Ladies and gentlemen, good day, and welcome to the Quarter Two FY 2025 Earnings Conference Call of Dr. Reddy's Laboratories Limited. As a reminder, all participants' lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Please note that this conference is being recorded. I now hand the conference over to Mr. 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 Q2 FY 2025 earnings conference call. We have with us the leadership team of Dr. Reddy's comprising Mr. Erez Israeli, our CEO; Mr. MV Narasimham, our CFO, who will be formally called as MVN, and the Investor Relations team. Earlier during the day, we released our results, and the same is also posted on our website. We kick off today's call with MVN taking us through the financial highlights of the quarter. This will be followed by Erez, sharing his thoughts on the operating environment and business performance, after which we will open the forum for Q&A. 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. This call is being recorded, and the playback and transcript shall be made available on our website soon. All discussions and analysis of this call will be based on the IFRS consolidated financial statement. The discussion today contains certain non-GAAP financial measures or a reconciliation of GAAP to non-GAAP measures; please refer to our press release. 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 MVN.

Thank you, Richa. A very warm welcome to all. It is my pleasure to interact with you for the first time and present results for Q2 FY 2025. We delivered a strong performance this quarter with broad-based top line growth and healthy operating margin, resulting in our highest quarterly sales to date. As you all know, we completed the acquisition of the NRT portfolio with an upfront cash consideration of $458 million. We also completed the transaction with Nestlé India on August 1, and all business activities of the nutraceuticals portfolio are now being carried out through our subsidiary, Dr. Reddy's Nestlé Health Science Limited. Following the completion, Nestlé India was allocated shares of the subsidiary, representing a 49% stake. We have also recently completed five one-stop clicks following the approval from the Board and the shareholders. Let's now take a look at the financial performance of the quarter. Consolidated revenues for the quarter stood at INR 8,016 crores, which is US$957 million, and it grew by 17% on a year-over-year basis and 4% sequentially. All markets contributed to this quarter's year-over-year growth. Consolidated gross profit margin stood at 59.6% for the quarter, an increase of 92 basis points over the same quarter of the previous year and a decrease of 81 basis points sequentially. The year-over-year increase was primarily a result of an improved product mix and manufacturing efficiencies, partially offset by marginal price erosion in the generic market. Gross margin for Global Generics and PSAI were at 63% and 30% respectively. The SG&A spend for the quarter was INR 2,301 crores, which is US$275 million, an increase of 20% year-over-year and 1% on a Q-o-Q basis. The year-over-year increase was primarily due to investments in new business initiatives, building capabilities, higher freight costs, annual merit increases, and certain one-time costs related to the acquisition of NRT brands. The revenue spend as a percentage of sales was 28.7%, which is higher by 138 basis points year-over-year and lower by 87 basis points Q-o-Q. Excluding the one-time acquisition-related costs, SG&A spend was at 28.1% of sales. We expect SG&A to be in the range of 27.5% to 28% for the full fiscal. The R&D spent for the quarter was INR 727 crores, which is US$87 million, an increase of 33% year-over-year and 17% Q-o-Q. We are developing a robust pipeline of small molecules, biosimilars, and quality assets through internal and cooperative efforts to drive future growth. The R&D spend as a percentage of sales was 9.1%, which was higher by 115 basis points year-over-year and 100 basis points Q-o-Q. We expect R&D to be in the range of 8.5% to 9% for the full fiscal. The other operating income for the quarter was INR 98 crores, lower than INR 180 crores last year due to one-time product-related settlement income in the United Kingdom in the same quarter of the previous fiscal. The EBITDA for the quarter was INR 2,280 crores, which is US$272 million, an increase of 5% year-over-year and 6% Q-o-Q. The EBITDA margin stood at 28.4% of sales, which was lower by 326 basis points year-over-year and higher by 30 basis points Q-o-Q. Excluding the one-time acquisition-related costs, the underlying EBITDA margin stood at 29.1% of sales. There was an impairment loss of INR 92 crores on intangibles related to a product in the main portfolio that was facing procurement constraints from its contract manufacturers. The net finance income for the quarter was INR 156 crores, compared to INR 123 crores for the same quarter last year. Profit before tax for the quarter stood at INR 1,917 crores, which is US$229 million. PBT as a percentage of revenue was 3.9% excluding the one-time acquisition-related costs and the impairment charge mentioned earlier. The underlying PBT margin stood at 25.7% of revenues. The effective tax rate for the quarter was at 30%. Pursuant to the amendments in the Finance Act 2024, which resulted in the withdrawal of indexation benefit, the company reversed a deferred tax asset of INR 48 crores created in an earlier period on land. Excluding the impact of this one-time reversal, adjusted ETR for the quarter on the underlying PBT is 25.9%. We expect our normalized ETR to be around 25% for the fiscal. Profit after tax, but before minority interest for the quarter stood at INR 1,342 crores, which is US$160 million. The tax margin was at 16.7% of revenues. The non-controlling interest share of profit after tax for the quarter was INR 86 crores. This primarily includes the share of one-time deferred tax assets recognized upon the transfer of Dr. Reddy's nutraceutical branch to the subsidiary. Profit after tax, excluding the non-controlling interest for the quarter stood at INR 1,255 crores, which is US$150 million. This is at 15.7% of revenue. Excluding the one-time acquisition-related costs, the impairment charge, tax reversal, and non-controlling interest share as indicated earlier, the underlying tax margin stood at 90% of revenues. Reported EPS was INR 15.04, derived on the increased number of shares post-stock split and after subtracting non-controlling interest. Operating working capital as of September 30, 2024, was INR 12,066 crores, which is US$1,441 million, an increase of INR 511 crores, which is US$61 million over June 30, 2024. CapEx cash outflow for the quarter stood at INR 735 crores, which is US$88 million. The free cash flow generated during this quarter was INR 204 crores, which is US$24 million. Post-acquisition-related upfront payout, we have a net cash surplus of INR 1,889 crores, which is US$226 million as of September 30, 2024. Foreign currency cash flow hedges in the form of derivatives are as follows: US$693 million hedge through structured derivatives around the rate of INR 83.9 to INR 84.1 to the dollar, maturing over 12 months, which allows participation when the USD strengthens; and rubles 5,290 million with the minimum production rate of INR 0.905 to the rubles, maturing in the next six months. With this, I now request Erez to take us through the key business highlights.

Thank you, MVN, and very good morning, or good evening to everyone who is on the call. Thank you for joining us this time. Our gross momentum continued in Q2 FY 2025 across all markets. It's translating into yet another quarter of highest-ever revenues and operating profits. The quarter witnessed two milestones in our journey towards building new businesses. Our venture with Nestlé for nutraceutical products in India was operationalized in August. We also completed the acquisition of Nicotinell and related brands in the nicotine replacement therapy category in September. We continue to strengthen our presence in existing spaces by building best-in-class capabilities and commercial infrastructure to leverage our portfolio globally and drive operational efficiencies. We remain focused on our core businesses of generics and APIs while also investing in our pipeline as well as growth drivers of the future in line with our stated strategy. Let me take you through some of the other key highlights for the quarter. Firstly, we achieved double-digit growth in revenues in Q2, with year-over-year growth of 17%, while both reported EBITDA margins and annualized ROCE were over 28%. Adjusting for one-time expenses related to the NRT acquisitions, the EBITDA margins were higher at 29.1%. We had a net cash surplus of $226 million, after making an upward payment of £458 million to the recently acquired NRT portfolio. Our subsidiary, Aurigene Oncology, announced promising results of a Phase I study for India's first trial for novel autologous CAR-T cell therapy for multiple myeloma. Additionally, the US FDA approved the IND for AUR-112, an asset developed by Aurigene Oncology for the treatment of lymphoid malignancies. We have secured marketing authorization from the European Commission for rituximab biosimilars, our first EMA in Europe. We recently entered into a licensing agreement with Gilead Sciences to manufacture and commercialize the HIV treatment drug Lenacapavir in over 120 countries. On the regulatory front, the US FDA classified three of our facilities as VAI. This included two formulation manufacturing facilities in Duvvada and Vizag following the routine GMP inspection in May 2024, as well as our API manufacturing facility in Srikakulam, Andhra Pradesh, following their GMP inspection in June 2024. In August, the US FDA completed a product-specific preapproval inspection of our formulation manufacturing facility, FTO SEZ PU1 in Srikakulam, Andhra Pradesh, and issued a Form 483 with three observations. We responded to these observations within the stipulated timelines. In September, the US FDA completed a routine GMP inspection of our R&D center in Bachupally, Hyderabad, and closed the inspection with zero observations. Sustainability continued to remain central to our business strategy, and in recognition of our focused efforts in sustainability, KPMG India awarded us the ESG Excellence Award in 2024 in the Large-cap Pharmaceuticals & Healthcare category. Furthermore, we are featured among the top 15 most sustainable companies in 2024 by Business World India. Now let me take you through the key business highlights for the quarter. Our North America generics business recorded revenues of $445 million for the quarter, with year-over-year growth of 16% and a sequential decline of 4%. The increase in sales volume helped offset single-digit price erosion and additional general competition in certain base products. We launched four new products during the quarter and closed the full year with 15 to 20 launches. Our European generics business recorded revenues of $63 million this quarter, with a year-over-year and sequential growth of 7%. The increase was largely due to revenues from new launches, partially offset by pricing pressure on certain products. During the quarter, we launched a total of eight products across markets. Our emerging markets generics business recorded revenues of INR 1,455 crores in Q2, showing strong year-on-year and sequential growth of 20% and 23% respectively. Market share expansion and revenue from new product launches in the rest of the world markets more than offset the unfavorable forex. We launched 22 new products during the quarter across various countries in emerging markets. Within this segment, the Russia business grew by 27% year-over-year and 23% sequentially in constant currency. The India business recorded revenues of INR 1,397 crores in Q2 with double-digit year-over-year growth of 18% and sequential growth of 5%. This growth was primarily driven by additional revenues from the recently licensed vaccine portfolio from Sanofi and new brand launches. According to IQVIA, our IPM rank continues to be at 10. We launched three brands this quarter in addition to integrating the surgical products under our subsidiary, Dr. Reddy's and Nestlé Health Science Limited. Our PCI business recorded revenues of $100 million in Q2 FY 2025 with year-over-year growth of 18% and a sequential decline of 9%. The year-over-year growth was primarily due to improvements in volumes and growth in the CDMO business, which is also reported under this segment. We filed 22 Drug Master Files globally this quarter. We invested 9.1% of our revenue to strengthen our R&D capabilities. Our R&D investment this quarter stood at INR 727 crores. Our efforts are focused on developing complex, value-accretive products, including several demand injectables, peptides, and biosimilars in line with our patient-centric strategy on access and affordability. We made 60 global generic filings, including two NDAs for the US market during Q2 FY 2025. In addition to investing in our development pipelines, we continue to strengthen our processes in our core areas of business while also collaborating to build businesses in three areas: consumer healthcare, access to novel molecules, and digital therapeutics. We are also evaluating value-creating inorganic opportunities in existing spaces as well as future businesses. We are confident that these strategic investments, combined with our focus on improving efficiencies, will enable us to deliver sustainable growth and profitability. And with this, I would like to open the floor for questions-and-answers.

Thank you. We will now begin the question-and-answer session. Our first question comes from Kunal Dhamesha from Macquarie. Please go ahead.

Hi. Thank you for the opportunity and congratulations on a good set of numbers. First, on the North America business, we noted that the sequential decline is primarily due to volumes. So sequentially, is it fair to assume that the pricing was stable?

The prices are relatively stable in the way we normally calculate them. We did not have major issues on the big products that we normally discuss. As for the sequential, I would not take it too seriously. Part of it is normal supply chain behavior related to inventory levels of the distributors or retailers. We can definitely guide that we will continue to grow in America in both our base products and new launches. So I would not read too much into that. You’ll see different numbers in the next quarter.

Okay. And this decline in sales volume you mentioned is a channel inventory adjustment. Could it also be due to some seasonal products not kicking in this quarter?

Yes. It was mostly about supply chain. There is no real decline. There is no loss of market share or anything like that. In fact, we have gained market share. So I would not place too much emphasis on the sequential decline. It’s more of a normal fluctuation.

Sure. And then the second one on the India business: I know you posted around 18% growth. But if we remove the Sanofi vaccine business, would we be at double-digit growth for our base business?

It's almost there. It’s around 9-point-something percent even without the vaccine.

Okay. So we have improved a lot from single-digit to low-double-digit growth in this quarter?

Yes, we are in double-digit growth even without the vaccine and showing progress in the right direction. But it’s very close.

Sure. And then do you think that this can again accelerate beyond what we have done in Q2 in the coming quarter, given the strong launch momentum?

Absolutely.

Sure. I have more questions. I'll join back the queue. Thanks.

Thank you. The next question comes from Neha Manpuria from Bank of America. Please go ahead.

Yes. Thank you for taking my question. My question is a two-part question related to the US business. Given we have seen a host of facilities being cleared in the last few months, when should we start seeing high-value product launches from Reddy’s? And the second part, we noted that our R&D has stepped up significantly, but the filing momentum has been fairly muted. When do you expect this R&D spend to reflect in higher quality filings and revenue?

On the first question, I hope that you will see it probably in Q3, but I cannot guarantee that. It depends on the ability to get approvals; however, we have a couple of those high-value products waiting for US FDA approval, so I hope by Q3 to see that. Throughout the remainder of the year, we should see a much stronger performance.

Got it, sir. Regarding our R&D spend, how much of this would be allocated to biosimilars in the oncology segment? And any updates on the timing for our two biosimilar filings?

Out of the total R&D, 36% is focused on both biologics and origin, while the remainder goes towards generics. We have about biologics, and most importantly, we are focusing on the abatacept project, along with several licensing activities. As for the timing of our two biosimilar filings, we are on track to file by late this year.

Thank you very much.

Thank you. The next question comes from Amey Chalke from JM Financial. Please go ahead.

Thank you for taking my question. My first question is on REVLIMID. In the first half, for the sales we might have booked for REVLIMID, do you expect them to be similar in the second half, or do you expect the run rate to be lower?

I cannot provide specific sales figures for REVLIMID due to agreements. However, I can tell you that the sales will continue to be strong in the remainder of the year.

Sure. The second question I have is regarding the preparation for the GLP-1 products for both the US and ROW markets. What is the status of those products?

On GLP-1, we're very focused on peptides, especially API. We have identified several GLP-1s coming up, and we plan to be ready by day one in all markets. Our internal capabilities are well established for APIs as well as formulations.

Sure. Just one last question on the spend. Our SG&A spend, excluding amortization or depreciation, has risen sharply over the last two to three years. Given our big opportunity in the US, do you expect this SG&A spend to remain elevated post FY 2026, or do you expect a correction?

Indeed, we have increased SG&A over the years primarily due to our mix of markets—a focus on India and emerging markets, which are very profitable. However, post FY 2026, we expect SG&A to be moderated. The growth will depend on the markets we continue to build.

If you look at the objective one-time costs this quarter, our SG&A is 28.1% of sales, and we expect it to remain in the range of 27.5% to 28% for the full fiscal.

Thank you so much. I will join back the queue.

Thank you. The next question comes from Balaji Prasad from Barclays.

Hi, this is Mikaela on behalf of Balaji. Thanks for taking our question. We are just wondering how you can leverage the situation in America for generics gets a stronger emphasis? And if you increase manufacturing in the U.S., what would this mean for your operating margin?

We are not investing in manufacturing in the U.S. The products we are launching in the U.S. will be made outside of the U.S., primarily in India.

Thank you. The next question comes from Harith Ahmad from Avendus Spark. Please go ahead.

Hi. Thanks for the opportunity. My first question is on the rituximab biosimilar for which we got EMA authorization recently. Can you share some color on the timelines for launch and expectations from this product? Additionally, for the U.S., what is the status of our facility in Bachupally? Are we expecting clearance soon?

The European launch is planned for February 2025, and for the U.S., we have submitted a response to the FDA. We anticipate approval likely in the first part of FY 2026.

We have provided a full carrying value due to the existing contract manufacturing organization unable to supply the product, hence we have provided 100% of the carrying value.

Sir, last one with your permission. The intangibles related to the Haleon portfolio acquisition, which I believe is around INR 5,500 crores, over what timeframe will you amortize this? What impact will that have on our P&L?

We are largely projecting around 20-plus years for amortization; currently, we are evaluating, and it will likely be in the 22 to 23 years range.

Thank you. The next question comes from Damayanti Kerai from HSBC. Please go ahead.

Hi. Thank you for the opportunity. My question is on R&D. So you mentioned you are focusing on high-quality R&D. Can you discuss the segments or products you are working on, and do you think you can launch material products in the next one to two years in the U.S. that could help cover sales lost on the REVLIMID part?

In terms of R&D allocation, about 50% goes to generics, focused on peptides and injectables, particularly complex injectables. The biologics are centered on our pipeline; most of the investment in the short term will be on the clinical trials of abatacept. We also anticipate launches of over 20 products in the pipeline that will contribute to our portfolio. Most of them are approval-dependent.

Sure. My related question is on GLP-1: Based on the R&D focus you've outlined, do you have in-house manufacturing capability, or do you intend to use external partners?

We are going to manufacture in-house, both the API and the finished product. Our internal manufacturing capabilities for these segments are well established.

Okay. Thank you.

Thank you. The next question comes from Bino Pathiparampil from Elara Capital. Please go ahead.

Hi. Good evening. Just following up on a previous answer about a potential launch in early 2027. Did you mean calendar 2027?

Yes, that’s correct—calendar 2027.

Okay. I was looking at the Russia growth adjusted for currency fluctuations; it seems that first half growth in Russia and CIS is muted, probably around the mid-single digits. Any particular reason for this? What's the outlook for the rest of the year?

Russia is performing really well. In constant currency, we grew 27%. The devaluation affects some of our revenue, but overall, we expect to maintain a high level of double-digit growth as companies shift focus and we increase our investment in Russia.

Got it. Thank you.

Thank you. The next question comes from Surya Patra from PhillipCapital. Please go ahead.

Hello, and thanks for the opportunity. My first question is on the Nicotinell business integration. Having completed the transaction, can you share your growth plans and integration strategy for this business across various markets and your margin and cost positioning?

We have a structured sequence for entering various markets, as this involves carving out brands from Haleon’s current portfolio. We are creating necessary legal entities, sales force, and distribution agreements as we enter markets incrementally. The UK will be our starting market in April, and over the next 12 to 14 months, we expect to manage over 80% of the sales ourselves. We see three key synergies to enhance growth: our ability to invest in these brands, the capacity to expand into more markets, and options for innovation in packaging and lifecycle management.

My second question is about our CDMO business. Given the manufacturing base and positioning within the U.S., do you expect the Biosecure Act development to provide a meaningful boost for our CDMO operation?

We do see an increase in projects within our biologics CDMO segment, which is a new focus area for us, and we believe that the Biosecure Act will enhance attention in this segment. There is potential for future business growth, though it's too early to quantify.

Okay. Just one last clarification on the U.S. business growth. You mentioned that there is some volume-related impact in the quarter. Can you provide some guidance on growth year-on-year for the first half, excluding lenalidomide?

On a year-on-year basis, we are growing the base business, and I would not overly interpret the quarterly fluctuations, as we are seeing positive trends overall.

Thank you, sir.

Thank you. The next question comes from Tarang Agarwal from Old Bridge. Please go ahead.

Hi, good evening and congrats for a very strong set of numbers. My first question is regarding Russia. The INR 600 crores investment in working capital—what's driving this? Can you provide insights into how working capital intensive this business is?

The working capital we managed through factoring and short-term loans is becoming costlier. As a group, we evaluated this funding as equity to be more beneficial overall. Additionally, we have increased our working capital to meet the requirements in the Russian market.

Regarding our market share, we do not have the exact numbers, but we have increased our share significantly in Russia, growing faster than the market in all segments.

What is the size of the covered market in Russia where Dr. Reddy's operates? How do you foresee this business growing compared to your India business?

I believe we will continue to see consistent growth. The market itself may not grow in volumes, but we expect value growth due to pricing increases resultant from current conditions.

Thanks. My second question is on CapEx. Observing the trajectory over the last three to four years, can you provide insights on your current utilization levels in injectables, oral solids, and API business? What investments do you plan for expanding physical infrastructure?

Most of our investment currently is focused on injectables, biosimilars, and our API business. About 60% of our CapEx is aimed at building capacity for GLP-1 and other peptide products in our pipeline.

Thank you, sir.

Thank you. The next question comes from Kunal Randeria from Axis Capital. Please go ahead.

Hi. Good evening. With respect to denosumab, considering our first biosimilar launch in the U.S. is expected in 2024, how many players do you anticipate will launch ahead of us?

For denosumab, we expect that we should be somewhere between number three to number five in terms of launch timing among competitors.

Understood. Thank you.

As there are no further questions, I would now like to hand the conference over to Ms. Richa Periwal for closing comments.

Thank you all for joining today's call. If you have any further queries, please get in touch with Aishwarya or myself. Thank you once again on behalf of Dr. Reddy’s.

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