Earnings Call
Dr Reddys Laboratories Ltd (RDY)
Earnings Call Transcript - RDY Q3 2021
Operator, Operator
Ladies and gentlemen good day and welcome to the Dr. Reddy’s Laboratories Limited Q3 FY’21 Earnings Conference Call. Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Agarwal from Dr. Reddy’s Laboratories Limited. Thank you and over to you sir.
Amit Agarwal, Manager
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 December 31, 2020. Earlier during the day we have released our results and the same are also posted on our website. This call is being recorded and the playback and 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. To discuss the business performance and outlook we have the leadership team of Dr. Reddy’s comprising: Mr. Erez Israeli, our CEO; Mr. Parag Agarwal, our CFO; and the Investor Relations team. Please note that today’s call is a copyrighted material of Dr. Reddy’s and cannot be rebroadcasted or attributed in press or media outlet without the Company’s expressed consent. Before I proceed with the call I would like to remind everyone that the Safe Harbor contained in today’s press release also pertains to this conference call. Now, I hand over the call to Mr. Parag Agarwal. Over to you, sir.
Parag Agarwal, CFO
Thank you, Amit, and greetings to everyone. I hope all of you and your families are keeping safe and healthy. I am pleased to take you through our financial results for the quarter three of fiscal 2021. We had yet another quarter of good performance in terms of revenue growth and EBITDA margin, though, the profits were impacted by impairment charges taken during the quarter. Let me take you through these in a bit more detail. For this section, all the amounts are translated into U.S. dollars at a convenience translation rate of INR73.01, which is the rate as of December 31, 2020. Consolidated revenues for the quarter stood at INR4,930 crores, that is $675 million and grew by 12% on a year-on-year basis. Growth is primarily on account of new product launches across markets. Our North American Generics business grew by 9%, Europe business by 34%, India by 26%, Emerging Markets by 5% and PSAI by 1%. Sequentially, our revenues grew by 1% supported by volume pick-up in India, Emerging Markets and Europe. However, impacted by price erosion in North American business and lower volumes in the PSAI business. During the quarter, we recognized milestone received towards AUR102, one of the programs of our Aurigene Discovery business. Consolidated gross margin for this quarter has been 53.8%, a decline of 30 basis points year-on-year and 10 basis points on a quarter-on-quarter basis. The decline is primarily on account of price erosion and lower export benefits. However, supported by milestone income received towards AUR102 compound and productivity improvements. Gross margin for the Global Generics and PSAI businesses were at 57.6% and 25.3%, respectively, for the quarter.
Erez Israeli, CEO
Thank you, Parag. Good morning and good evening to everyone. Hope you are having a happy, safe, and healthy beginning of the New Year. The year of 2021 has started with hope and visibility around life returning to normal after a significant healthcare crisis and socioeconomic disruption caused by COVID-19 in 2020. The vaccinations program has started in several countries and we are continuing to contribute our part in this fight against the global pandemic. Recently, after the approval from DCGI, we have initiated the Phase III clinical trials of the Sputnik V vaccine in India. The vaccine’s efficacy is confirmed at 91.4% based on the data analysis of the final control point of clinical trials in Russia. We have also strengthened our partnership with RDIF and have been confirmed as the preferred marketing partner for the expeditious distribution of the vaccine in India. During this quarter, we continued in our growth journey and achieved our highest-ever quarterly sales, healthy EBITDA margins, and once again turned net cash positive as of December 2020. We saw healthy growth across our branded markets in Europe, while the market demand in India, Russia, and other branded markets has witnessed sequential improvement over the last couple of quarters; however, it is yet to recover to pre-COVID levels. We continue to progress well on our strategy of a diversified business model and creating the right leverage of growth from each of our businesses. This includes building a healthy product pipeline, focusing on productivity, improving marketing capability, and strengthening our processes led by digitalization initiatives. The strong balance sheet position allowed us to continue to invest in the right set of opportunities for future growth. Now, let me take you through the key business highlights in each of our businesses. Please note that all references to the numbers in this section are in respective local currencies. Our North America Generics business recorded sales of $235 million for the quarter with a growth of 4% year-over-year and a decline of 5% on a sequential quarterly basis. While the new product launch momentum continued through the quarter, we faced incremental competition and some pricing erosion in certain base portfolio products. Towards the end of the quarter, we also witnessed signs of a COVID-driven slowdown in demand levels, especially at the retail and hospital level impacting resourcing.
Shanti Patel, Analyst
The light on capacity utilization in respect of various verticals. And question number two, is impairment loss, how it is determined? And will it be reversed in future? It situates on changes, please throw some light on that?
Erez Israeli, CEO
Yes. We experienced the triggering event of the launch of Nobel and Vascepa, and we have adhered to sound accounting practices while assessing the associated base events. We are still planning to launch these products, and I don’t anticipate any plans to backtrack on that. I am hopeful and confident that we will launch these products and generate revenue from them.
Shanti Patel, Analyst
Capacity utilization, what is the capacity utilization in respect of the various verticals?
Erez Israeli, CEO
Yes. The capacity utilization? We have enough capacity for the visibility trial, so I’m not sure I understand the question.
Shanti Patel, Analyst
No, no. Capacity utilization means suppose we can produce 1,000 units. Today, we are producing only 900, so 90%. So that way, what is the installed capacity and how much we are producing, the ratio?
Erez Israeli, CEO
We have sufficient capacity for all verticals. The only area where we need additional capacity is in injectables, particularly for the fiscal years 2023 and 2024, as well as for biologics. We have adequate capacity to support growth in oral solids.
Shanti Patel, Analyst
Okay. Thank you. Thank you.
Rashmi Sancheti, Analyst
Yes. Thanks for the opportunity. If you can highlight what kind of growth we are seeing in the India business excluding Wockhardt integration?
Erez Israeli, CEO
Yes. We are not listing the growth. Amit, you want to answer it? Amit?
Amit Agarwal, Manager
Yes. Rashmi, thanks for the question. Excluding the Wockhardt portfolio, our base business grew at about 8% during the quarter.
Rashmi Sancheti, Analyst
Thank you. And, sir, for the nine months?
Amit Agarwal, Manager
For the nine months, also the business grew in single digits.
Rashmi Sancheti, Analyst
Single-digit? Okay, sir. And, sir, related to the Wockhardt integration expenses in this quarter, is it going to continue in the subsequent quarter or is this one-off, and would you be able to quantify how much of that additional cost has come?
Amit Agarwal, Manager
Yes, we have successfully integrated the Wockhardt portfolio into our business. Our profit and loss statement now reflects only the regular ongoing expenses, and there are no one-time expenses related to the Wockhardt business this quarter.
Rashmi Sancheti, Analyst
Okay. But that integration expenses, will it continue in the subsequent quarter or is it already over by third quarter?
Amit Agarwal, Manager
So Rashmi, this integration expenses, so there is nothing in integration expenses. It is the field force we have got from this business. So that is now part and parcel of our business, so that will continue. So, it is on account of incremental manpower cost, S&M cost, the plant which came from Wockhardt, so those expenses. On a year-on-year basis, that’s the reason we have mentioned. On a sequential quarter basis, that is not the reason. It was there in Q2 also. It is there in Q3 also.
Rashmi Sancheti, Analyst
Okay, sir. Got it. And, sir, finally, on the U.S. business, are we going to maintain our 30 product launches guidance in the U.S. for this entire year? We have already launched around 22 products.
Erez Israeli, CEO
Yes, that is the reason for the incremental manpower costs and expenses related to S&M and the plant acquired from Wockhardt. On a year-on-year basis, this explains our previous comments. However, this is not the case for sequential quarters, as these factors were present in Q2 as well as in Q3.
Rashmi Sancheti, Analyst
Okay. And, finally, last on the pricing on the base portfolio. Are we seeing a huge price erosion in double-digit sort of or it is a mid-single-digit price erosion? And with the traction in launches, will it go down or would it remain at the same level?
Erez Israeli, CEO
So it’s not huge. And, of course, it differs from product to product. But it’s more than it used to be in the other quarters for us. And I believe that the business will continue to do well also in the future.
Rashmi Sancheti, Analyst
Okay, sir. Thank you and all the best.
Damayanti Kerai, Analyst
Hi. Thank you for the opportunity. Continue on the U.S. business. While we are seeing a healthy number of launches, but on the filing side I believe it has been a bit muted for the last few quarters and we are also having around 87 pending ANDAs. And in the past, you only expressed your goal about increasing your U.S. sales by 50% in the next three years. So how do you see the pick-up happening on the ANDA filings front? And second question on the U.S. businesses, any update on Vascepa and Remodulin generic launches?
Erez Israeli, CEO
So, on the filing, I think you’re going to see many more filings next quarter. It’s in line with what we discussed in previous meetings. So we are in the same place, just in terms of the collision between the quarters, what would happen in Q4. As for Vascepa, we are preparing for the launch of the product. Sorry, was there another one?
Damayanti Kerai, Analyst
Remodulin?
Parag Agarwal, CFO
Remodulin, there will be some time away in the main peak. It will take some time for us.
Damayanti Kerai, Analyst
Okay. Okay. And my second question is on the impairment part. So, for acquiring eight ANDAs from Teva, we paid around $350 million. If I’m correct, we have already taken impairment of around $250 million, $260 million due to change in market conditions. So, do you see like the remaining asset value can also like be impaired if we see further deterioration in the market condition?
Erez Israeli, CEO
We are not expecting any additional impairments.
Damayanti Kerai, Analyst
Sorry, I didn’t get that.
Erez Israeli, CEO
We are not expecting additional impairments.
Damayanti Kerai, Analyst
Okay. And my final question, how should we look at API business growth picking up from here? Obviously, 1H was very strong. But as you said it has normalized now, so how should we look at that part of business?
Erez Israeli, CEO
We are going to grow this business on both the external sales as well as much more important for us is the big integration. So we are working on both and we are going to see growth in the API in the future.
Kunal Dhamesha, Analyst
Hi. Thanks for taking my question. So the first question is on the other expenses. So, I think in the opening remarks, our CFO said that there was some one-time expense that was included. So, can you throw some light on what was the nature of the expense and can you quantify it?
Parag Agarwal, CFO
Yes. Thank you for the question, Kunal. The one-off expenses that I referred to are primarily two: one is COVID-related freight expenses have been at the higher end, as you know, for the last few quarters since COVID started. And we are not seeing any moderation in the rates yet. It’s a very marginal reduction. We do think as the situation normalizes, and COVID comes under control, over the next few quarters this is going to reverse. So, that’s one reason I mentioned as one-off. And secondly, we also have some one-off litigation expenses that we have recognized during the quarter, which are non-recurring in nature.
Kunal Dhamesha, Analyst
Okay. So, if I see the quarter-on-quarter, last quarter our SG&A expense excluding D&A was around INR983 crores and this quarter it is somewhere around INR1,120 crores. So, can you attribute the entire increase to that because we have said that Wockhardt integration costs were already there in quarter two, so the entire thing is related to and the freight cost would also be there in quarter two, right? So then the entire difference is coming from the one-time litigation costs?
Parag Agarwal, CFO
No, that’s not correct, Kunal. Let me explain the increase. As I mentioned earlier, the largest part of the increase is due to our investments in sales and marketing in the branded markets. In countries like India and Russia, we are beginning to see gradual market growth, and it's important for us to invest ahead of that trend. Therefore, we have cautiously started to invest in our brands in these areas. Additionally, we are focusing on enhancing our digital capabilities. We have an ambitious plan to digitize our core operations, quality systems, and manufacturing processes, as well as how we manage product selection and launch. We are also improving our digital engagement in how we go to market and interact with doctors. So, a significant portion of this increase is due to our investments in brands and capabilities. The remainder, as I noted, is related to increased freight costs this quarter compared to the last. Part of this is attributed to a higher air-to-sea shipment ratio, which has some COVID-related impacts, as well as the mix of air and sea shipments.
Kunal Dhamesha, Analyst
Okay. Okay. So, do you think that this investment in the brands and sales and marketing will continue for like the next three, four quarters before it kind of normalizes or how should we look at it? Like, is this the new normal of SG&A, like INR1,100 crore?
Parag Agarwal, CFO
As you know, we don’t provide forward-looking guidance. However, I want to emphasize that we expect our investments in sales and marketing to persist. We continuously assess the return on those investments, and if we determine that the sales growth is attributed to these investments, we will maintain them; if not, we will scale back. Additionally, the expenses related to COVID will gradually return to normal levels.
Kunal Dhamesha, Analyst
Thank you for that. The second question is more of a housekeeping matter. In the third quarter of FY’20, we recognized a $156.5 million impairment charge for NuvaRing, and we added another $40 to $45 million this quarter, totaling around $200 million. However, the purchase price allocation for this product was about $185 million. What am I missing here? Did we capitalize some of the R&D expenses on this product?
Parag Agarwal, CFO
Yes. That’s a good question, Kunal. The difference is because of the interest that has been capitalized in line with the accounting standards.
Kunal Dhamesha, Analyst
Okay. Okay. Okay. Yes. Thank you. Thank you for taking the question.
Nithya Balasubramanian, Analyst
Yes. Thank you. Sir, my question is a follow-up on the SG&A expenses. Sir, in the last quarter, at least in branded markets like India, China, Russia, assuming that all the clinics are open, but that’s the back on the ground. So the kind of savings you probably realize in Q1 and Q2, most of the costs are likely to come back. Is that also partially the reason why it’s gone up? And should we now assume that there are no longer any lockdown-related savings in the base anymore?
Parag Agarwal, CFO
I think, to a large extent, I would say, it is getting normalized, that’s true, Nithya. I would not say we are back to pre-COVID levels. But yes, it is getting normalized, so that’s a fair statement.
Nithya Balasubramanian, Analyst
Sir can I take that, you mean it’s likely to inch a little higher because it’s not fully back?
Parag Agarwal, CFO
Yes, it will gradually pick up, but as I said earlier, we maintain a very tight control on our investments and we link it to sales growth. These investments are linked to the growth that we can deliver. But yes, you can expect that gradually will go back to pre-COVID levels.
Nithya Balasubramanian, Analyst
Okay. Understood. Thank you. The second question was on some of the material products that we have filed in the U.S. or are likely to file. Sir, if you can give us an update on where you are on NuvaRing, Copaxone, I think you mentioned you refiled? Do you have a CAT date? If you can update us on those two products?
Erez Israeli, CEO
Yes, I’ll do that. Regarding NuvaRing, we submitted our response to the CRL in December. Now, we are waiting for the FDA's response before preparing for the launch. Concerning Copaxone, we received the CRL and are currently addressing it. This is the status of both products.
Nithya Balasubramanian, Analyst
Sorry, Erez, I hope I got that right, you have received another CRL on Copaxone and you are preparing a response. Did I hear that right?
Erez Israeli, CEO
Yes. Yes, correct.
Nithya Balasubramanian, Analyst
Any timelines on when you are likely to resubmit?
Erez Israeli, CEO
We are still testing but I believe it will be within the next few months.
Vishal Manchanda, Analyst
Thank you for the opportunity. Regarding the domestic aspect, is there a seasonal factor affecting the Wockhardt portfolio, making this Q3 a significant quarter for it, or does it typically perform consistently across all quarters?
Parag Agarwal, CFO
Yes, I would say there is no significant seasonal element. As I mentioned earlier, the Wockhardt portfolio is performing well. It is exceeding our internal expectations, and we believe we will maintain growth at similar levels for this portfolio.
Vishal Manchanda, Analyst
Okay. And second one on the Sputnik vaccine. So, just wanted to understand whether this could involve marketing and you would need to distribute it in the private market or will this be a sale to the government? And whether you would also be allowed to sell in markets outside India?
Erez Israeli, CEO
So, we are planning to go to both the government, as well as the private market. Of course, in accordance with the guidance that will come from the Indian government about priorities and how do they see that. So this is still in discussion or will be in discussion also in the future. And what was the second part of the question, sorry?
Vishal Manchanda, Analyst
Would we also be allowed to sell it outside India, maybe Emerging Markets?
Erez Israeli, CEO
Yes. So, we are discussing regarding the auctions to increase the collaboration also to branded markets.
Neha Manpuria, Analyst
Thank you for taking my question. If I heard the numbers correctly, you said that excluding Wockhardt, our India business is growing about 8% in the quarter, which would imply that Wockhardt revenues are pretty much back to the peak sales level? Is that correct and in this case, how should we look at momentum from Wockhardt from here? What will drive incremental growth or what are you indicating in line growth for the Wockhardt from here?
Erez Israeli, CEO
I believe that the Wockhardt products will continue to grow from here as well, Neha.
Neha Manpuria, Analyst
What factors will contribute to that growth? Most of the easy opportunities are already reflected in the figures.
Erez Israeli, CEO
I believe our ability to invest in this product and manage the necessary activities has been key. We have achieved both the sales synergies and cost synergies we expected, and it is performing well so far.
Neha Manpuria, Analyst
Okay. Understood. Okay. I’m not sure if I caught this in your opening remarks, but our working capital seems to have increased in the quarter, both receivable and inventory. Could you indicate, if there was anything specific here that you would like to point out?
Parag Agarwal, CFO
Yes, Neha. So, on receivables, approximately the increase is INR300 crores. I would say roughly around one-third or slightly higher than that is because of lower discounting of receivables in the U.S. and that’s because we are no longer finding it economical because of the drop in interest rates in India. So that’s the fundamental reason. The second reason is an increase because of the normal sales growth that we see. And finally, the milestone payment that we had received from Aurigene is another driver. But overall, I would say, the receivables increase is due to the underlying business drivers. On inventory, again, part of it is because of sales growth and the rest of it is a planned increase. We want to make sure that our safety stock levels are adequate and there is absolutely no disruption as we enter Q4. So, these are the reasons for the increase in working capital. I hope I’ve answered the question.
Neha Manpuria, Analyst
Understood. Okay. Fair enough. Just one other clarification on the U.S. business, the price erosion that we saw quarter-on-quarter, was that related to any specific product or was it across assets and across the portfolio and that could probably continue?
Erez Israeli, CEO
It starts to be more than one product, so it’s not specific. It’s like the normal course of business, but it’s not the entire portfolio. So, like always in the United States, when competition is coming we need to react to it if we want to defend the service in these cases.
Kunal Mehta, Analyst
Thank you for the opportunity. My first question is about NuvaRing. I would like to understand the reasoning behind the decision to write down the entire product, as I believe it is still a viable option. From an earnings perspective, considering the five-year period, it effectively becomes neutral since it merely accelerates the amortization. I would like to know the rationale for writing down this product entirely.
Erez Israeli, CEO
The reason for the write-down is linked to the launch of Teva, which led us to adjust our model for this product. As we are currently addressing the CRL, the timing of when we receive approval will determine how we account for this asset, which has led us to depreciate it. However, you are correct that we remain committed to this product. We hope for FDA approval so that we can launch it and generate revenue.
Kunal Mehta, Analyst
Understood. My second question is about the Emerging Markets. In your opening remarks, you mentioned various filings made this year, particularly this quarter, focused on the Emerging Markets excluding the U.S., including Europe, Russia, the CIS, and other smaller Emerging Markets. I would like to learn more about the new product launches we have planned over the next two to three years in these markets. If we aim for a growth rate of around 15% in these markets over that period, could you provide insight into the expected contribution of these new product launches?
Erez Israeli, CEO
We are not providing specific targets, but I anticipate that our product will make a substantial impact on growth in the institutional and hospital sectors. As previously mentioned, our strategy involves maximizing our global product portfolio by identifying numerous markets to enhance revenue, which will be reinvested in research and development. Consequently, you can expect an increasing number of filings in various markets. The majority of our current development efforts are conducted globally rather than focusing on a particular market. This aligns with our outlined strategy, and we are just beginning the execution phase, indicating that we will continue to submit more filings.
Kunal Mehta, Analyst
Understood. I have one final question. I would like to gain clarity on our strategy regarding injectables. Could you please provide the number of outstanding filings in the U.S. ANDAs that are specifically for injectables? Additionally, could you break this down into complex and simpler injectables? I noticed in your 20 AF that around one-fourth of the U.S. business comes from the injectable portfolio, specifically in the financial year 2020. Do you have any insights on how we plan to advance this segment of the business in the U.S.? Given that a significant portion of off-patent products is now in this market, what are our plans for the next five years?
Erez Israeli, CEO
Our injectables are products that are available globally, and most of our investments in this area focus on global products, including those in the U.S. As a result, we expect a greater number of injectable products to be submitted for approval in the U.S., leading to a higher proportion of injectables compared to the past. Therefore, in the U.S., we anticipate growth in both complex injectables and simpler ones following this trend.
Kunal Mehta, Analyst
Okay, sir. So, do you believe that the current 25% contribution will increase over the next three to four years in terms of the overall portfolio, assuming that’s our goal?
Erez Israeli, CEO
Yes. The weight of the injectables will be bigger in the future.
G Vivek, Analyst
Yes. Is my understanding correct that the tailwind our pharma sector was having Q2 COVID is now weakening and are we back to the time of price erosion getting on weight severely, instead of the single-digit price erosion due to consolidation we faced?
Erez Israeli, CEO
You are talking about the United States?
G Vivek, Analyst
Yes. The positive effects of COVID on the pharmaceutical sector in India contributed to strong performance in the first and second quarters, but that momentum is now diminishing.
Erez Israeli, CEO
Yes, the impact on costs is influenced by the market. However, we have not returned to pre-COVID levels or behaviors, and we are still experiencing effects from COVID in certain areas. For instance, in the U.S., some products continue to be impacted by people's ability to consult with physicians. We observe that these products are not performing as strongly as they did before. Regarding price erosion, in the U.S., this is mainly driven by competition rather than the impact of COVID. In India, we are seeing an improvement, but Q3 was a quarter where activities nearly returned to normal levels. We are not fully there yet, but we are close.
G Vivek, Analyst
And is the similar situation prevailing for injectables also or is it mostly for oral solid? Injectable also the price erosion is severe?
Erez Israeli, CEO
Yes. The price erosion is affected by both injectables and oral solid. It’s not related to COVID. It is related to competition that is coming. It’s present in both segments in the U.S.
G Vivek, Analyst
The positive aspect for our Company was that all five of our plants received FDA approval, even after a period of delay. Currently, FDA inspections have resumed in India. Is there any upcoming FDA inspection for any of our plants in India?
Erez Israeli, CEO
We did not get any requirements from the USFDA yet. And in general, it’s good news that the USFDA is starting inspection soon. It’s great news, actually.
Nitin Agarwal, Analyst
Hi, all. Thanks for taking my question. It is on the U.S. business. During the year, we’ve launched, as you mentioned, 24 products so far, but there’s not been much pick-up in our quarterly sales run rate number. So, what is in your assessment? Does it take to meaningfully move this number from 40 to 45 that being kind of stuck around the last couple of quarters?
Erez Israeli, CEO
Sorry, I could not hear well the question. Can you repeat it, please? Sorry.
Nitin Agarwal, Analyst
My question is about the 24 new launches we've had this year in the U.S. Our quarterly run rate remains below $240 million. In your opinion, what will it take for us to significantly increase our performance from these current levels? The number of launches does not seem to have been an obstacle, as we have introduced a sizable number of products this year.
Erez Israeli, CEO
As you know, the number of launches and the types of products we are introducing play a significant role. I believe that our portfolio moving forward is appealing and should drive growth. The products we are set to launch should help us achieve the growth we aim for. It's not just about the quantity; the quality and size of the products being launched are also important. Some of the upcoming products are quite promising.
Nitin Agarwal, Analyst
Okay. And secondly, regarding the gross margin, we've seen a significant decline in the gross margin for the generic business this quarter when adjusting for the licensing income. How should we interpret this? Is this the new normal now that the export incentives are no longer available? How should we approach modeling the gross margins for the generic business moving forward?
Erez Israeli, CEO
Yes. As we have mentioned previously, our focus is not specifically on managing gross margin. Instead, we are concentrating on EBITDA and are committed to maintaining the 25% target we communicated earlier. We are currently in this range and plan to remain there or potentially even drop lower for some time. Gross margin is influenced by the mix of activities. For instance, if we have a growth product with a 50% gross margin that is still profitable with a similar EBITDA, we will pursue it. We are not focused on the percentage; we are looking at the nominal gross margins. Overall, we maintain that we will stay within the gross margin range we previously experienced. However, we are not specifically managing it. We will continue with solid businesses that will likely remain below the current number we've shared.
Nitin Agarwal, Analyst
Okay. Sir, thank you very much. Best of luck.
Sameer Baisiwala, Analyst
Yes. Thank you and good evening, everyone. This is an important launch, which is Vascepa. Let me ask a question about this. I’m not sure how much detail you can provide, but what is the expectation for a typical high-value launch? Are there volume constraints like being the first entrant with lower margins that should improve over time? Any insights would be appreciated.
Erez Israeli, CEO
Yes, Sameer, I cannot share specific details. This will definitely be an important launch for us. However, I won't discuss quantities or related specifics for various reasons.
Sameer Baisiwala, Analyst
Okay. Sir, can you confirm that this would be a regular high-value launch for you?
Erez Israeli, CEO
This would be a high-value launch for us, yes.
Sameer Baisiwala, Analyst
Okay, great. Thank you. Sir, second question was Sputnik V. Just if you can tell us, what’s your sourcing plan for the vaccine? And second, is there any change to your earlier launch timelines and 100 million volume target, that would be great?
Erez Israeli, CEO
So the 100 million is now 125 million. This is one update. We are discussing more countries and we see initiatives already taking shape. We hope to submit to DCGI the most recent application, and if we receive approval, we can launch in March.
Sameer Baisiwala, Analyst
Okay. And what about the sourcing plan? I mean, would you be taking it from your partner RDIF or would you also be doing some manufacturing?
Erez Israeli, CEO
So, a little bit from Russia and most of it from India with our partners. Thank you for the question, Sameer. Both we and Aurigene have developed intriguing pipelines. We plan to advance some of these into later stages, while others will be monetized earlier to help Aurigene achieve self-sustainability in risk-reward management. I believe Aurigene's pipeline looks promising for the future. For those that we want to retain and invest in, we will not monetize them at an early stage; we will focus on later stages instead.
Sameer Baisiwala, Analyst
Okay. One final one, if I can. Parag, if I’m not wrong, you’ve mentioned that in the EBITDA margins sort of internal aspiration as 25%. And if so, if you did fill it and you are very close to that already. So, what’s in your outlook for margins and what are the levers for that? Thank you.
Parag Agarwal, CFO
Yes. So, as I said, our aspiration indeed is to deliver 25% EBITDA on a sustainable basis. And while we are in the lever of the 25%, we are not yet able to consistently deliver 25% and we have a number of levers to deliver it. I think the biggest lever, obviously, is top line growth and second is productivity that we are driving very hard across the value chain. I mean, I can talk about it in detail that we drive products re-formulation, the chemistry, how we can run our machines more efficiently, how to include the yields, finding alternate vendors for our materials and so on. And also in sales and marketing and so on. So productivity is a big driver and we want to make it a habit. But I must point out that, as we drive productivity, we also need to invest some of it back into the business behind our brands and behind capabilities. Digital capabilities I spoke earlier. So it’s very important that we drive the levers that can potentially improve the margin, but we also invest behind the business so that we can give you sustainable growth in the future. So I would say that we are in the neighborhood of 25% EBITDA escalations. And I think you can expect that in the next few quarters we should be in that range.
Prakash Agarwal, Analyst
Thank you for the opportunity. I want to follow up on this. You mentioned a sustainable 25% over a few quarters, but if I calculate correctly, particularly for this quarter, excluding the licensing income, we are at about 21%. You also mentioned that there will be ongoing structural cost improvements over the next few quarters. I'm trying to reconcile these figures since we are currently at 21%, and the last two quarters showed 25%. There seems to be a 400 basis point gap here, and it appears we are not close to 25%. Could you provide some clarification on this? Or do you consider the cost increase to be a one-off? That would be helpful. Thank you.
Parag Agarwal, CFO
That’s not right that the cost is entirely one-off. Let me clarify that, first of all, the impact of the Aurigene milestone payment is around 1%. We have delivered EBITDA margin of 24% during the quarter and even if our EBITDA margin is around 23% excluding the milestone payment, it is in the normal range. I must also say that we do drive out-licensing in a number of our businesses, like Proprietary Products and Aurigene and Biologics business fairly regularly. So I’m not sure it is fair to exclude or include the milestone payment. As I said earlier, we are driving productivity and we are also investing behind the business. We are right now in the neighborhood of 25% margin and we will continue to drive that as our long-term aspiration.
Prakash Agarwal, Analyst
Okay. And can you confirm, like the increase in expenses are recurring apart from the small one-off you mentioned and can you quantify that one-off, please?
Parag Agarwal, CFO
I don’t think I can quantify the one-offs. In terms of the increase in cost, as I said, it is an investment behind our brands. We do expect it to continue, but it is also due to growth. So we have a process to manage return on investment and therefore, this went to growth. So, in summary, I think this level of investment we expect to continue, but this is directly linked to the sales growth that we can deliver.
Prakash Agarwal, Analyst
Perfect. Thanks helps. Very helpful. Secondly, sir, on China, so I think with COVID, everything is muted. But what is the ground level action in terms of the filing momentum? How it has been in the last nine months? And is it started to pick-up and when do we see the next round of approvals for us?
Erez Israeli, CEO
So China is doing very well for us. We are also growing in China despite COVID. And we already filed 15 products and out of a list of about 100 products in the pipeline that we shared before. So we are very much on track with our plans for China.
Prakash Agarwal, Analyst
Sorry, you mentioned 16 products filed and growing double-digit. Did I hear that right, sir?
Erez Israeli, CEO
What I said is 15 and I did not say anything about double-digit.
Prakash Agarwal, Analyst
Okay. Okay. But we are growing in China despite COVID?
Erez Israeli, CEO
We are experiencing growth in China despite COVID. We have submitted 15 products and are effectively managing the products we currently have in the market.
Prakash Agarwal, Analyst
Perfect. That is very helpful. Thank you. And, sir, on the API, PSAI business that we have. So, clearly, the first two quarters very heavy, you mentioned stocking supply disruption. So how do we see the outlook going forward given that in the last call we mentioned that digitally important to us and you want to invest in this business?
Erez Israeli, CEO
We would grow our API business. It will grow, maybe not quarter-on-quarter but it will grow. It will grow and it’s very important for us. And I want to increase also the level of big integration over time.
Prakash Agarwal, Analyst
And it has two parts, the API in the pharma services. Then you carved out Aurigene from it. I just wanted to understand the growth trajectory for each of the businesses.
Erez Israeli, CEO
Both will grow. We are giving guidance, but both will grow.
Prakash Agarwal, Analyst
Okay. Understood. And lastly, sir, on the regulatory, is there any update in terms of where we are in the overall approval scheme?
Erez Israeli, CEO
The go ahead.
Amit Agarwal, Manager
Yes. Yes, Prakash. So, the program is run by us, they filed the product. We haven’t heard anything about approval, but we expect in FY’22, but we do not have any confirmed date.
Prakash Agarwal, Analyst
Okay. Thank you and all the best.
Operator, Operator
Thank you. Ladies and gentlemen, due to time constraints, we will take that as the last question. I now hand the conference over to Mr. Amit Agarwal for closing comments.
Amit Agarwal, Manager
Thanks, everyone for joining us today for the earnings call. In case of any further queries, please reach out to the Investor Relations team. Thank you.
Operator, Operator
Thank you. Ladies and gentlemen on behalf of Dr. Reddy's Laboratories Limited that concludes this conference. Thank you for joining us and you may now disconnect your lines.