Dr Reddy Laboratories : Earnings call transcript - Q2 FY 24

Dr. Reddy's Laboratories Limited's

Q2 FY24 Earnings Conference Call

October 27, 2023

MANAGEMENT: MR. EREZ ISRAELI : CHIEF EXECUTIVE OFFICER

MR. PARAG AGARWAL : CHIEF FINANCIAL OFFICER

MS. RICHA PERIWAL : HEAD - INVESTOR RELATIONS &

CORPORATE ANALYTICS

Q2 FY24 Earnings Conference Call Transcript

October 27, 2023

Moderator:	Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Q2 FY24 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. Should you need assistance
	during the conference, please signal an operator by pressing '*' then '0' on your touchtone
	phone. Please note that this conference is being recorded.
	I now hand the conference over to Ms. Richa Periwal. Thank you, and over to you, ma'am.
Richa Periwal:	A very good morning and good evening to all of you and thank you for joining us today for the
	Dr. Reddy's Earnings Conference Call for the quarter ended September 30, 2023.
	Earlier during the day, we have released our results, and the same is also posted on our website.
	This call is being recorded, and the playback and transcripts shall be made available on our
	website soon.
	All the discussions and analysis of this call will be based on the IFRS consolidated financial
	statements. The discussion today contains certain non-GAAP financial measures or a
	reconciliation of GAAP to non-GAAP measures, please refer to our press release.
	To discuss the Business Performance and Outlook, we have our CEO, Mr. Erez Israeli; and our
	CFO, Mr. Parag Agarwal, along with the Investor Relations team.
	Please note that today's call is a copyrighted material of Dr. Reddy's and cannot be rebroadcasted
	or attributed in press or media outlet, without the company's expressed written consent.
	Before I proceed with the call, I'd like to remind everyone that the safe harbor contained in
	today's press release also pertains to this conference call.
	Now, I hand over the call to Mr. Parag Agarwal. Over to you, Parag.
Parag Agarwal:	Thank you, Richa, and a warm welcome to our Q2 FY24 earnings call, and a 'thank you' to
	everyone joining today.
	We have built on our positive momentum and delivered another strong quarter of financial
	results, with highest ever sales and record profitability. In the financial overview section that I
	will cover today, all the amounts are translated into US dollar at a convenience translation rate
	of 83.08, which is the rate as of 30th September 2023.
	Consolidated revenues for the quarter stood at Rs. 6,880 crores, that is US$ 828 million and
	grew by 9% on year-on-year basis and by 2% on a sequential basis. The growth was driven by
	the generics business, mainly in US and Europe.
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Consolidated gross profit margin for this quarter has been 58.7%, a decrease of around 40 basis points over previous year and broadly flat sequentially. Gross margin for the Global Generics

	and PSAI business were 63.6% and 17.8%, respectively.
	The SG&A spend for the quarter is Rs. 1,880 crores, which is US$ 226 million, an increase of
	13% year-on-year and increase of 6% quarter-on-quarter. The year-on-year increase is primarily
	on account of investments in sales and marketing, digitalization and other business initiatives.
	The SG&A cost as a percentage to sales was 27.3% and is marginally higher by 106 basis points
	year-on-year and 105 basis points quarter-on-quarter.
	The R&D spend for the quarter is Rs. 545 crores, that is US$ 66 million and is at 7.9% of sales.
	Our R&D investments are driven by ongoing clinical trials on differentiated assets as well as
	other developmental efforts to build a healthy pipeline of new products across our markets for
	both small molecules and biosimilars.
	The EBITDA for the quarter is Rs. 2,181 crores, that is US$ 263 million, and the EBITDA
	margin is 31.7%. Our profit before tax for the quarter stood at Rs. 1,913 crores, that is
	US$ 230 million, an increase of 19% year-on-year and 4% over previous quarter. The net finance
	income for the quarter is Rs. 123 crores.
	Effective tax rate has been at 22.6% for the quarter. The effective tax rate was lower than the
	previous year mainly due to adoption of corporate tax rates under Section 115BAA of the Income
	Tax Act of India. We expect our normal ETR for the year to be in the range of 24% to 25%.
	Profit after tax for the quarter stood at Rs. 1,480 crores, that is US$ 178 million. Reported EPS
	for the quarter is Rs. 88.8.
	Operating working capital reduced by Rs. 598 crores, which is US$ 72 million against that on
	June 30, 2023, mainly due to decrease in receivables. Our capital investment stood at
	Rs. 322 crores, which is US$ 39 million in this quarter.
	The free cash flow generated before acquisition-related pay out during this quarter was at
	Rs. 1,447 crores, which is US$ 174 million. Consequently, we now have a net surplus cash of
	Rs. 5,906 crores, which is US$ 711 million as on September 30, 2023.
	Foreign currency cash flow hedges in the form of derivatives for the US dollar are approximately
	US$ 648 million, largely held around the range of Rs. 82.9 to Rs. 84.5 to the Dollar,
	RUB 2,475 million at the rate of Rs. 0.98 to Ruble and AUD 2.7 million at the rate of Rs. 58.06
	to Australian Dollar, maturing in the next 12 months.
	With this, I now request Erez to take us through the 'Key Business Highlights'.
Erez Israeli:	Thank you, Parag, and a warm welcome to everyone participating in our earnings call today. As
	always, we appreciate your interest in our company.
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We are pleased to report a quarter with the highest ever revenue, EBITDA, profit before tax and profit after tax. We saw growing momentum in our products and businesses. Our geographic diversification and productivity improvement in operations enabled operating margin delivery. We continued strategic progress on our various key initiatives to ensure that we are well positioned for differentiated and competitive growth.

Let me take you through some of the key highlights of the quarter.

Sales for Q2 grew 9% and EBITDA grew by 13%, reflecting the portfolio strength and continued momentum in US and Europe. We generated healthy EBITDA at 32% and annualized RoCE at 39%. High cash generation leading to net cash surplus of more than US$ 712 million at the end of the quarter.

A few developments in our global biosimilars journey in the quarter includes receiving of GMP certificate indicating closure of inspection by the UK MHRA for our Bachupally biologics facility. A pre-approval inspection by the US FDA of our biologics facility based in Bachupally was concluded with nine observations. We will address them within the stipulated timeline. The CAR-T asset DRL-1801 was approved for clinical trials in India.

The leading financial publication, Financial Express and E-Cube, in a joint study, have named Dr. Reddy's as a leading company in ESG in India across sectors. The company received SA8000, a multi-site certification which includes six CTO units and 10 formulation units in biologics, and has been successfully audited and awarded compliance to ISO 20400:2017. This demonstrates the organization's commitment towards our social goals and accountability. We were conferred with the prestigious Golden Peacock Award for Excellence in Corporate Governance, 2023.

Now, let me take you through the 'Key Business Highlights for the Quarter'. Please note that all references to the numbers in this section are in respective local currencies.

Our North America Generics business recorded sales of US$ 384 million for the quarter, with strong year-on-year growth of 9%, while being broadly flat on a sequential basis. The growth was supported by market share expansion in certain existing key products and complete integration of Mayne portfolio, which more than offset price erosion. We launched four new products during the quarter.

Our Europe business recorded sales of € 59 million this quarter, with a year-on-year growth of 12% and a sequential increase of 4%. The contribution from new product launches and improvement in base business volumes more than offset price erosion. We launched a total of 20 products across markets during this quarter.

Our Emerging Markets business recorded sales of Rs. 1,216 crores, a marginal year-on-year decline of 1% and a sequential increase of 5%, primarily impacted by seasonality and unfavourable forex. While we may experience QoQ volatility, full year outlook is on track. We

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launched 32 new products during the quarter across various countries of the Emerging Markets. Within the Emerging Markets segment, the Russia business grew by 4% on a year-on-year basis

	and 9% on a sequential basis in constant currency.
	Our India business recorded sales of Rs. 1,186 crores and reported year-on-year growth of 3%
	and a sequential increase of 3%. Excluding loss of revenues from NLEM-related price reduction,
	India business grew in mid-single digit. Our focus on profitable growth, coupled with sales and
	marketing execution have led to gradual improvement in business performance.
	We further made following strides to access new growth levers and drive differentiation. We
	signed an in-licensing deal with Hengrui's NCE, Pyrotinib. We launched 'Nerivio' in India, our
	first digital therapeutic products addressing the unmet need of migraine patients. We launched a
	direct-to-consumer platform, 'celevidawellness.com' for serving the needs of diabetic patients
	in India.
	India remains our priority market and we will continue to strengthen presence in the generic
	business, while investing and building the innovation spaces.
	Our PSAI business recorded sales of US$ 85 million, with year-on-year growth of 5% and a
	sequential increase of 4%. We expect sales to improve over the next couple of quarters on the
	back of increasing volume pickup and strategic collaborations with regional and global players.
	We invested 7.9% of our revenue to empower and enhance our R&D competencies. Our efforts
	are focused on developing value-accretive products, including several generic injectables and
	biosimilars, where there is a patient need. We have done six global generic filings, including
	two ANDAs and one NDA filing in the United States during Q2 of FY24 and are on track to
	accelerate on this in the balance of the year FY24.
	We remain focused on building best-in-class capabilities and commercial infrastructure to
	leverage our portfolio to expand further. Our ability to adapt, strong execution and financial
	muscle will enable us to grow our core business and build pipeline of products to meet patient
	needs.
	I'm pleased with the progress that we have made so far this year and we have a clear plan in
	place to move forward at the pace to deliver on our key objectives and support the overall growth
	ambitions of the company.
	With this, I would like to open the floor for questions and answers.
Moderator:	Thank you very much. We will now begin the question and answer session. Anyone who wishes
	to ask a question may press '*' and '1' on their touch-tone telephone. If you wish to remove
	yourself from the question queue, you may press '*' and '2'. Participants are requested to use
	handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the

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	Q2 FY24 Earnings Conference Call Transcript
	October 27, 2023
	question queue assembles. The first question is from the line of Balaji Prasad from Barclays.
	Please go ahead.
Mikela:	Hi, this is Mikela, on for Balaji. Thanks for taking our question. Given India remains a priority
	market for you, could you just provide an outlook on your Indian market and just elaborate a bit
	more on the evolution in your India focus?
Erez Israeli:	The focus and the main effort is licensing and collaborating with the partners to bring innovation
	to India. This is the most important initiative that we have for India. In addition to that, we
	identified a focused portfolio, in which we are growing, and indeed, our biologics focused
	portfolio is growing very, very nicely. The overall performance of the portfolio that we have
	today is growing in mid-single digit. Part of it is also because we have obviously Cidmus that
	has a price erosion in line with the plans. While it meets our expectations from a business case,
	but naturally it has contributed to this decline. If you wish the portfolio that we are focusing on
	actually grows in double digit, then actually that's what you're going to see - quarter-over-quarter
	that we are actually improving our performance.
Mikela:	Great, and just one follow-up, if I can. What kind of innovations and therapeutic areas are you
	targeting? And just how willing are partners to launch in India, when you approach them about
	these deals?
Erez Israeli:	There is actually enthusiasm. Naturally, India is an important country, everybody understands
	that. There is always a concern about the price point, about the adoption of India and certain
	requirements that are relevant to localize the product - whether its local production or local trials
	or maybe different position of this product. But, in general, people understand that India is an
	important market, an important country, and they want to have a presence here, and they want
	to go very much with a reputable company, and we are one of them. Sorry, I lost the first part of
	the question.
Mikela:	Just what kind of innovations and therapeutic areas specifically are you targeting?
Erez Israeli:	Yes. Sorry about that. We are targeting primarily areas like cardiovascular, diabetes, CNS,
	oncology, especially in an area in which we can find standard-of-care or something that is better
	from the current standard-of-care. So, what is driving us is primarily if we see an innovation that
	are addressing those areas. This is also the area in which, at least in our analysis, we find the
	utmost unmet needs.
Moderator:	The next question is from the line of Kunal Dhamesha from Macquarie.
Kunal Dhamesha:	Hi, thank you for the opportunity. So, the first one is on the nine observations for the biologics
	plant that we have received. Can you please elaborate on what is the nature of these observations
	and whether we will need to undertake some corrective preventive actions there?

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	Q2 FY24 Earnings Conference Call Transcript
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Erez Israeli:	I believe that those observations are addressable. We are going to address all of them in the
	beginning of November. Some of them will require us to create a CAPA, which means we need
	to produce certain product for a certain period of time in order to show certain consistency of
	data, which will take us to January. But overall, I believe that this is addressable.
Kunal Dhamesha:	Sure. And second one is on the PSAI business. So, if I look at the gross margin for that business,
	it has gone down. Obviously, there's some growth on a quarter-on-quarter basis and year-on-
	year basis. But, is it primarily due to the unfavourable pricing environment? And if that is the
	case, do we get the benefit of lower API prices in our global generics business, if that is like
	more widespread pricing decline in APIs?
Erez Israeli:	I don't see such a decline in the API like it was in previous years. Most of the growth is coming
	when new products and launches that likely to happen by the customer for API or PSAI business.
	So, if you wish, we are now selling the API that will serve them in the next quarters. What we
	see now is the impact of the new portfolio that we worked on in the last couple of years, which
	is replacing the old portfolio from the decade before. And as time will go by, we will launch
	more and more of these products, and you'll see acceleration in growth because of that.
Kunal Dhamesha:	The gross margin for this business, will it also improve? Because it has come down to now
	around 13%?
Erez Israeli:	So, as we grow the sales, we normally grow the gross margins because it kind of has a relatively
	higher level of fixed cost. So, as you grow, you're also increasing your margin. That's what is
	likely to happen.
Parag Agarwal:	Kunal, to clarify, the gross margin for this business, we have reported is 18% during the quarter,
	not 13%.
Kunal Dhamesha:	Sure, I'll check. Lastly, you know, we have mentioned price erosion in US as a growth drag, at
	least on a quarter-on-quarter basis, perhaps. Now, this price erosion in this quarter, is it limited
	to a few large products such as Vasopressin or it is more broad-based price erosion that you are
	witnessing?
Erez Israeli:	The price erosion always affects certain products that went into either a bid or RFP or
	competitive situation in that particular quarter, it's never broad. But, let's say, relatively to other
	years, this year its more moderate than we are used to in other years.
Kunal Dhamesha:	Lastly, on the same thing, the shortage situation and then some of the short-term contracts, etc.,
	are those opportunities continuing into Q2 and probably in Q3, that is what the trend you are
	seeing?
Erez Israeli:	Yes, absolutely, the focus in the US is on continuity, service and sustainability of supply.
Moderator:	The next question is from the line of Neha Manpuria from Bank of America. Please go ahead.
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Neha Manpuria:	Thanks for taking my question. First is on the Mayne acquisition. When we announced this
	acquisition, it had a revenue base of about US$ 65 to 70-odd million. Post clearly five, six
	months of integration into the Reddy's portfolio, have we seen traction in terms of our ability to
	gain more volume in the product because we don't see that in products like NuvaRing, which is
	stuck in that 2% - 3% market share. How should we look at the acquired portfolio going forward?
Erez Israeli:	Each one of these products have different timing in which customers are putting their RFP or
	open for those kinds of discussions. I believe that this will grow and will pick up volumes as
	these timelines will be there. Most of those discussions are likely to happen in the second half
	of the year. So far, I'm happy with this deal. Its meeting our expectations and likely that you will
	see growth in the next two quarters.
Neha Manpuria:	On NuvaRing, sir, any reason why its stuck at about 2%-3% market share despite the launch in
	Feb?
Erez Israeli:	Timing of the discussions with customers.
Neha Manpuria:	Ok. Understood. My second question is on the India business. We have guided to wanting to
	grow higher than the market, double-digit in this business. But, for several quarters now, that
	hasn't been the case, at least if you look at the market data. When do we think we get to that
	growth trajectory? And the collaborations and licensing that we talked about, when do you
	actually see that materialize and flow through numbers?
Erez Israeli:	Likely, that we are going to see it already this fiscal. In terms of the innovation, what we see
	now is the launch of deals that we signed a year ago. So, it takes about 12 to18 months from the
	time that you sign a deal until you get your product approval. Naturally, you need to go through
	the regulatory process. In some of the cases, we need to do clinical trials and then regulatory
	process and then it takes a bit longer. This is also, right now, the main efforts in terms of building
	the portfolio in India. In each one of them, it's about - to bring the products that are either going
	to be the standard-of-care or better than the current standard-of-care. In addition, the products
	that we are focusing on, in India, are growing in double-digits and likely, that they will be more
	dominant in the future in that respect.
Neha Manpuria:	Just to understand this correctly, we are saying that we will be able to achieve double-digit
	growth in India this year?
Erez Israeli:	I believe that in the end of the year, we should see double-digit growth and continue in the
	quarters after.
Neha Manpuria:	How many of the licensing deals have been completed in India so far, just to get a broad sense?
	Is there any monetary value that we can attach to this, you know, this is the potential market
	opportunity or market size of these deals?

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	Q2 FY24 Earnings Conference Call Transcript
	October 27, 2023
Erez Israeli:	So, I hope I'm giving you the right numbers, but it should be around 10. We are normally going
	for a product, which will be at least Rs. 100 crores and of course, some of them can be much
	more than that.
Moderator:	The next question is from the line of Saion Mukherjee from Nomura. Please go ahead.
Saion Mukherjee:	Ya, thanks. Can you tell us on biosimilar Rituximab, what's the timeline you're looking at now
	for the US and European markets?
Erez Israeli:	We submitted it in April. We just got the pre-approval inspection. So, we will answer it by
	November. So, now we hope that it will stay on course and let's say, if everything will be okay,
	we will be able to launch it in the beginning of FY25.
Saion Mukherjee:	Ok. If I look at quarter-on-quarter revenue in the US, which is sort of flattish, can you just share
	the dynamics with respect to Mayne contribution, Revlimid and the base business, how each of
	these buckets have moved quarter-on-quarter?
Erez Israeli:	Most of the growth came from volume growth and the Mayne portfolio.
Saion Mukherjee:	Ok. And finally, on the US, how many launches we are expecting for the full year? How much
	we have done so far in the first half? How should we think about material launches from your
	pipeline, if you can guide something in terms of timeline, where you could expect some material
	launches to happen?
Erez Israeli:	Sure. So, this year, we are still on track with the 25 to 30 launches, and we have identified a
	group of between, something similar, 25 to 30 products, which are material that will be launched
	in FY25, in FY26 and FY27.
Saion Mukherjee:	How many, sir, 25 products you are saying across these three years?
Erez Israeli:	25 to 30 because there's some uncertainty about time of approval. So that's what we can guide.
Saion Mukherjee:	When you say material, what kind of revenue potential typically a product with the material
	contribution would contribute?
Erez Israeli:	It has to be at least with a single digit in millions of dollars of sales.
Moderator:	The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Surya Patra:	Thanks for the opportunity, sir and congrats for the great set of numbers. Sir, first, a clarification
	about the government grants. In fact, in the previous year, we have seen something around
	Rs. 300-odd crores, in the first half, it is more than Rs. 200 crores that we have already booked.
	So, what is the visibility here and how long this can sustain and this is relating to the PLI only
	or something else?

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	Q2 FY24 Earnings Conference Call Transcript
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Parag Agarwal:	So, this includes PLI, but it also has the other export incentives that we are entitled to. Overall,
	our PLI scheme and the other export incentives this year, would be marginally higher than last
	year. But quarter-on-quarter, there is always a fluctuation because we have to recognize this in
	line with the entitlement, sales growth that we show, as per the scheme. So, there are quarter-
	on-quarter fluctuations. But for the year as a whole, it will be higher than last year.
Surya Patra:	But this is sustainable, sir?
Parag Agarwal:	Yes, it is, for the next several quarters, we expect it to be meaningful.
Surya Patra:	Ok, fine. My second question is about the sustainability of the US business. So basically, having
	seen the run rate of around US$ 380 - 390 million kind of quarterly run rate and kind of the ramp
	up what we have witnessed in terms of our Revlimid. So, can we see a kind of a progressive
	performance in the overall US business going ahead? I'm saying progressive because I believe
	in terms of the volume limit condition, whatever that is there in case of Revlimid, every 12
	months that should see a kind of upward move. So, considering that, how should we see the US
	business going ahead in terms of the quarterly run rate and all that?
Erez Israeli:	The quarters can fluctuate. We discussed it in the past, because in the quarter, it very much
	depends on the ordering patterns of this product. But overall, you should see growth.
Surya Patra:	Ok, fine, sir. And my second question is about this European business. So, in the first half both
	the quarters we have seen a kind of very strong growth, more than 20% kind of growth. What is
	driving that? Is it the launch of the biosimilars, introduction of new products or any improvement
	in the pricing scenario there, demand situation improving? Could you give some sense about
	Europe, why is it delivering this kind of growth and whether it is sustainable even in the
	subsequent period?
Erez Israeli:	So, it's primarily new product launches. There is also some volume growth of the base business.
	And just more markets that we are participating in, more tenders. Most of our growth is coming
	from injectables and just winning tenders.
Surya Patra:	Since we are now seeing progress in the regulatory point of view as well as the launch point of
	view in terms of biosimilars, so, is it possible to share some update about the Pegfilgrastim
	success in the US and non-US market or even generally for biosimilars? What is the, let's say,
	annual or quarterly run rate that we are currently having? If you can give some sense, that would
	be really helpful, sir.
Erez Israeli:	So just to remind, Peg is not our product. It is a product that was part of the arrangement that
	was done many years ago with Merck Serono, after that was brought to Fresenius. So, they are
	selling it, we are getting only royalty. So, by design, its not a big amount. Most of our activities
	in the biosimilars, today, are in emerging markets, primarily Rituximab and in fact, other
	products, so India, Russia and other emerging markets. We are ramping up that activity. It is
	very important to us. We are going to have in the next two years or so, about five Phase-III of
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