Dr. Reddy’s Laboratories - Q2 19/20
November 1, 2019
Transcript
Operator (participant)
Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Q2 FY20 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing 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 (Head of Investor Relations and 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 September 30, 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 transcript shall be made available on our website soon. All the discussion and analysis of this call will be based on the IFRS consolidated financial statements. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's, comprising Mr. Erez Israeli, our CEO, 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 (CFO)
Thank you. Greetings to everyone. Let me take you through the key financial highlights for the quarter. This quarter, we have certain one-off items impacting revenues, gross profit margin, and SG&A, which I will cover as part of the respective section. Wherein all the amounts are translated into U.S. dollar at a convenient translation rate of INR 70.64, which is the rate as of September 30, 2019. Consolidated revenues for the quarter are at INR 4,801 crore, which is $680 million, registering a growth of 26% year-on-year, and 25% on a sequential quarter basis. It includes an amount of INR 723 crore recognized as revenue towards the sale of two neurology brands of our proprietary product business.
Even after netting off this amount, revenue during this quarter has been the highest ever for Dr. Reddy's. This has been made possible by registering a good growth in the PSAI, Europe, emerging markets, and India businesses. However, North America performance could have been better. Consolidated gross profit margin for the quarter is 57.5%, with an improvement of 250 basis points on a year-on-year basis and 590 basis points on a sequential basis. Gross margin for the global generics business was 55.5% and for PSAI business was 24.6%. While the overall gross margin is benefited due to revenue recognition of the Copaxone brand, it was impacted due to certain one-offs, including but not restricted to the impact of the voluntary recall of ranitidine in the U.S. market.
Adjusted for the one-off, the normalized gross profit margin for the quarter is about 51.5%. The SG&A spend for the quarter is INR 1,678 crore, that is $238 million. As part of our quarterly impairment testing analysis, we concluded that the carrying value of the intangible asset is not reflective of the current market reality for three of the products, namely, Tobramycin, Ramelteon, and Imiquimod acquired from Teva. While the first two products face increased competition and substantial price drop during this quarter, we have taken a decision not to launch the third product. Accordingly, an impairment charge of INR 355 crore has been considered in the current quarter.
Beyond the impairment charge, there have been additional one-off over INR 100 crore, including but not restricted to the cost associated with the sale of two neurology brands. Adjusted for the one-off, the normalized SG&A spend is lower on a sequential quarter basis. R&D spend for the quarter is INR 366 crore, that is $52 million, and is at 7.6% of the sales for the quarter. The R&D spend is lower by 11% year-over-year, but higher by 1% on a sequential quarter basis. Considering the current state of activities, we believe that the overall R&D for this fiscal would be in the range of $200 million-$240 million.
The EBITDA of the quarter is INR 1,434 crore, that is $203 million, which is around 29.9% of the revenue. The net tax for this quarter is a benefit of INR 326 crore, due to recognition of deferred tax assets for INR 522 crore, primarily related to MAT credit. Pursuant to the recent amendments in the taxation laws in India, the MAT rate has been reduced from 21.55% to 17.47%. Consequently, during the quarter, the company has evaluated the recoverability of the unrecognized MAT credit and ascertained that it is likely to recover the MAT credit within the stipulated period as per Income Tax Act.
Accordingly, the company has recognized a deferred tax asset for INR 499 crores related to the unrecognized MAT credit in the current quarter. With this development, the ETR for this financial year is expected to be less than 10%. EPS for the quarter is INR 65.82. Operating working capital increased by around INR 350 crores, which is $49.5 million. This increase is attributable to an increase in receivables in line with the sales proceeds. The net working capital days has increased by 4 days against the last quarter. We invested INR 108 crores, which is $15 million towards capital investment in this quarter. The free cash flow generated during this quarter was INR 874 crores, which is $124 million.
Consequently, our net debt to equity ratio has improved further and is at 0.01, as on 30th September 2019. Foreign currency cash flow hedges for the next six months in the form of derivatives for U.S. dollar are approximately $300 million, largely hedged around the range of INR 70.20-INR 73.95 to the dollar. In addition, we have currency hedges of $564 million. We also have foreign currency cash flow hedges of INR 1,650 million at the rate of INR 1.0813 to the rupee, maturing over next six months. With this, I now request Erez to take to the key business highlights.
Erez Israeli (CEO)
Thank you, Saumen. Greetings to all. We had a good quarter, and are progressing well in implementing our strategy in the focus spaces we have communicated. In this quarter, we generated INR 870 crore in cash, which improves our financial strength and enables us additional means to grow in the future. This quarter, we had a number of one-offs in the financial performance, but we believe that these are not going to impact our strategy and our future growth. Now, let me take you through the key highlights across our businesses. Please note that all the references to numbers in this section are in the respective local currencies. Our North America Generics recorded sales of $202 million for the quarter, and declined by 1% year-over-year and 14% on a sequential quarter basis.
The sequential decline was primarily driven by certain issues impacting the quarter, such as A, provisions related to nationwide recall of ranitidine products due to NDMA impurities limits following FDA's caution. Note regarding the same, we have now completely suspended the sales of ranitidine OTC and RX products. And B, logistics-related challenges leading to temporary disruption in supplies, which have been addressed since. We expect the sales run rate to normalize from Q3 onwards. During the quarter, we launched 8 new products, including some first-to-market and limited competition products like Carboprost injectable, Pregabalin, Fosaprepitant injectable, and OTC Naproxen Sodium. Overall, we launched 13 products in the first half of the fiscal. While we continue to work towards ramping up our market share across the key launches, we are on track to launch more than 30 new products in the current fiscal.
Our Europe business recorded sales of EUR 35 million, with a strong year-on-year growth of 50% and sequential growth of 15%. This great performance was driven by increased contribution from new launches, coupled with base business performing well across all the European markets. We expect this business to continue to perform well during the balance of the year. Our emerging markets business recorded sales of INR 820 crore, with a year-on-year growth of 10% and sequential growth of 13%. Within EM segment, Russia business grew at 6% year-on-year and 2% sequential in constant currency. New launches and higher volumes contributed towards the overall growth, which were partially offset by lower realization in few of the markets. This quarter witnessed a great milestone for our China business.
As many of you may be aware, Dr. Reddy's successfully emerged as one of the winners for the supply of Olanzapine in the centralized drug procurement program, becoming the first Indian generic company to have prevailed in the new tendering process. This award is a testament to our focus and efforts towards building China as one of our key growth drivers for the company. We remain committed to building a healthy pipeline of products to enable us to support Chinese patients with more such opportunities going forward. Our India business recorded sales of INR 7,751 crore, with a year-on-year growth of 9% and a sequential growth of 8%. During the quarter, we launched five new brands.
As per the secondary sales reported by IQVIA, we registered a healthy growth of 13.4% ahead of total market growth of 13.1% for the quarter ended September 2019. We continue to focus and strengthen our presence in India markets. Our PSAI business recorded sales of INR 100 million, with a year-on-year growth of 16% and sequential quarter growth of 54%. We had a strong quarter for the business, and we expect to build on this momentum going forward. On the R&D front, we filed one ANDA during this quarter, and the filing target is expected to ramp up during the balance of the year. As of September 30, 2019, we have 99 cumulative filings pending for approval with the U.S. FDA, including 96 ANDAs and 3 NDAs.
During the quarter, we have also filed eight drug master files globally. We continue to strengthen our product portfolio across all of our focus markets. On the quality and regulatory front, we had several audits during the year carried by U.S. FDA and other agencies, and I'm quite satisfied with the overall audit outcome. We believe that we should be able to appropriately address wherever there are open observations from these audits. As regards the API, Srikakulam plant, what we call CTO-6, we are expecting an inspection from the U.S. FDA in the near future. Our proprietary products business, close to the closure of the divestiture of our few neurology brands to Upsher-Smith Laboratories, we recognized income of $105 million during this quarter, representing the upfront consideration and discounted value of near-term milestones.
Further, we are happy to announce that Tosymra brand for intranasal sumatriptan was launched by Upsher-Smith Laboratories in the United States in October 2019. Going forward, we remain focused on addressing unmet and undermet medical needs of patients suffering from critical and chronic illness globally. We are focusing on our core capabilities in R&D to build a self-sustained business that can consistently deliver high value, globally relevant, differentiated products that provide meaningful health economic outcome to patients and payers. The NDA for DFN-15, which is oral celecoxib, has been accepted by the U.S. FDA, and progress on all of our other R&D program is on track. While we continue to progress well on the organic growth for each one of our focus businesses, we are also evaluating multiple inorganic opportunities, which can accelerate our growth journey further to reach more patients and create value for all stakeholders.
I'm pleased with the shift seen in the organization behavior towards cost consciousness and higher prudence toward cash utilization. We are taking significant effort to improve on multiple health parameters in addition to financial performance, and believe that we are progressing well in the right direction. Within this, I would like to open the floor for questions and answers.
Operator (participant)
Sure. Thank you very much. We will now begin with the question-and-answer session. Anyone who wishes to ask questions may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets when asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask questions, please press star and one. The first question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Prakash Agarwal (Deputy Head of Research)
Yeah, good evening, and thanks for the company. Sir, question, two questions. One is on the U.S. business. Just trying to understand the reasons that you have cited in terms of, you know, the logistics, the price erosion, volume erosion, and some bit on ranitidine. If you could just break it down so that we know that what is the normalized, if things wouldn't have happened, what would have been the normalized U.S. sales run rate? Would it be similar to last quarter or tad lower or much lower?
Saumen Chakraborty (CFO)
It will be a bit lower than the previous quarter, not much lower.
Prakash Agarwal (Deputy Head of Research)
Okay. So are we quantifying the ranitidine impact and the logistics impact? That would be really helpful.
Saumen Chakraborty (CFO)
Ranitidine will be quantified when we are releasing 6-K very shortly. That you will find out there. Others are not quantified.
Prakash Agarwal (Deputy Head of Research)
Okay. And, with respect to going, coming back to the normalized run rate, do we expect going forward with the, these new launches to ramp up, coming back to Q1 run rate, or how should we think about the rest of the year?
Erez Israeli (CEO)
So, we are planning to go. We are not going to disclose specific numbers, and as we normally do not do so. But absolutely, the performance of this quarter was impacted significantly, or the main difference, by the factors that we mentioned. On top of that, we had a price decrease on some of the products, so it was not the only reason for that. These two issues naturally will not be there in the Q3, and plus, I believe that we will ramp up, so it's supposed to be better. Overall, we are planning to grow in North America.
Prakash Agarwal (Deputy Head of Research)
Okay. And, and, so second question on the key products. So if you could share any progress on our biosimilar portfolio, which is the XenoPort, Rituximab, and the PEG.
Erez Israeli (CEO)
So on biosimilar, we are talking about Rituximab. This is the trial is progressing well. On your first question, just to add, and naturally, on top of it, we see an opportunity with Suboxone. And that there is a certain announcement that the AG will not be there, and naturally it's open an opportunity for us, which we hope to explore.
Saumen Chakraborty (CFO)
So on XenoPort, I would tell you the status. We successfully completed the phase IIB study. Now it really does support our data, so this may become the first approved oral drug of monomethyl fumarate plus for treatment of moderate to severe plaque psoriasis in the U.S.. We are in active dialogue with the U.S. FDA right now for crafting the way forward with respect to the design of the phase III trials.
Prakash Agarwal (Deputy Head of Research)
Okay. And, we're also developing Tegoprazan, right?
Saumen Chakraborty (CFO)
That is, Eli Lilly. We earlier had an agreement with Dermira, which was acquired by Eli Lilly, so they would have the latest today.
Erez Israeli (CEO)
Yes, it's phase III was completed. They are preparing their file for filing. We do not know the date, but they will, they should be filing.
Prakash Agarwal (Deputy Head of Research)
Okay. We do have economic interest, right?
Erez Israeli (CEO)
Yes, yes, absolutely.
Prakash Agarwal (Deputy Head of Research)
Right. Okay, great. I understand. Thank you.
Operator (participant)
Thank you. The next question is from the line of Anubhav Aggarwal from Credit Suisse. Please go ahead.
Anubhav Aggarwal (Director)
Thank you. First question is, can you just elaborate a little bit on this disruption which you mentioned related to logistic issue? Is this Dr. Reddy's specific issues or this was a industry issue?
Erez Israeli (CEO)
Dr. Reddy's specific issues. We had the issue with the distribution of the products in the U.S. for a certain period of time.
Anubhav Aggarwal (Director)
This was across the basket, or this was very few products you had the issue?
Erez Israeli (CEO)
It across the basket, it was just issue in the way we distribute the products. No, nothing is special, and we overcame.
Anubhav Aggarwal (Director)
But just, I was just trying to understand. So the way it's worded in the press release, it looks like the sales that were lower this quarter is the lost sales. So I'm just trying to understand, let's say, X amount of dollars we lost, we showed a lower sales in this quarter.
Erez Israeli (CEO)
We had less days that we could ship products. So naturally, to evaluate it for the quarter, we had lower sales.
Saumen Chakraborty (CFO)
But, you are right to interpret in terms of that things that happened in the last month of the quarter. We could not get back to the normalcy during the quarter. Now, things have become normal, so there have been, you know, some problem in shifting out of the warehouse during the last part of the quarter.
Anubhav Aggarwal (Director)
Yes, so I'm just trying to understand, very simple question, that let's say $X million was the sales in each quarter. Are we going to, over a period of two, three quarters, go... Are we going to get three X, let's say, over three, three quarters, or are we going to get two X because of the supply issues?
Erez Israeli (CEO)
We did not do sales because of the supply issues.
Anubhav Aggarwal (Director)
But are we going to get, in the next quarter, is this what, what?
Saumen Chakraborty (CFO)
Whatever we could not ship in the last quarter, that part of the things would have been shifted in last month, in this quarter, in the month of November.
Anubhav Aggarwal (Director)
Oh, sorry, last one. So this quarter should show higher sales for whatever we have done lower than the second quarter, right?
Erez Israeli (CEO)
Each quarter should be better than the second quarter, yes.
Anubhav Aggarwal (Director)
Okay. So, and second question was on generic Suboxone. Just wanted to check that, can our capacity support, let's say, if our market share was to double, do we have enough capacity to support that?
Erez Israeli (CEO)
Yes.
Anubhav Aggarwal (Director)
Thank you. And just one clarity on generic Febuxostat, we did not get approval of this product. We were one of the shared generic. Is that what, what was the reason that we did not get approval of this product?
Erez Israeli (CEO)
Which product?
Anubhav Aggarwal (Director)
This is generic Uloric. Sorry, Uloric is a brand, generic Febuxostat.
Erez Israeli (CEO)
Okay. I don't have the detail. I believe that maybe it's because of the CTO-6 situation, but I'm not sure about it. Maybe we can check and get right to you.
Anubhav Aggarwal (Director)
Okay, thank you.
Operator (participant)
Thank you. The next question is from the line of Neha Manpuria from JPMorgan. Please go ahead.
Neha Manpuria (VP)
Thank you for taking my questions. So first on the SG&A, on the INR 100 crore, I understand some part of it is, transaction cost related to the proprietary brand sales. But could you give us some color on what the other one-off was? And, should we see the SG&A spend continue to decline from the current quarter level, like you've indicated, or, you know, in the second quarter, or, you know, this is, the adjusted for these INR 100 crore is, the new level?
Saumen Chakraborty (CFO)
So whatever we can disclose, and we need to disclose, these are all to be there in the 6-K. And there will be certain areas where, you know, there could be specific confidentiality and other that we cannot speak so directly. But the crux of the thing is, at a normalized level, the SG&A actually is improving. And this quarter, at a normalized level, is lower than the just the previous quarter. That means from the Q1, we have improved on SG&A. But because of the one-off, it is looking higher.
Neha Manpuria (VP)
Okay. So if I were to look at the margin trajectory, now, given that a lot of our growth is now coming from, you know, emerging market, India, is it fair to assume that, you know, this growth should help improve, you know, EBITDA margins? Is that the right way to look at, you know, our margins?
Saumen Chakraborty (CFO)
Yes. Over time, yes.
Neha Manpuria (VP)
And that will be-
Saumen Chakraborty (CFO)
Yes, go ahead.
Neha Manpuria (VP)
When you say over time, that would be, you know, a couple of quarters, or you see that happening more gradually?
Saumen Chakraborty (CFO)
So first, you know, you have to first appreciate that, over the last few years, there have been continuous pressure of price erosion. And we, at other hand, we have been constantly or continuously trying to improve productivity and have all the cost excellence programs to, neutralize the impact of so severe price erosion, particularly in the U.S. market. And, we have been, you know, trying to keep the gross margin at that level. But at an EBITDA level, overall, since, you know, multiple things that we are doing, we have come to a level where we are not very far from the right kind of benchmark for the, you know, pharma industry, what kind of EBITDA we should be having.
So that, you know, what dropped so subsequently to the one later situation, I think we are, we are recovering, more or less we have recovered. And as Erez just said, that, you know, if there is no other specific impact, which is dropping down, we hope to, you know, continue having it.
Neha Manpuria (VP)
Understood. My second question is on the, you know, your use of cash, particularly after the cash flow in this quarter. You mentioned in the opening comments that we are evaluating quite a few opportunities. You know, again, the, are these focused on, you know, on, you know, probably India emerging market, if you could give some areas where we are looking at deploying this cash in?
Erez Israeli (CEO)
Absolutely. We are looking to invest in our spaces, in all the relevant spaces. The primary focus is on branded generic markets, India in particular. This is the primary focus. At the same time, the efforts and the discussions are in each one of the spaces in order to support the growth that is required in the strategy. We are doing it with the following limits. One, it has to support the strategy. It's something that will add capability, and it makes sense for economically, and it's better for the shareholder to buy the capability than develop it ourselves. And it's complementary to the organic growth of in that space. We will continue to be an organic growth company, so this is a complementary.
But naturally, the fact that essentially we have no debt, and this is going to improve even further in the future, if we find opportunity to increase shareholder value by having a good deal, we will not hesitate to do so.
Neha Manpuria (VP)
Understood. Thank you so much, sir.
Operator (participant)
Thank you. The next question is from the line of Damayantha Pathmanathan from HSBC. Please go ahead.
Speaker 14
Yeah, hi, thank you for the opportunity. Sir, can you elaborate bit more about our progress in China? So are we targeting mainly the tender market or we're looking into other channels also? And any sales target or any guidance we are having for China market in next three to four years, if you can share that.
Erez Israeli (CEO)
Sure. So China is a very important market for us. It's one of our leading spaces. In China, we are working in the following channels. One, our original channel that is primarily through our partnership, our JV in China, KRRP, and this is selling and marketing of branded generic products. This is also called Rotam, and it's growing double digits as we speak. In that space, we are 20 years now, and we will continue to be in that space. What was opened up to us, and I discussed it in a couple of the investor meetings, given the new regulations in China, two channels are now open for us. One is direct sales of generic product if we are getting a GQC evaluation.
And when you do that, the idea is to partner. This is not through the partnership. This is where we partner a company that has the relevant sales force for this therapeutic areas, that we can compete on the slot of the innovator in that relevant hospitals. The third channel is this new procurement program. This is a relatively new development in China, which is probably going to be scaled up, and in which if we have product that meets this criteria, we'll try to participate and win our share as well. And we want to grow in all three channels, not just in the last one. And we are happy that we have the Olanzapine is the first time that we enter into the third channel dimension. We are already in the other two.
Speaker 14
Okay, so any target we have in mind, let's say for a near to medium term, where we would like to reach?
Erez Israeli (CEO)
Not something that we want to share, because we are not giving guidance, but it's way, way, way higher than what we have now.
Speaker 14
Sure. And, do we have any update for our key filings of NuvaRing and Copaxone from what we shared earlier? Or, anything, any update there?
Erez Israeli (CEO)
On both the NuvaRing and generic Copaxone, we are on CRL, and we are addressing it. We continue to address it, and we hope to file a response to that in the next few months.
Speaker 14
For both the products or, for delivering or?
Erez Israeli (CEO)
For both products.
Speaker 14
Okay, sure.
Erez Israeli (CEO)
We cannot yet commit on a specific date.
Speaker 14
Sure, sir. Thank you.
Operator (participant)
Thank you. The next question is from the line of Abhishek Sharma from IIFL. Please go ahead.
Abhishek Sharma (VP and Research Analyst in Healthcare)
Yeah, thanks. Can you hear me?
Erez Israeli (CEO)
Yes.
Abhishek Sharma (VP and Research Analyst in Healthcare)
So two questions. First, from China tender market, Olanzapine, just trying to understand the dynamics of pricing there. How was the- how is the pricing for Olanzapine in the tender market versus the private market?
Erez Israeli (CEO)
We are not sharing specific numbers, naturally, or pricing per product. But, as you can imagine, it's a tender process, so it was significantly lower.
Abhishek Sharma (VP and Research Analyst in Healthcare)
Would that mean that you would, you know, sort of look at, sort of, much higher volumes through the tender market? Is that how you're looking at it, yes?
Erez Israeli (CEO)
Yeah. It's a higher volume, it's lower prices, but it's still very profitable, and you don't need to have the sales and marketing efforts. You don't need to go to physicians and use sales efforts like you need to do, for example, in the second channel that I mentioned. So it's more like, if you wish, other tender systems in other countries.
Abhishek Sharma (VP and Research Analyst in Healthcare)
Net profit is higher on that?
Erez Israeli (CEO)
Yeah, net profit is actually higher.
Abhishek Sharma (VP and Research Analyst in Healthcare)
Right. All right. The other question was on receivables. There was a sharp jump, this quarter, despite the fact that, you know, there was even a dip in the U.S.four So just wanted to understand what led to that.
Erez Israeli (CEO)
Yeah, overall, working capital fund, I already shared that there is only four days increase in the number of days, so we are not concerned about it. Whatever jump in receivable has happened, it is in line with the sales.
Abhishek Sharma (VP and Research Analyst in Healthcare)
Okay. Okay.
Erez Israeli (CEO)
Yeah, that's all from my side. Next, please.
Operator (participant)
Thank you. The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Surya Patra (SVP of Healthcare & Specialty Chemical Research)
Yeah, thanks for this opportunity, sir. Just wanted to have some more clarity on the Suboxone. Recently in the opioid lawsuit settlements at Teva, what has offered to supply and subsidize the Suboxone tablet? Yeah, for a longer period. So what are the business dynamic the Suboxone, the films will be really seeing, and whether that would really impact the opportunity what we are targeting? Anyway, we have so far progressed in terms of market share around 15% only in the Suboxone. So what is also has restricted our penetration faster? So any something on the Suboxone side that you are, you can?
Erez Israeli (CEO)
Firstly, I would like to address our market share in Suboxone is higher than 15%.
Surya Patra (SVP of Healthcare & Specialty Chemical Research)
Okay.
Erez Israeli (CEO)
Second, there were developments that were shared by Indivior, I think even yesterday, about the potential exit of the AG. So naturally, this is open for us an opportunity that we are planning to pursue. As for the Teva API line, you know, naturally, we are not part of those activities, so I'm learning about it, and we are monitoring it in the same way as others. Once we will come, we will try to understand the outcome as to I don't know what is the pace and how it will impact the market.
Surya Patra (SVP of Healthcare & Specialty Chemical Research)
Okay. Sir, is it right that- Hello? Hello.
Erez Israeli (CEO)
Yeah, yeah. Continue.
Surya Patra (SVP of Healthcare & Specialty Chemical Research)
Yeah. So is it right that earlier also it has been commented that way by industry people, that hardly there is a difference in Suboxone tablet versus the film version, so sublingual. So, is there any practical difference there, or it is not, and hence there could be a kind of impact if there is a subsidiary supply by a large player?
Erez Israeli (CEO)
Naturally, the film is more advanced version and gives better outcome for the patients that are taking it. That, that's why the film is growing versus the tablets originally. And in the natural course, so that this phenomenon will continue. I don't have any visibility if any other development in the market will happen. I cannot speculate on it.
Surya Patra (SVP of Healthcare & Specialty Chemical Research)
Okay. And, second thing, one clarification about this, the $105 million you have received from the disposal of the three brands. So initially you were talking about in two tranches, like 70, 40, so that means it is clear that, okay, the entire $110, something like that, has already been factored in this quarter, right?
Erez Israeli (CEO)
Yes.
Surya Patra (SVP of Healthcare & Specialty Chemical Research)
Okay. In regards to the European growth, sir, it has on a sequentially has improved significantly, but why, why it is still stronger double digit kind of so what is driving, whether it is on a relatively low base, it is growing or it is any sense on that front?
Erez Israeli (CEO)
For sure. First, for many years, we are not performing well in Europe, and we made certain adjustments to the portfolio, to the team, and to our activities, and I think now we are starting to bear the fruits of it. Overall, Europe will grow significantly of what we are now. The growth now is primarily due to launches of couple of very good products in various markets.
Surya Patra (SVP of Healthcare & Specialty Chemical Research)
Okay. Just one thing, sir. Is it fair to believe that NuvaRing is a product opportunity for FY21?
Erez Israeli (CEO)
NuvaRing is an important product for us, and once we will get approval, then we will know. I absolutely hope so.
Surya Patra (SVP of Healthcare & Specialty Chemical Research)
Okay, fine. Thank you, sir. Thanks a lot.
Operator (participant)
Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.
Sameer Baisiwala (Analyst)
Yeah, thank you, and good evening, everyone. So one question on China is, to the extent that you are going to do local manufacturing out there, which I think would be substantial part of your business, how does it make you more competitive than the other local Chinese players? And second, how do you bring to table India's cost competitiveness when you are participating in Chinese market?
Erez Israeli (CEO)
Yes, thank you, Sameer. We are making products now. We have a plant that is making product for China, primarily for the care products, and we took a decision, and we are implementing an expansion for that plant. So this will take some of the growth. On top of it, we are moving few products to a contractor to make in China. There are certain advantages, for example, exemptions from certain tests, when you do a bio study and make products in China, and we will exploit that. And some products we will sell out of our Indian facilities. So it's a combination of the three of them.
Sameer Baisiwala (Analyst)
Okay, great. And the second question is on the U.S. pricing environment. My, my understanding is, over the last two quarters, most companies and both manufacturers, as well as your customers, have come back to say that the base business price erosion is roughly about, you know, somewhere around mid-single digit, call it 5%-7%. But your commentary seems to be suggesting that it's much worse than that. Is that true, and, you know, is this anything specific to Dr. Reddy's?
Erez Israeli (CEO)
Yeah, so it's not an overall market dynamics, it's a specific situation in which products that face new competition. Normally, for this particular product, there is a double-digit decrease in price, in which you can either protect your share or drop the product. And now it depends what is the mix of those in the mix. In our case, for the quarter, it was relatively higher.
Sameer Baisiwala (Analyst)
Okay, and going forward, for the base business price erosion, what's the outlook for your portfolio?
Erez Israeli (CEO)
The same that we discussed in the past. I don't see any specific outcome for the base. The main erosions, I believe, going forward will be on new launches that naturally, over time, the price that we launch with will be different as more competitors will join the game.
Sameer Baisiwala (Analyst)
Okay, thanks. And so just one final one from my side, and that's about generic NuvaRing. I remember on the last call, you mentioned that until you get the full response from FDA and see the new queries from them, you would not know what's the timelines and what kind of complexity, and what kind of work is required to be done. So I'm sure pretty, I'm pretty much sure that now you've got all that information. If you can add any more color to what you've already spoken on the call, that'd be great, sir.
Erez Israeli (CEO)
We got the CRL, if I'm not mistaken, August, right? In August. It was related to some aspects of the products that we had to address in certain testing. For that, we had to do some experiments and to buy certain equipments. This is the work that will take few months, starting from August. If everything successful, we will address and answer the CRL. Naturally, we are still very keen on this product.
Sameer Baisiwala (Analyst)
Okay, great. Thank you so much.
Operator (participant)
Thank you. The next question is from the line of Ranvir Singh from IDBI. Please go ahead.
Ranvir Singh (Healthcare Analyst)
Yeah, thanks for taking my question. So my question related to the proprietary products, thereafter, divesting these three molecules, what is the outlook there? So what kind of investments you are making and, what you are doing actually there?
Erez Israeli (CEO)
Thank you. First, we still have a pipeline of products that we need to finish certain experiments, and in order to further find the partner for that, either a licensing in or the revisions. So we are looking for either get what you call long-term stream of revenue, which would be more of a licensing in nature of the product, or the directions, which means a relatively high level of upfront and lower level of royalties going forward. Both models we are pursuing on the projects that we have.
In addition to that, we are giving this team to be to continue to develop product, this time less and less dependent on the U.S. market, but rather more globally, in which we want to continue to develop products for unmet need with basically, if you wish, the desire or the as we ask to have a meaningful stream of revenue from each one of these development. We can either develop directly partnering with the potential partner globally or do it after certain milestones if there is an interest.
The new model is pretty simple, stream of revenue in, then it allows certain stream of revenue out, and overall, this is going to be going forward, the profit center for us, rather than an investment for long term.
Ranvir Singh (Healthcare Analyst)
Okay. So what portion of our R&D is going towards this promising partner?
Erez Israeli (CEO)
Relatively small portion.
Ranvir Singh (Healthcare Analyst)
Oh, okay. Fine. And, secondly, on the ranitidine, I think two events that we recalled, and then we halted the sale on, I think, last week of September. So in this quarter, virtually, what we have factored in is recalled value and then the discontinuance of sales. So what I wanted to understand that if the entire ranitidine issue has been factored in this quarter, or a part of it is likely to come in subsequent quarters also?
Erez Israeli (CEO)
We have covered whatever is impact of voluntary recall. We have covered it fully.
Ranvir Singh (Healthcare Analyst)
Okay. So what I see that, few other regulators, like Australia, have given, you know, go-ahead with ranitidine in, in present form to some of your competitors. What I wanted to understand that the standard that, U.S. FDA, came out for this, ranitidine, is there any, you know, further submission or something is happening there to lower their standard so that the ranitidine, the content of NDMA, can be, you know, permissible going forward?
Erez Israeli (CEO)
I don't know what eventually will be the right level of NDMA, sorry, and where it will lead for us. By the way, it's globally, so we will not sell ranitidine. We have one standard in that respect. We will not differentiate between countries as related to safety of patients. But overall, it will be interesting to see if there will be consensus about certain levels that is possible to sell this product, and then if we'll have the relevant API that can meet that, we can always consider to go back. But right now, we are not aware of that API and that limit.
Ranvir Singh (Healthcare Analyst)
Yeah. Fine. Fine. And the last one, I couldn't understand that sharp jump in SG&A, so selling and administration expenses. Could you give some light on it?
Saumen Chakraborty (CFO)
Sure. One, of course, is impairment tax, which we have taken during the quarter. And then I also explained there are, you know, certain one-off, which has contributed to more than INR 100 crore during this quarter. Then, of course, there is also these costs of sales associated with this PP Neuro brand, and that amount already we have declared in the press release. So-
Ranvir Singh (Healthcare Analyst)
Okay, okay.
Saumen Chakraborty (CFO)
Overall, overall, that's why the DNA has gone up, but I also said that if you normalize the one-off, actually there is an improvement in the DNA product.
Ranvir Singh (Healthcare Analyst)
Okay. That's it from my side. Thanks a lot, sir.
Operator (participant)
Thank you.
Saumen Chakraborty (CFO)
Yeah.
Operator (participant)
The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Surya Patra (SVP of Healthcare & Specialty Chemical Research)
Yeah, just one clarification that whether the Carboprost, which is a FTF and a sort of exclusive product opportunity, whether we have gained meaningfully there by this quarter or the true benefit is yet to be seen?
Saumen Chakraborty (CFO)
So this product, we have been able to get our market share, though it will ramp up further going forward, but largely, market share-wise, we are there.
Operator (participant)
Thank you. The next question is from the line of Surajit Pal from Prabhudas Lilladher. Please go ahead.
Surajit Pal (Analyst)
Yeah, thanks for the opportunity. Could you please tell me, there are two events. One is your logistical, you know, challenge. One is your, you know, recall of ranitidine. Now, these two events, will it lead to some bit of penalty payment going forward as an overhead cost in, say, in H2?
Erez Israeli (CEO)
No.
Surajit Pal (Analyst)
None of them will lead to any kind of penalty payment?
Erez Israeli (CEO)
Whatever had the penalty, that was already booked in this quarter.
Surajit Pal (Analyst)
Okay. So if there is any penalty, you have already booked?
Erez Israeli (CEO)
Whatever is related to any activity that's related to that, including penalties, we have included in the quarter.
Surajit Pal (Analyst)
As you guided, initially of this fiscal, what could be your current guidance in terms of launcher product in this year, and what could be the kind of growth we could expect from U.S. revenue year on year?
Erez Israeli (CEO)
So as I read in my script, it was 30. We are still on track for 30+ products for this fiscal. As for the guidance for sale, we are not giving guidance.
Surajit Pal (Analyst)
Last question is that regarding Suboxone and, you know, their interchangeability between tabs and films. Do you think that this Teva deal could ultimately erode the sales under Medicare, Medicaid program, or some of the insurance formularies might be, you know, forcing the users to go for tablets from films?
Erez Israeli (CEO)
Yeah, I mentioned it in previous question. We are not part of the discussion. I'm not. I don't know what is the Teva deal. I'm reading about it in the media, and I cannot speculate what will be the outcome of that.
Surajit Pal (Analyst)
Thank you, Erez Isaraeli.
Operator (participant)
Thank you. The next question is from the line of Nitin Agarwal from IDFC Securities. Please go ahead.
Nitin Agarwal (Analyst)
Hi, thanks for taking my question. Saumen, on the SG&A, you talked about an adjustment of INR 100-odd crore in the current quarter, to get a normalized number. So does this reflect the full impact of the discontinuation of the proprietary business from this quarter onwards?
Saumen Chakraborty (CFO)
So, of course, when you say proprietary product business, there is no discontinuation of proprietary product business.
Nitin Agarwal (Analyst)
The marketing part.
Saumen Chakraborty (CFO)
There is a, you know, the commercial arms, including the sales and marketing for those new franchise now that has been reduced. So that impact is there, that's the same thing in terms of SG&A reduction.
Nitin Agarwal (Analyst)
Okay. Now, I just said for that, that's probably reflected in this quarter. Now, going forward, how should we really look at the SG&A base? I mean, we've done a fairly decent job on this cost over the last three, four years. Do we still see an opportunity to keep SG&A in absolute terms at these levels, around these levels? Or you know, how one should budget in some of our inflation as we go through the years?
Saumen Chakraborty (CFO)
So if the transport cost has been reduced in North America, that is not one-off. Okay, it is going to stay, so that is going to stay. So why should we adjust that? And anyway, anyway, what we, the focus that we have for productivity improvement and cost excellence has given us good results. But we believe that, you know, there is still further scope, and we are continuing on this focus.
Nitin Agarwal (Analyst)
Secondly, you know, on the U.S. business, you know, in the current quarter, we had about eight odd new launches. And despite that, you've sort of mentioned that even adjusted for the two factors you mentioned, the business was lower on a QoQ basis, margin was lower on a QoQ basis. So in this context, when you look at the business?, when we had a reasonable number of launches?, what will really be required to move the needle on the business from a revenue growth perspective in the U.S.?
Saumen Chakraborty (CFO)
Sell more.
Nitin Agarwal (Analyst)
Or do you, do we need some big blockbuster launches, and by the time they come through, we will not have a meaningful delta on the U.S. sales? Or how should one, you know, structurally look at this business the way the business is in the US right now?
Saumen Chakraborty (CFO)
We have a great portfolio. We just need to sell more of it.
Nitin Agarwal (Analyst)
Okay, thank you.
Operator (participant)
Thank you. We'll be able to take one last question. The last question is from the line of Aditya Khemka from DSP Mutual Fund. Please go ahead.
Aditya Khemka (Assistant VP of Healthcare)
Yeah, hi, thanks for the opportunity. There is, Saumen, could you just talk about the gross margin? So your adjusted gross margin for the quarter, you said is 51.5%. And if I remember correctly, when we were speaking after the FY 2019 results, the range that you had cited for your gross margin, you know, over the past several quarters was between 53% and 56%. So clearly, we are lagging our historical range of 53%-56% gross margin.
Saumen Chakraborty (CFO)
So, in the same quarter, when I spoke, we also said that, how the way we put our business model is expected to deliver more successfully. But, it has been fluctuating between these two, and yes, I agree. Last couple of quarters, we are outside that range, and we are lower than 53. But, you know, we will hope to get back there. That's all I can say.
Aditya Khemka (Assistant VP of Healthcare)
Sorry, I couldn't catch that last bit. You expect to?
Saumen Chakraborty (CFO)
I said we can hope to get back to this range.
Aditya Khemka (Assistant VP of Healthcare)
Yeah.
Saumen Chakraborty (CFO)
All I can say.
Aditya Khemka (Assistant VP of Healthcare)
Okay, I want to-
Saumen Chakraborty (CFO)
You need to also understand there is, you know, there have been impacts of price erosion in the U.K. and also in Europe. So we have been improving on our cost structure front to, you know, be in that gross margin range. We are trying to do it if possible, but there is still some improvement we have to do.
Aditya Khemka (Assistant VP of Healthcare)
Sure, I understand. My only doubt there was that since we are now more inclining towards branded-centric businesses versus, you know, Europe and U.S. being more generic, generic businesses, so from that perspective, ideally, our gross margin should have already started reflecting improvement-
Saumen Chakraborty (CFO)
Yeah.
Aditya Khemka (Assistant VP of Healthcare)
-versus what it historically was.
Saumen Chakraborty (CFO)
See, what happened in this quarter, we had much higher PSAI. Last quarter, PSAI was lower. When the mix changes, that will also have its impact on the overall gross margin. So there are multiple factors which contribute to the overall gross margin number.
Aditya Khemka (Assistant VP of Healthcare)
No, that's fair enough. Just another clarification on ranitidine. Were you selling ranitidine in Australia?
Saumen Chakraborty (CFO)
We say that it is categorically said we have only one quality system, which is global. So we don't go by, you know, respective regulators and their opinion, you know. If we have voluntary recall from U.S. market, that means we are not selling ranitidine anywhere in the globe.
Aditya Khemka (Assistant VP of Healthcare)
No, my question was, before the voluntary recall, were you selling Ranitidine in Australia?
Saumen Chakraborty (CFO)
No, no, we were not.
Aditya Khemka (Assistant VP of Healthcare)
Okay, so just the last question then on R&D expenses. So could you help us with a budget number there for FY 2021, anywhere you want to guide?
Saumen Chakraborty (CFO)
FY 2021?
Aditya Khemka (Assistant VP of Healthcare)
Yeah, your R&D budget for FY 2020 and 2021, if you could, you know, opportunity to save there are absolutely-
Saumen Chakraborty (CFO)
We have not even started the budgeting process for FY 2021. So you know, maybe in next couple of quarters we'll complete that.
Aditya Khemka (Assistant VP of Healthcare)
For FY 2020?
Saumen Chakraborty (CFO)
FY 2020, as I said today, that, given the kind set of activities, in most likelihood, in this fiscal year, R&D will be anywhere between $200 million-$240 million.
Aditya Khemka (Assistant VP of Healthcare)
Okay, thanks a lot. All the best.
Saumen Chakraborty (CFO)
Thank you.
Operator (participant)
Thank you very much. We'll take that as the last question. I would now like to hand the conference over to Mr. Amit Agarwal for closing comments.
Amit Agarwal (Head of Investor Relations and VP of Finance)
Thank you everyone for joining us today for the earnings call. In case of any further queries, please reach out to the investor relations team. Thank you.
Operator (participant)
Thank you very much. On behalf of Dr. Reddy's, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.