Dr. Reddy’s Laboratories - Q1 19/20
July 29, 2019
Transcript
Operator (participant)
Good day, ladies and gentlemen, and a very warm welcome to the Dr. Reddy's Q1 FY20 earnings conference call. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. 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 (VP of Finance)
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 30th June 2019. Earlier during the day, we have released our results, and the same are also posted on our website. This call is being recorded. The playback and transcripts will be made available on our website soon. All the discussion and analysis of this call will be based on the IFRS consolidated financial statement. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's, comprising Mr. Erez Israeli, our COO, Mr. Saumen Chakraborty, our CFO, and the investor relations team. Please note that today's call is the copyrighted material of Dr. Reddy's and cannot be rebroadcast or attributed in press or media outlets without the company's express written consent.
Before I proceed with the call, I would like to remind everyone that the safe harbor language contained in today's press release also pertains to this conference call. Now, I hand over the call to Mr. Saumen Chakraborty. Over to you, sir.
Saumen Chakraborty (President and CFO)
Thank you, Amit. Greetings to everyone. Let me take you through the key financial highlights for the quarter. For this section, all the amounts are translated into US dollar at a convenient translation rate of INR 68.92, which is the rate as of 28th June, 2019. Consolidated revenues for the quarter are INR 3,844 crores, that is $558 million, and grew 3% year-on-year. However, it declined by 4% on a sequential quarter basis. Adjusted for the amount of INR 181 crores pertaining to the sale of US rights for PP Derma products in the previous quarter, the sequential quarter growth is flat. The year-on-year growth in revenue has been supported by the new product launches and an increase in the volume pickup across our Global Generics market.
This growth has, however, been partially offset due to a sharp decline in the revenue of PSAI business, price reduction in the generics market, and absence of Derma product sales, which was registered in the previous year. Consolidated gross profit margin for the quarter is 51.7%, with a sequential quarter decline of 70 basis points. Adjusted for the PP Derma contribution in previous quarter, the gross margin has improved by 150 basis points sequentially. Gross margin of Global Generics segment is at 57.6%, which has been partially impacted due to slow-moving inventory provision on a specific product, impacting the segment's margin by almost 80 basis points. Gross margin for PSAI is at 7.2%, which has been majorly impacted due to lower sales during this quarter.
The SG&A spend for the quarter is INR 1,207 crores, that is $175 million, which is at similar level as last year and declined by 3% on a sequential quarter basis. The SG&A cost percentage to sales declined from 32.5% in Q1 FY 2019 to 31.4% in current quarter. The decline in the expense related to proprietary product commercial business was partially offset with an increase in the expense related to manpower cost increments and an increase in amortization charges related to new launches. R&D spend for the quarter is rupees 361 crores, that is $52 million and is at 9.4% of the sales for the quarter.
The R&D spend is lower by 13% year-on-year and lower by 1% on a sequential quarter-on-quarter basis. The R&D spend, however, is expected to increase during the balance of the year. Other income includes INR 346 crores received from Celgene pursuant to an agreement entered towards settlement of any claim the company or its affiliates may have had for damages under Section Eight of the Canadian Patented Medicines (Notice of Compliance) Regulations in regard to the company's NDA for a generic version of Revlimid brand capsule, that is lenalidomide, pending before Health Canada. The EBITDA of the quarter is INR 1,134 crores, that is $165 million, which is around 29.5% of the revenue.
The effective tax rate for the quarter is 22%, and we expect to be around similar levels for this year. EPS for the quarter is INR 39.91. Operating working capital decreased during this quarter by around INR 75 crores, which is $11 million. The decrease is attributable to a decrease in receivables, partially offset with an increase in the inventory. The net working capital base has marginally improved over the last quarter. We invested INR 106 crores, which is $15 million, towards capital investment in this quarter. The free cash flow generated during this quarter was INR 850 crores, which is $123 million. Our net debt to equity ratio has improved further and is at 0.04, as on 30th June 2019.
Foreign currency cash flow hedges for the next nine months in the form of derivatives for U.S. dollar are approximately $345 million, largely hedged around the range of INR 70-INR 73.9 to the dollar. In addition, we have balanced hedges of $361 million. We also have foreign currency cash flow hedges of INR 2,400 million at the rate of INR 1.075 to the rupee, maturing over the next nine months. With this, I now request Erez to take through the key business highlights.
Erez Israeli (CEO)
Thank you, Saumen. Greetings to all. We had yet another good quarter, with continued improvement witnessed across various business health and performance metrics. There has been significant growth in the free cash flow generation, and we now have much stronger balance sheets. On our quest to grow, diversify our business, and become more efficient, we have seen good traction in new product launches in the US and Europe markets, and continued with the growth momentum in the India and Emerging Marketss. Let me take you through the key highlights across our businesses. Please note that all references to numbers in these sections are in the respective local currencies. The North America Generics revenue for the quarter is at $234 million, with a year-on-year decline of 1%.
However, the business registered growth of 10% over the sequential quarter, driven by continued ramp-up in Suboxone sales and improved contribution from recent launches. The overall market environment has been relatively stable, and with the base price erosion consistent with the past few quarters. We have been fairly busy with the uptick in the launch momentum of new products, and till date, have launched 10 products since the beginning of this fiscal. This includes multiple interesting products like daptomycin, Vitamin K injection, carboprost injection, OTC, guaifenesin, pseudoephedrine, ramelteon, and relaunch of isotretinoin. Many of which have been either first to market or are in limited competition space. We expect this launch momentum to continue and are on the track to bring more than 30 products to the market in FY 2020.
As of now, we have around 115 commercial products in the US market. On the generic NuvaRing asset, we are actively awaiting the feedback from the US FDA around the approaching goal date in the coming weeks. While we have answered all the queries in our last CRL response, we expect to receive some additional queries. We will have better visibility on timelines once we hear back from the agency. The Europe business recorded sales of EUR 31 million, with a year-over-year growth of 22% and a sequential quarter-over-quarter growth of 29%. The strong performance for the quarter was a result of improvement in supply situation and new product launches across markets. During the quarter, we launched six products in Germany, four in the UK, three in France, one in Spain. We expect this business to continue to perform well during the year.
The Emerging Markets business recorded sales of INR 730 crore, with a year-over-year growth of 10% and a sequential quarterly growth of 4%. The Russia business grew by 5% year-on-year and 9% quarter-on-quarter in constant currency. The current quarter performance is in line with our expectation. As per our strategic growth plan, we are continuing to strengthen our product portfolio across the Emerging Marketss and expect the current growth momentum to continue going forward. India business recorded sales of 696 crores, with a year-over-year growth of 15% and a sequential quarter growth of 7% during the quarter. During the quarter, we launched 8 new brands.
As per the secondary sales reported by IQVIA, we have registered strong year-over-year growth of 13%, ahead of the total market growth of 10.4% for the quarter ended June 2019. We believe that with our renewed focus on home market, we will continue to grow better than the overall markets. The PSAI business revenue is at $65 million, which has a decline by 20% on a year-over-year basis, and a sequential decline of 32%.... partially impacted due to manufacturing issues, which has now been resolved. We expect that the business performance should improve from Q2 onwards. On the R&D front, we are progressing well in line with our expectations. While we have filed only one ANDA in this quarter, the filing run rate is expected to pick up during the balance of the year.
As of the 30th of June, 2019, we had 107 cumulative filings pending for approval with the US FDA, including 104 ANDAs and 3 NDAs. During the quarter, we filed 7 drug master files globally. On our Proprietary Products business, following the divestitures of our, on-market derma brands to Encore Dermatology, we recently announced the divestiture of our neuro brand, Zembrace and, Tosymra, to Upsher-Smith. The transaction value reflects the strong potential of these two brands, and we believe this partnership will help realize the full value for these assets. With these divestitures, we have only executed the front and commercial business. We remain committed to developing products to address the unmet and under-met medical needs of part of Proprietary Products, Proprietary Products business.
Our focus going forward will be to leverage our core capabilities in R&D to build a self-sustained business model that consistently deliver high value, globally relevant, differentiated products, providing meaningful health economic outcomes to patient and payers. On the pipeline front, DFD-29, which is a low-dose minocycline, and XP23829 have both successfully completed phase 2b studies with the data looking quite encouraging. The development on E7777 for CTCL indication is also on track. Consistent with these guiding principles, we will continue to further this agenda. On the quality front, I'm quite pleased with the outcome of the recent inspections, which has been result of our focus and dedicated efforts to continuously improve our quality system. We will continue with our efforts in building high quality culture across the organization.
As regards to CTO 6, we had face-to-face meeting with the U.S. FDA, and based on this discussion with the agency, we expect the re-inspection will be conducted for the site. I'm pleased to inform that we also continue to progress well on our journey towards driving cost efficiency, improving CapEx investment, and improvement in the business processes for a long-term sustainable growth. With this, I would like to open the floor for questions and answers.
Operator (participant)
Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on the attached phone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. First question is from the line of Neha Manpuria from J.P. Morgan. Please go ahead.
Neha Manpuria (Executive Director)
Thank you for taking my questions. My first question is on India. You know, we have seen an improvement in the growth momentum, outperforming the industry. How should we look at the, you know, growth trend over the medium term? What is our expectation of, you know, the India performance, let's say, over the next two years? Where do we see our India business?
Erez Israeli (CEO)
India is a very important market to us. We indicated also in the past that it's, we are focusing on India, and we want to grow our ranking. So we should expect to see growth that is better than the overall market. Plus, we will also, if applicable, and we'll find the right deal, we will not be shy to do inorganic moves as well.
Neha Manpuria (Executive Director)
Erez, how do you plan to, you know, improve the growth rate or maintain the growth momentum? If you could, you know, indicate a couple of actions that you are taking to probably, you know, further improve the growth.
Erez Israeli (CEO)
It's a combination of improving the execution of the sales force, so we have. That's what we are doing. It's a salesforce effectiveness and other commercial excellence activities. This is one. Second, we are improving and we are putting more investment in the brands that have a chance to be bigger. The third is that we are launching, and as I mentioned, we already launched 8, and we are going to continue to do so. We are ramping up and launching more products.
Neha Manpuria (Executive Director)
Understood. My second question is on the margins. You know, this is the Q2 where we are seeing certain provision for inventory. I think we saw some in the last quarter, too. What are these provisions related to, and should we expect, you know, more such provisions going forward?
Saumen Chakraborty (President and CFO)
We always build up inventory in anticipation for new product launch. So if there is a considerable delay in that, there is more option left for providing for, you know, inventories, which is closer to expiry, fixed, ready.
Neha Manpuria (Executive Director)
So this is primarily for the U.S. in that case?
Saumen Chakraborty (President and CFO)
Uh, mostly.
Neha Manpuria (Executive Director)
Understood. Thank you so much, sir.
Operator (participant)
... Thank you. The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Yeah, thanks for this opportunity, sir. Again, on the gross margin front, so, see, although there is a kind of, decline, sequential decline in the PSAI business, which is, generally a low margin or low gross margin business, despite that, we have seen a kind of a sequential decline in the gross margin. So entire of this, negative trend in the gross margin is because of the inventory adjustment?
Saumen Chakraborty (President and CFO)
No, I mean, you see, the gross margin of Global Generics segment has actually improved. So it is the PSAI which has pulled down, and then also this inventory provision that has also contributed.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Okay. So are you quantifying, sir, this inventory adjustment?
Saumen Chakraborty (President and CFO)
We are clarifying what is the gross margin of Global Generics segment-
Surya Patra (SVP and Pharma and Healthcare Analyst)
Mm.
Saumen Chakraborty (President and CFO)
-which is, 57.6.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Yes.
Saumen Chakraborty (President and CFO)
PSAI is at 7.2%, which is, you know, although the mix-wise, there is a benefit because Global Generics as a percentage of overall market scale has improved. Then the remaining is attributable to write-offs, providing for, you know, inventory.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Do you think this is a kind of a sustaining fact for this year, or it is just a couple more quarter specific or anything on that front?
Saumen Chakraborty (President and CFO)
PSAI, as Erez has already alluded, we believe it was a Q1 specific issue, which should bounce back in Q2. So far as slow-moving inventory provision, you know, it all depends. If there is a further delay in anticipated new product launch, we have, we have to appropriately then take care of that.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Okay. On the second question on the PSAI business, sir, so this, what about the impact that we are seeing? It is only because of the manufacturing or any pricing or volume or any other issue that we are witnessing on the market?
Erez Israeli (CEO)
It is primarily because of operational issues.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Okay.
Saumen Chakraborty (President and CFO)
We have a healthy order book, which gives confidence of, you know, recovering in Q2, because we have a healthy order book.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Okay. And just on one more question on the Vimovo side. So what is- what could be the kind of a competitive scenario there, though it is as of now it seems that okay it is a limited competition one, and you have already indicated that you have responded to the CRL there, and you're hopeful about it. So any color on that front in terms of the timeline that you are visualizing and the competitive scenario there?
Erez Israeli (CEO)
On the competitive scenario, we don't see any additional people that are coming beyond the one we know. So in that respect, I don't see a change. As of the timing, it depends on the queries, if and when they will come, then we will know the timelines to address those. We don't have any better indication than that at this stage.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Okay. Thank you, sir.
Saumen Chakraborty (President and CFO)
See you on the rest.
Operator (participant)
Thank you. The next question is from the line of Nimish Mehta from Research Delta Advisors. Please go ahead.
Nimish Mehta (Founder Partner)
Yeah, thanks for taking my question. So, a little bit more on the gross margin. If you can just tell us, you know, what could be the gross margin had we had a normalized PSAI? I mean, just so that we know what to model, that would be helpful. And second question is about the launch of Vimovo. Are we likely to launch it at risk or what is the plan? Thank you.
Saumen Chakraborty (President and CFO)
So, first is, you know, PSAI, there could be fluctuations from quarter to quarter, so it is very difficult to tell you, you know, what could be a normal range. But, if we perform well, then it should be better than 20%. It could be even 30%, or it depends. It can fluctuate, so it is very difficult for me to tell any specific, you know, normal range.
Nimish Mehta (Founder Partner)
But the PSAI margin should be taken as 20%-30% normalized? I mean, versus 7% that we are seeing right now. Is that a fair understanding?
Saumen Chakraborty (President and CFO)
So I'm just giving you the range. It is, if we look at the past data and draw a kind of a, you know, kind of a, how it has fluctuated over the things, then you can also get to your own conclusion. Otherwise, you know, for investor relation, we can send you the past graph of what has happened in different, different quarters. But yeah, it will be safer to assume, you know, that kind of range.
Nimish Mehta (Founder Partner)
Okay, okay. So, okay, I mean, just to put it in context, we had earlier said that, the gross margin would be over between 53%-56% at a group level.
Saumen Chakraborty (President and CFO)
That is for the company. Again, if you look at the past data, and I said that time there will be some exceptions in Q quarter. But if you see the past data, you will see that it has fluctuated between this range in most of the quarters. If you take for last several years, multiple quarters, the fluctuation has been... you know, more than 80%-85% of the data point will be in that range, and 53-56. So that we will expect for a company level, a normal kind of range.
Nimish Mehta (Founder Partner)
Yes, at a company level, once we get back to normalized sales and PSAI, 53-56 is a reasonable expectation. Is that a fair understanding?
Saumen Chakraborty (President and CFO)
If the PSAI, because 7.2 is pretty low, you can understand it. If the margin level would have been higher, then definitely overall company margin also would have come, you know, within that range.
Erez Israeli (CEO)
As for the G&A, the M&A, your second part of the question-
Nimish Mehta (Founder Partner)
Right, right.
Erez Israeli (CEO)
Firstly, we have a very exciting positive outcome in the Court of Appeals, as you know, that we won the two patents. Now we are waiting basically to get either denial of en banc rehearing or the issuance of the mandate in the next coming weeks. Now, once the mandate is issued, naturally, we will evaluate the launch possibility. It's exciting product. We will not commit now what we will do, but we are very excited about this one.
Nimish Mehta (Founder Partner)
Okay, understand. If I may reason also would be helpful if you can tell us about the, you know, possible outlook of the Vitamin K injection that you recently launched. And do you think Revlimid as an opportunity is exciting now that you've succeeded in Canada? I'm talking about the U.S. opportunity. So some color on both these products will be extremely helpful. Thank you very much.
Erez Israeli (CEO)
So Vitamin K is a great product. That's what I can say about it, and we are very happy with our team. We are not giving guidance per product. As for the other one, it's we are proceeding in the legal case, and we believe that we have a nice story about it, that also the innovator is appreciates.
Nimish Mehta (Founder Partner)
The winner appreciates, okay. You're talking about the U.S. market, right?
Erez Israeli (CEO)
Yes.
Nimish Mehta (Founder Partner)
Yeah.
Erez Israeli (CEO)
There is no relation between the Canada process and the U.S. These are separate processes.
Nimish Mehta (Founder Partner)
Correct. Correct. Yes. Okay. Thanks very much.
Operator (participant)
Thank you. The next question is from the line of Nitin Agarwal from IDFC Securities. Please go ahead.
Nitin Agarwal (Equity Research Analyst)
So thanks for taking my question. So on the, again, on the gross margin bit on the US business, especially in the global generic business, we've had three or four quarters of 57.5% gross margins. We used to be much earlier in the business with much higher margins earlier in this business. So given the new pricing dynamics in the market, is this the normalized level for this business, or do you see opportunities to meaningfully increase it on a global generic segment going forward?
Saumen Chakraborty (President and CFO)
It depends on, you know, new products and, you know, if there is a significant kind of a new product launch, then, definitely, you know, during those quarters, there could be an improvement possible. Now, similarly, in a quarter, if there is no new product launch, it could be impacted because... So, again, very difficult, you know, the reason why we not provide any kind of financial guidance is that it is, unpredictable. You cannot, you know, give any kind of a specific kind of thing, what it could be. Give you, what you see is the impact of all the, you know, price increases which have been happening over the last few years.
Nitin Agarwal (Equity Research Analyst)
All right. And so, I mean, on R&D, we still hold on to the $250 million-$300 million guidance for the year. We have $50 million or so spent this quarter.
Saumen Chakraborty (President and CFO)
So, let me clarify. One thing we always say, we don't give any kind of financial guidance. So at the same time, on few of these, like, you know, CapEx or R&D or effective tax rate, what we provide is more of an, you know, indicated kind of things which, if there is any change quarter to quarter, we can then accordingly, you know, inform all of you. So at this point of time, there is no reason for me to believe that it will go out of this range. For the Q1, it has been 52, but for the remaining three quarters, it could, you know, it could cumulatively come to the same. But if there is any change we expect, then in the Q2 earnings call, we will talk about that.
Nitin Agarwal (Equity Research Analyst)
Thanks. Lastly, Saumen, are there any more costs on the proprietary business which are still there in the current quarter numbers, which will be probably reduced from the next quarter onwards?
Saumen Chakraborty (President and CFO)
So, as you know, that, it is a commercial part of the business, which, is actually, you know, closing down. So there are definitely, you know, some of the, you know, the employee settlement-related things which we have to factor in. So we'll come back probably next quarter onwards, you can see at a normalized level of Proprietary Products, business, the cost aspects on that front. But we are going to continue to spend money on R&D for Proprietary Products.... So that will be there. Only thing you are not going to see any, you know, sales except for the royalty from proprietary product.
Prakash Agarwal (Executive Director)
Okay, thank you.
Operator (participant)
Thank you. The next question is from the line of Abhishek Sharma from India Infoline. Please go ahead.
Prakash Agarwal (Executive Director)
Sir, just two questions. You said on PSAI, essentially this is a manufacturing related issue. Can you help us with more color on it? Well, it must have been facility specific. So, which facility was impacted?
Saumen Chakraborty (President and CFO)
So you are asking more, you know, granular detail. There have been, you know, some hiccups in terms of committing to customer delivery, and that has impacted the sale. As already evaluated, that those things have been resolved. And since we have a healthy order book, we expect the quarter two performance to get back to normal then.
Prakash Agarwal (Executive Director)
Okay. Just, just, one bit on that. It was product specific or was it site specific?
Erez Israeli (CEO)
It is, if you are related that should, do we have any site quality issues? The answer is no. These are related to product production specific.
Prakash Agarwal (Executive Director)
Got it. And, the other question is, you know, on strong free cash flow. Now, you know, the company continues to generate strong free cash flow. Last year was great, this quarter again has been great. So in terms of capital deployment, how are you thinking about it? You know, what avenues are you exploring for that?
Saumen Chakraborty (President and CFO)
So, this is something we discuss at length within management and along with the board, in terms of the total, you know, capital allocation. In the past, when we had surplus cash, we even went for a buyback arrangement. If there is an inorganic growth opportunity which is there, then that also is helpful in terms of the capital deployment. We have already alluded to that in terms of our total CapEx requirement, the need has come down, already having invested so much in the capacity. So, we have been continuing with the very consistent, you know, dividend policy. So this is something which we are discussing internally. Maybe, you know, in terms of which specific part of the business, where the capital allocation could be more in comparison to some other part of the business.
Those are some, you know, adjustments which we will be doing in our capital allocation.
Erez Israeli (CEO)
We are absolutely planning to use our financial capacity for inorganic, once it will be material. We will not go crazy, and we will not pay something that we should not pay. We mentioned it also in past meetings as well. We are very happy about our situation, and it's going to be even further improved, as for example, we already got some of the money for the proprietary product as well, of what we did, which we'll recognize next quarter. This allow us now much more flexibility, strategic flexibility, and naturally we will spend the money, if we're going organic, in the relevant spaces that we decide. We're going to create additional value in the spaces that we are focusing on.
Prakash Agarwal (Executive Director)
Just to close that out, where do you see opportunities in terms of inorganic? Is it more India, Emerging Marketss, US, or something else?
Erez Israeli (CEO)
Actually, there are many, many assets that are out there. Plus, there are many, many assets that will be out there. I think fortunately for us, we have a very good situation, especially in terms of balance sheet. I think that some of our colleagues in the market have much, have issues, and you know well about it, and I believe that more assets will come, and, in each one of the spaces. So we, what we want to make sure that we... It's not just the, the right, value for investment, but also that it will help us to create the right capability and the right synergy in each one of the spaces. Specifically for India, we would love to have it, to have in India, in any one of the spaces that we have. Yeah.
Operator (participant)
Thank you. The next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Prakash Agarwal (Executive Director)
Yeah, thanks for the opportunity. So the question on the just announced Mylan Upjohn, you know, merger taking place. And we've also seen Aurobindo, you know, buying our large Sandoz assets in U.S. So how do we think about the current environment? You know, is it like, you know, the large players consolidating and the pain points, you know, bottoming out? Or do we still see, you know, the pain points coming ahead, and that's why they're getting, you know, merging and, that's why, you know, getting stronger to face the headwinds? How should we look at it?
Erez Israeli (CEO)
... I believe that each one of the cases is different. Sandoz is something that happened more than a year ago, and it is actually, it started more than, I think, 18 months ago, when it actually started. And the rationale, of course, was the way Sandoz Novartis wanted to conduct the Sandoz business at the time. I believe that the recent news of Mylan and Pfizer is coming from, of course, the perspective of these companies and how we want to manage the generic assets. I don't see any similarities. And naturally, what we are going to see, I believe, is that assets will continue to flow out of there, and people are finding solutions for the relevant challenges for, especially for those that have the challenges. They will seek those solutions.
We are on the. I hope we can find that we will find ourselves on the winning side, because we can actually use those assets if we, if they will be synergetic to our activities. So I see it overall as an opportunity.
Prakash Agarwal (Executive Director)
But Dr. Reddy's, as such, we are not looking for something, something as large in terms of acquisitions. We would be more so looking at something in the Emerging Markets. Would that be correct understanding?
Erez Israeli (CEO)
We are looking all over the place, and for the relevant opportunity, not necessarily in Emerging Marketss.
Prakash Agarwal (Executive Director)
Perfect, great. And sir, second question on Suboxone. Since the last, you know, Q4 commentary, we, I made a comment that we are improving market share. Have we, you know, reached a fair share? Has the competition intensified there, and what is the outlook there?
Erez Israeli (CEO)
I think that the main challenge was not so much about the fair share, but rather that the uptake of generics as a whole, it means that the substitution from the innovator products to the generics as a whole, was relatively slow. I think we will see-
Saumen Chakraborty (President and CFO)
Fifty percent.
Erez Israeli (CEO)
I see that it's about 50% right now, so it means that there is no room for growth in that respect.
Prakash Agarwal (Executive Director)
Sir, I did not understand. 50% generics are already there, you are saying?
Saumen Chakraborty (President and CFO)
No, no, no. Genericization of this product, this brand. So even now, the innovator brand is continuing to hold the 50% of the market share.
Prakash Agarwal (Executive Director)
Okay, and we would have around-
Saumen Chakraborty (President and CFO)
It tends to get genericization. All generics company combined will have the remaining 50%.
Prakash Agarwal (Executive Director)
Understood. And we would be at around 15%-20%, sir?
Erez Israeli (CEO)
We would be around 20% of the generic market, perhaps.
Prakash Agarwal (Executive Director)
20%. Perfect, great. And sir, last question on Russia CIS. Last year, obviously, on a low base, we saw a lot of, launches, and we had a good base. So, but, particularly this quarter, the start has been slower. How should we see the full year?
Saumen Chakraborty (President and CFO)
Again, we cannot give guidance. But, as Iris has said, that we are doing, you know, multiple... We're taking multiple initiatives, including, you know, new product launch, improving the sales force effectiveness, so we hope to perform well in the market share.
Prakash Agarwal (Executive Director)
Perfect, great. Thank you so much.
Erez Israeli (CEO)
For Russia, it's not that slow. For Russia, it's not that slow. I don't know what the others are doing in Russia, but if you see the IMS for the Russia market, you'll see that it's not that slow.
Prakash Agarwal (Executive Director)
Okay. Thank you so much.
Operator (participant)
Thank you. The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.
Shyam Srinivasan (Research Analyst)
Hi, thank you for taking my question. My first question is on generic Velcade. I recollect we had a 505(b)(2), so is there any update on this particular filing?
Erez Israeli (CEO)
So, Shyam, on the generic product, the generics have basically lost the case, and will only be able to launch after the patent expiry. And, for the 505(b)(2), the filing is under review with FDA. And as and when we hear from FDA, maybe at that point in time, we can come to market. So, as of now, we don't have any further update. The filing is under review with the FDA.
Shyam Srinivasan (Research Analyst)
Amit, in the next few quarters, or you think it's, like, next year kind of an opportunity, if it comes?
Erez Israeli (CEO)
It's a little difficult to comment at this point in time, because we haven't heard from FDA. And it is an old filing, so we don't have a goal there to prep.
Shyam Srinivasan (Research Analyst)
Okay, thank you. My second question is on Revlimid. I think to another participant, you know, I was not clear what was mentioned. Are we waiting now for the district court process to complete, which is, like, early 2020 calendar year? Would that be the current status update on the Revlimid?
Erez Israeli (CEO)
We are in the legal process. I don't know about the dates, and how to predict dates of legal proceedings, but we are in the legal processes.
Shyam Srinivasan (Research Analyst)
... Okay. Okay. Sure. My last question is on SG&A. I think we have seen, like, significant progress on this, 31% fiscal in the current quarter. Historical levels, say, 5, 15, 16, have been lower. Do you think there is more room for the cost rationalization program to kind of cut costs further?
Saumen Chakraborty (President and CFO)
Yes, there is room.
Shyam Srinivasan (Research Analyst)
So in any sense, is that, you know, where are these—what are these areas? Because we have done a lot of work, is what are the other pending kind of levers that you think we can actually kind of bring down?
Saumen Chakraborty (President and CFO)
See, we need, whatever we do it, all the things doesn't accrue straight away. It accrues over a period of time. And second thing, there is always scope to improve productivity, beyond what we have today. That depends on technology, that depends on, you know, specific intervention. So we are going to focus on it. This is a journey which we have undertaken with utmost seriousness, and we want to be more efficient.
Shyam Srinivasan (Research Analyst)
Got it.
Saumen Chakraborty (President and CFO)
Okay?
Shyam Srinivasan (Research Analyst)
Yeah, thank you so much.
Operator (participant)
Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.
Sameer Baisiwala (Equity Analyst)
Yeah, hi, thanks. Good evening. Is any updated thoughts on increasing the scale of operations in China, specifically 70 products that you thought is something that you can take to development?
Erez Israeli (CEO)
Yeah, so we are, we are on track with that. We increased the team that is dealing with the development, and as we are doing some of the products, we are doing studies in China and especially bio studies. And we also had a project of expansion of the capacity of the plant that we have in China. So we recently updated the management over there and sent a new head of China. So we are ramping up, and I'm very happy with the progress that we have in China.
Sameer Baisiwala (Equity Analyst)
Great. So what's roughly the time that it takes to do the bio studies and all the work that's required, and do the filing? Second, from filing to approval, so can you just help us with that?
Erez Israeli (CEO)
It's a bio study, it's a process, including the stability, et cetera, let's say, around a year. And as related to filing to approval, it depends on whether the product can reach GA or not, because they can do it very, very fast. But let's say between a year to 18 months, it's this is the timing.
Sameer Baisiwala (Equity Analyst)
18 months, you're saying from now to getting to the market or just approval?
Erez Israeli (CEO)
No, from filing to approval, that's what you ask.
Sameer Baisiwala (Equity Analyst)
Yeah, that's it. Correct. Okay. Okay, and so, so basically, is it fair to say that it's about 2-year plus, 2-3 years before we start to see the real money coming in? Would that be a fair assessment?
Erez Israeli (CEO)
It depends what you call real money. We are growing at double digits as we speak, and this is pretty real. But yeah, we will see in this period of time, much bigger money. Yes, that's what we are planning to have.
Sameer Baisiwala (Equity Analyst)
Okay, great. And then on Specialty Products, for the three drugs which are right now in the clinical development, would you want to take them fully to the market and commercialize? Or do you think at some point in time, you'll be looking to monetize as you have done with the five other products?
Erez Israeli (CEO)
It's, we'll probably monetize them as well.
Sameer Baisiwala (Equity Analyst)
Okay. In effect, over some time period, you'll be completely exiting the specialty business?
Erez Israeli (CEO)
No, we are not exiting. Let's clarify that, that's important. What we saw, that we do not, that we do have an advantage on the development and the clinical development of these kind of products. And we want to continue to leverage that, because this is a proven capability that we have. What we saw, that we do not have advantage, we will lose money, is on the commercialization, the detailing United States. That part, we lost money, so we have exited the commercial, the commercialization or the direct co-commercialization of the, products, but we did not exit specialty. We believe that we can make more money by monetizing this product than by selling it ourselves, at least for the next coming years. So we are not exiting specialty, that's a very important clarification.
Saumen Chakraborty (President and CFO)
Also, we explained earlier, it is very difficult to synchronize the number of products which will get launched in a specific sales force, you know, you build up. So if you have only one product to, you know, promote, then, you cannot recover the total sales force effect. So considering all these things, we thought it is prudent that, you know, if people have the scale and the capability, they can do much better with the product that we develop and, you know, get a royalty model.
Erez Israeli (CEO)
Plus, in the markets that we do have the access, we will absolutely take them commercially. And the way we see specialty, we see it more as a global business than an American business... and in places like India and Russia, for example, we are actually actively working. These are not the names that you said, but we have additional, Proprietary Products for these countries.
Sameer Baisiwala (Equity Analyst)
Okay, great. Thank you so much.
Operator (participant)
Thank you. The next question is from the line of Hari Belawat from Techfin Consultants. Please go ahead.
Hari Belawat (CEO and Director)
Good evening, sir. This is regarding this net finance income you have shown during this quarter of around INR 39 crores, and out of which some it has come, you know, sale of investment, profit sale of investment INR 20 crores is because of that. Is it a regular phenomenon for selling of assets and earning profits, or is it just a one-off case?
Saumen Chakraborty (President and CFO)
No, these must be from partnering through the mutual fund investment. So normally we, you know, whatever we have, the surplus cash, we instead of keeping in the fixed deposit, which will give very low return, we do on a, you know, based on the credit rating and set of funds kind of analysis. So when you redeem them, then that leads to the, you know, the profit on sale of investment. Earlier, there was a different accounting standard, where immediately, you know, it could have probably gone to balance sheet and later on to P&L. Now, it is impacting directly on with the current accounting standard.
Hari Belawat (CEO and Director)
Okay, sir, I agree with you. But you have shown it in all the quarters, even including in, you know, last year corresponding quarter also, this was income, and sequential quarter also this is shown as income. So every quarter you are having finance income, that way.
Saumen Chakraborty (President and CFO)
If we have money, we will, if we are investing in that, then, whenever we redeem, we will generate, you know, a profit on that investment, so that will come on that quarter.
Hari Belawat (CEO and Director)
Okay. Yeah, I think this is a good decision for investing money there. Another thing is, where it is shown in the Indian accounting standard, in Indian accounting, it is a finance cost, it is shown, but this income is included, is it in other income or elsewhere?
Saumen Chakraborty (President and CFO)
Part of the finance income.
Hari Belawat (CEO and Director)
It is part of the finance income? No, no, no, sir, in, in your statement for this consolidated statement, you have shown this is the expense. I mean, this is not a net income.
Saumen Chakraborty (President and CFO)
There are two things. One is we have some loans, and whatever loan we have taken-
Hari Belawat (CEO and Director)
Yeah.
Saumen Chakraborty (President and CFO)
There we pay interest, so that will be an interest cost. And wherever we make investment, if there we earn, that will be an interest that we earn. So net is, you know, if we have more investment than what we are spending on loans, then the net comes. Suppose, anything hypothetically, if you would have spent a lot of money on inorganic growth, then you will find it is more of a net interest expense rather than an interest income.
Hari Belawat (CEO and Director)
Okay. I'm not able to comprehend these things, because in the consolidated statement, you have shown finance cost of INR 298 million and then, 240-
Erez Israeli (CEO)
Hari-
Hari Belawat (CEO and Director)
something like that, which is actually interest cost, not the income.
Erez Israeli (CEO)
Hari, you may get in touch with the investor relations team. We will clarify you offline, whatever you want to it.
Hari Belawat (CEO and Director)
Okay. Yeah, thank you.
Erez Israeli (CEO)
You can go ahead.
Hari Belawat (CEO and Director)
Thanks a lot, Sir. Thank you.
Operator (participant)
Thank you. The next question is from the line of Charulata Gaidhani from Dalal & Broacha. Please go ahead.
Charulata Gaidhani (Senior Analyst)
Hi. My question pertains to the ANDA filings. Of the 34 first to file opportunities, what would be the addressable size, and how many approvals will you expect in this year?
Erez Israeli (CEO)
So I mentioned before, we are planning to launch 30+ products in this year. Some of them are the first to file. I don't know the exact number.
Charulata Gaidhani (Senior Analyst)
Okay. Okay, and my second question pertains to Russia. What is the normalized growth that you expect for Russian market for Dr.-
Saumen Chakraborty (President and CFO)
As I told you earlier, we do not give any financial guidance. So we can only tell you that we expect to grow. By how much, we will not be able to quantify and give you a guidance.
Charulata Gaidhani (Senior Analyst)
Okay. Fine. Thank you.
Operator (participant)
Thank you. We have the last question in queue from the line of Surya Patra from PhillipCapital. Please go ahead.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Yeah, just thanks for the call. Sir, if you can give some clarity on your progress in the biosimilar side for the advanced market, that is one. And second, I just wanted to have a clarity, this INR 70 million, the disposal receipt upfront, whether you have factored this quarter or whether it will be factored in the subsequent quarter.
Saumen Chakraborty (President and CFO)
Second question, I will take first. It will be in subsequent quarter, because, that deal got closed in July, after the FTC approval, and also we have verified GAAP. So it will be in Q2, it was not in Q1. Then, the first question-
Erez Israeli (CEO)
On the biologics, we are on track with the rituximab studies. So this is on track. We have the patients coming up and signing up for the study, so everything is on time, on track, on budget in that respect.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Sorry, I missed the product name, sir.
Erez Israeli (CEO)
rituximab.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Okay, rituximab. Okay. Any other that, any other product that is in the advanced phase for development?
Erez Israeli (CEO)
For the United States, that was published. We did not disclose the names of the others, but we are working on multiple others. This the name.
Surya Patra (SVP and Pharma and Healthcare Analyst)
Okay, thank you.
Operator (participant)
Thank you. That was the last question. I now hand the conference over to the management for their closing comments. Thank you. That was the last question. I now hand the conference over to Mr. Amit Agarwal for closing comments.
Erez Israeli (CEO)
Thank you, everyone, for joining us today for the earnings call. In case of any further query, please reach out to the investor relations team. Thank you.
Operator (participant)
Thank you very much. Ladies and gentlemen, on behalf of Dr. Reddy's, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.