Dr Reddys Laboratories Ltd Q2 FY2024 Earnings Call

Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Q2 FY '24 Earnings Conference Call. Please note that this conference is being recorded. I now hand the conference over to Ms. Richa Periwal. Thank you, and over to you, ma'am.

Thank you. 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 September 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 a copyrighted material of Dr. Reddy's and cannot be rebroadcasted or attributed in press or media outlet 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, and a warm welcome to our quarter 2 FY 2024 earnings call, and thank you to everyone joining today. We have built on our positive momentum and delivered another strong quarter of financial results with higher sales and record profitability. In the financial overview section that I will cover today, all the amounts are translated into U.S. dollars at a convenience translation rate of INR 83.08, which is the rate as of 30th September 2023. Consolidated revenues for the quarter stood at INR 6,880 crores, that is USD 828 million and grew by 9% on a year-on-year basis and by 2% on a sequential basis. The growth was driven by the generics business, mainly in the U.S. and Europe. Consolidated gross profit margin for this quarter has been 58.7%, a decrease of around 40 basis points over the previous year and broadly flat sequentially. Gross margin for the Global Generics and PSAI business were 63.6% and 17.8%, respectively. The SG&A spend for the quarter is INR 1,880 crores, which is USD 226 million, an increase of 13% year-on-year and an increase of 6% quarter-on-quarter. The year-on-year increase is primarily on account of investments in sales and marketing, digitalization and other business initiatives. The SG&A cost as a percentage to sales was 27.3% and is marginally higher by 106 basis points year-on-year and 105 basis points quarter-on-quarter. The R&D spend for the quarter is INR 545 crores, that is USD 66 million and is at 7.9% of sales. Our R&D investments are driven by ongoing clinical trials on differentiated assets as well as other developmental efforts to build a healthy pipeline of new products across our markets for both small molecules and biosimilars. The EBITDA for the quarter is INR 2,181 crores, that is USD 263 million, and the EBITDA margin is 31.7%. Our profit before tax for the quarter stood at INR 1,913 crores, that is USD 230 million, an increase of 19% year-on-year and 4% over the previous quarter. The net finance income for the quarter is INR 123 crores. The effective tax rate has been at 22.6% for the quarter. The effective tax rate was lower than the previous year's mainly due to the adoption of corporate tax rates under Section 115BAA of the Income Tax Act of India. We expect our normal ETR for the year to be in the range of 24% to 25%. Profit after tax for the quarter stood at INR 1,480 crores, that is USD 178 million. Reported EPS for the quarter is INR 88.8. Operating working capital reduced by INR 598 crores, which is USD 72 million against that on June 30, 2023, mainly due to a decrease in receivables. Our capital investment stood at INR 322 crores, which is USD 39 million in the quarter. The free cash flow generated before acquisition-related payout during this quarter was at INR 1,447 crores, which is USD 174 million. Consequently, we now have a net surplus cash of INR 5,906 crores, which is USD 711 million as of September 30, 2023. Foreign currency cash flow hedges in the form of derivatives for the U.S. dollar are approximately USD 648 million, largely held around the range of INR 82.9 to INR 84.5 to the dollar, RUB 2,475 million at the rate of INR 0.98 to ruble and AUD 2.7 million at the rate of INR 58.06 to Australian dollar maturing in the next 12 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 are pleased to report the quarter with the highest revenue, EBITDA, profit before tax, and profit after tax. We saw growing momentum in our products and businesses. Our geographic diversification and productivity improvement in operations enabled operating margin delivery. We continued strategic progress on our various key initiatives to ensure that we are well-positioned for differentiated and competitive goals. Let me take you through some of the key highlights of the quarter. Sales for quarter 2 grew 9% and EBITDA grew by 30%, reflecting the portfolio's trends and continued momentum in the U.S. and Europe. We generated healthy EBITDA at 32% and annualized ROCE at 39%. High cash generation leading to net cash surplus of more than $712 million at the end of the quarter. A few developments in our global biosimilar journey in the quarter include receiving a GMP certificate indicating closure of inspection by the UK MHRA for the Bachupally biologics facility. A pre-approval inspection by the U.S. FDA of our biologics facility based in Bachupally concluded with 9 observations. We will address them within this stipulated timeline. The CAR-T asset ‘DRL-1801’ was approved for clinical trials in India. The leading financial publication Financial Express and ECube in a joint study has named Dr. Reddy's as the leading company in ESG in India across sectors. The company received SA8000, a multi-site certification which includes 6 CTO units and 10 formulation units in biologics. And has been successfully audited and awarded compliance with ISO 20400:2017. This demonstrates our organization's commitment to our social goals and accountability. We were conferred with the prestigious Golden Peacock Award for Excellence in Corporate Governance of 2022. Now let me take you through the key business highlights for the quarter. Please note that all references to these numbers in this section are representative local currencies. Our North America generics business recorded sales of $384 million for the quarter with strong year-on-year growth of 9%, while being broadly flat on a sequential basis. The growth was supported by market share expansion in certain existing key products and the complete integration of the main portfolio, which more than offset price erosion. We launched 4 new products during the quarter. Our Europe business recorded sales of EUR 59 million this quarter with a year-on-year growth of 12% and sequential increase of 4%. The contribution from new product launches and improvement in base business volumes more than offset price erosion. We launched a total of 20 products across markets during this quarter. Our emerging markets business recorded sales of INR 1,016 crores, a marginal year-on-year decline of 1% and sequential increase of 5% primarily impacted by seasonality and unfavorable products. While we may experience quarter-on-quarter volatility, full year outlook is on track. We launched 32 new products during the quarter across various countries in the emerging markets. Within the emerging markets segment, the Russia business grew by 4% on a year-on-year basis and 9% on a sequential basis in constant currency. Our India business recorded sales of INR 1,186 crores and reported year-on-year growth of 3% and sequential increase of 3%. Excluding loss of revenues from NLEM-related price reduction, India business grew in mid-single digits. Our focus on profitable growth coupled with sales and marketing execution has led to gradual improvement in business performance. We further made strides to access new growth levers and drive differentiation. We signed a new licensing deal with Hengrui for Pyrotinib. We launched Nerivio in India, our first digital therapeutic product addressing the unmet needs of migraine patients. We launched a direct-to-consumer platform Celevidawellness.com to serve the needs of diabetic patients in India. India remains our priority market and we'll continue to strengthen our presence in the generic business while investing and building innovation spaces. Our PSAI business recorded sales of $85 million with year-on-year growth of 8% and sequential increase of 4%. We expect sales to improve over the next couple of quarters on the back of increasing volume pickup and strategic collaboration with regional and global players. We invested 7.9% of our revenue to empower and enhance our R&D competency. Our focus on developing value-accretive products, including several generic injectable biosimilars where there is a significant patient need. We have done 6 global generic filings including 12 ANDAs and 1 NDA filing in the United States during quarter 2 of FY' 24 and are on track to accelerate this in the remaining part of FY '24. We remain focused on building best-in-class capabilities and commercial infrastructure to leverage our portfolio to expand further. Our ability to adapt strong execution in financial matters will enable us to grow our core business and build a pipeline of products to meet patient needs. I'm pleased with the progress that we have made so far this year and that we have a clear plan in place to move forward at a pace to deliver on our key objectives and support the overall growth ambitions of the company. With this, I would like to open the floor for questions and answers.

The first question is from Balaji Prasad from Barclays.

This is Mikaela on for Balaji. Given India remains a priority market for you, could you just provide an outlook on your Indian market? And just elaborate a bit more on the evolution in India focus?

So the main focus is and the main effort is actually licensing and collaborating with partners to bring innovation to India. This is the most important initiative that we have for India. In addition to that, we identify a focused portfolio in which we are growing. And indeed, by the way, this focused portfolio is growing very, very nicely. The overall performance of the portfolio that we have today is growing in mid-single digits. Part of it is also because as per the plans, we have obviously seen most that we have price erosion as expected when required if it meets our expectations from a business case, but naturally has contributed also to this decline. If you look at the portfolio that we are focusing on, it is actually growing double digits. And luckily, that's what you're going to see for quarter-over-quarter that we are actually improving our performance.

Great. And just one follow-up, if I can. What kind of innovations in therapeutic areas are you targeting? And just how willing are partners to launch in India when you approach them about these deals?

There is actually enthusiasm around India, which everyone recognizes as an important country. However, there are ongoing concerns about the pricing, adoption rates, and specific requirements for localizing the product, including local production, trials, or different positioning. Overall, people acknowledge India as a significant market and want to establish a presence there, particularly with reputable companies like ours. Sorry, I lost track of the first part of the question.

Just what kind of innovations and therapeutic areas specifically are you targeting?

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

The next question is from the line of Kunal Dhamesha from Macquarie.

So the first one on the 9 observations for the biologic plant that we have received. Can you please elaborate what is the nature of these observations? And whether we need to undertake some corrective preventive actions there?

I believe that those observations are addressable. We are going to address all of them in the beginning of November. Some of them will require us to create a CAPA, which means according to the procedures, the product success until the time, in order to show certain consistency of data, which will take us to January. But overall, I believe that this is addressable.

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

I don't see a decline in the API like there was in previous years. Most of the growth is coming from new products and launches that customers are likely to initiate for API or PSAI business. We are currently selling API that will support them in the coming quarters. What we see now is the impact of the new portfolio we have developed over the past few years, which is replacing the older portfolio from a decade ago. As time goes on, we will continue to launch more of these products and you will see an acceleration in growth as a result.

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

As we increase sales, we typically see an improvement in gross margins because we have a higher level of fixed costs. Therefore, as we grow, our margins also expand. This is what we expect to occur.

To clarify, the gross margin for this business, we have reported as 18% during the quarter, not 13%.

Okay. Sure. I'll check. Yes. And then lastly, we have mentioned price erosion in the U.S. as a growth drag at least on a quarter-on-quarter basis, perhaps. Now this price erosion in this quarter is limited to a few large products such as vasopressin, or is it more broad-based price erosion that you are witnessing?

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

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

Yes, absolutely. Absolutely, the focus in the U.S. on continuity, service, and sustainability of supply. Absolutely.

The next question is from the line of Neha Manpuria from Bank of America.

First on the main acquisition. When we announced this acquisition, it had a revenue rate of about $65 million, $70-odd million. Post clearly 5, 6 months of integration into the Reddy's portfolio, have you seen traction in terms of our ability to gain more volume in the product because we don't see that in products like NuvaRing, which is stuck in that 2%, 3% market share? Or how should we look at the acquired portfolio going forward?

Each product has a different timeline for when customers are issuing their requests for proposals or starting discussions. I believe that growth will occur and volumes will increase as these timelines progress. Most discussions are expected to happen in the latter half of the year. So far, I am satisfied with this deal as it is meeting our expectations, and we are likely to see growth in the next two quarters.

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

Timing of the discussions with customers.

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

We are likely to see results this fiscal year. In terms of innovation, we are currently launching deals that we signed a year ago, which typically takes about 12 to 18 months from signing to product approval due to the necessary regulatory processes. In some cases, this may involve clinical trials, which can further extend the timeline. Our main focus right now is on building our portfolio in India, where we aim to introduce products that will either meet or exceed the current standard of care. Additionally, the businesses and products we are concentrating on in India are experiencing double-digit growth and are expected to become increasingly dominant in the future.

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

I believe that at the end of the year, we should see double-digit growth and continue in the quarters afterwards.

And how many of the licensing deals have been completed in India so far? Just to get a broad sense? And is there any monetary value that we can attach to this as the potential market opportunity or market size of these deals?

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

The next question is from the line of Saion Mukherjee from Nomura.

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

We submitted it in April and recently received the preapproval inspection. We plan to respond by November and are optimistic that everything will stay on track. If all goes well, we anticipate launching it at the beginning of fiscal year 2025.

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

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

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

Sure. So this year, we are still on track with the 25 to 30 launches. And we have identified a group of between 25 to 30 products that are material that will be launched in FY '25, FY '26, and FY '27.

How many of the 25 products you're saying across these 3 years?

25 to 30 because there's some uncertainty about the time of approval. So that's what we can guide.

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

It has to be at least in the single digits in millions of dollars of sales.

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

Congratulations on a good set of numbers. So first, clarification about the government grants. So in fact, in the previous year, we have seen something around INR 300-odd crores, in the first half it is more than INR 200 crores that we have already booked. So what is the visibility here? And how long this can sustain? And this is relating to the PLI only or something else?

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

But this is sustainable, sir?

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

Okay, fine. My second question is about the sustainability of the U.S. business. So basically, having seen the run rate of around $380 million, $390 million kind of quarterly run rate. And kind of the ramp-up we have witnessed in case of our agreement. So can we see a kind of progressive performance in the overall U.S. business going ahead? I'm saying progressive because I believe in terms of the volume limit condition, whatever that is there in case of their limit, every 12 months that should see a kind of upward move. So considering that, how should we see the U.S. business going ahead in terms of the quarterly run rate and all that?

The quarters can fluctuate. We discussed it in the past because the quarter very much depends on the ordering patterns of this program. But overall, you should see growth.

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

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

Since we are now seeing progress from a regulatory perspective as well as regarding the launch of biosimilars, could you provide an update on the success of pegfilgrastim in both the U.S. and international markets? Also, could you share some insights on the current annual or quarterly run rate for biosimilars? That would be very helpful.

So just to remind, peg is not our product. It is a product that was part of the arrangement that was done many years ago with Merck Serono, after that was brought to Fresenius. So they are selling it, and we are getting only royalties, so by design, it's not a big amount. Most of our activities in the biosimilars today are in emerging markets, primarily rituximab and, in fact, other products, so India, Russia, and other emerging markets. We are ramping up that activity; it is very important to us. We are going to have in the next 2 years or so, about 5 Phase 3 of biosimilars to be launched globally, including in the United States. And the main ramp-up in biosimilars for us will be probably from FY '27 onwards.

Okay. Okay. Just last one question, sir. See, in fact, obviously, there is a strong cash flow that we have been seeing also supported by REVLIMID, but whatever the case be, we have been seeing a quarterly run rate of, let's say, INR 1,500 crores kind of free cash flow. And already, we have a INR 6,000-odd-crores kind of cash in books. So could you give some sense of what incremental growth this fund can add to the overall visibility of our growth for the next, let's say, next 1 or 2 years or over a period of 3 years?

We can use this money for deals, depending on the type of deals we want and the multiples involved. I hope I understood the question correctly. Our primary focus for this money is on inorganic activities, which can benefit us in the short term, as we did with Mayne, and also in the long term, such as acquiring assets or products for future launches. This will be the main use of the funds and should help generate growth. However, the timing is uncertain, as we do not yet know the specifics of the deals or when they will have an impact.

The main purpose of this funding is primarily for inorganic activities, which can benefit us in the short term, similar to what we did with Mayne, as well as in the long term by acquiring assets or products that we can launch in the future. This is certainly the primary use of the funds and is expected to help us achieve growth. However, the timing of these activities is uncertain, as we cannot predict the nature of the deal and when it will affect us.

The question is on our diabetic portfolio. So if you can talk about how well are we placed as a company to take the advantage of the upcoming GLP-1 opportunity that is coming? So I believe you have some FDA filings in that. So in terms of launch readiness, are we ready? Whenever the expiry happens, we'll be there? And do you think this product category can be like a $300 million to $500 million kind of category for the next 5 years?

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

And in terms of the important dosages, are we present in all of them, and if you can talk about the same?

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

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

We are ready.

The next question is from Tushar Manudhane from Motilal Oswal Financial Services.

Just on this e-commerce foray, I would like to understand what is the strategy behind it, what kind of investment are we thinking in this particular foray?

Investment of what, sorry? In e-commerce? It's not a big investment, but it allows us an additional channel for our products as well as other nutraceuticals. And I believe that it's very nice and other channels and another part of the capabilities that we have now in India. That is not a big investment.

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

The specific platform is direct to consumer that you mentioned, which means nutraceuticals and products that do not require a prescription, OTC.

And sir, secondly, just on the trade receivables, there have been reasonable reductions if I compare quarter-over-quarter. Any read-through over there?

Sorry, Tushar, your voice is not clear. Can you repeat that question?

Is it better?

Yes.

There has been good reduction in the trade receivables quarter-over-quarter, any read-through over there?

It's normal. There's nothing unusual. I think it depends on the credit period, the cycle and the receipt of orders. So we obviously keep a very tight track of all our receivables and collect on time. So nothing unusual in this, yes.

The next question is from an individual investor.

Sir, are we looking at any 505(b)(2) opportunities in the U.S. market?

Sorry, which opportunities in the U.S. market?

505(b)(2) opportunities.

For which product, sorry?

General.

So 505(b)(2) that requires sales force, we will not do. 505(b)(2) that is interchangeable, we would love to do.

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

What is there?

We are observing stable trends in price erosion. Over the past few quarters, we have noticed a moderation in price erosion, which is now at a consistent level. However, it will usually fluctuate between high single digits and low double digits from one quarter to the next.

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

We are not building on that.

Or it will be product specific?

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

Yes, whenever there's an opportunity, it's opportunistic rather than strategic.

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

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

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

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

I don't feel there is a need to expand our team at the moment; it's more about how productive the team is and the level of coverage we achieve. It's not really about the number of people, but if we find that we need more, we will increase our headcount.

Okay. I think this question was already discussed. So India, despite many efforts from your end, we have been seeing sales largely remain range-bound somewhere say $12 billion a quarter or so. So when can we see a significant step-up coming up? So any timeline, if you can indicate because I guess for the last 6 to 8 quarters, sales were broadly in this range.

I believe you will see an improvement this year. We made two key decisions regarding India. First, we chose to focus our efforts and divested several brands to streamline our portfolio. We do not think that the upcoming changes and challenges in the generics and branded drugs sector in India will hinder our plan's success, and we believe this was a smart move. Second, we acquired a brand called Cidmus, aware that we would likely face price erosion, but it aligned with our business strategy. I feel confident that the brands we are concentrating on are already experiencing double-digit growth, and we plan to introduce more innovations and collaborations. This year, you will begin to see results, and as we expand our product offerings, our growth will continue. India is a key strategic market for us, and we are committed to its growth.

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

We are making progress in China, particularly since April, with an increasing number of approvals. We have received four approvals so far and an additional two this month, totaling six. We are also filing more than 15 products annually, and we could potentially reach 18 if all goes well. Most of our products are among the first wave and typically within the top three. This is an exciting area for us in China. Initially, we believed the ramp-up would happen sooner than I previously mentioned, but due to COVID and our execution, it has been delayed. However, we are now starting to see positive results.

So with this portfolio buildup, should we assume China portfolio could start contributing meaningfully from next fiscal? Or it will be a bit long-term in nature?

No, no, for next fiscal absolutely.

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

It is expected to grow because we are increasingly investing in biosimilars. We will also keep investing in new molecules, which will direct growth. Additionally, sales are projected to increase. In terms of percentage, it should be around the range we are currently seeing, possibly a bit higher.

The next question is from the line of Gagan Thareja from ASK Investment Managers.

I hope I'm audible?

Yes, you're audible, sir.

So the first question is on the India business. If you knock out the discontinued products from this quarter 1 of 2Q of FY '23...

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

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

I cannot discuss the quantities of REVLIMID.

I don't want you to enumerate the number. I'm just asking, would it be a reasonable assumption or inference that there wouldn't have been a material change in the REVLIMID sales from the first quarter to the second?

Most of the growth, like Erez said earlier, has come from the base business and also the main portfolio.

Okay, right. And India, is it a correct surmise that you're saying that India you'll exit FY '24 with a double-digit sort of growth rate, that's Q4 you'll be able to do a double-digit sort of growth rate. And you will probably be improving from 2Q to 3Q and from 3Q to 4Q. Is that a correct inference?

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

Next question is from the line of Saion Mukherjee from Nomura.

My question is about the inorganic activities you mentioned. The cash balance is substantial and may continue to increase. The acquisitions and deals you've made so far are relatively small. So, are you considering larger deals moving forward? Is there increased activity in the M&A space? Additionally, what level of leverage would your company be comfortable with?

So we are looking for all deals, small and bigger than usual for us as needed, but we are not in rush. It has to be a good deal. It has to be something that will match our strategy, something that we believe can contribute to our growth. Is there products that we want or capability that we are missing? We are not in a rush to spend this money. In that respect, also the money is yielding very nicely now by investing it. We are, as we speak, participating in quite a few processes and we'll see what will yield. Likely that we will spend eventually this money. But it's important for us that it will be the right strategic deal for us. We are not looking for transformative deals. We are looking for complementary activities for our organic strategy.

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

I would say that we would be willing to pursue a valuation of 2x EBITDA. Beyond that, we would prefer not to take on additional financial risk.

The next question is from the line of Neha Manpuria from Bank of America.

Parag sir, on the SG&A expense, that seems to have inched up quarter-on-quarter. I just wanted to get a sense of where we are investing? And how should we look at that number over the next few quarters and probably FY '25?

Overall, Neha, the increase in SG&A year-on-year has been 13%. This rise is primarily due to investments in our brands and digitalization efforts. I have discussed our initiatives in digitalization extensively, both at the front end and in R&D and manufacturing facilities. Last year, we were recognized as a Digital Lighthouse and are now working to certify more facilities as such, as we believe this digitalization will significantly impact quality, reduce quality incidents, and improve productivity and costs in the medium term. These are the areas where we are focusing our investments. While there may be fluctuations in SG&A quarter-on-quarter, last year it was approximately 30% to 31%. We have gradually decreased it to around 29% to 28%. I won’t provide specifics on quarter-on-quarter changes, but for the full year, I would anticipate staying within that range.

The next question is from the line of Kunal Dhamesha from Macquarie.

So the first one on the in-licensing innovation deals that we are doing for India. Can you highlight what is the typical payback period for these kinds of deals?

So normally, the payout is very good because we hardly put down payments for that. So most of the deals have very small down payments. And normally, we are getting healthy margins that enable us to buy a transfer plus investment. So normally, the payout will be within the first 3 years, taking into account the time that it takes to build a brand. So most of the investments are actually not because of the payout to the partner but rather the investment in building brands in a country like India, which normally takes about 3 years.

Sure. For markets like India, are these deals structured more on a profit share basis by some of these innovators, or are they more inclined to seek an upfront payment followed by some royalties?

So most of the deals will be certain milestones and some royalties, and giving us the flexibility to market it in places we want and with the right mix of SG&A. So that normally will be the case, but we will also have cases in which it will be a profit sharing.

Sure. And second question on the biosimilar business now that we are kind of close to launching our first biosimilar in the U.S., probably somewhere in FY '25. What type of front-end investment would we be looking for, for sales force or the formulary access personnel? And how much drag it could be on our SG&A?

So the product that will be launched, rituximab that will be launched in the U.S. will not be launched by us. So this is a sales force that is with our partner. The products that we will launch will be from FY '27 onwards. And for that, we will have to build the sales force.

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

Sir, just one clarification I wanted to have. In terms of the margin profile, let's say, for India business and the base U.S. business, let's say, excluding REVLIMID. So what could be the differential in terms of the margin profile of these two businesses?

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

Okay. And even that Russia would be similar to India or slightly lower than India?

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

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

No, I'm not ranking the market. So I'm just pointing out that both Russia and India are branded generics markets, and therefore, their margin profile is better than the unbranded businesses in U.S. and Europe.

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

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

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