Dr. Reddy's Laboratories Limited analyst Q&A

Thank you very much. We will now begin the ‘Question & 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 only, while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Balaji Prasad from Barclays. Please go ahead.

This is Mikela, on for Balaji. Thanks for taking our questions. Just two from us. First one is, what is your latest thinking on generic pricing trends, particularly in the U .S.? And could you provide a bit more color on how you see this trending going forward? And second one, what are your thoughts around the Chinese pharma market in 2024? Thanks so much.

So, the first question is just continuation of the pricing environment that we saw in the last couple of quarters. So, we are, give or take, in the same environment, meaning that relatively to other years, it is less than it used to be . M ore focused on service, sustainability of supply. B ut obviously, the business model did not change. And, in every place that competitors are coming, we see price erosion in the same neighbourhood like we have discussed in previous quarters. As for China, we do see very good tracking for approvals. We got nine approvals since the beginning of this fiscal and 3 in the last quarter. So, for us, the momentum continues in China.

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

Hi, thank you for taking my question and congratulations on a good set of numbers. First one, on the U.S. product launch and filing momentum. So, if I look at the first nine-months data, we have launched twelve products in the U.S., and we have just made eight new filings and our total pending ANDAs also have come down from 90 in Q4FY22 to now 79. So, is it because we are focusing on a few therapy areas, more complex? If you can provide some color there, would be helpful.

So, yes, we do have less filings, let us say, overall, because we are now focused on products that we believe is meaningful. But it is still a healthy number of files. I believe that you'll see in the next coming months more filings that are coming, just timing of those files. On the launch piece, we will have more than 20 this year. So, it looks like a healthy number. But , obviously in the U.S., what is important is the type of product launches, not the number of launches, but so far it looks healthy for us.

Sure, and then just a follow up on that. Now, we have acquired this MenoLabs, if you can provide some clarity as to how does this fit into our strategy? W hat was, probably, the last 12 months sales for these brands? And what is the acquisition value that we have paid, and does the increase in borrowing quarter-on-quarter relate to this? Erez Israelī: So, at the start, at that time of what we call Horizon -2, we decided to focus , in general, as a company, on three type of segments - NCE & NBE, I'm talking primarily collaborations or BD/acquisitions; OTC and nutraceuticals; and digital therapeutics. Specifically, for the U.S., we decided to focus on OTC in several areas, including working on digital aisle on our private label as well as brands in women ’s health. So, we acquired Premama in the past and now , we have complementary products, brands that were added to it. The idea is to create franchise in women health supplements. So, that is the kind of, if you wish, diversified U.S. business, to areas that have different patterns of demand and supply and the brand awareness. I don't recall exactly the sales of MenoLabs, because we are talking about the range of millions of dollars there. So, it is relatively small. We believe that we can take it from there.

And, after this what would be our U.S. revenue contribution from the wellness products or OTC products? I think earlier we used to provide it in 20F or the quarterly filing. I'm not sure now do you provide that?

So, the OTC, if I may, on an annual basis, should be about 10%, give or take, of the overall U.S. business.

Thank you. I have more questions. I will join back the queue.

Thank you. The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.

Ya, thanks for the opportunity. Sir, firstly, on the receivables which have increased on a quarter- on-quarter basis - is this on certain select products or is it across the portfolio ? And for which markets?

No, receivables increase is primarily in line with the top -line increase. So, it's nothing unusual. It's across the market , but largely concentrated in the U .S. So, it's in line with the normal top - line increase.

Ok. Secondly, gross margin for PSAI segment has been higher for the quarter , compared to the previous quarters. So, anything in specific you'd like to comment?

Yeah, we are growing. And, because of the nature of the business that has normally a high level of fixed costs. So, when you are increasing the sales, you normally will have better margins. So, it's just a reflection of the growth. I'm happy that we are back to growth. It took us quite some time to achieve that. I think now we are, it looks like, in the right direction.

Ok. Because, second quarter, the PSAI revenue was Rs. 960 crores with 13% gross margin and now, it is Rs. 1,040 and the gross margin has improved to almost 22%.

Yes, so it's a combination, again, of the mix and the combination of more sales . And there was nothing unusual in that. It's just a type of growth.

And just lastly, considering the launches and the filings and the market share gain for the existing products, if you would like to share outlook for the U.S. business for FY25, we are approaching now at the end of FY24. So, if you could share some color on that?

You know that we are not giving guidance, but we are supposed to continue to do well in all the levers. So far it looks healthy for both commercial products, service to the customers, and price environment. Lenalidomide is going to continue to be meaningful. So, all the levers should continue to work well also in the next coming quarters.

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

Thank you so much for taking my questions. If I were to look at the SG&A spend increase that we have seen in the quarter or even if I were to look at it over a three-year period, I know you’ve mentioned that we've been investing in Horizon -2 projects that you talk about. But from a monetization point of view, when should we start seeing this contributing to revenue? I'm just trying to understand, when should we start seeing operating leverage in the higher spend? And do you think this number continues to trend up from where we are?

Yes, so part of it which is related to the investment we put now in certain brands in India, will give results already in FY25, because that's the nature of the game. So, we are creating demand. Some of it is related to investment that will take more time as we are putting money into building products that will be launched in FY25-26 and even 27. So, likely that, this level, at least value wise, will continue to be a bit higher, but I do see more growth in revenue. So, overall, it should be in the same environment that it used to be in the past , meaning before that. But let's say to your questions, part of it will be already in FY25 and part of it will be in FY26 instead.

And, you know, if I were to dig a little deeper on the points on the launches . I know in your analyst meet; you've mentioned certain areas that you're working on. But , out of the 20 -25 launches that you talk about in the U.S., can we try to understand as to how many of these could be the ‘bread and butter ’ launches that we need , to offset the base business and how many of these could be meaningful products? Some color there would be helpful.

Yes, so we have overall about 26 products that can be launched, if it will get approval. We will know then when and only how in the market that can be launched. And I'm talking about products that can be meaningful. What meaningful means, probably in tens and millions and more than that. This is what is, let's say, for the second discussion, meaningful. The question is what combination of that will get to the market and what will be the sale that? Of course, I don't know, but we are building on that to offset the period after lenalidomide. In addition to that, we are planning to have a growth in the other levers as well as potential business that will come. So, the combination of those is supposed to lead & address to that.

And, you know, just to follow up on that, the 26 pr oducts would be over the next 2 years, 3 years, how should I look at the timeline for that?

So, potentially, with all the cautions about this kind of product s, I refer to product that are supposed to be in the next two years, 25 and 26. If it 's going to 27, we have more products , of course, subject to approval, subject to winning court cases, subject to all the normal challenges that go into bringing products to the market. But, let's say, it's a healthy list of ‘tough to make’, ‘tough to develop’ products.

Understood. And my last question on the biosimilar pipeline. Could we talk about how many products we are developing for the U .S. and European market? And when should we start expecting, some sort of a timeline, or let's say a progress update on the pipeline that we're looking at for biosimilars?

We are talking about 6 products by FY30. And again, subject to receiving approval in those timelines and subject to winning the patent cases. But this is what we are aiming for. If you recall, at the time when we had the change that we made , after the arrangement that we had, at the time, with Merck Serono, we decided to skip a couple of years and to move to products that we have a chance to be ‘first-to-market.’ This is the strategy. The first product should come in the beginning of calendar 2027 and then, the rest of the products by FY30. Then, of course, we have a bunch of products that will come later between FY31 and FY35 and ongoing. So, that's right now the pace for which we are planning.

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

Hi, thank you for the opportunity. My first question is for your India business. So, you obviously mentioned you're working on some innovative product s, digital therapeutics etc. to improve market offering. But I just want to understand like how far these opportunities are right now for you because it appears that this kind of product uptake might take some time and meanwhile , your India business is , I'll say, growing slowly than the market. So, how do you bridge your growth versus market growth till the time those innovative products start delivering results?

Sure. First, just to calibrate, a part of the reason that people see single digits is that for Cidmus, the brand that we acquired, the price erosion that we had, which we anticipated is part of the business plan that we took into account when we acquired this brand, contributed about 2% for that decline. Plus, in the base of last quarter last year, we had also products that we divested. So, if we are taking those, we are already in the p lace of double digits. But going forward, what's more important, we identify brands that should grow even faster than the market. So, I'm talking about brands that will grow at the pace of 1.5x the market for those specific brands, so we are building behind them. And in addition to your point, indeed, those pick up may take time, but it's a very significant pipeline that we are building now. All the products that we are bringing in innovation are better than the current standard of care, so it will be meaningful growth, more in the medium term. In April 25, I'm expecting to see double digit growth of India business from the big ones.

Okay, that's comforting to hear. My second question is on your U.S. business. So, obviously you delivered a very good set of numbers. So, a few reasons you mentioned - pickup in market share for some key products etc. So, just want to understand, was the Revlimid contribution for the third quarter even much higher than what we saw in the first and second quarter? And have you seen like what kind of pickup you have seen on the Mayne portfolio?

So, you know that I cannot speak unfortunately on quantities on lenalidomide. I can also say that it's absolutely within our expectations. And I'm expecting it to be meaningful also in the future. As for Mayne, we see pick up. We see that it is growing. So far it is within our expectation. I'm happy for this acquisition.

Ok, thank you. And my last question is, can you talk about your progress in som e of GLP -1 products, specifically for anti-obesity indications, which you might be targeting for, say, U.S. or other export markets?

So, we decided, like many others, to be in this segment. It's a very important segment for us. It's in our interest from both areas. First, we are very much into anti-diabetics, not just in India, but also actually globally and we build ourselves. And the second is the peptides, as a family , we believe that it's a core strength for us, both on the API as well as on the sterile facilities that we have. So, the combination of that, we want to play in these markets very much, and to address some of the needs. So, we are planning to launch globally, we mean in all the countries that we have a reach, these products when the relevant patent situation will allow us to do that.

The next question is from the line of Surya Patra from Phillip Capital. Please go ahead.

Thanks for this opportunity. So, my first question is on the U.S. business. In fact, the base U.S. business excluding, let's say, Revlimid and the recently acquired Mayne’s portfolio, it looks like that Y-o-Y we are kind of seeing is flattish performance, despite the improved pricing scenario in the U.S. So, could you qualify that whether that is the k ind of trend what we have also seen and what is the kind of growth that we are anticipating for the base business?

So, I can confirm that the base business is growing, and this is attributing to our ability to and the efforts that we put on b oth inventories and service, and obviously relationship s with customers. I anticipate that these trends will continue, also, in the future. And naturally, with the geopolitical situation in certain areas, concern about sustainability of supply is an important topic for customers. And we see ourselves as a partner to help them with that challenge. And, wherever we are successful, we also see more sales.

Ok. Regards the recent M&As what we have seen, let's say, leveraging the cash flow generation from Revlimid, I think we have done a couple of acquisition s and already announced 3 -4 odd kind of in-licensing arrangements. So, cumulatively, all these initiatives should have also contributed to the growth in the base business. So, in fact, could you share that, what is the kind of incremental growth that such M&A initiatives would have added to the base business? And going ahead over a period of, let's say, next 3-4 years, I mean, beyond Revlimid opportunity, so what base business growth that you are anticipating out of the M&A activities?

So, I'm not calling M&As as base business. It’s by design, new stuff that we are adding to t he company. It's not just M&A s - we have all kinds of collaboration s - licensing in , JVs, also M&As. All of that is primarily to strengthen the future portfolio as per the strategy, whether it’s in, like I mentioned, it can be on the base product s like Mayne, but mostly, it is about what we call Horizon -2 - again NCEs & NBEs, OTC & nutraceuticals and digital therapeutics. So, actually most of the efforts are coming from that. In addition to that, we are always looking for opportunity. By the way, it’s not the money from gRevlimid. It’s the money that we make ‘also’ from gRevlimid, but also from the other activities of the company. How much it will contribute? As much as we'll be able to buy. We potentially have a significant financial capacity, and we are very active in the market. At the same time, we are not buying for the sake of buying or for the sake of any other reason. We buy, because we feel it’s a good deal for us and its meaningful for our strategy. So, like I said, in the past we are not on a shopping spree. We are buying what we believe is good for us and strategic for us.

Regards the inspection outcomes for the Bachupally facility. So, what risk that one should assign to it or what is your practical assessment here, sir? Do you find any risk to the existing business, given the kind of number of observations that has been issued to you? And the nature of the observation that has been highlighted?

Yes, so you're talking about the FTO-3, I'm assuming.

Correct.

So, first, what is the risk? The risk is we get an OAI. Is there a possibility for that? Yes, there is a possibility. There is always a possibility, but there is a possibility that it will happen. What I can update is that first, we addressed all the observations in stipulated time. After that, we gave, twice, to the FDA, with the blessing also of external consultants, data that shows that the CAPA that we put in place is working. This is happening in two instalments, one in December and one in January. And I believe that it's a robust answer, but, of course, we will wait for the FDA response for that.

So, just one last clarification from my side. Whether you have commented on the MenoLabs size and potential contribution to our U.S. business?

No, I did not, because I don't remember the numbers. I apologize for this.

And we’ve not disclosed the number, but as Erez had mentioned, couple of millions is what is there. And as the business progresses, we'll keep updating you all.

Thank you. The next question is from the line of Bino Pathiparampil from Elara Capital. Please go ahead.

Hi, good morning, good evening. Just a couple of quick questions. One, you have this product , gLumify, which you have been licensed in the U.S. So, is there any timeline we can get regarding the approval of the same?

I don't have any information about this one.

That is there actually in the pipeline product, and we'll keep updating once, when the approval is in place.

Second on biosimilar Rituxan. Could you give some color on what sort of timelines you have in mind for the launch? Also, given the recent inspection of U.S. FDA and the outcome, etc.?

So, we submitted in April. We got the FDA inspection on time in October. We addressed the FDA observation s. We did not receive any additional information. So, if everything will be without any CRL or any query that will come from the U .S. FDA, the earliest that we can get approval is the end of April, but of course, it may be late, if we will get any query or CRL.

Understood. Okay. And Erez, you mentioned about this biosimilar pipeline, which kind of starts from CY, calendar year 27, and going into the 30s. Do you have some products which could be among the first wave or the first biosimilar to some of the products within that?

This is the intent. All the products that we are developing, we are developing with the intent to be either first or in the first wave.

Thank you. The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.

Ya, thank you. Good evening and thank you for taking my question. Erez, just the first one is on the overall CDMO kind of space, I know you have a subsidiary. But just want to understand, are you able to see more demand coming from global innovators towards India based companies , including companies like yourself or your subsidiary? So, that's the fi rst question. And are you investing in capacities, either on the small molecules side or the biologics side for manufacturing for CDMO?

So, its ‘yes’ for both. The caveat is that still our business is not that big, so I cannot say that it’s an overall global trend , but the trend that we see is the growth. And indeed, we do invest in capacity, both in the labs as well as for production , for products that we have contracts and we know that the capacity will be, of course, be paid by those contracts.

So, Erez, I'm just trying to understand from a capital allocation standpoint, will this be significant for you or you think we have enough other projects in the pipeline for us to be, you know, or do you think this will be a small part and will not be ramping up?

The CDMO is not in the overall scheme of things, capital allocation will not be big. But it’s a business that should go from tens of millions of dollars to hundreds of millions of dollars, that's the expectation. But, in the overall scheme of things of the whole size of the company, it's a relatively small business.

Just a second, a financial question to Parag. I'm just looking at your disclosure around net cash generated after removing t axes and looking at FC F. So, the conversion has been low. So, just want to understand, I know there has been an acquisition you paid out for in the quarter one, but just want to understand , either in terms of CAPEX or in terms of intangible build -up, is there something that we need to keep in mind?

So, I think the only thing I would point out is what Erez mentioned, which is we are investing in strategic inventory build -up. So, we are investing in new product pipeline build -up. Also, because of the supply chain, the sea routes disruption, we don't want to lose any sales. So, we are also increasing inventory in our front -end markets. So, it’s primarily the working capital impact, apart from the receivables increase, which is in line with normal sales. So, that’s the key reason. Otherwise, our cash flows on various fronts continue to be healthy. The conversion is healthy.

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

Thank you for the opportunity again. Just continuing the last question on the inventory build-up. So, how much of our product would probably be going through sea route now and anything going through Red Sea route as of now?

So, the majority of the products are going for the sea route. The situation creates an opportunity to move something by air, in a strange way, certain products are even better to do by air now. But of course, this is a volatile situation and may change. But in general, we are trying to address the majority. The majority means that for us it should be 80% plus. The second one is that we are trying to have as much inventory in the U.S., very close to the customers, part of our service to address customer need . We see that as an advantage for us , as we can give the customer a service that they may not get from others. So, this strategy, of course, leveraging the fact that we have a healthy balance sheet helped us a lot to grow.

Sure, sure. And just one related question in U .S. Over, let’s say, the last three to four quarters, how has the one -time or short -term supply opportunities behaved for you? Are those supply opportunities increasingly coming to you or decreasing in the last three, four quarters?

I would say that the one -time situation is not big. And there is no , let’s say, tangible trends on that. For me, it's more of the fact that if we are gaining share, we are gaining it for the long term. This is more something that we are focused on. And most of the growth that we have in our base products is more longer term in nature, rather than a one-time buy.

So, is it fair to say that now the agreements that are being done are for a little longer period of time versus what it used to be, let's say, two years back?

Every customer has its own pattern of procurement. I don't want to go into details, but in general, we do see appreciation of the approaches we are taking. So, we are trying to position as a partner for customers in certain areas.

Sure, sure. And one on the India business. So, we have said that we want to focus on our key brands. We have identified in India where we want to grow 1.5 times the market rate. Could you provide some ballpark number as to how much of these key brands will be contributin g to our India business?

So, most of the contributions to the overall growth that India is supposed to do, will come from those brands. So, when they will grow at the pace we mentioned, the overall India business will grow by double digits.

Sure. And the last one, because you are focusing on the GLP -1 opportunities, can you provide some color on how much is our peptide manufacturing capacity? And are we manufacturing anything currently for regulated or semi-regulated markets?

We are focusing not just on GLP -1. We are focusing beyond that, like other peptides, etc. But to your point, yes, we are making, but most of the volume s is yet to be launched , because the products are still under patents or are still under approval process , by either ourselves or by partners, external partners.

But any capacity that you want to put out ? Like some of the other global players have put out that they can manufacture 32,000 litre capacity to manufacture GLP-1.

Let's say that we invested a lot in our capacity, both on the API as well as on the finished products. I will not tell out the numbers of the capacity.

Thank you. The ne xt follow -up question is from the line of Neha Manpuria from Bank of America. Please go ahead.

Ya, thanks again for taking my question. Just to confirm, out of the 26 products that you mentioned, Erez, in the U.S. pipeline which are meaningful, n one of these would be from Bachupally? Would that be a fair assumption? Bachupally, FTO-3?

In FTO-3, we do have, I think, two products that are part of that. And , so in the case that we have an issue, we will have to move it to a nother site that we have, if it will come into that situation.

From a pipeline dependence, upcoming launches, how important would FTO -3 be ? J ust to understand the risk in case of an adverse outcome?

Not significant. Most of the products are oral solid, most of them commercial, so not significant. Obviously, we don't want it, it’s not nice to our reputation, et cetera, but it’s not significant. Most of the growth will come from Vizag and not from Bachupally.

Got it. And Parag, on the moderation in the gross margins that we have seen in the generics business - how much of that would be, I mean, the quarter -on-quarter moderation, would all of that be because of pricing pressure or is there any other big factor t here? I think FX would be the other one, I'm assuming.

It's more of a mix issue, Neha. I mean, pricing is obviously there, but it's very stable. So, pricing doesn't stand out, but it is just that the offset from new product launches from the product mix has been a bit lower, that's all. So, it's not that the price erosion is higher, price erosion still remains at the same level. It's the upside from the other things that we see in terms of productivity, in terms of product mix. There is some timing issue I would say there. So, overall, well within the normal range. So, I shouldn't assume that the incremental business that we've seen in U.S., et cetera, is a lower margin business, and hence, that's reflective in my gross margin.

No, no, that's not right. Yes, you should not assume that.

Thank you. Ladies and gentlemen, that was our last question for today. As there are no further questions, I would now like to hand the conference over to Ms. Richa Periwal for closing comments.

Thank you all for joining us for today's evening call. In case of any further queries, please contact the Investor Relations team. Thank you once again on behalf of Dr. Reddy’s Laboratories Limited. That concludes this conference. You may now disconnect your lines. Thank you.