Earnings Call Transcript - RDY Q4 2021

Operator, Operator

Ladies and gentlemen, good day, and welcome to the Q4 and FY '21 Earnings conference call of Dr. Reddy's Laboratories Limited. I now hand the conference over to Mr. Amit Agarwal, Head of Investor Relations at Dr. Reddy's Laboratories Limited. Thank you, and over to you, Mr. Agarwal.

Amit Agarwal, Head of Investor Relations

Thank you. 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 and full year ended March 31, 2021. Earlier, during the day, we have released our results and the same are also posted on our website. This call is being recorded, and the playback and transcript shall be made available on our website soon. All the discussions and analysis of this call will be based on the IFRS consolidated financial statements. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's comprising Mr. G.V. Prasad, our Co-Chairman and Managing Director; 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 written consent. Before I proceed with the call, I would like to remind everyone that the safe harbor contained in today's press release also pertains to this conference call. Now I hand over the call to Mr. G.V. Prasad. Over to you, sir.

G.V. Prasad, Co-Chairman and Managing Director

Thank you, Amit. Good evening, good afternoon and good morning to all the participants. I do hope that you and your families will remain safe and healthy during these challenging times. I would like to start this call by thanking all our teams from the bottom of my heart for the work they are doing for COVID patients in India and the rest of the world. I also want to thank all our teams who are ensuring the safety of our frontline workers and teams by ensuring all the precautions for COVID. All of us at Dr. Reddy's are driven by our purpose and belief that good health can't wait. We are motivated to serve patients in every possible way and with utmost urgency. This is reflected in the multiple collaborations we have entered to develop and commercialize a wide range of preventive and curative options for COVID treatment. As you already know, we launched the Sputnik V vaccine today. And we have also, over the past few weeks, ramped up our supply of multiple medicines, including Remdesivir to meet the surge in demand. We are also working on the launch of newer treatment options, which we will bring to the market in the next few months. We have also ensured that supplies of our existing medicines continue uninterrupted and we continue to meet the market demand for all our markets. Being sensitive to the current realities, we are extending help in all possible manners to our employees, including additional insurance coverage, converting some of our residential training facilities into dedicated in-house treatment facilities, supporting people with virtual doctor consultations, arrangement of medicines, oxygen and any other required support. While we do all this, we remain committed to our strategy of attaining market leadership in our chosen spaces, driving operational excellence with continuous improvement and focusing on patient-centric product innovation. Each of our current businesses will continue to drive growth for the next few years. But we are also investing in building for the future through advancing science, digitalization and innovation. These are extraordinary times that call for finding solutions rapidly and making them available to as many people as possible in the shortest possible time. This is what is driving us, and we are all committed to playing our part in helping people to get back to health at the soonest. With these opening remarks, I hand over the call to Parag for taking you through the financial performance of the company for the quarter and for the year. Over to you, Parag.

Parag Agarwal, CFO

Thank you, Prasad. Greetings to everyone, and thanks for joining this call. Given the prolonged COVID times, I hope you and your families are keeping safe and healthy. I'm pleased to take you through our results for the quarter 4 and full year of fiscal 2021. It is yet another year of good financial performance with highest ever sales in EBITDA and a strong cash flow generation from operations.

Operator, Operator

I’m so sorry to interrupt you. Sir, may I request you to come a bit closer to the phone, sir.

Parag Agarwal, CFO

Yes. Is that better? Okay. It is yet another year of good financial performance with highest ever sales and EBITDA and a strong cash flow generation from operations. The profit before tax adjusted for impairment in both the year and for out-licensing and settlement income in FY '20 grew by 45% for the year despite COVID-related challenges. Let me take you through the 3 financial highlights for the quarter and the financial year as companywide in a bit more detail. For this section, all the amounts are translated into U.S. dollars at a convenient translation rate of INR73.14, which is the rate as of 31st March 2021. Consolidated revenues for the quarter stood at INR4,728 crores, that is USD 646 million and grew by 7% on a year-on-year basis and declined by 4% on a sequential quarter basis. Year-on-year growth has been supported by a growth in most of our businesses. Sequential decline was primarily due to lower sales in branded markets and recognition of milestone income in quarter 3. The revenues for the financial year 2021 stood at INR18,972 crores, that is USD 3.59 billion and grew by 9%. A business for out-licensing income during FY '20, the growth stood at 13.5%. The growth is supported by new product launches, contribution of the portfolio acquired from BOCAD, improvement in the base disease volume, scale-up in new markets and favorable currency exchange. Consolidated gross profit margin for this quarter has been 53.7%, an increase of 220 basis points year-on-year, a decline of 10 basis points on a quarter-on-quarter basis. The year-on-year increase is primarily attributable to improved product mix and productivity, partly offset by lower export incentives and price erosion in the generic markets. Gross margin for the global generics and PSAI were at 57.9% and 31.7% for the quarter. Gross margin for financial year '21 has been 54.3%, which is an improvement of 50 basis points over financial year '20. Gross margin for the global generics and COPI were at 59% and 29.5% for the year. The assumed expense for the quarter is INR1,428 crores, that is USD 195 million, an increase of 17% year-on-year and a decrease of 1% quarter-on-quarter. The year-on-year increase is primarily due to additional expenses incurred with the integration of the business acquired from BOCAD, higher freight costs, investments in digital capability building, and higher filing costs. The SG&A spend for the year is INR5,466 crores, that is USD 746 million and has grown by 9%. The SG&A cost as a percentage to sales was 28.8%, which is similar to the previous year. The R&D spend for the quarter is INR409 crores, that is USD 56 million and is at 8.7% of sales. The R&D spend for financial year '21 is INR1,654 crores, that is USD 226 million. R&D percentage to sales stood at 8.7% for FY '21, which is in line with the previous year. The improvement in R&D productivity is reflected in higher filings across our markets. The EBITDA for the quarter is INR1,133 crores, that is USD 155 million, and the EBITDA margin is 24%. The EBITDA for the year is INR4,748 crores, that is USD 649 million. EBITDA margin for the year is at 25%, which is in line with our expectations. Our profit before tax for the quarter stood at INR807 crores. That is USD 110 million, and that for the year stood at INR2,832 crores, that is USD 387 million. Effective tax rate for the quarter has been 31.4%. The ETR has been impacted due to the recognition of deferred tax assets related to depreciation and goodwill pursuing a recent change in income tax regulation. Effective tax rate for the year has been at 32.4%, higher primarily due to non-recognition of deferred tax assets on losses arising out of impairment. We expect our normal ETR to be in the range of 25% to 26%. Profit after tax for the quarter stood at INR554 crores, that is USD 76 million, and that for the year stood at INR1,915 crores, that is USD 262 million. Reported EPS for the quarter is INR33.29 and that for the year is 115.14. Operating working capital decreased by INR139 crores, which is USD 19 million, again that on December 31, 2020, mainly driven by a decrease in receivables, partially offset by an increase in inventory. Our capital investments stood at INR288 crores, which is USD 39 million in this quarter and INR974 crores, which is USD 133 million during the year. The free cash flow generated during the quarter was INR792 crores, which is USD 108 million, mainly supported by profitability and decrease in operating working capital. The free cash flow generated during this year was at INR761 crores, which is USD 104 million. Consequently, we now have a net surplus cash of INR751 crores, that is USD 103 million as of March 31, 2021. Foreign currency cash flow hedges in the form of derivatives for the U.S. dollar are approximately USD 675 million, largely held around the range of INR74.6 to INR77.6 to the dollar, even 7,200 million at the rate of INR0.9906 to the Euro, AUD 10 million at the rate of INR57.7 to the Australian dollar, and South African rand, 148 million at the rate of INR4.96 to the South African rand maturing in the next 12 months. With this, I now request Erez to take us through the key business highlights.

Erez Israeli, CEO

Thank you, Parag. Good morning, and good evening to everyone. I hope that you and your loved ones are staying safe and well during this surge of the pandemic in India. I'm quite happy with the way we have been able to manage our business operations during these unprecedented times. While we have made significant efforts to bring to market a range of COVID-related drugs as part of the response to global pandemics, we remain committed to our long-term strategy and continue to push our agenda forward towards accelerating growth in each of the areas. The full year '21 has indeed been a milestone year for us, which is reflected in the following key highlights: successful completions of clinical trials for the Sputnik V vaccine in India, leading to an eventual launch today, development and launch of several COVID-related drugs, successful integration of the business acquired from BOCAD in India, healthy sales growth supported by all our major markets; attaining EBITDA margin of 25%, consistent with our aspiration, ROC adjusted for impairment charges also moving towards our aspirational targets; healthy cash flow generation leading to a much stronger balance sheet, scaling-up of product development pipeline for all of our businesses and productivity improvement across manufacturing, R&D and commercial sections of the business. Now let me take you to the key business highlights of our business. Please note that all the reference to the numbers in these sections are in respective local currencies. Our North America Generics business recorded sales of $237 million for the quarter, with a decline of 5% year-over-year and a growth of 1% on a sequential quarterly basis. On the back of a much higher base of March 2020, which was driven by pantry loading by patients and significant inventory buildup by customers due to the COVID-19 lockdowns at the time. On a full-year basis, the sales for the business were $948 million, a growth of 4% over the previous year. Despite all the industry level headwinds and COVID-related slowdowns, our business has managed to grow for the second year more. We launched 6 new products during the quarter, including Remdesivir tablets, which have been rated CGP status. Overall, for the year, we launched 28 new products, including 1 relaunch. We expect this strong new launch momentum to continue through the current year as well as with a similar number of launches. Our Europe business recorded sales of EUR 45 million this quarter, with a year-on-year growth of 4% and sequential quarter decline of 5%. On the full year, the sales of EUR 178 million and have grown at a strong rate of 20%. The growth is driven by both new product launches and improvement in volumes across the market. During the quarter, we launched 3 new products in Germany, 4 in the U.K., 1 in Italy and 2 in Spain. During the full year, we had 14 new launches across our markets in Europe. We are extremely pleased with the strong turnaround in both our key generics businesses of North America and Europe. Our emerging markets business recorded sales of INR885 crores with a year-on-year growth of 10% and sequential quarter decline of 8%. On a full-year basis, the emerging market sales have been INR3,509 crores and grew by 7%. Within the EM segment, the Russia business in Q4 grew by 10% on a year-on-year basis and declined by 11% on the quarter-to-quarter basis in cost and currency. The quarter-on-quarter decline has been largely due to a market slowdown seen in this quarter. In FY '21, the Russia business grew by 1% in constant currency. Our business in China has performed well beyond expectations. During the quarter, we launched 31 new products across emerging markets. Our India business recorded sales of INR845 crores with a year-over-year growth of 23% and a sequential decline of 12%. The sequential decline was driven by the reduced demand for COVID drugs during this quarter as the infections remained low and seasonal impacts on our portfolio. On a full-year basis, our sales was INR3,342 crores and grew by 15%. Adjusted for sales contribution from the portfolio acquired from BOCAD, we grew at 8% during Q4 and 2% in the full year. While we saw an increase in physical connections with healthcare professionals, the physical activities again reduced significantly in the recent months due to a COVID surge. During the quarter, we launched two new products in the Indian market. As per the report of March 2021, we have now ranked number 11 in the MAT basis. Our PSAI business recorded sales of $108 million, with a strong year-on-year growth of 9% and sequential quarterly growth of 14%. On a full-year basis, the sales were $431 million with a strong loss of 19%. While there may be fluctuations in quarter-on-quarter growth trends for this business, owing to a change in order book cycles, we believe that there is a reasonable headwind for sustained growth in both API as well as custom services business. On the R&D front, we continue to strengthen our pipeline of products across the markets. We focus R&D investment in value assertive assets. During the quarter, we filed 57 drug master files globally, including 7 filings made in the U.S. We have also filed 60 formulation products across global markets, including 11 ANDAs and 1 NDA in the United States. In addition to these new filings, we have filed multiple supplements and variations as part of manufacturing or business cost deployment initiatives to enhance our overall competitive position in the U.S. market. As of March 31, 2021, we have 95 cumulative filings pending for approval with the U.S. FDA, which include 92 ANDAs.

Operator, Operator

Ladies and gentlemen, we lost the line of the current speaker. We would request you to please hold the line, while we will be joining back on the call. Ladies and gentlemen, we have Mr. Israeli reconnected. Over to you, sir.

Erez Israeli, CEO

Yes. I saw about this disturbance. Apologies for the inconvenience. We are progressing with Phase III trials on some of the next wave of biosimilar products, which are at different stages of development. In our proprietary products business, we are progressing with Phase III trials for CTCL indication. Additionally, efforts are underway to globally monetize key approval and market assets. During the current quarter, we out-licensed the development, registration, and commercialization rights of Elixir, which is the sale of an oral solution for the EU 5 markets. While the current business environment involves uncertainty due to the global pandemic, we believe that the foundation is solid and the multiple growth levers are available for us to sustain this growth trend in FY '22 and beyond. Our growth will be primarily driven by organic moves, focusing around pipeline amortization, productivity enhancement, diversification, and capability ramp-up in marketing and digitalization. Further, our strong balance sheet allows us to continue to invest in the right set of inorganic opportunities to enable long-term growth. With this, I would like to open the floor for questions and answers.

Operator, Operator

The first question is from Prakash Agarwal from Axis Capital.

Prakash Agarwal, Analyst

So first question is on the Sputnik V. Just wanted to understand the opportunity better. So it's about 100 million plus doses. And how should we think about since we have the marketing and how should we think about in terms of monetizing this opportunity? I mean?

Erez Israeli, CEO

Yes. So first, just to put the database together, we have the rights for the first 250 million doses in India, which translates to 125 million patients. The initial supply will come from the imported stock that will come out of Russia. In the meantime, we have 6 contractors that we are qualifying to manufacture the product locally in India. This is specifically for the country of India. In addition, there are discussions with the RDIF and other engagement for the future for India. We are also in discussions with them about quantities and rights assets permitted for other countries. So this is the overall view that we have at this stage.

Prakash Agarwal, Analyst

Yes. Just trying to understand for modeling purposes, even if we assume that we make INR100, 10% on the current price, the sales opportunity could be as high as INR2,500 crores.

Erez Israeli, CEO

We are not providing guidance, and we cannot share the specific details at this time. However, we announced that the price for the import route will be INR945 before tax. The global pricing of Sputnik is around $10. That's the information we can provide.

Prakash Agarwal, Analyst

Okay. Got it. And my second question is on the margin trajectory. So clearly, we have seen some improvement versus last quarter, which had some one-offs. But we are still below quarter 1 and quarter 2, which had obviously lower cost due to lockdowns. And we are a little behind on our 25% aspirational guidance. So I mean, how do we see this achieving in '22?

Erez Israeli, CEO

We are very much on the radar. And we are not giving guidance again. But in terms of aspiration, we are very much there. We also put efforts in order to make our activities more robust. So we invested a little bit more than the average in terms of building capabilities for the future, including digital activities. So in that respect, we are very much committed to the numbers that we shared in the past on both the EBITDA as well as the ROC.

Operator, Operator

The next question is from Damayanti Kerai from HSBC Securities and Capital Markets.

Damayanti Kerai, Analyst

Please go ahead. My question is about the U.S. business. We are consistently launching around 20 to 25 products each year, yet our quarterly sales remain in the $240 million to $250 million range. Can you explain what could significantly boost U.S. sales from this current quarterly run rate? Additionally, what is the current price erosion level for your portfolio?

Erez Israeli, CEO

The U.S. market is experiencing some similar trends. Unfortunately, price erosion is not helping. However, the model remains consistent. When certain products encounter competition, particularly from larger customers, they will naturally face pricing pressure. This trend is expected to persist into FY '22, although I can't predict whether it will be in the single-digit or double-digit range. Nevertheless, the model will continue as it is. The products that we are developing will keep growing, especially those that carry higher value. It's important to note that our focus is not only on sales but also on profit. We are actively working on various initiatives to lower costs and transform the cost structure of our active pharmaceutical ingredients and pharmaceuticals. This approach will continue to enhance the profitability of the U.S. market.

Damayanti Kerai, Analyst

And my second question is the India part. So the fourth quarter definitely has some impact of seasonality. But barring seasonally and uncertainties around the current COVID situation, how do you see India business progressing in the next few quarters?

Erez Israeli, CEO

India, first of all, I'm very optimistic. Even though there are concerns about confidence in India, the company believes firmly in India. And India is a very important market for us; we are part of the effort against the pandemic in India. So I do see growth in India. We have launched several COVID products, including the ones mentioned earlier and additional products will come. Our portfolio is getting more and more robust. In addition to that, we improved our capabilities and focused better on our major brands in India, which I believe will grow as well. Overall, I'm very bullish about the Indian market and the new activities that we will announce in the future.

Operator, Operator

The next question is from the line of Kunal Dhamesha from Emkay Global.

Kunal Dhamesha, Analyst

So first is on EBITDA margin as we continue our journey towards our aspirational goal of 25% EBITDA margin. But from here, what are the 3 key drivers of the EBITDA expansion in your view in order of importance? Obviously, there would be product mix, etc. But in the order of magnitude, which you believe could have the greatest impact on our journey? If you could share that, that would be great.

Erez Israeli, CEO

Yes, certainly. The main drivers of EBITDA are similar, though they may seem like common knowledge, they vary in significance for fiscal year 2021 and beyond. First, we are concentrating on our relevant portfolio. We are developing an attractive future portfolio that we plan to prioritize heavily. This portfolio will be both larger and more profitable. The second aspect is boosting our productivity within the existing portfolio. We have been working on several initiatives related to our operational models, which include overall productivity improvements. Additionally, we are heavily investing in digital initiatives, as we strongly believe in the benefits of digitalization and automation, which are already showing promising results. Lastly, we are expanding our market share in both branded and unbranded products. We are applying the same principles that have been relevant in this market for nine years and are continuously improving our execution each quarter.

Kunal Dhamesha, Analyst

Sure. We have been discussing our significant investment in digital initiatives. Could you specify how much we've invested so far, and is there a possibility that these investments will decrease significantly in the near or medium term? Additionally, can we expect any cost savings from these investments over time? Any insights you can share would be appreciated.

Erez Israeli, CEO

So, I can say that if you look at FY '21, our CapEx was primarily focused on operating expenses; much of the goal is related to these investments in R&D or in digital capabilities. We want to ensure that our growth in CapEx is aligned with scaling up our operations. So if I recall correctly, we had about INR1,000 crores of CapEx in FY '21, which is more than the years before, and it's primarily to prepare for future growth.

Kunal Dhamesha, Analyst

Sure. And the investment in digital will come down. Do you foresee that it would come down once we are through the cycle, and can come down drastically in the coming quarters?

Erez Israeli, CEO

The investment in digital will continue to grow, and it will replace manual activities. Overall, the expense base will go down.

Operator, Operator

Next question is from the line of Neha Manpuria from J.P. Morgan.

Neha Manpuria, Analyst

My first question is a continuation of the operating costs. Looking at the SG&A spend, it has been increasing in the last two quarters to about INR1,540 crores. How should I view this going forward? Do you anticipate the rate of increase will rise as we invest in digital and launch more products, or do you believe this level is sufficient to support the growth we have planned for the next two years?

Erez Israeli, CEO

We have done it? Do you want to take it?

G.V. Prasad, Co-Chairman and Managing Director

Yes, I think take it. So yes. The SG&A expense as a percentage of sales for the full year, as you know, is flattish compared to the last year. It has gone up in the last few quarters, primarily driven by 2 factors. One is we are prioritizing the supply and availability of our products across all markets, and because of COVID's impact, freight costs are higher; hence the ratio is slightly worse because we are prioritizing supplies. And the second reason is the increased investment that we are making behind digitalization and higher product filing costs. The levers impacting SG&A are clearly the investment we make on one hand and the productivity we drive on the other hand. From one quarter to another, you can expect fluctuations. As you know, we are operating in uncertain times right now, and the impact of COVID also impacts this line. So I would say that going forward, we can expect to see higher investments in digitalization, as it has been mentioned. We can also see some of this being offset by productivity. I believe this will shape how we enter the future.

Neha Manpuria, Analyst

Okay. Understood. And Erez, in your opening comment, you mentioned about the Russia market seeing some disruption in the quarter, which led to the quarter-on-quarter growth. If you could give some color on that? And was this something one-off like destocking? What led to this disruption?

Erez Israeli, CEO

Yes, the demand from the consumers in this quarter was less than usual and less than anticipated. It's probably due to the financial situation of those customers as well as a relatively low season. As you know, our products are very seasonal, and this was something I do not see as a quality issue. I see that as primarily related to this period of time.

Operator, Operator

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

Sameer Baisiwala, Analyst

Erez, the first question on Sputnik. What's the timeframe within which you think you can supply the 50 million doses that you're contracted for India? And when do you think that the local manufacturers will start giving the supplies?

Erez Israeli, CEO

Yes. Thank you. I anticipate that between now and July, maybe August, the primary supply will be from Russia. The first quantities will come from the Indian manufacturers hopefully by August and September. It depends, of course, on the qualifications of those sites and the ability to meet the bridging studies, etc. But this is at least the anticipation. If this plan holds, we can deal with these quantities within 12 months.

Sameer Baisiwala, Analyst

Excellent. And the second question, Erez, is on the U.S. 2 products. One is the 500-milligram powder. I think you launched the other 2 forms, but this 1 is pending FDA approval. So is it holding it back? And when do you see this getting approved? And second is on. What's the outlook for the launch? And when do you think you can have sort of a smooth supply of API?

Erez Israeli, CEO

Yes. Amit, if you can take the first one, because I don't recall the status of it. Bear with me, that will give you the details of it in a second; the second, indeed, we faced a shortage of supply. I believe that we can launch within the next quarter.

Amit Agarwal, Head of Investor Relations

Yes. And on the first one, the 500 mg sachet, we expect it sometime in this year.

Sameer Baisiwala, Analyst

Okay. That's right, broad, Amit.

Amit Agarwal, Head of Investor Relations

No, it is not expected in the next 1 or 2 quarters, but maybe during H2 of the year, we expect.

Sameer Baisiwala, Analyst

Okay. And if I missed your point on as you said, you launch it in the next couple of months, but you said something about the API supply, would it be with a smooth supply? Or would it be with a limited supply?

Amit Agarwal, Head of Investor Relations

It's good supply.

Sameer Baisiwala, Analyst

Excellent. So sir, with your confirmation, 1 last question, if I may. And that's about your 95 pending filings with the FDA. So 3 of them are NDAs. Are these generic kind of products? Or are these specialty branded kinds of products?

Erez Israeli, CEO

These are generic, more of a generic products, not the specialty products, which we were having in the proprietary product segment. You are basically generic product to cycle 505(b)(2) out.

Operator, Operator

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

Nikhil Mathur, Analyst

Sir, my question is around the recent products that you have launched in collaboration with Pharma. I wanted to understand now the company having invested so much into injectable capacity in the past, why does Dr. Reddy's still have to work with contract manufacturers for injectable products?

G.V. Prasad, Co-Chairman and Managing Director

I can answer that. So I think the PMS require dedicated facilities, which we don't have. And thus, we are using those dedicated lines. Our capacity is for oncology and multipurpose, Insulins, and all of these require specialized dedicated facilities.

Nikhil Mathur, Analyst

Okay. And will it be possible in 1 year or 2 years' time frame for Dr. Reddy's to establish capabilities in this space so that in the future, whatever positives are there, the company doesn't have to profit share with contract manufacturing?

G.V. Prasad, Co-Chairman and Managing Director

I don't think we will ever say that we will do everything in-house. There will always be opportunities to create value through partnerships. And Dr. Reddy's has gained a lot through many partnerships. So I will not say that we will do everything in-house. Of course, where there is a business case there are volumes, we will do that, but we will not say that we do everything in-house.

Nikhil Mathur, Analyst

Okay. Okay. And just one more question. Does Dr. Reddy's have any ambitions or plans to enter the U.S. facilities generic business? Because a couple of last are quite heavily invested in that business space. Do you see that as an opportunity for Dr. Reddy's as well sometime down the line?

G.V. Prasad, Co-Chairman and Managing Director

You talked about respiratory products. It's not a big space for us, but it's something we don't know what we'll do in the future at this time. But right now, we are not investing a lot in inhalation.

Operator, Operator

The next question is from the line of Ranvir Singh from Sunidhi Securities.

Ranvir Singh, Analyst

My question again relates to that Sputnik. So just wanted to understand the price which has been refreshed right now is for imported consignment or even if you can start manufacturing ourselves or get it manufactured in India, will the price remain the same? Or will the price be redetermined?

Erez Israeli, CEO

This is a price that is related to the approved imported product. If and when we will have approval for the contract manufacturers, I hope we will be able to offer a better price to the market.

Ranvir Singh, Analyst

Okay. And second question, again on Sputnik. Further RIDF has got a manufacturing agreement with all 5 players. Will these manufactured products be distributed through you or will they have a separate distribution agreement with them?

Erez Israeli, CEO

For the first 250 million vaccines, we have the rights from all of these countries. What will happen after that, we will have to discuss and agree with RIDF and of course, those contractors. At this stage, they are all working for our distribution.

Ranvir Singh, Analyst

Okay. And the last one, if I can. You saw news yesterday that your entail licensing deal for a therapy product called. So just we wanted to understand the more details on it. What is the outlook? What kind of market actually will it cater to and what prospects can we expect from this?

G.V. Prasad, Co-Chairman and Managing Director

I will take it. So this is the cell therapy. It is in early stages of development with our licensing partner. It's not going to be a big product. It's a niche therapy, but it is an area we want to explore because we have a strong presence in oncology in small molecules, as well as biologics. We are getting into this to offer an affordable option to Indian patients. In the process, we will gain skills in cell therapy. We will have a facility to convert cells into CAR-Ts and then administer them to patients. This is an entry into a new space but in a therapeutic area that is very key to Dr. Reddy's. At this time, it is too early to predict margins because we have to go through clinical development.

Ranvir Singh, Analyst

But how is the cell therapy market in India currently? How many products?

G.V. Prasad, Co-Chairman and Managing Director

There is no market today. Today, it is not available to Indians. We have to go abroad to get this done.

Operator, Operator

The next question is from the line of Shyam Srinivasan from Goldman Sachs.

Shyam Srinivasan, Analyst

Just a clarification on the supplies again. When it is locally manufactured. And I think as you said that 50% of the locally manufactured vaccines should be given to the central government and 50% is state and private. Would that rule apply to you as well?

G.V. Prasad, Co-Chairman and Managing Director

I think to domestic manufacturers, it could be applicable as they stand, but these rules are evolving every day, as you can see. So it's hard for us to predict when we then supply, ease in the next few months, what exactly will happen. But you're right about that rule for Indian developed and manufactured medicines. But there are contracts also that Russia and RIDF have signed with the local companies. So we'll have to see how the situation evolves. But we will do whatever the government mandates us to do.

Shyam Srinivasan, Analyst

We believe that the export opportunity for Sputnik V could be significantly larger due to our strong presence in emerging markets, despite the challenges posed by local regulations and the various payers we will be engaging with.

Erez Israeli, CEO

I think, I’ll take it. Regarding the export, we have 2 routes for engagement. One is that it is made in Russia in those other countries, and we have several discussions and we do see an opportunity for those markets out of that route, along with the additional capacity in Russia. The intent is that India will be a big hub for Sputnik in the future. Therefore, a portion of the quantities needed for India will also be for export, but this is still in discussions.

Shyam Srinivasan, Analyst

Got it. The last question is about the PSAI business. We have observed good growth, which the press release indicates is primarily driven by volume, despite some price erosion. What is the sustainability of this growth in fiscal '22? From a capacity perspective for API and PSAI, are we in a good position? Is the inventory-driven demand we experienced in the first half of last year still ongoing, or what is contributing to this volume increase?

Erez Israeli, CEO

Yes. So I think the main drivers of the business are good execution on our end to provide products with the right servicing at the right cost, especially during these challenging times. It is primarily driven by focusing on those products in which we can have a global market share, which is our main drivers. In terms of geography, it's mainly driven by Asia, China, Japan, Korea, and some products in the United States. As for the future, the API will grow, but it will fluctuate. There will be quarters that it will look soft, and there will be quarters that it will look positive depending on the timing of inventory pickup by the customers. So it's not going to be linear quarter-on-quarter necessarily. But absolutely, our API business will grow and become more profitable.

Operator, Operator

The next question is from the line of Alok Dalal from CLSA.

Alok Dalal, Analyst

Any updates on Copaxone and filing?

Erez Israeli, CEO

We got the recent CRL, and we are still working on its solution.

Alok Dalal, Analyst

This is for both products, Erez?

Erez Israeli, CEO

You asked about Copaxone, the next season. What was the question? Sorry. We are still waiting for the feedback. Yes, go ahead.

Alok Dalal, Analyst

So I was asking about an update on Copaxone.

Erez Israeli, CEO

Yes, yes. So Copaxone, I gave you. We are still working on the CRL that we had said in January. And in the case of, we submitted the CRL response in December, and we are waiting for feedback, which is likely by October.

Alok Dalal, Analyst

Okay. Will these be FY '22 launches?

Erez Israeli, CEO

Unlikely for both of them.

Alok Dalal, Analyst

Okay. And second and last question, how should we think about the capital allocation strategy for the next 2, 3 years? How important will acquisitions be a part of this?

Erez Israeli, CEO

Yes. We have a very good balance sheet and a relatively strong financial capacity. We are always looking for opportunities. We are keen to take deals that we find suitable for our strategy. Having said that, we are not in a shopping spree. We will go after assets that fit us well, primarily focusing on products and brands for specific capabilities we want. This will be globally focused, but the main target will be India and similar markets.

Alok Dalal, Analyst

Okay. And CapEx will be higher than FY '21?

Erez Israeli, CEO

The CapEx will be around the same numbers, maybe a bit higher if everything goes through. It depends of course on COVID-related activities and restrictions, but I'm assuming it will be roughly around the same as what we had in FY '21.

Operator, Operator

Thank you. Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to Mr. Amit Agarwal for closing comments.

Amit Agarwal, Head of Investor Relations

Thanks, everyone, for joining us today for the earnings call. In case of any further queries, please reach out to the Investor Relations team. Stay safe and healthy. Thank you.

Operator, Operator

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