Earnings Call Transcript - RDY Q4 2020

Operator, Operator

Ladies and gentlemen, good day, and welcome to the Dr. Reddy’s Q4 FY2020 Earnings Conference Call. As a reminder, all participant 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. Amit Agarwal. Thank you, and over to you, sir.

Amit Agarwal, Investor Relations

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, 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 transcript will be made available on our website soon. All discussions and analysis from 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. Saumen Chakraborty, our CFO; and the Investor Relations team. Please note that today’s call is copyrighted material of Dr. Reddy’s and cannot be rebroadcasted or attributed in press or media 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 continue to remain safe and healthy during these unprecedented times. Let me quickly provide you with an update on the current situation and how we, as an organization, are playing a part within the overall healthcare system in these extraordinary times. Our foremost priority is to ensure the health and safety of our employees, patients, healthcare professionals, customers, suppliers and the community at large. We have enhanced safety requirements across all our working locations, enforced physical distancing norms, mandated the use of protective gear and enabled remote working across all our global office locations. We have accepted the new reality and swiftly implemented an effective business continuity plan across the functions and have been able to ensure that our operations continue right through the pandemic without compromising the health and safety of our employees. From a supply perspective, together with the inventory on hand and the continued manufacturing support, we have been able to address the enhanced product demand across various markets. We launched several new products, overcame logistical barriers and, through effective customer engagement, continued business. In the branded markets, we’ve effectively leveraged the virtual connect model to support healthcare professionals, patients and our people. Overall, we are truly inspired to see how our colleagues across the company have risen to the occasion and overcome every obstacle in their path to fulfill our mission, which is to ensure the continued supply of medicines to patients and doctors under safe conditions. We are also fulfilling our role as a socially responsible corporate citizen and have extended support to communities through various initiatives, such as supporting healthcare workers, staff and police and other public servants by providing them with PPE kits, masks, sanitizers, gloves as well as food assistance to marginalized sections and migrant worker families. With this, I hand over the call to Saumen to take you through the financial performance of the company.

Saumen Chakraborty, CFO

Thank you, Prasad. Greetings to everyone. The current year financial performance has been quite good with the highest ever sales and EBITDA and a strong free cash flow, thereby turning net cash surplus. Let me take you through the key financial highlights for the quarter and FY2020. For this section, all amounts are translated into U.S. dollars at a convenient translation rate of INR 75.39, which is the rate as of March 31, 2020. Consolidated revenues for the quarter stood at INR 4,432 crore, that is $588 million, and grew by 10% year-on-year and by 1% sequentially. The year-on-year growth has been supported by good performance in North America Generics, Europe and emerging markets. Sequentially, while there has been good growth in North America and Europe, our branded market had lower sales. The revenues for FY2020 stood at INR 17,460 crores, that is $2.32 billion, and grew by 13%. The growth has been primarily supported by improvement in the base business volumes, new product launches and proprietary product out-licensing income, however, partially impacted due to price erosion. As regards to COVID-19-related impact, while we saw some incremental sales in certain markets, that is U.S., Europe and Russia, due to increased panic buying, our sales were impacted or deferred in PSAI, India and a few emerging markets, albeit on an overall basis, there was no major impact on Q4 or FY2020. Consolidated gross profit margin for this quarter has been 51.5% with a decline of 90 basis points year-on-year and a decline of 260 basis points quarter-on-quarter. The sequential quarter decline is primarily due to changes in the business mix and an increase in inventory provisions or write-offs related to this quarter. Gross margin for Global Generics and PSAI were at 55.9% and 28.4% for the quarter. The gross margin for FY2020 has been 53.8% against 54.2% in FY2019. The gross margin for Global Generics was 56.8% and PSAI was 24.1% for the full year. The SG&A spend for the quarter is INR 1,218 crores, that is $162 million, and declined by 1% year-on-year and by 4% quarter-on-quarter. The SG&A spend for the year is INR 5,013 crores, that is $665 million and has grown by 3%. The SG&A cost as a percentage of sales declined from 31.6% in FY2019 to 28.7% in FY2020, indicating the leverage benefit from improvement in sales. The R&D spend for the quarter is INR 419 crores, that is $56 million, and is at 9.5% of sales. The R&D spend for FY2020 is INR 1,541 crores, that is $204 million. R&D as a percentage of sales stood at 8.8% for FY2020 against 10.1% in the previous year. Other income for the year includes an amount of settlement income received in quarter one. The EBITDA for the quarter is INR 1,001 crores, that is $133 million, which is around 22.6% of the revenue. The EBITDA for the year is INR 4,643 crores, that is $666 million, and around 26.6% of the revenue. Profit before tax for the quarter is INR 714 crores with a year-on-year growth of 32%. PBT for the full year is INR 1,803 crores, a decline of 20% over FY2019. This decline was due to the impairment charges of INR 1,677 crores taken during the year. Adjusted for this, the PBT would have grown by a healthy 55%. Profit after tax is higher than PBT during the quarter and full year due to recognition of MAT credit and creation of deferred tax assets, in line with the requirements of accounting standards. We expect that the EPS would be around 22% for the next year. The reported EPS for the quarter is INR 46.01 and for the full year is INR 117.40. Operating working capital increased during the quarter by around INR 439 crores, which is $58 million. The increase is primarily attributable to an increase in receivables due to higher sales and delay in certain collections, which we expect to normalize in the current year. Net working capital days, however, have remained in line with the last quarter, supported by a reduction in inventory levels. We invested INR 150 crores, which is $20 million, toward capital investment in this quarter. The free cash flow generated during this quarter was lower at INR 7 crores, which is around $1 million, mainly constrained by an increase in receivables, which we expect to improve from the current quarter. The free cash flow generated during FY2020 is healthy at INR 2,313 crores, enabling us to now have a net surplus cash of INR 397 crores as on March 31, 2020. Our net debt-to-equity ratio is at negative 0.03 and reflects our strong balance sheet position. Foreign currency cash flow hedges for the next seven months in the form of derivatives for U.S. dollars are approximately $265 million, largely hedged around the range of INR 72 to INR 76.3 to the dollar. In addition, we have cash flow hedges of RUB 1 billion at the rate of INR 1.0283 to the ruble, maturing over the next 10 months. With this, I now request Erez to take through the key business highlights.

Erez Israeli, CEO

Thank you, Saumen. Good morning, good evening to everyone. I am very happy with the way we have adapted and continued our focus on execution even during these challenging times. We made good progress in implementing our strategy toward diversification, creating more opportunities with less risk and attaining a self-sustainable business model for each one of our businesses. FY2020 has been a very good year for us, reflected through the following: successful in obtaining the VAI status for CTO-VI after five years and desired outcomes for all other site inspections by the U.S. FDA; PBT growth of 55% adjusting for impairment charges taken during the year; EBITDA growth of 36% and improvement in the EBITDA margin; improvement in the ROCE adjusted for impairment charges taken during the year; healthy cash flow generation, leading to a much stronger balance sheet; turnaround performance for our North America Generics and Europe business; healthy double-digit growth in branded markets; continued traction toward development of our product pipeline across business; and productivity improvement seen across manufacturing, marketing, and R&D. Let me now take you through the key business highlights for each of our businesses. Our North America Generics business recorded sales of $250 million for the quarter with a strong growth of 17% year-on-year and 11% on a sequential quarter basis. The quarter witnessed an overall increase in demand driven by plenty loading by patients and inventory buildup by customers due to COVID-19 lockdowns. Further, we benefited from continued activity on new product launches coupled with favorable market share gains across some of our key products. In all, we launched five new products in this quarter, including our second CGT product, naloxone hydrochloride injection, as well as the first-to-market generic launch for gVimovo and gDaraprim. On a full-year basis, we launched 27 products, including four relaunches of earlier discontinued products. We expect the new launches momentum to continue during the year with about 25 product launches lined up despite uncertainty caused by COVID-19. Our Europe business recorded sales of €43 million, with a strong year-on-year growth of 81% and sequential growth of 10%. On a full-year basis, the sales are €148 million and have grown at a phenomenal rate of 53%. This performance is driven by improvement in the base business, new product launches, and ramp-up in three new markets: France, Italy and Spain. During the quarter, we launched one product in Germany, three products in the UK, and two products each in France, Italy, and Spain. This current year has reset a new base for this business, and we look forward to continued growth from here on. Our emerging markets business recorded sales of INR 804 crores in Q4, with a year-on-year growth of 15%, however, with a sequential quarter decline of 13%. On a full-year basis, emerging market sales have been INR 3,281 crores and grew at a healthy rate of 14%. Within the EM segment, the Russia business in Q4 grew by 9% in constant currency on a year-to-year basis, but saw a decline of 17% quarter-on-quarter due to a high base in Q3. In FY2020, Russia grew by 9% in constant currency. Overall, the growth in emerging markets was led by higher volume and new product launches, although partially impacted by price erosion in a few markets. During the quarter, we launched 10 new products across these markets. Our India business recorded sales of INR 684 crores with a year-on-year growth of 5%, however, with a sequential quarter decline of 10%. The growth was impacted due to logistics-related disruption caused by COVID-19 lockdowns. On a full-year basis, our sales were INR 2,895 crores and grew by 11%. We continue to witness a healthy order book for our business and are hopeful for good growth in the coming year. On the quality and compliance front, we have turned a new leaf with the resolution of pending issues for all of our sites. The recent audit outcomes for all site inspections have been positive. Quality continues to remain a key focus area and priority for the company going forward. During this quarter, we filed 45 formulation products across global markets, including three ANDAs in the U.S. market. As of March 31, 2020, we have 99 cumulative filings pending for approval with the U.S. FDA, including 97 ANDAs and two 505(b)(2) NDAs. We continue to strengthen our product pipeline across markets and are also working on a few molecules related to COVID-19 disease. On our Proprietary Products business, the USFDA recently approved our NDA for oral liquid celecoxib formulation named ELYXYB. This latest product emergence from Dr. Reddy’s portfolio for acute migraine treatment. Overall, we are making good progress in building and advancing a strong pipeline of high-value, globally relevant assets. We continue our efforts to monetize select assets through partnership and licensing transactions that maximize their value. We are going through a phase of uncertain business environment wherein the possibility of volatility remains high. However, there are certain structural tailwinds for us, such as opportunities for improving our market share across multiple markets and ramping up relevance in our global API business. Overall, we remain hopeful to continue to grow and emerge as a much stronger company, meeting the expectations of all stakeholders. With this, I would like to open the floor for questions and answers.

Operator, Operator

Thank you very much. [Operator Instructions] The first question is from the line of Yash Gupta from Angel Broking. Please go ahead.

Yash Gupta, Analyst

Thank you for giving me another opportunity, sir. My first question is on the domestic business. How are you looking at the Indian domestic business for the next two quarters as the MRs' productivity will come down and the number of prescriptions may decrease in the near future?

Erez Israeli, CEO

We don’t know how the market will evolve. I cannot predict it; we cannot predict it. Naturally, there is going to be an impact on the fact that patients could not visit physicians. And there will be a certain impact on that. On the other hand, we do see a place in which demand is higher. So I believe that once the lockdown is over, India will eventually ramp up toward normal consumption. When exactly it will be, I wish I knew.

Yash Gupta, Analyst

Okay. Thank you, sir.

Operator, Operator

Thank you. The next question is from the line of Anubhav Aggarwal from Credit Suisse. Please go ahead.

Anubhav Aggarwal, Analyst

Hi, good evening. One question is when we look at the IQVIA data, it shows that the U.S. generic market volumes were down in the last 45 days in April and May. Just wanted to check how has been the primary sales trend? Have we seen that the impact is largely on the secondary sales? Or have the primary sales been impacted as well?

Erez Israeli, CEO

Right now, we see a healthy demand coming from the customers. So we see the IQVIA numbers as well. Right now, what we see is normal activities on our side.

Anubhav Aggarwal, Analyst

Okay. That’s helpful. Second question is on generic Suboxone. So earlier, you mentioned that you have enough capacity that you could double your market share, the authorized generic has almost exited the market. Our market share has gone up, let’s say, 15% to 20%. But given our capacity size, we could have achieved a much higher market share. So I just wanted to understand what was the constraint here. The reason I am asking is innovators still have a 40% share. So just trying to understand our ability to take market share here.

Erez Israeli, CEO

We are able to take more market share, yes.

Anubhav Aggarwal, Analyst

No. But we haven’t done as well as we could have done, like Sandoz, who exited the market; had a 25% share, we could only take 5% share out of that.

Erez Israeli, CEO

You ask if there is a constraint? I don’t see a constraint on our side.

Saumen Chakraborty, CFO

So there is always a lag between contracted and actual reported sales.

Anubhav Aggarwal, Analyst

Okay. You mean to say that you have taken higher share, it will reflect in the future? Is that what you’re suggesting, Saumen?

Saumen Chakraborty, CFO

No, I don’t want to imply that. But I’m just saying there is always a lag, which there is between the two. That also you need to keep in mind. I am not implying anything.

Anubhav Aggarwal, Analyst

Okay, sir. Thank you.

Operator, Operator

Thank you. The next question is from the line of Neha Manpuria from JPMorgan. Please go ahead.

Neha Manpuria, Analyst

Thank you for taking my question. My first question is on the India business. I know that the Wockhardt deal is still pending, but what’s the thought process post the completion of that acquisition? What are the key areas that we want to focus on in that business?

Saumen Chakraborty, CFO

So right now, we are looking for the closure because a definitive agreement was signed, but the closure is contingent to completion of all the conditions precedent. Along with the closure, we’ll develop a full integration plan, and then we can give a full response to your question. Right now, it is too premature.

Neha Manpuria, Analyst

And by when do we expect the closure, sir, of the deal?

Saumen Chakraborty, CFO

It should be happening during this quarter. We’ll get back to you whenever it happens.

Neha Manpuria, Analyst

Okay, sure. My second question is on generic Vascepa. Post litigation win at the district court, just wanted to get a sense on where we are in terms of the product with the FDA?

Erez Israeli, CEO

So it’s a great win for us. And we believe that this is a product with a lot of potential. And right now, and as you know, there is still a legal process, and we are working toward exploiting the potential of this one.

Neha Manpuria, Analyst

But do we have a target action date on this? Or is there a CRL on this from an FDA perspective?

Erez Israeli, CEO

There is no regulatory issue on this one.

Neha Manpuria, Analyst

Okay, understood. Thank you.

Operator, Operator

Thank you. The next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.

Prakash Agarwal, Analyst

Yes. Thanks for the opportunity and congratulations on good numbers. Sir, just one statement you made on the U.S. business, COVID-related stocking in the U.S. So can you quantify that roughly? And also, is the stocking continued? Or the previous participant asked that volumes have come down, and you mentioned your volumes are okay; are you the beneficiary of some shortages in the market? If you could clarify that as well. Thank you.

Erez Israeli, CEO

So at the end of March, indeed, there was some piling up of inventories in the U.S., preparations for the COVID-19 situation. This is not happening anymore. Now it’s a normal trend of activities. There is nothing special now.

Prakash Agarwal, Analyst

Okay. But sir, you mentioned that your sales are okay. I mean you’re not seeing a drop. So I was just thinking if this one-time COVID restocking is not happening, are volumes going up due to some shortages or new launches are taking that share? If you could clarify that.

Erez Israeli, CEO

First, we have new launches and we launched also in the end of March, and we continue to launch in this quarter. This is absolutely helping us. We have some products gaining market share, and we expect also to get more. Overall, like I mentioned, so far, it is business as usual in the United States.

Prakash Agarwal, Analyst

Okay. And lastly, if you could give any guidance in terms of the number of product launches like you gave last year in the U.S. and also the outlook on PSAI business? Thank you, sir.

Erez Israeli, CEO

I mentioned in my script; it was about 25 products for the U.S.

Prakash Agarwal, Analyst

Okay. And the outlook for the PSAI business? Since you mentioned you have been filing a lot of DMFs, how should we see this business scaling up over the next 12 to 24 months?

Erez Israeli, CEO

It will be a great business going forward. We are not giving guidance as you know.

Operator, Operator

Thank you. The next question is from the line of Nithya Balasubramanian from Sanford Bernstein. Please go ahead.

Nithya Balasubramanian, Analyst

Yes. Hi, thank you for the opportunity. The first question is on the U.S. pricing environment. So can you tell us a little bit about what you’re reading right now post COVID? If pricing is better because supply is more important right now than pricing? And my second question was around SG&A and productivity improvement. You’ve obviously done really well in the recent past. So is this right now at an optimum level? Or do you think there are more efficiencies to be extracted?

Erez Israeli, CEO

So on the first question, the pricing situation in the U.S. has stabilized over time, and every year is getting better. So naturally, there will continue to be price decreases in the U.S. This is the business model, but it has stabilized compared to the previous years. The last call.

Nithya Balasubramanian, Analyst

But do you think COVID still specifically is helping or…

Erez Israeli, CEO

Maybe, but it’s yet to be seen. We need more time to see the pattern. Right now, I cannot comment on COVID-19; I really don’t know. On productivity, it’s not – because it’s productivity. We were able to generate growth without adding to our infrastructure costs, even including inflation. This is primarily by leveraging the activities in our sites, in R&D, in our marketing to do more in some places while using fewer resources. We are not yet at the productivity level that I expect us to be. So there is more potential for productivity improvement in the company going forward; in some areas, even much more. We have a quest to be the most productive owners in what we do, and we are on our way there.

Nithya Balasubramanian, Analyst

Are there specific areas that you can highlight? Is it sales force productivity or manufacturing optimization? What specific levers do you think you will be focusing on going forward?

Erez Israeli, CEO

First, it’s about leveraging the activity globally. It means that if we have one product, we want to sell it in many markets, and to provide that service to as many markets as we can from one operation center. Then the manufacturing needs to be modernized, with digitized facilities able to do it in the most efficient manner, then the time to market, the cycle time of activities, and of course, also lean SG&A, including the markets. So productivity is everywhere. But the primary cost that we have is naturally on the back end, which includes the products that we are buying, plus the sites that we have.

Nithya Balasubramanian, Analyst

Okay. Thank you.

Operator, Operator

Thank you. The next question is from the line of Vishal B from Aviva Insurance. Please go ahead.

Vishal B, Analyst

Hi. The higher growth in Europe that we saw in this quarter was mainly led by some large tenders? Or any other important aspects that you would like to point out here?

Erez Israeli, CEO

It was a better performance of the European teams in five countries, but primarily in Germany, plus new markets that we entered with injectable products, mainly Spain, France, and Italy. So it’s a combination of factors; it’s not just one product in the market. It’s the overall activities, better performance of our European team.

Vishal B, Analyst

Okay. And what would be your guidance for the whole year of 2021 in terms of growth in Europe that you see, some qualitative view?

Erez Israeli, CEO

We are not sharing guidance, sorry.

Saumen Chakraborty, CFO

Yes. A part of the receivables is in line with the increase in sales, but part of the receivables was because of some collections we saw in the recent months that we have been able to do. So that’s why I say that temporarily, what got increased in the quarter ending March will normalize in the quarter going forward.

Vishal B, Analyst

This increase was primarily in India or…

Saumen Chakraborty, CFO

Overall, it is both in India as well as some other markets. But overall, our cash cycle remains in line with what it was in the previous year.

Vishal B, Analyst

Okay. And lastly, some qualitative perspectives on Suboxone film as to how do you see the pricing and the competition shaping up? Any perspective on this?

Erez Israeli, CEO

It’s going to continue to be a great product for us.

Operator, Operator

Thank you. The next question is from the line of Kunal Dhamesha from Systematix. Please go ahead.

Kunal Dhamesha, Analyst

Hi, thanks for taking my questions. My first question is related to capital deployment. Now that we are net cash plus and generating INR 2,000-plus crores of cash every year, I think the Wockhardt acquisition could largely be paid through cash accrual only. So post that, what are our priorities, given the COVID challenges? Are we seeing opportunities in India to invest, or is share buyback on the cards?

Saumen Chakraborty, CFO

So in terms of deployment categories, our primary lever for growth has always been on the R&D side. So R&D and technology along with innovation will be one area of deployment. We would like to spend more on R&D in terms of absolute amount next year. So that will be there. Inorganic growth, we have been focusing but very strategically, with the articulation which Erez has already done earlier. We have chosen specific spaces where we want to attend to leadership. In line with those specific spaces, we are strategically thinking about inorganic growth. We are very comfortable regarding our balance sheet, so it should not be difficult for us if we get the right kind of target to move on in that area. We are deploying quite a bit of resource, going beyond capital in terms of overall resource including digital capabilities, as this is one thing we feel will help us improve productivity and create real differentiation.

Kunal Dhamesha, Analyst

Yes, partly. So on the CapEx side, how much are we planning to put for biosimilars and injectables? And what are our maintenance and the basic development CapEx for, let’s say, this year or the next couple of years?

Saumen Chakraborty, CFO

So I won’t be able to provide you with granular details. Overall, the CapEx for FY2021 could exceed INR 1,000 crores.

Kunal Dhamesha, Analyst

Okay, okay. And my second question relates to the launches in Germany, France, Spain, Italy. For the new product launches that we are doing, are we launching the same products in our portfolio, as you mentioned, that we will be leveraging whatever products we have, or are we launching new products?

Erez Israeli, CEO

Yes. That’s exactly it. So we want to leverage our portfolio globally, and the products that we launched are primarily products that we have also in the United States or that we will have in the United States, depending on the timing of the launch.

Kunal Dhamesha, Analyst

Okay. Based on that I’d say, I believe we have a long runway in terms of product launches, because we have 100-plus products in the U.S.?

Erez Israeli, CEO

Yes. And we will have much more in the U.S., and we will have much more in Europe. We just started to open in Europe.

Kunal Dhamesha, Analyst

Okay. Got it. Thank you.

Operator, Operator

Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.

Sameer Baisiwala, Analyst

Hi, thanks and good evening everyone. Great quarter. Is it possible to update us on generic Copaxone and NuvaRing in terms of timelines to resubmit data with the FDA?

Erez Israeli, CEO

Yes. So, we are working on both CRLs, and we are planning to submit them within the next few weeks to months.

Sameer Baisiwala, Analyst

Okay, great. What would your best guess be? Will this be getting to market in the current fiscal year?

Erez Israeli, CEO

I don’t know. I learned from these two products after we received multiple CRLs, so it’s better not to predict. Once we obtain approval, we will launch it.

Sameer Baisiwala, Analyst

Okay, great. One final question from my side. In terms of your capacity utilization now, how is it versus pre-COVID across your network?

Erez Israeli, CEO

We never stopped working. We had some bumps for a couple of weeks, but we never stopped working. And overall, there will be no impact related to COVID-19 on production.

Operator, Operator

Thank you. The next question is from the line of Kishore N from Motilal Oswal. Please go ahead.

Kishore N, Analyst

Good evening. Good set of numbers. Just would like to understand the gross margin. Is there any inventory-led write-off if adjusted for that? Then what would be the gross margin implied for the quarter?

Saumen Chakraborty, CFO

I cannot get into that finer level of details. I say that normally, the price erosion impacts gross margin. We have always been trying to improve productivity and various other measures to contain that. But there was a specific sequential decline, as I said, due to inventory write-offs as well as changes in the business mix.

Kishore N, Analyst

Understood. So would you like to call out for like FY2021 range of gross margin?

Saumen Chakraborty, CFO

See, I have earlier also said that the way we put our business model entails a gross margin of not less than 50%. If we look at how we have performed over various quarters across several years, it fluctuates, but it could be fluctuating from quarter to quarter due to specific events in those quarters. The normal expectation range will be between 52% to 54%.

Kishore N, Analyst

Okay, sir. And similarly, on R&D as a percentage of sales?

Saumen Chakraborty, CFO

Difficult to predict. It will depend on how much sales will be. But R&D on an absolute level, as I said, will increase. You can estimate it to be around 9% to 10% of sales maybe on R&D.

Kishore N, Analyst

Sure. And just lastly, on the India side, where it seems the supply chain issues are very much resolved whether it be in terms of capacity utilization or in terms of distribution of the product. But is the willingness of patients to reach out to doctors? If that takes time, then would it mean that we continue to change the system but ultimate sales would get delayed by three, four months?

Erez Israeli, CEO

So we will naturally experience an impact because of that reason you mentioned, and it will also impact us. All channels in our case will stay open, and we will continue to serve any customers that we have. I believe that it will improve in the future once the lockdown is over.

Kishore N, Analyst

Okay, sir. Thanks once again.

Operator, Operator

Thank you. The next question is from the line of Nikhil Mathur from AMBIT Capital. Please go ahead.

Nikhil Mathur, Analyst

Yes, hi. Good evening everyone. I just have one question. Since this COVID outbreak, we have seen that a number of plants, both for the operative and the industry as a whole, a number of plants have been given clearances by the USFDA. But the clearance status given is largely voluntary action indicated, and very few plants have received action that is more action indicated. So my simple question here is, does the voluntary action indicated leave room for the FDA to come back and cite certain noncompliant issues at a particular facility? Or are you confident enough that even with the VAI status, the facilities have resolved the issues within a month horizon?

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

So VAI does not mean they’ll come back. It means that the action plan we submitted is acceptable and the site is clear. NAI is applicable only when there is no action necessary at all. I don’t think it has anything to do with COVID, but it’s more about the GMP status of the action plan and acceptability.

Nikhil Mathur, Analyst

Okay, sure. That was the question. Thank you.

Operator, Operator

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

Damayanti Kerai, Analyst

Hi, good evening everyone, and thanks for the opportunity. Sir, can you quantify how much of sales were impacted due to logistic disruption in the quarter? And are we confident about recovering most of the sales that were delayed?

Saumen Chakraborty, CFO

So we are, again, not giving granular details of how much has been impacted due to logistics. It has been particularly in India, we mentioned that. Otherwise, we have been growing well during the year. Last quarter, in the last fortnight of March, we faced genuine problems in dispatching, and we can only recognize revenue subject to the proof of delivery being there at the end of our distributors. So regarding recovery, it all depends on how this whole COVID-19 pans out. We cannot predict at this point. But whatever could not have been dispatched due to logistics, once it opened up, it has been dispatched, if that answers your question.

Damayanti Kerai, Analyst

Okay, sure. And how…

Erez Israeli, CEO

make sure, all the stuff to us that we were not able to recognize in March, naturally, we could recognize once it reached the customer level, that’s what Saumen is trying to say.

Damayanti Kerai, Analyst

Sure. My second question is: how are you viewing India in terms of launches planned? Last year, obviously, it was a very strong year in terms of launches. So how are you planning for the next one or two years in terms of new launches for the Indian market?

Erez Israeli, CEO

It’s going to continue to be strong for us as well.

Damayanti Kerai, Analyst

Okay. Similar to 25, 30 launches a year, that’s a range we should look at?

Erez Israeli, CEO

We are not guiding on that. It’s going to be very healthy.

Operator, Operator

Thank you. The next question is from the line of Alok Dalal from CLSA. Please go ahead.

Alok Dalal, Analyst

Yes, good evening. Just one question on the injectable pipeline for the U.S. Your last update states about 30 injectable products awaiting approval. How do you see the launch pipeline for FY2021?

Erez Israeli, CEO

It’s the same as last time we discussed. Still, a big portion of our portfolio in value is in injectables, and it will continue to be like this also going forward.

Alok Dalal, Analyst

Okay. Can you guide, as to out of 25 new launches, how many could be injectable?

Erez Israeli, CEO

We are not providing this kind of information.

Alok Dalal, Analyst

Okay. That’s it from my side. Thank you.

Erez Israeli, CEO

Thank you.

Operator, Operator

Thank you. The next question is from the line of Aditya Khemka from DSP Mutual Fund. Please go ahead.

Aditya Khemka, Analyst

Yes, hi. Thanks for the opportunity. So Saumen, did I hear you correctly, the R&D budget for FY2021 you mentioned is around 10% of sales?

Saumen Chakraborty, CFO

I didn’t say that. I only said the absolute amount will be higher than FY2020. It all depends on sales. But I mentioned it could be approximately 9% to 10% of sales. That’s what I mentioned.

Aditya Khemka, Analyst

Okay.

Saumen Chakraborty, CFO

But it cannot be accounted for as guidance.

Aditya Khemka, Analyst

No, fair enough. And secondly, you also guided towards a CapEx of over INR 1,000 crores for FY2021. Safe to assume a similar run rate for FY2022 as well?

Saumen Chakraborty, CFO

Too premature to comment on that. I said some of the projects that we’ve started and approved in FY2020, so that some of that is going to spill over to FY2021. So for FY2021, I could provide guidance; FY2022, we cannot speak about anything right now.

Aditya Khemka, Analyst

Right. So my question really is that if you see your costing side, be it R&D or your capital expenditure, I see slightly higher amounts dedicated to R&D and CapEx versus six or three months earlier. So what is driving this optimism in terms of R&D investments and capital expenditure? Are you observing more demand for which you need more capacity or more opportunities for which you need higher R&D? What is driving this higher expenditure on both R&D and capital expenditure?

Erez Israeli, CEO

When we discussed our strategy, it suggests leadership in the spaces we discussed previously. In the past, the main investment was throughout the United States, now we are diversifying our strategy. So first of all, we have more products in more countries that will require more quantities. The primary investment is that we are going to ramp up to develop more products and more differentiated products. So it’s a combination of both. On the capacity side, it’s primarily more investment in the Indian portfolio.

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

And I’d like to add to that; we are also investing in modernizing some of our older plants, which will require some level of investment.

Aditya Khemka, Analyst

Got it, Prasad sir, thank you. Just one follow-up on that. So we had earlier alluded to an aspirational target of achieving 25% EBITDA margin by FY2022. In light of the higher capital expenditure and the slightly higher R&D that we are speaking about, do you think that’s still an achievable target?

Erez Israeli, CEO

First, I never said FY2022. I did say 25% and I believe that is achievable, and we will achieve it.

Operator, Operator

Thank you. Ladies and gentlemen, we take the last question from the line of Saion Mukherjee from Nomura. Please go ahead.

Saion Mukherjee, Analyst

Yes, thanks for taking my question. Sir, just on the biosimilar bit, you mentioned about CapEx there. Is it more to do with the regulated markets or the opportunity you see in the emerging markets? Can you give some more color on the biosimilar business?

Erez Israeli, CEO

So the capacity is for overall markets because we are utilizing the products for all the spaces that we are in. We are not dedicating capacity for a specific market. Our products are, by and large, global. So it’s a capacity for each one of the relevant spaces that we have, especially if you remember that we discussed the space of hospital products. This is a truly global business. And for biologics, again, it’s a global market, in which we will be self-sustaining for the United States and Europe with a couple of products in which we will have, hopefully, partnerships that will help us market those products and finance our R&D.

Saion Mukherjee, Analyst

Okay, thank you.

Operator, Operator

Thank you. Ladies and gentlemen, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.