Dr. Reddy’s Laboratories - Earnings Call - Q1 25/26
July 23, 2025
Transcript
Richa Periwal (Head of Investor Relations and Analytics)
Good morning, good evening, and a warm welcome to all. Thank you for joining us for Dr. Reddy's Q1 FY26 earnings conference call. We truly appreciate your time and participation. Joining us today are members of the leadership team: Mr. Erez Israeli, our CEO; Mr. M V Narasimham, our CFO; and the IR team. Earlier today, we released our quarterly financial results. These are now available on our website for your reference. We'll begin the session with M V presenting an overview of the financial performance for the quarter. Following that, Erez will provide his perspective on the business highlights and the strategic outlook. We will then move to the Q&A segment, as mentioned by Aishwarya. Before we proceed, please note that today's call is the proprietary material of Dr.
Reddy's Laboratories and cannot be rebroadcasted or attributed in any media or press outlet without prior written consent from the company. This session is being recorded, and both the replay and the transcript will be made available on our website shortly. All commentary and analysis during this call are based on our IFRS consolidated financial statements. In addition, the discussion may refer to certain non-GAAP financial measures. A reconciliation to the GAAP measures is provided in our press release. We would also like to remind you that the safe harbor provisions, as detailed in today's press release, apply to all forward-looking statements made during this conference call. With that, let me now hand it over to M V to present the financial highlights for the quarter.
M V Narasimham (CFO)
Thank you, Richa. A very warm welcome to all. Thank you for taking the time to join us today. I am pleased to walk you through our financial results for the first quarter of FY26. The quarter began on a positive note, marked by a steady double-digit revenue growth. We delivered an EBITDA margin of 26.7%, modestly ahead of our aspiration of 25%. The inclusion of our consumer health care business contributed positively to top-line momentum. All financial figures in this section are translated into US dollars using a convenience translation. INR 85.74, the exchange rate prevailing as of June 30, 2025. Consolidated revenues for the quarter stood at INR 8,545 crore, which is $997 million, a growth of 11% on a year-over-year basis and remaining flat on a sequential basis. This performance was driven by steady performance across most markets, with the exception of our US Gen X business.
Consolidated gross profit margin for the quarter was 56.9%, a decrease of 350 basis points year-over-year, and an improvement of 134 basis points sequentially. The year-over-year decrease in margins was largely attributable to price erosion in the generic segment, particularly in lenalidomide and lower operating leverage, partly balanced by a better product mix. Gross margin for Global Generics and PSAI were at 60.9% and 13.2%, respectively. Lower business margins in PSAI reflect seasonal weakness and under-recovery of overheads. The SG&A spend for the quarter was INR 2,565 crore, which is $299 million, an increase of 13% year-over-year and 7% on a sequential basis. The year-over-year increase was primarily driven by strategic growth-oriented investments in the consumer health care business of nicotine replacement therapy and the Nestlé joint venture for nutraceuticals portfolio. Both businesses represent strategic growth drivers, necessitating focused investment to unlock and sustain their long-term potential.
Other SG&A expenses remained well-managed and broadly flat on a year-over-year basis, reflecting discipline in cost control across core operations. Consequently, SG&A spends accounted for 30% of the sales during the quarter, higher by 44 basis points year-over-year and 173 basis points quarter-on-quarter. The R&D spend for the quarter was INR 624 crore, which is $73 million, remaining broadly flat on a year-over-year basis and declined by 14% sequentially. We continue to make targeted investments in our complex generics, API, and biosimilars pipeline to support long-term growth. The R&D spend was at 7.3% of the sales for the quarter, lowered by 76 basis points year-over-year and 123 basis points quarter-over-quarter. For the full fiscal, we expect the R&D investments to be in the range of 7%-7.5% of the sales.
EBITDA for the quarter, inclusive of other incomes, stood at INR 2,278 crore, which is $266 million, an increase of 5% year-over-year and a decline of 8% on a QoQ basis. The QoQ decline was primarily driven by higher SG&A and lower other income on a relatively flat revenue base. The EBITDA margin stood at 26.7%, as was lower by 149 basis points on a year-over-year and 243 basis points on a QoQ basis. The net finance income for the quarter is around INR 157 crores, as compared to INR 84 crores for the same quarter last year. As a result, the profit before tax for the quarter stood at INR 1,905 crores, that is $222 million. PBT as a percentage of revenue was at 22.3%. Effective tax rate for the quarter was at 25.9%, compared to 26.04% in the corresponding period last year.
We expect the normalized ETR to remain around 25% for the full fiscal year. Profit after tax attributable to equity holders of the parent for the quarter stood at INR 1,419 crores, which is $166 million. A growth of 2% on a year-over-year and a decline of 11% on a QoQ basis. This is at 16.6% of revenues. Diluted EPS for the quarter is INR 17.04. Operating working capital as of 30 June 2025 was INR 13,320 crores, which is $1.55 billion, an increase of INR 722 crores, which is $84 million, over 31 March 2025. CapEx cash outflow for the quarter stood at INR 683 crores, which is $80 million. Free cash flow generated during the quarter was INR 433 crores, which is $51 million. As of June 30, 2025, we have a net cash surplus of INR 2,922 crores, which is $341 million.
Foreign currency cash flow hedges executed through derivative instruments during the period are as follows: $648 million has been hedged using structured derivative contracts scheduled to mature over the next financial year. These contracts provide a minimum protection rate of INR 86.13 per dollar, while also allowing participation in the event of dollar appreciation. RUB 3.7 billion hedged at a fixed rate of 1 per Russian ruble, with maturity falling within the next four months. With this, now I request Erez to take us through the key business highlights.
Erez Israeli (CEO)
Thank you, MVN. A very good morning and good evening to everyone joining us today. We appreciate your time and interest. Our performance in Q1 highlights consistent performance and steady progress of our strategic agenda. We delivered a double-digit growth in our base business. Advanced critical pipeline programs, including semaglutide and abatacept. We remain focused on optimizing structural costs and driving operational efficiencies. We are also consistent with our strategic priority as we scale our presence in consumer health, innovative therapies, and biosimilars. Overall, our results were broad-based, except for some softness in the U.S. generic market. Let me now walk you through some of the key highlights from the first quarter. Revenue grew by 11%, reflecting a sustained business momentum and consistent execution. We delivered an EBITDA margin of 27%. The ROC for the quarter was 22%.
We closed the quarter with a net cash surplus of $341 million, reinforcing our strong balance sheet position. Our biosimilar business gained momentum this quarter through a strategic collaboration with Alvotech for the development, manufacturing, and commercialization of pembrolizumab, a biosimilar to Keytruda. The phase integration of the acquired nicotine replacement therapy, the NRT business, is progressing as planned. Following the successful integration in the U.K. and Nordics, we are now preparing to onboard additional markets, including Canada, Australia, and other selected countries across Western Europe, in the next phase. During the quarter, the U.S. FDA inspected our Middleburg API facility in New York and issued a Form 483 with two observations. Following our response, the site has been classified as VAI. The agency also conducted a GMP inspection at CTO5, our API facility in Laguda at Telangana, and issued a Form 483 with two observations.
We have submitted timely response in line with our regulatory requirements. Last week, U.S. FDA conducted a GMP and pre-approval inspection at our FTO11 formulation facility in Shrikakulam, Andhra Pradesh, resulting in a Form 483 with seven observations. We will respond within the required timelines. In recognition of our sustained commitment to sustainability, our Carbon Disclosure Project CDP rating for 2024 was elevated to an A in the climate category, making us the only Indian pharmaceutical company with this score and placing us among the top 2% of any companies globally. We have also retained our leadership status in the water and supplier engagement categories, reflecting our consistent performance across key environmental dimensions. Let me take you through the key business highlights for the quarter. Please note that all financial figures mentioned are reported in their respective local currencies.
Our North American business generated revenue of $400 million for the quarter, a 17% year-on-year decline and 4% decrease sequentially. The softness in the market was primarily due to price erosion in selected products, primarily lenalidomide, as well as timing of procurement of this product by certain customers. During the quarter, we launched five new products and expect a pickup in the large momentum in the remainder of the fiscal year, which is expected to support recovery and drive growth in this segment. Our European generic business delivered revenue of EUR 131 million for the quarter, making it a 124% year-on-year, both a 6% sequential decline. The year-on-year performance was primarily fueled by the contribution from the acquired nicotine replacement therapy portfolio and the new product launches, which provided an offset to some pricing erosion.
During the quarter, we introduced 13 new generic products across European markets, further strengthening our portfolio and reinforcing our growth trajectory. Our emerging market business reported revenue of INR 1,404 crore in Q1, reflecting a 10% year-on-year growth and a flat sequentially. Growth was primarily driven by higher volumes and further supported by new product launches. During the quarter, we introduced 26 new products across multiple countries, reinforcing our commitment to expanding access and deepening market presence. With this segment, our Russia business delivered a 17% year-on-year growth and a 2% sequential increase in constant currency terms, underscoring its continued momentum despite macroeconomic challenges. Our India business reported a revenue of INR 1,471 crore in Q1, delivering a double-digit year-on-year growth of 11% and 13% in sequential increase. This performance was primarily driven by contributions from new products and pricing.
According to IQVIA, we continue to hold our position as the 10th largest player in India's pharmaceutical market and have outpaced market growth with moving annual total growth of 9.2%, compared to IPM of 8% growth and MQT growth of 11.2% versus IPM growth of 8.6%. During the quarter, we launched five new brands, including two innovative assets: Bathotus, which is an RCV vaccine, and the product Sensimium in Q1, further strengthening our domestic portfolio and reinforcing our growth momentum. Our PSAI business reported revenue of $95 million in Q1 FY2026, registering a four-year-on-year growth while experiencing a 14% sequential decline. The business momentum is expected to pick up in the coming quarters, positioning us to return to a double-digit growth trajectory for the fiscal year. During the quarter, we filed 12 drug master files.
We remain committed to strengthening our pipeline as a key driver for future growth, while actively pursuing a strategic collaboration to accelerate innovation and expand our capabilities. Our R&D efforts remain concentrated on complex generic high-impact like GLP-1 group and biosimilars, which are central to our long-term value creation strategy. During the quarter, we completed 11 global generic filings. As we move through the fiscal year, our focus remains on strengthening our base business, advancing key pipeline assets like semaglutide and abatacept, building commercial strength in regulated markets, and improving efficiency and cost structure. We are actively exploring strategic partnerships and acquisitions to diversify and strengthen our portfolio. These efforts reflect our commitment to agility and disciplined execution in a very dynamic market environment aimed at delivering sustainable value for our stakeholders. With that, I will welcome your thoughts and questions as we move into the Q&A session.
Operator (participant)
Thank you, Erez. We will now begin the question and answer session. To join the question queue, please use the raise hand option available on the bar at the bottom of your Zoom application. If you wish to exit the question queue, you may click on the lower hand option. Participants are requested to not ask more than two questions at a time and to rejoin the queue in case of any incremental queries. I would like to reiterate that the chat will not be monitored for any questions to the management. However, in case of any technical concerns, please do feel free to use the chat option to reach out to us. The first question is from the line of Amey Chalke from JM Financial. Amit, please go ahead.
Amey Chalke (VP of Sector Lead)
Thank you for the opportunity. I hope I'm audible. The first question I have is for the U.S.-based business. Is it possible to give some guidance on how it has performed quarter on quarter, whether it has improved or gone down directionally, and how the base business is expected for the FY26 as well for the U.S.?
Erez Israeli (CEO)
Toby, there was maybe something with the mute button or something. Can you just repeat your question, please?
Amey Chalke (VP of Sector Lead)
Yeah, I wanted to ask the US-based business how it has performed on a Q1 basis. Whether it has increased or decreased directionally. For FY26, what is our outlook for the US-based business?
Erez Israeli (CEO)
Yeah, so the base business in the U.S. was... Yeah, the base business in the U.S. decreased. It's primarily timing. I will say I don't see anything relatively special. There were some key products, especially Suboxone, in which there were kind of orders that moved from a quarter to quarter. I would not give too much importance to it. Overall, the base business, the way I see it, is going to be flat to single-digit growth like we normally are discussing. Of course, it depends on the success in some product launches that we are going to be. Most of the decline that you see or Q1Q was attributed to lenalidomide.
Amey Chalke (VP of Sector Lead)
Sure, thank you so much. The second question I have is on the Revolut Med. Going ahead, do you expect some pickup in coming quarters before going down from Q3? Or do you expect the similar trajectory for Revolut Med for upcoming quarters as well?
Erez Israeli (CEO)
You know, we are not discussing a specific number on this product, but it is important people we know. Naturally, we are trying to avoid shelf price adjustments. What you should anticipate is one more quarter, give or take, in the range of what you have today and relatively much less in Q3. After that, some leftover, and that's it.
Amey Chalke (VP of Sector Lead)
Sure. Just last question, if I can squeeze in. On semaglutide launches in the RoW non-regulated market. When should we expect that to happen?
Erez Israeli (CEO)
In the what you call RoW, most of these launches, we are prioritizing the capacity that we have to launch in Canada. Assuming that this will happen, the launch in the rest of the countries during calendar 2026. Eighty-seven markets overall, most of them are small. The key will be India, Brazil, Turkey, and products like that will be after March of 2026. Canada has an opportunity, like we discussed many, many times, to be before that.
Amey Chalke (VP of Sector Lead)
Sure, thank you so much. I will join back.
Operator (participant)
Thanks, Amit. The next question is from the line of Neha Manpuria from Bank of America. Neha, please go ahead.
Neha Manpuria (Senior Analyst)
Yeah, thanks for taking my question. My first question on the US pipeline, you know, North America, you know, obviously we have SEMA that we will probably get to know in the near term. One, if you could tell us what timelines we need to watch for SEMA and for Canada particularly. Second, other than that, the single-digit growth that you're talking about, does that include any high-value launches in the second half that we should watch out for? I'm asking this because we also saw PAI inspection, you know, for the Chicago facility recently.
Erez Israeli (CEO)
Yeah, so we. I'll start with the last part. I believe that we will get a VI. The observation that we got, to my opinion, are addressable, and we should expect a VI. From that. On the timing of Semaglutide, we are still planning. Gearing to get approval of the product somewhere between the end of October to the beginning of November. If this will happen, we can launch the product at the time of the loss of exclusivity in the beginning of January 2026. That's what we are gearing ourselves to do. As for the rest of the products, with this analysis that we made, meaning that I try to give you how I see the trajectory of the year, we did not take into account a very significant, let's say, out-of-the-ordinary launch.
We are planning to launch about 20 products in the United States, but none of the, let's call it, a sophisticated product. We learned from experience, and I'm trying not to give—I look at them as an upside. It could be upside to that trajectory that we see. Another thing on SEMA, just to make sure that people have the complete picture. We are having two assumptions as related to Canada. One, that from IP perspective, we'll be able to make and ship the product to Canada, which is a country without a patent. Second, that we will get approval in that period of time. Obviously, if these two assumptions will not happen, it may change the trajectory of Semaglutide.
Neha Manpuria (Senior Analyst)
Okay, thank you so much, Erez. Amit, on another question for you, just looking at the gross margin trend for this quarter, you know, given a quarter where we've seen a fair bit of erosion in Revolut Med, they still managed to improve gross margins. If I were to think about the full year, you know, how should we think about gross margins, you know, particularly going into fiscal 2027? And historically, you've also mentioned that SG&A cost will be in the 28% of sales range, but obviously it's tracking higher. Is it fair to assume that this is the new range for SG&A cost, the closer to 30% mark that we have reported in this quarter?
Erez Israeli (CEO)
Let me first thank you, Neha. As far as gross margin is concerned, I think at least for this year it would be in similar levels. There could be higher sales from the base businesses in the branded markets and other POs. That is where I think for this year and next year, I just do not want to give any number at this point of time, range also. Definitely, once we launch Semaglutide, we can model it. That is where it is, I think we can see. As far as SG&A is concerned, I think we, even for the full year basis, it should be in the zone of 28%-29% zone, not at 30%. What I just want to make sure, Neha, if we successfully launch Semaglutide, we should be absolutely good in all the parameters that we are familiar with, meaning the EBITDA as well.
We are aiming that the base business will be always north of 50%. In Semaglutide, it should be even more than that on the gross margins and EBITDA, obviously, like always 25% or north of it. In the time in which we do not have LINA and we do not have SEMA, likely that these parameters will be lower than that.
Neha Manpuria (Senior Analyst)
Understood. Yeah. Got it. Thank you so much, Erez.
Operator (participant)
Thanks, Neha. The next question will be from the line of Damayanti Kiray from HSBC. Damayanti, please go ahead.
Damayanti Kiray (Analyst)
Yeah, hi. Thank you for the opportunity. My first question is again on lenalidomide. So Erez, for 2Q as well, also, you mentioned the label should be similar to what you booked in the June quarter. Or there is still like some room to book higher sales. Given, I think you want to book most of the sales intended for FY26 in the first half itself.
Erez Israeli (CEO)
Yeah, in order not too much because there is also moving parts on prices. The price went down in this fiscal versus last fiscal. But overall, let's call it similar magnitude. I will not say the same, but similar magnitude.
Damayanti Kiray (Analyst)
Okay. So on the pricing pressure part, is there a possibility you will be facing higher magnitude compared to the current level? Because I understand your competitors are also trying to pass on maximum volume, which is possible in the first half itself. In view of that, will price erosion intensify possibly from here?
Erez Israeli (CEO)
We hope not. I believe not. Because most of the booking was done already. In general, naturally, when more companies came this year, they had bigger quarters and they tried to sell in less quarters. By design, it creates certain density versus the year before. It is all well anticipated. Honestly, I do not see any surprise. In my discussions, especially in the last couple of weeks, and I met quite a few people during this period of time, we kind of explained it. I believe that what you should see from us is, give or take, similar magnitude of pricing as well as quantities. After that, it will be a sharp decline in the other quarter.
Damayanti Kiray (Analyst)
Sure. My second question is on semaglutide regarding your preparation. Can you update us on your capacity expansion at ViaJag and when do you expect that capacity to come on board?
Erez Israeli (CEO)
Yeah, we are. The launches that will happen in FY26 and FY27 will not be out of ViaJag. It will be with our partner and using our API, but with the partner. Which means that the capacity of FY11 will come from FY28 onward. We will likely have, in the beginning with our partner, about INR 12 million in FY27. If you look at calendar 2026, because it is very relevant for the potential Canadian launch, it is about INR 10 million. This is what we are planning to have.
Damayanti Kiray (Analyst)
Okay, so for 2026 and 2027 fiscal year, you are good to go with INR 12 million capacity from your partners. Do you think that that will be sufficient to gain meaningful market share in the market which you are targeting?
Erez Israeli (CEO)
We believe so. Naturally, we would love to have more, but we feel very confident about this magnitude. There is maybe potential upside to it, but this amount I feel very confident about. Now it is a matter of what mix of market we will get overall and then what will be the average price for those. This, of course, is unknown. Yeah, I feel very comfortable about this magnitude.
Damayanti Kiray (Analyst)
Okay, that's helpful. Thank you.
Operator (participant)
Thanks, Amit. The next question is from the line of Madhav Marda from Fidelity International. Madhav, please go ahead.
Madhav Marda (Investment Analyst)
Hi, good evening. Thank you so much for your time. First question was if you could just give us an update on the biosimilar abatacept phase three trials, how that is progressing, and by when do we expect outcome for the phase three trial? That's my first question.
Erez Israeli (CEO)
So far, so good. The readout is November 25, which is as expected in accordance to the timelines. Following the readout, which I hope and believe that it will be positive, we are planning to submit the BLA in order to be on time for the market formation, which is December 2026 or January 2027, let's say, if we look for the realistic launch because there are some registration post approval. Just to make sure that you have the full picture, the launch in the beginning of calendar 2027 can be of the IV formulation. The subcutaneous formulation, because of IP, will be a year later.
Madhav Marda (Investment Analyst)
Understood. Yeah, that's quite clear. The second question is on the cost-saving measures. Could you give us some sense in terms of the extent of cost savings that we can drive? If you could give us some sense in terms of the R&D spend, given we do have phase three trial of biosimilar abatacept ongoing, what's the quantum of that spending? I'm assuming that spending should not recur next year. The extent of cost saving that we can drive for the organization next year. Thank you.
Erez Israeli (CEO)
Absolutely. You got it right. We used the time in which we enjoyed the backing, the tailwind that came with the lenalidomide, and we boost some investment in the future, including abatacept, including the creation of the franchise of the GLP-1, including the buildup of the facility for that, including the acquisition of the NRT business. All of that was done because we had access to more financial capacity and we used it. As you said rightly, some of that investment we do not need anymore. Post, for example, November 2025, we will not have to pay for the clinical trial of abatacept. We also kind of feel that there are discretionary costs between R&D, SG&A that can be 500 basis points, 600 basis points that we are planning to adjust in accordance to the motion.
We need to remember that we have also some question mark of how the future will hold between tariff and the semaglutide, the magnitude. Accordingly, we are preparing a scenario. The idea is between growing the base semaglutide and the expenses as well as a success BD, we will kind of manage to make sure that the growth is coming in the right way.
Madhav Marda (Investment Analyst)
Just to clarify, when you say 500-600 basis points. Dr. Reddy said, you know, it's at about, let's say, INR 30,000 crore plus top line. So 500-600 basis points, are you saying there's potential to say INR 1,500-1,800 crore on cost? Is that the right way to think? Of course, like you said, it depends on how the business shapes up, but is that the potential?
Erez Israeli (CEO)
The potential is like that, but it does not mean that we are going to save all of that. I am not recommending you to put in the model that much. Absolutely, that is the game that we play. We prepared it in advance. Naturally, the lenalidomide was a known factor. We are preparing for it for, actually since we signed the deal. That is part of the idea. Hopefully, we do not need it because if the growth will allow us to invest more, eventually we want to invest because we want to create additional future. We want to be a growing company for many, many years. We are trying to manage the famous 25%, 25% double-digit growth also into the future. It is not going to be necessarily every quarter because of this timing of some big products, as you can appreciate.
I am confident that on the big scheme, we will be there.
Madhav Marda (Investment Analyst)
If I can ask one last question, when you said that, you know, we have GBP 12 million pens available in FY27. I guess you're right that the mix of markets will be important for the profitability. Are we confident, given we plan to launch in more than 80 countries, potentially some of which can be small as well, that we can sell the entire GBP 12 million pens? With or without Canadian approval? Like we can sell the entire volume at least?
Erez Israeli (CEO)
I believe so. For two reasons. One, in all of this market, we are aiming to be first or among the first. Second, the demand for this product looks crazy. And so far, the indication in the places that we started to speak to people can confirm this, that the demand is there. Yeah, so I believe that it's absolutely possible.
Madhav Marda (Investment Analyst)
Perfect. Perfect. Got it. Thank you so much. Thank you.
Operator (participant)
Thanks, Madhav. The next question is from the line of Dr. Harith Ahmed from Avendus Park. Harith, please go ahead.
Harith Ahmed (Director and Equity Research Analyst)
Good evening. Thanks for the opportunity. A couple of questions related to your US pipeline. The first one is on generic Liraglutide, which you had filed sometime in 2023, and I see that there are quite a few generics already in the market. It is a fairly decent opportunity. What is the status of our filing and what are the timelines we are looking at?
Erez Israeli (CEO)
Yeah, so it's a product that we obviously have. We are planning to launch it also in the next coming quarters. In some markets, we will be late. In some markets, we will be first to market. It's also, as you know, Liraglutide is Victoza and Saxenda. We believe that with Saxenda, we are going to be first to market or some of the first to market in some of them. It's a product in the mix. It's not as big as Semaglutide. That's why we're not talking about it. If you recall, we have about 25 products that we call them peptides or how to make or with bigger potential. Neha asked me about it before. I'm not guiding on those products before they're coming, but Liraglutide is definitely one of them, and we're planning to launch it.
Harith Ahmed (Director and Equity Research Analyst)
Okay. Thanks for that. On semaglutide in Canada, you said earlier that you're making two assumptions. One of them is that there won't be any patent protection for the brand in Canada. Is there a risk to that assumption or is there any scenario where, you know, there could be a patent-related hurdle to your launch?
Erez Israeli (CEO)
Just to correct, there is no patent in Canada. What keeps the product from being launched is that exclusivity that will expire in January 2026. There is a patent in India that we are now litigating in the Delhi High Court. Of course, so far, we are following the instruction of the court, and we are preparing for that. The second is that we need to get approval. If both will happen, we will be good. I do not see an IP situation in Canada that will stop us.
Harith Ahmed (Director and Equity Research Analyst)
Okay. Thanks for that. I'll get back in a few.
Operator (participant)
Thanks, Harith. The next question is from the line of Dr. Bino Pathiparampil from Elara Capital. Bino, please go ahead.
Bino Pathiparampil (Research Analyst)
Hi. Good evening. Most questions got answered, just a couple of them. On the PSAI gross margins, it has been. It was very weak this quarter. I think your press release talks about some operating leverage issue. If I look at the top line in PSAI, it has not changed materially for year-on-year or quarter-on-quarter. Why then the gross margin decline from mid-20s to low teens?
Erez Israeli (CEO)
Yeah, actually the API business is healthy. The reason for that is some of the demand products for the U.S. are also being back integrated. Also, the way we build the inventory, if you wish, it's attributed to the internal sale. Once there is less internal sales, there is more cost allocation on whatever you sold, you know, in accordance to accounting. That's what created it. It's actually a very healthy business and it's growing. You'll see that it will correct itself in the next coming quarters.
Bino Pathiparampil (Research Analyst)
Understood. In others, I see about INR 165 crore, which is more than the usual quarterly run rate. Is there any one-time other operating income there?
Erez Israeli (CEO)
In this, you know, we have an outlet sensing income from our origin. That is like, it's always, I think it's part of our regular business. I think business, that's what is there. This quarter we have that income.
Bino Pathiparampil (Research Analyst)
Got it. Thank you. I'll jump back to you.
Operator (participant)
Thanks, Bino. The next question is from the line of Saion Mukherjee from Nomura. Saion, please go ahead.
Saion Mukherjee (Managing Director and Head of Equity Research)
Yeah, hi. Thanks for taking my question. Sir, can you share the PLI income or the government grant that you generally share for the quarter?
Erez Israeli (CEO)
San, here, if you remember, like overall INR 1,000 crore for a period of six years, I think. The first four years quota, we have already, because we have just taken, we have got additional approvals, and then we accounted for FY 2026 PLI. Is not much. I can say almost is zero. Once again, you will see the PLI income in FY 2027-2028.
Saion Mukherjee (Managing Director and Head of Equity Research)
Okay. So there is not much in this quarter, is what you're referring to?
Erez Israeli (CEO)
Not for this quarter. For the full year also, is almost, let me put it, I think is very small value is there. Not very big.
Saion Mukherjee (Managing Director and Head of Equity Research)
Okay, sir. Understood. On the PSAI front, with regard to Origin Pharma Services, if you can throw some light, how you see the CDMO business scaling up and what kind of customer or profile of customer and kind of products or services you're offering?
Erez Israeli (CEO)
It is growing. I don't remember how much we sold, but I think $17 million or $18 million this quarter, something like that. We are gearing up for about $100 million of sale for the full fiscal. It's a combination of small molecule CDMO as well as biologic CDMO, primarily ADC. It's a kind of a combination of both. It is growing nicely. It is not that we are going to be a CDMO company, but it's a nice growing business as we speak. We see that there is enough traction for those that want kind of our size of business. That creates synergy with Dr. Reddy's. It's those that are not afraid from Dr. Reddy's, but actually want to have a synergy with us, especially as related to collaboration on clinical trials, R&D activities, and even marketing rights in emerging markets.
Saion Mukherjee (Managing Director and Head of Equity Research)
Understood. But it is like, do you have from $100 million this year? I mean, what should we expect, let's say three, five years down the line? Do you have some line of sight of growth on this business?
Erez Israeli (CEO)
Yeah, it should be between $250-$300 million by 2030.
Saion Mukherjee (Managing Director and Head of Equity Research)
Understood. Okay. Thank you.
Operator (participant)
Thanks, Aaron. The next question is from the line of Tushar Manudhane from Motilal Oswal. Tushar, please go ahead.
Tushar Manudhane (Research Analyst)
Yeah, thanks for the opportunity. Just on this Keytruda biosimilar, if you could, you know, share, like throw some insights in terms of the kind of spend that will be done on the clinical trial on a combined basis, Dr. Reddy's as well as Alvotech basis.
Erez Israeli (CEO)
Yeah. If you recall, we are targeting on biosimilars, being a relatively young organization in that space, to try and bring products that want to do ourselves, a product with relatively less level of competition. And this is how we target Abatacept, Daratumumab, and these kind of products. Pembro is a molecule that many, many markets want, naturally being a very, very important molecule in this space. We felt that it's likely to be crowded. The exemption of phase three, no phase three, plus collaboration, plus the ability to licensing, create a situation in which the level of net investment is not much. It can create a very good ROI, especially when we are going to the relevant markets. The intent is to launch it in many markets, including the United States, including in Europe, but with much less burden of prior investment. This was the thinking behind it.
Tushar Manudhane (Research Analyst)
Got it. The trials, again, given that this molecule has been there for multiple indications. What is the thought process? Like we'll be progressing with certain indication to start with, and then the clinical trials of the biosimilar version would be as good as the innovator molecule.
Erez Israeli (CEO)
You don't need to do it for the indication. Actually, the type of trial that we do allows you in each one of the markets to get the same indication that is approved for the relevant market of Keytruda. You don't need to do it for multiple indications. You can have one trial and get all the relevant indications, as it's going to be an interchangeable product.
Tushar Manudhane (Research Analyst)
Got it. Just one more on the R&D spend. Like, you know, this year, it's relatively less as a percentage of sales, like almost 7-7.5%. Summing up to, let's say, compared to FY2025, which was almost 8.5-9%. Given that we have such complex assets in the pipeline. You know, what is sort of the thinking to sort of reduce the R&D spend, both as a percentage of sales as well as maybe on the absolute amount as well?
Like I mentioned before, we have a certain level of 500-600 basis points. That of what I call discretionary that we can play with. In order to match the sales growth as well as to the expenses. R&D is part of it. Right now, you should think about 7%. We have, of course, enough projects to go more than that if the P&L and the numbers will allow us, we will do that. If not, we can go even down to 6%. We have that flexibility. Like I mentioned, the profitability of the company is very important for us. This is the level of flexibility that we have on the R&D. Right now, we are somewhere in the middle, waiting to see how the next quarter will evolve.
Got it. Just one last one, if I may. Like while there are many questions asked on semaglutide, but just broadly, you think this is like sort of a two-year opportunity, one-year opportunity, or much more than that?
Erez Israeli (CEO)
First of all, I see that as a many, many years opportunity. Actually, we are entering a decade of GLP-1 products. Obviously, it is not going to be, it is going to change and evolve. At the beginning, it will be more like to start to be in the market, to try to get in those markets that will be first or among the first certain premium. Selling our capacity. We believe that this segment will grow significantly. We will add capacity. There will be more volume, obviously lower prices. We are going to see brands that play, whether consumer care play, like in the obesity or, you know, differentiated devices and stuff like that. Actually, just the beginning of the journey, more products will be added. By the way, the full portfolio of GLP-1 for the company is 26 products.
Obviously, the Semaglutide as well as the Eli Lilly product will be the biggest. We are trying to get for each one of them to be first to market as well as to create some differentiated play. It will evolve. 2026 is just the first year that we will significantly deal with these products.
Tushar Manudhane (Research Analyst)
Sure. Thanks. Thanks a lot for this.
Operator (participant)
Thanks, Tushar. Participants are requested to restrict the number of questions to two to ensure that everyone gets an opportunity to interact with management. The next question is from the line of Shyam Srinivasan from Goldman Sachs. Shyam, please go ahead.
Shyam Srinivasan (Research Analyst)
Yeah, thank you. Thank you for taking my question. Just the first one is on, we did CapEx of $80 million. We have about $350 million in cash. Just want to understand outlook on CapEx for the year. Where is it generally being spent for? The sub-question is on $350 million of cash. What is the, other than CapEx maybe, what are the other areas or avenues where we are looking to deploy this cash?
Erez Israeli (CEO)
CapEx this year also would be more or less like last year level. We are overall for the full year, we are expecting cash outflow in the range of INR 2,500-2,700 crore. That is the level. This entire CapEx, also a lot of investments, is going for peptides and biosimilars. As you know, we are looking for BD. Like I mentioned, we have four levers of growth: the baseline growth, special products, cost optimization, and BD. We believe not just this cash, we have also the ability to borrow that we have $2 billion to $2.5 billion of financial capacity. We are engaging as we speak with BD and hopefully will come. I know BD you can never guide. We are definitely working on it and we see growth opportunities.
Shyam Srinivasan (Research Analyst)
There is the 2, 2.5 is like what is the net debt to EBITDA or what is the leverage you have in mind?
Erez Israeli (CEO)
This is Shyam, is going to be like a max at 0.5.
Shyam Srinivasan (Research Analyst)
Understood. Okay. Just the second question on the India business, we have outgrown IPM. Just want to understand, I know you talked about the top 10, but what can help us sustain double-digit or even outperforming the market? If you could also give us some data points around what are field forces, what is our expansion plan in terms of distribution in India? Thank you.
Erez Israeli (CEO)
Sure. Shyam, we decided, and I know you are fully aware of it and appreciate it, that we will not focus on branded generic at the time. We believed that the growth in India will come primarily by introducing innovative products, which is better than the standard of care that is used today in the market. The growth that you see now is part of that. We are launching innovative products in addition to the branded generic. The branded generic will be like normal price adjustment with some minor volume growth. We will not be that special on the branded generic. Some products will do more, some less. Our key debt, and that is why I believe in the consistency, is because we signed many deals so far on branded products and more to come.
We believe that we will outpace the market and that is what will grow our ranking. I am still committed to the number five in the market. We are doing it in a slow way because we are not acquiring to be there. We are growing that organically, actually inorganically if you are considering licensing in. That is what we are planning to do. We should see consistent double-digit growth in India in the coming quarters and years.
Shyam Srinivasan (Research Analyst)
Just a data point on the field force, Erez or Amey, sorry, yeah.
Erez Israeli (CEO)
Yeah, about 10,000 people in the 50 teams.
Shyam Srinivasan (Research Analyst)
Understood. Thank you and all the best.
Operator (participant)
Thank you, Shyam. The next question is from the line of Surya Patra from Philip Capital. Surya, please go ahead.
Surya Patra (VP of Healthcare and Specialty Chemical Research)
Yeah, thanks for this opportunity. My first question is about biosimilars. So it seems that we are busy in licensing, doing deals for biosimilar to expand our portfolio there. Could you provide some pipeline visibility for US market, let's say starting from FY27 or 28, which are the key product opportunities that we are targeting for the US market?
Erez Israeli (CEO)
Yeah, so obviously the key products will be Abatacept. Abatacept, like I mentioned before. End of calendar 2026, January 2027, we should launch the IV product. In the year after, we will launch the subcutaneous. Sorry?
Surya Patra (VP of Healthcare and Specialty Chemical Research)
Okay. Yeah. Second product, I missed that. So if you can just.
Erez Israeli (CEO)
We will have launches of smaller products, which is obviously we will launch the Denosumab prior to that, primarily to prepare the launch of Abatacept. We took licensing of this product for both Europe and US because it is a similar customer base, especially similar doctors. In a way to prepare the team, by the time that Abatacept will come, we will have the team as well as to have that ready. In addition, after that, we will have Pembrolizumab, Zilumab, we will have Daratumumab. Obviously, more products will come to the US, but right now, these are the four names that will be in the US. Rituximab, we will have also in the US, but with Resilience, not by our people.
Surya Patra (VP of Healthcare and Specialty Chemical Research)
Okay. My second question is about the Russia business or particularly the secondary tariff, what either emerging from the European sanction or the U.S. sanction, what on Russia. So whether this is a kind of factor of worry for us?
Erez Israeli (CEO)
No, if at all, it's an opportunity. We are working freely in Russia, great relationship with the country. Great team that we have. If other people will put sanction on it, the sanctions are not relevant to us. If at all, it's an opportunity.
Surya Patra (VP of Healthcare and Specialty Chemical Research)
Sure. Just last one point on the NRT. We have reported that there is a quarter-on-quarter growth of around 12%. Is there any seasonality in that NRT portfolio? What growth like-to-like would the portfolio have seen on a year-on-year basis?
Erez Israeli (CEO)
Yeah. First, no seasonality. This is a smoking cessation brand.
Surya Patra (VP of Healthcare and Specialty Chemical Research)
Correct.
Erez Israeli (CEO)
Second. It's a normally. The brand is used to grow in single digits. So far, we are accelerating it. We are still, at least in our business model, we anticipate a mid-single digit growth. Right now. So far, knock on wood, this acquisition is exceeding our expectations.
Surya Patra (VP of Healthcare and Specialty Chemical Research)
Great. Yeah. Thank you. We see all the best.
Operator (participant)
Thanks, Surya. In the interest of time, we would request all participants to restrict the number of questions to only one. The next question is from the line of Abdulkader Puranwala from ICSA Securities. Abdul, please go ahead.
Abdulkader Puranwala (Research Analyst)
Yeah, hi. Thank you for the opportunity. My first question is with regards to semaglutide. Sir, just on, you know, we spoke a lot on the call, perspective of the launch timing. In terms of pricing, you know, if you could provide some color on, you know, tentatively indicating at what price point you may want to introduce this product in Canada and, you know, other markets?
Erez Israeli (CEO)
As high as we can. Honestly, I wish I could give you a much better answer. It very much depends on how many competitors will be, what will be the reimbursement. The scenarios are very wide. It will be dictated obviously by number of competitors. Whatever the market will give us, we will take.
Abdulkader Puranwala (Research Analyst)
Sure, sir. And just next, next one question on, you know, on the expenses, what you would have incurred on NRT and nutraceutical. So when you talk about, you know, 500 to 600 basis points of cost savings, would that be that, you know, would it be safe to assume that a lot of that is currently getting incurred toward these two products, which may not happen in the near future once the regulator goes off?
Erez Israeli (CEO)
No, we are talking not about. Discretionary costs are normally costs that you can save at the time that you need to, which are not supporting sales. Not support marketing. Obviously, we just got the product. We want to grow it. We will invest in it. We are talking about things that are good to do also on the ongoing basis, but for sure, if you need to save money, less traveling, less meetings, less consultants, et cetera. This kind of the discretionary that will not touch the sales. We are not desperate. We are actually very comfortable with what we do. We knew that Lina will come. No, we are not planning to cut expenses that are supporting the growth of the company. The priority is to grow the company.
Abdulkader Puranwala (Research Analyst)
Got it. Thank you for answering my questions.
Operator (participant)
Thanks, Abdul. The next question is from the line of Forum Parikh from Bank of Baroda Capital Markets. Forum, please go ahead.
Foram Parekh (Equity Analyst)
Yeah, thank you for the opportunity. Most of my questions are answered. Just on the NRT front, should we still assume EBITDA margin to be 25%, or would it be in the neighborhood if you can just throw some light on that?
Erez Israeli (CEO)
Yes.
Foram Parekh (Equity Analyst)
Okay. On the Europe front, X of NRT, the growth has come down to 15%. Going forward, do we expect it to bounce back to above 20% kind of growth as we have new product launches and biosimilar launches? Or can we work out with 15% kind of growth?
Erez Israeli (CEO)
First of all, to grow double-digit in generic business is not bad. Yeah, once we will launch the biosimilars, it will accelerate this growth. It's hard for me now to calculate the percentage because I think we are launching each one of them in 10 countries, and it's pretty complicated. Let's say we should expect double digits from Europe. If it's 15% or 20%, it's hard for me to tell per quarter. The important part about Europe is that it's all average activity. These are all products that we have, not just for Europe. That's the beauty of this business. It's adding to the economy of scale. So far, so good. Yeah, it's in the neighborhood of what you said, maybe plus. I'm taking a disclaimer that I don't know what will be exactly the timing of the biosimilar and how it will contribute to that.
Foram Parekh (Equity Analyst)
Sure, no problem. Lastly, if I may squeeze in, can you just throw some color on how do you see ahead of the semaglutide launch in India? How do you see the obesity market forming, you know, post the launch, given that the size of the obesity market is very small, which is, you know, one to innovators? Post-generic, how do you see the obesity market expanding in India?
Erez Israeli (CEO)
I believe that is going to be significant. The unmet need is very, very clear, especially for people that live here in India. I believe that it's a big opportunity.
Foram Parekh (Equity Analyst)
Would it be possible for us to quantify?
Erez Israeli (CEO)
I don't want to give you unreliable numbers. It's big. The potential is big. I don't know to say how much.
Foram Parekh (Equity Analyst)
Okay, thanks. No problem.
Operator (participant)
Thanks, Forum. The next question is from the line of Shashank Krishnakumar from MK Global. Shashank, please go ahead.
Erez Israeli (CEO)
I think he's on mute.
Amey Chalke (VP of Sector Lead)
He's on mute.
Operator (participant)
Shashank, can you unmute yourself? Okay, can I ask for the next question?
Erez Israeli (CEO)
Thank you.
Shashank Krishnakumar (Senior Research Analyst)
Hello.
Erez Israeli (CEO)
Yeah.
Operator (participant)
Yeah.
Shashank Krishnakumar (Senior Research Analyst)
Yeah. I'm audible.
Erez Israeli (CEO)
Yes.
Shashank Krishnakumar (Senior Research Analyst)
Yeah. Yeah. My first question was on the outlicensing income, which we booked this quarter. Is it possible to quantify that?
Abdulkader Puranwala (Research Analyst)
It's INR 120 crore.
Shashank Krishnakumar (Senior Research Analyst)
Got it, sir. My second question was more from.
Erez Israeli (CEO)
Only Shashank, just I would like to add, this is not like a one-time income. This is like a, always, I don't know, few quarters in a year or I think going forward it always will be there.
Shashank Krishnakumar (Senior Research Analyst)
Okay. Okay. My second question was more from a million-ton strategy standpoint. We have typically relied on high-value complex generic launches in the U.S. How do we sort of reconcile that, the fact that we are also looking to sort of moderate our R&D spend? I think you mentioned possibly we can also reduce it to 6% going forward. Can we still keep pace with the pace of complex generic launches that we have typically done in the past in the U.S. if we sort of moderate R&D spend going forward?
Erez Israeli (CEO)
Yeah, just to remind, R&D spend are relevant for products that will be launched in the United States between 10-12 years from now. Yeah, absolutely, we can decide how much to spend for the future and how much to keep in accordance to our performance. I do not see any effect for the immediate terms because all those products were either we committed the development or we have the files already.
Shashank Krishnakumar (Senior Research Analyst)
That's it.
Operator (participant)
Thanks, Shashank. The next question is from the line of Aman Wij from Astute Investment Management. Aman, please go ahead.
Erez Israeli (CEO)
Aman?
Operator (participant)
Aman, your line is unmuted.
Aman Vij (Head of Research)
Yeah. Sir, first question is on the semaglutide API side. If you can talk about our yields currently and the quality and the pricing compared to Chinese API players because I believe they have a lead. We are planning to set up a big capacity in India, which is much more than the guidance of 10-12 million pens you have talked about for two years, which we are targeting. Could you talk about this side?
Erez Israeli (CEO)
Sure. Just to calibrate, the 12 million pens is the launch for 2026. Obviously, only a small portion of the capacity will be used for that. We are also in this peptide capacity going to do products for third party as well as for the future, as well as other peptides. Just to clarify, it's not comparative numbers. Second, in terms of cost, we believe that once we finish the scale-up, our products will be competitive with the other competitors, including China.
Aman Vij (Head of Research)
That is heartening to hear, sir. Second question is on the Delhi High Court patent challenge, which I think by next week we will get an answer. I am saying in my understanding, in worst case scenario, is it not just that even if it goes against us, it means we will be able to launch only two months later because India patent expires in March versus Canada in January? It does not delay beyond two months in worst case scenario. Is the understanding correct?
Erez Israeli (CEO)
The understanding is correct as related to the timing of the launch in India. For us, it is important to enable our launch in Canada. The Canadian launch then will be more than two months. If it will not go our way, obviously, I cannot react because it's a, you know, the laws in India. I'm not reacting on any prejudiced situation. We believe that it's going to go in the way that will be satisfactory to us.
Aman Vij (Head of Research)
Sure. Just final question. You have talked about 10-12 million kind of capacity, which we have tied up with, say, the fill-finish players and the pen players. In, say, good case scenario, if the demand is, say, 2x our initial assumption, will we have, do we have arrangements with both the parties, the suppliers as well as the fill-finish players, that if the demand is way more, because I believe there is a shortage of capacity in terms of both fill-finish and devices, is there a case, is there a case where if the demand is 2x, we can somehow arrange 2x volumes also?
Erez Israeli (CEO)
2x for calendar 2026 will not happen.
Aman Vij (Head of Research)
Twenty-seven, sir. You said similar number for twenty-six and twenty-seven, right? So I was more worded on twenty-seven, not on twenty-six.
Erez Israeli (CEO)
Yeah. I just make sure that you got it right. Calendar 2026, calendar 2026, which is FY2027, but mostly. Is 10 million. If you take it as FY2027, it's 12 million. There is some upside to that. I normally, when I'm giving guidance, I have to be very, very accurate. Reliable in what we are giving. Double it will not be in that period of time.
Aman Vij (Head of Research)
Okay, but slight increase we'll be able to manage with the arrangement, say 30-40% extra than what we are predicting.
Erez Israeli (CEO)
Depends on the definition of slight, but yes.
Aman Vij (Head of Research)
Sure, sir. That's it. Thank you for answering the questions.
Operator (participant)
Thanks, Aman. We'll take the last question from Kunal Dhamesha from Macquarie. Kunal, please go ahead.
Kunal Dhamesha (Research Analyst)
Hi, good evening. Thank you for the opportunity. Just one on semaglutide Canada. Because there are two brands, one for type 2 diabetes, which is Ozempic, and one for weight loss, Wegovy. Currently, Canadian authorities are not reimbursing Wegovy for the weight loss indication. How are we planning to tackle this issue when we launch our product?
Erez Israeli (CEO)
We are going to launch only Ozempic, generic Ozempic. The submission of generic Wegovy will happen throughout the year. The launch that we are discussing is only for Ozempic. I do not anticipate any issues with that.
Kunal Dhamesha (Research Analyst)
Sure, sure. Can you help us also understand the split of this 10 million pen capacity that we have between single-use pen versus multi-use pen? Because semaglutide in Canada is available in both versions, multi-use as well as single-use pen.
Erez Israeli (CEO)
The quantity that I mentioned is in single-use terms.
Kunal Dhamesha (Research Analyst)
One pen per week is the. Is available.
Erez Israeli (CEO)
Yeah, it's like equivalent to one pen a week.
Kunal Dhamesha (Research Analyst)
Sure, sure. Thank you and all the best.
Erez Israeli (CEO)
Thank you.
Thank you.
Operator (participant)
Thank you. With that, I now hand the call over to Richa for the closing comments.
Richa Periwal (Head of Investor Relations and Analytics)
Thank you all for joining us today. We appreciate your continued interest in Dr. Reddy's and the time that you've taken to engage with our Q1 FY26 results. If you have any further questions or require additional information, please feel free to reach out to Aishwarya or myself. With that, this concludes today's earnings conference call. Stay safe and take care.
Erez Israeli (CEO)
Thank you.