is what you would book?

Let's say three years down the line is a fair number to look at in China. It's in this range could be even more.

Understood. Okay. My second question would be around R&D. I think you mentioned a run rate of around 500 crores a quarter, right? Is it possible for you to sort of indicate how much of this is going into, say, biosimilar development at this point? And secondly, at the time of the analyst day, you talked about new Horizon initiative, Horizon Two initiatives having an impact of 1500 basis points on your EBITDA margin. That's the kind of investment you are doing. So what's the number at this point in time? If you have anything to share on that?

On the second question right now, we are in the range of 5200 basis points on an annual basis is what we are investing behind Horizon Two. Of course, going forward, depending on how many of these succeed, it might start inching up. But we'll obviously discuss that subsequently in the subsequent call. Your first question was regarding biosimilars. Right now, our R&D behind biosimilars would be approximately 20% of the total, and we expect it to progressively go up as we are investing behind biosimilars. Some of the products that you've discussed in the past tosi and facility map about accept and so on. We expect it to progressively go up. This 5200 basis points does not include the R&D investment in biosimilars.

Thank you. The next question is from the line of Binopati Parampil from Ilara Capital. Please go ahead.

Hi, good evening and congrats on a great set of numbers. Just a couple of questions. One on Regdenison. Could you please help us understand the competitive landscape there? I know a couple of you guys have launched, but there are more approvals. How many competitors are there in the market right now?

For Regdenison, 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, and any update on your products which you have out-licensed, that is Peg, Phil Grassim and the novel product E Seven. Any update regarding timelines?

The first one was already launched, whatever are the considerations will come, of course, with the progression of the share of this product, and for equal seven, likely that in the next quarter or the third quarter, depends; it will be December, January. We should expect to see whether it will get approval or not.

Okay. Any milestones or any royalties included in the current quarter from the first product?

No. Sorry. It's a low single-digit number in absolute terms.

Okay. It's not material. And finally, on generic map, now that Fe 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 twelve months, eighteen months, or something like that?

Yes, this is the timeline, somewhere between twelve to eighteen months. It depends, of course, on the approval by the US FDA. Once it is approved, we will launch it. Now, it depends if a response letter will come or anything like this, but likely in that time.

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

Thank you, sir, for providing me the opportunity and congrats for a good set of numbers. This is an extension of the question that our base business is improving. From the number that the base business in the US market has improved a lot, can we say, a high single-digit growth Q1 Q in the base business?

I mentioned part of it is the timing of RFPs, agreements with customers, shortages of some products, and relatively lower than normal price erosion on the base. It's a combination of all of it.

Can we expect this trend to continue?

It should, yes. So this quarter, there's high single-digit growth Q-on-Q on the base business. I would just say that it is healthy growth. Even after excluding Lina, as well as the main, it is healthy growth.

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

Just coming back to the licensing opportunities for the India market or the innovation that we have talked about, how do those opportunities fit into our 25-25% framework for EBITDA margin and ROCE? Are they accretive, neutral, or would you say diluted?

That's absolutely part of it. So we should reach those margins with the investment. It means it's included. That's why right now we have debt, and we have even higher margins than debt. I use 25 as a benchmark for our comfort zone. It doesn't mean that we will get it every quarter. Likely that in the next couple of quarters it will be higher than that, including that investment. The 25% is for the entire portfolio across all geographies. So there are business segments that will be higher and lower than that. This model includes a certain part of the portfolio which will be enlightened.

Sure. Perfect. And secondly, on the trade generic business, can you provide some details as to how we have launched this division? How many people have we hired for this? How many products are we expected to launch, let's say, over the next two to three years, and which geographies are we targeting, or are there any particular therapy areas that we are targeting for this business?

We are not participating in about 50% of the Indian markets. When you look at our portfolio today, there are certain therapies and segments that we are not participating in, which is about half of the market. We are targeting, obviously, places where we believe there is meaningful play in those areas that we are not currently participating in. We will launch it all over India. Geographically wise, it will be in all the states of India. In terms of the number of products that will be launched, I don't have the exact number, but it's a few tens of products that will be launched in that direction. As for the pickup and stuff, we probably need to see the response of the customers to that at the moment. We can offer; we probably need to wait a quarter.

Thank you. That was our last question, ladies and gentlemen. I now hand the conference over to Ms. Richa Periwal for closing comments.

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. Thank you on behalf of Dr. Reddy's Laboratories Limited. That concludes this conference. Thank you for joining us. You may now disconnect your lines.