Dr. Reddy’s Laboratories - Q2 20/21
October 28, 2020
Transcript
Operator (participant)
Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Q2 FY21 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. If you need assistance during the call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Agarwal. Thank you, and over to you, sir.
Amit Agarwal (Head of Investor Relations)
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, 2020. Earlier during the day, we have released our results, and the same are also posted on our website. This call is being recorded, and the playback and transcript will be made available on our website soon. All the discussions 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 a 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 we proceed with the call, I would like to remind everyone that the safe harbor contained in today's press release also pertains to this conference call. Now, I hand over the call to Mr. Saumen Chakraborty. Over to you, sir.
Saumen Chakraborty (CFO)
Thank you, Amit. Greetings to everyone. I hope all of you are keeping safe and healthy. I'm glad that we continued with our momentum of new product launches, productivity improvement, and strengthening of COVID-19 portfolio, while delivering the promise of serving our patients unabatedly even during these challenging times. The current quarter was witnessed with strong sales growth across all our key markets, healthy gross margin, significant leverage benefit on SG&A, which resulted in a healthy EBITDA and profit margin. Let me take you through these in a bit more detail. For this section, all the amounts are translated into US dollars at a convenient translation rate of INR 73.54, which is the rate as of September thirtieth, 2020.
Consolidated revenues for the quarter stood at INR 4,897 crore, that is $666 million, and grew by 2% on a year-on-year basis. The year-on-year growth, adjusted for proprietary product out-licensing income of INR 726 crore, recognized in the same quarter of previous year, stood at 20%. Growth is primarily on accounts of new product launches across markets, volume traction in base business, and integration of business acquired from Wockhardt. Our energy business grew by 28%, Europe business grew by 36%, Asia business grew by 21%, emerging markets business grew by 4%, and PSAI business grew by 20%. Sequentially, our revenues grew by 11%, supported by gradual improvement in the volume pick-up in India, Russia, and other markets, new product launches, and full quarter impact of the business acquired from Wockhardt.
Sequentially, we saw 46% growth in India, 6% growth in both energy and Europe, and 8% growth in emerging markets. Consolidated gross profit margin for this quarter has been 63.9%. Although on a reported basis, it declined by 360 basis points year-on-year, adjusted for out-licensing income during previous year, there has been an increase. This increase was driven by improved productivity, forex benefits, and product mix partially offset with price erosion. Sequentially, margin declined by 210 basis points due to lower export incentive, adverse forex risk, and product mix. Gross margin for the global generics and PSAI were at 59.4% and 26.8% for the quarter. The SG&A spend for the quarter is INR 1,311 crore, that is $178 million.
It increased by 1% year-on-year and an increase of 3% quarter-on-quarter. The sequential increase is primarily attributable to incremental costs arising with the integration of acquired business from Wockhardt and increased sales and marketing-related activities post unlock. Trade cost has shown a reducing trend, reducing trend post unlock with improvement in carrier availability. However, so far as pricing is concerned, SG&A as a percentage of sales at 26.8% reflects an improvement of 80 basis points year-on-year and 200 basis points quarter-on-quarter. The R&D spend for the quarter is INR 436 crore, that is $69 million, with an increase of 19% year-on-year and 10% sequentially. The spend is in line with the increase in the number of R&D projects, including development of COVID-19 products.
As a percentage of sales, however, R&D was at 8.9% of sales. The EBITDA of the quarter is INR 1,267 crores, that is $172 million. EBITDA margin is at 25.9%, surpassing our aspirational target of more than 20%. Profit before tax for the quarter is INR 862 crores, that is $117 million, with a year-on-year growth of 12% and a sequential decline of 2% after absorbing an impairment charge of INR 28 crores on certain products, in line with the requirement of the accounting standard. Effective tax rate for the quarter is at 11.6%. The ATR has been lower due to recognition of deferred tax assets for one of our subsidiaries.
We expect the ATR to be around 25% for the full year, as alluded earlier. Profit after tax for the quarter stood at INR 762 crore, that is $104 million, which is 15.6% of the revenue. Reported earnings per share for the quarter is INR 35.83. Operating working capital increased by INR 21 crore, which is $6 million. There has been an increase of INR 200 crore each in the receivables and the inventory, which are in line with the growth in business, which was partially offset by the increase in the trade payable. However, when we measure working capital in number of days, that has improved by 5 days. We invested INR 260 crore, which is $34 million, towards capital investment in this quarter.
The free cash generated during this quarter was INR 606 crore, which is $82 million. Our net debt as on September 30, 2020, was INR 136 crore. Our net debt to equity ratio is at 0.01 and continues to reflect our strong financial position. Foreign currency cash flow hedges for the next 11 months in the form of derivatives of US dollar are approximately $305 million, largely hedged around the range of INR 74.4-INR 76.7 to the dollar. In addition, we have cash flow hedges of RUB 2.1 billion at the rate of INR 1.031 to the ruble, maturing over the next 9 months. With this, I now request Amit to take to the key details.
Erez Israeli (CEO)
Thank you, Saumen. Good morning and good evening to everyone. I hope you and your family should remain safe and healthy during these difficult times. I am pleased to see our employees and business partners have responded to the current challenging environment and came up with innovative solutions, with speed and agility, to ensure that we continue to serve patients across our markets. I want to thank them all. We continue to progress well on our transformation journey, with consistent improvement in performance across all financial and health parameters. We have yet again delivered strong financial performance this quarter and recorded the highest ever quarterly sales of INR 4,897 crore. Actually, EBITDA margins of 25.9% annualized, and annualized ROC of 23.6%, and consistent generation of free cash flows.
The strong balance sheet position and low level of net debt give us reasonable headroom to invest for future growth. Despite COVID-19 impacting fundamental demand, we saw healthy growth across all of our businesses during the quarter. The market demand in India, Russia, and other branded markets have witnessed sequential improvement. However, it is yet to fully recover to pre-COVID levels. The quarter was supported by new product launch momentum across the markets, strong pick up in the sales of brands acquired from Wockhardt in India and overall cost leverage benefits. We continue to progress well in line with our strategy and believe that we are moving in the right direction with diversified levers of future growth on the back of expansion in market share across key markets and further improvement in productivity. We have also progressed in our effort towards this global fight against COVID-19.
As you are aware, we entered into a deal with RDIF, Russia for Sputnik V vaccine to conduct clinical trials and distribution in India. We are going to initiate combined phase II and III clinical trials for the vaccine candidate very soon. In addition to that, we are working towards the development and launch of multiple products as treatment options for COVID-19 in our various markets. Now, let me take you through the key business highlights for each of our businesses. Please note that all the reference to the numbers in this section are in respective local currencies. Our North America and generics business recorded sales of $247 million for the quarter, with a strong growth of 22% year-over-year and 8% on sequential quarter basis.
The growth was supported by new product launches, offsetting the lower volume uptake in select molecule segments, impacted by lower doctor visits and elective procedure in the hospital. We launched 9 product units for as a quarter, including some limited competition products, such as first to market products, ciprofloxacin and dexamethasone otic suspension, OTC diclofenac gel, OTC olopatadine eyedrops. With strong new launch momentum witnessed in H1, we are well on track to launch more than 30 products during this fiscal, exceeding our initial expectation of 25 launches. We believe that the H2 is likely to remain busy in terms of launches, and we would also include unique and limited competition products. Our Europe business recorded sales of EUR 43 million, with strong year-over-year growth of 22%, with a sequential quarter of growth of 2%. The growth was driven by new product launches seen across the markets.
During the quarter, we launched three products in Germany and one product in each in the UK, Italy, Spain, and Austria. In line with our strategy to expand our presence across Europe, leveraging our deep pipelines, we forayed into Austria market in the current quarter beyond our EU five countries. Our emerging market business recorded sales of INR 864 crore, with a year-on-year growth of 4% and sequential quarter of 8%. Within the emerging market segment, the Russia business grew by 4% on a year-over-year basis and 26% on the quarter-to-quarter basis in constant currency. The market demand has been gradually improving after COVID-19 related decline witnessed in Q1. We also saw similar improvement trend in our CIS markets. Our business in China is also continuing to perform well in this quarter.
During the quarter, we launched 28 new products across the emerging markets. Our India business recorded sales of INR 912 crore, with a year-over-year growth of 21% and a sequential growth of 46%. The strong growth in this quarter was supported by sequential improvement seen in the market demand after a lighter Q1 due to COVID-19 related problems. The sales was also supported with strong contribution made by the business acquired from Wockhardt, which has been performing quite well and ahead of internal expectations. We launched 7 new products in, in the India market, including the 2 COVID-19 treatment drugs, Avigan or favipiravir tabs and remdesivir injection. Our PSAI business recorded sales of $150 million, with a year-over-year growth of 13% and sequential quarter growth of 1%.
We believe this continuous strong demand was in part due to higher API inventory levels being carried by our customers to prepare for any potential COVID-19 related disruptions. This demand is likely to get normalized in the coming quarters and as inventory catches up with end consumption. However, we expect this business to be a key growth driver, supported by our focus on new product development, improvement in cost position, and tailwind due to evolving market dynamics. On the R&D front, we continue to strengthen our pipeline of products across the markets. During this quarter, we filed 27 formulation products across global markets, including 2 ANDAs in United States. As of September 30, 2020, we have 94 cumulative filings pending for approval in the U.S. FDA, including...
39 Drug Master File globally, including one filing made in the U.S. market. We have significantly strengthened our development pipeline across markets, including development for multiple products related to COVID-19. In the coming months, this will increase our investment in R&D and accelerate our submissions of new product filings. On biologics front, the phase III trials for Rituxan is progressing well. In parallel, we are working on the next wave of biosimilar products, which are at different stages of development. In our proprietary business, we continue to actively progress toward building a sustainable, globally relevant pipeline. Simultaneously, we are continuing our effort to monetize select assets through partnership and licensing transactions that maximize their value. We continue to progress on our growth agenda, complemented by inorganic moves.
After the successful integration of the business acquired from Wockhardt, we continue on our journey to evaluate more opportunities to help us achieve our strategic priorities. Having sailed through successfully over the last two quarters in the current volatile market environment, we remain committed to do our best and meet expectations of all of our stakeholders. With this, I would like to open the floor for questions and answers.
Operator (participant)
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask questions, press star and one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue opens. The first question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Prakash Agarwal (Deputy Head of Research)
Good evening to all. So my first question is, if you could help us understand, you know, the volume or the market opportunity for Remdesivir and Favipiravir?
Erez Israeli (CEO)
Yes, Remdesivir, we built certain capacity for India, so currently we are marketing it in India, and it is going very well. And we are expanding our capacity to ability to help both increase in demand from India as well as from other emerging markets. As for Favipiravir, we have set of clinical trials on top of what is the original topology of this product. So we have now trials conducted in the Kuwait as well as in the Emirates, and the additional trials will be conducted in the U.S., Canada and India to allow us variety of potential data as well as indication.
We will try to seek emergency use authorizations if the data, of course, is positive.
Prakash Agarwal (Deputy Head of Research)
Fair enough. At least, some color could be given in terms of, you know, volume that you are selling currently or some data, what is the market share you would have in Remdesivir? That would be helpful.
Erez Israeli (CEO)
We are not disclosing that at the moment.
Prakash Agarwal (Deputy Head of Research)
Okay. Fair enough. So sir, second question on the gross margin understanding. So you clearly mentioned that, you know, export incentive is partly the reason, so, and price erosion. So, what our understanding is only September month, it was not there. So, have we accounted export incentive till August? And how do we account going forward since there's a, you know, statement by the ministry that there would not be any export incentive going forward. So how do we look at that, and what is the outlook on the gross margin both for the global generics and the PSAI business?
Saumen Chakraborty (CFO)
So you are right. In this quarter, it was one month impact that is September. And in the next quarter or not, it will be full quarter impact for the export incentive. So that has some impact on the gross margin going forward. And I clarified that you will have to look at year-on-year and quarter-on-quarter on a like-to-like basis. So compared year-on-year, last year, definitely gross margin was very high beyond the normal range that earlier I alluded to. So there could be, if you look at multiple quarters, you know, over the years, if you see our gross margin, there has been always fluctuation quarter to quarter. But there is a kind of a range which we will feel is a normal range.
One-off quarter, because our exception is, goes higher than that, maybe one-off quarter, it could be worse than that. I believe 52.9 is very much within the normal range. Sequential decline is some part is also for the forex. In the Q1, US dollar was more than INR 75, and now it is INR 73.5, so that has an impact. Just one month of the export derivative growth, it has an impact. And of course, beyond that, there are so many multiple factors which impact, which includes product mix, business mix, business segment mix, everything. So fluctuations are bound to be there. It's very difficult for us to give any kind of specific outlook.
All that we can say is that we have continuous effort to not only improve productivity, which is in the G&A line or other overhead, but also improving the cost of revenue. The effort is continuing.
Prakash Agarwal (Deputy Head of Research)
... Okay, so what I understood was the normal range would largely be maintained despite the export incentive for the fourth quarter not going forward. Would that be correct understanding?
Saumen Chakraborty (CFO)
No, I said, 53.9 falls within the normal range. I said, so as export incentive is concerned, in this quarter, we got one month impact, and this is not only for us, it is, you know, it is withdrawn by the government earlier than what earlier one thought. That was supposed to be in December end, which has started in September. And, going forward, this will become a normal phenomenon. That means there will be export incentive will not be there. So our effort will be to what extent you can utilize by improving, you know, in terms of cost available, how do you improve? You know, software, how do you improve? There are many other things to utilize that.
Prakash Agarwal (Deputy Head of Research)
Okay, thank you, sir.
Operator (participant)
Thank you. Before we take the next question, we'd like to inform participants that in order that the management be able to address questions from all participants on the conference, we've limited questions to two per participant. Should you have a follow-up question, we request you to rejoin the queue. The next question is from the line of Damayanti Kerai from HSBC. Please go ahead. Damayanti Kerai from HSBC, you may go ahead with your question.
Damayanti Kerai (Analyst)
Hello, am I audible?
Saumen Chakraborty (CFO)
Yes, you are.
Damayanti Kerai (Analyst)
Okay. Yes, thank you for the opportunity. My first question is regarding SG&A cost trend going ahead. So I understand you can put the impact of as a full integration of Wockhardt portfolio, and now with opening up an Indian market, we assume there will be incremental costs coming up on the marketing and promotional side. So how do you see SG&A costs moving in coming quarters?
Saumen Chakraborty (CFO)
So first, we have been able to contain a lot of costs, because SG&A costs down, I think the containment is quite good. And, I mean, in terms of SG&A, the percentage of sales, you get a leverage if you are getting more and more sales, and this quarter has been very good on sales growth. And like, like as I already told, it is around 40% growth. If that happens, then the productivity, you know, improves definitely. Yes, you are right, on an absolute basis, the more we start spending on marketing and sales, on an absolute term SG&A may increase, but our effort would be only how do we keep on improving the SG&A productivity?
Damayanti Kerai (Analyst)
Sure. Thanks for that response. And my second question is regarding the update on recent cyber attack. So after this incident, do you believe you need to invest more in resources to secure up your system? And what kind of investment you are looking up there?
Saumen Chakraborty (CFO)
So we have been, you know, building up both in terms of, you know, digital initiatives, increasing our digital systems, as well as all information security measures. There have been always, you know, attacks which would have been happening, and we have been able to ward off most of them. But in this particular case, you know, the cyber attack happened. So we have, as we have already, you know, given to the stock exchange, our notification, we took, as I believe, the right kind of steps in terms of isolating impacted public cloud, and then with the help of international experts in cyber security, to really contain and restore from our backup very systematically, in a very controlled manner and very cautiously.
By this time, our most of the critical applications have been enabled and are being enabled also. So, but at any point of time, nobody can say, you know, things in a construction matter, so far as cyber attack is concerned. It's an ongoing effort by whoever wants to do it anywhere. But yes, we have been doing in the past, we are doing more heightened surveillance at this point of time, and we continue to do. But, it's not always a matter of investment, you know. There is always you can reduce the chance, but you cannot eliminate the possibility. So no matter what you invest, it is almost like, you know, zero defects can be a target, but it's an ideal. The more you improve your sigma level, the possibility of defects certainly comes down.
Similarly, we can get some comfort of whatever the security that we can give, but you can only minimize, but you cannot possibly eliminate. But there are so many things which are happening in terms of creating newer and newer strains and other ways of attack.
Damayanti Kerai (Analyst)
... Sure. Thanks for your response. So I have more questions. I'll get back in the queue.
Operator (participant)
Thank you very much. The next question is from the line of Neha Manpuria from JP Morgan. Please go ahead.
Neha Manpuria (VP)
Thank you for taking my question. Just to, you know, delve a little bit more on the HTML front, I understand the outlook, because I look at the spend in this quarter versus the last quarter, given we have the Wockhardt, you know, integration and normalization in our branded businesses from spend. Could you explain the reason for, you know, such a moderate increase on an absolute level? I understand the operating level, operating leverage, but, you know, what, what helped, you know, offset the increase of the, of the output factors?
As I told, that we have been able to contain various components of the SG&A cost, and specifically when you do things more digitally and virtually, then the sales and marketing expense will be a little bit lower. But there has been always a sustainable focus on improving, containing costs. This has been going on, and we can only disclose as much as we can, so I don't know. The SG&A which went up sharply in the previous quarter, there has been a little bit reduction, which I have already said in my script.
Understood. And, so the digital marketing which helps control costs, that should be sustainable, right? Or, or do you see this more, you know, as, as the markets are opening up, probably we go back to physical marketing?
Erez Israeli (CEO)
Yes. So we are going to be more productive, and we're going to use more digital marketing absolutely going forward. So we are actually even at the beginning of the journey, and I do see us even increasing the level of digital marketing. And some of it will be on the expense of the, let's call it, veteran marketing practices. So more and more, we are going to be more and more on the internet.
Neha Manpuria (VP)
Understood. My second question is on the [ARWG] market. If you exclude Russia CIS, there seems to be a moderation on quarter. And, you know, was there any specific reason for that?
Saumen Chakraborty (CFO)
There have been some countries like Vietnam, Jamaica, where the sales have been lower in this quarter.
Neha Manpuria (VP)
But a 20% decline quarter-over-quarter?
Erez Israeli (CEO)
Yeah, it has happened. In some of our smaller markets are dependent on specific products that sometimes depend on hospital and stuff like that. Some of those markets were affected also by COVID. So I think overall I think we had a very healthy performance in emerging markets. I'm actually very pleased, given the challenges that were in this quarter in some of these markets.
Neha Manpuria (VP)
Understood. Thank you.
Operator (participant)
Thank you. The next question is from the line of Nithya Balasubramanian from Bernstein Research. Please go ahead.
Nithya Balasubramanian (Managing Director)
Hi. My question was on the Sputnik V vaccine trial you're now conducting in India. If you can help us understand what's the size of the patient pool of the clinical trial, and if there's any visibility, you can give us a timeline as to when the clinical trial results will be available and when you can launch the product?
Erez Israeli (CEO)
So everything is tentative, because we need to be also successful with the trials. We are talking about phase II, which is about 100 patients, which will start very soon. And about 1,500 that will be on top of the trials that are conducted in Russia on the global trial, for India, which will be conducted right after, with, of course, the full authorities. If everything will go well, and of course it's a big if, because many things need to go right, it can be as soon as end of March. But of course it can also be after that, depends, of course, on the relevant results, as well as the requirements of the authorities.
Nithya Balasubramanian (Managing Director)
Got it. So the 40,000 patient clinical trial that GRF is conducting, what is the visibility on the trial results for that, that phase II trial?
Erez Israeli (CEO)
What we-
Nithya Balasubramanian (Managing Director)
What we are seeing.
Erez Israeli (CEO)
What we have is the relevant part of the CDMO arm of that they have it on top of what they do in the global trials.
Nithya Balasubramanian (Managing Director)
I understand, but I thought you mentioned that, this data will be kind of a bridging study open above, before that you will have some large-scale clinical trials. Would you need both in India?
Erez Israeli (CEO)
Yes, we will have to have both.
Nithya Balasubramanian (Managing Director)
Hence, the question is this specifically on when the topline data coming out of the larger clinical trial.
Erez Israeli (CEO)
I don't have a specific date on that, but what I gave you as the best case scenario is also today.
Nithya Balasubramanian (Managing Director)
Yeah. Just one more related question on the 100 billion doses that we saw in the press release, that you would be able to supply of the vaccine, has capacity actually been identified?
Erez Israeli (CEO)
... Yes, we are working on it, and, I hope, that it will be ready by the time that we can commercialize this product.
Nithya Balasubramanian (Managing Director)
So assuming everything goes well, and you have the right data, and you have to approve of the launch, you will have capacity scale up to 100 million doses, or would that happen over a period of time?
Erez Israeli (CEO)
We will have a capacity that we will build over time. At that point of time, we will not have 100 million available. It will come in certain phases over the time.
Nithya Balasubramanian (Managing Director)
Okay. Thank you so much.
Operator (participant)
Thank you. The next question is from the line of Kunal Dhamesha from Macquarie. Please go ahead.
Kunal Dhamesha (Research Analyst)
Yeah, thank you for taking my question. The first question is on the Wockhardt business. Now that you have integrated it for full one quarter, so any synergy potential that you identified? Because there's a lot of potential overlap that we have in terms of 2, 30.
Erez Israeli (CEO)
I'm very pleased with this integration, as well as from the product, as well as from the people that join us from Wockhardt. So like I think we discussed in previous meetings, the Wockhardt deal gives us both synergies in both top line and bottom line, and we are actually now executing on both, so we can sell more in less cost.
Kunal Dhamesha (Research Analyst)
What would be our current sales force in India?
Erez Israeli (CEO)
Excuse me, sorry, can you repeat?
Kunal Dhamesha (Research Analyst)
What would be our current sales force in India?
Erez Israeli (CEO)
We are not discussing the numbers of people. Sorry? It will be around 6,500. Overall?
Kunal Dhamesha (Research Analyst)
Yes.
Erez Israeli (CEO)
6,500 people.
Kunal Dhamesha (Research Analyst)
Thank you. The second question is on Europe. We have seen significant growth in Europe in this year, and it's driven by new product launches and new geographies. But if you can provide some color in terms of how much runway do we have in terms of new product launches? We have 10 products right now in the key five markets. Can we go to 2X or 3X in next two, four years, or maybe it is 5X, and will all those products be from our U.S. portfolio or whatever we are developing globally? If you can give some color on that.
Erez Israeli (CEO)
Yes. So the color is that we just started to expand in Europe, and we believe that we will grow much, much more, and we're just in the beginning of launching products. So we are not giving guidance for the future, but, naturally, our bases are now very low, and there is a lot of room for us to grow in Europe.
Kunal Dhamesha (Research Analyst)
Any qualitative commentary on margins in Europe, whether they will be in line with competing margins or?
Erez Israeli (CEO)
No, we don't discuss that.
Kunal Dhamesha (Research Analyst)
Okay. Thank you.
Operator (participant)
Thank you. The next question is from the line of Tushar from Motilal Oswal. Please go ahead.
Speaker 15
Yeah, just extending from the Europe question, now there's another wave of COVID. So do you see any near-term impact on the business?
Saumen Chakraborty (CFO)
Another wave of COVID?
Speaker 15
In Europe.
Erez Israeli (CEO)
I hope not. And so far, I do not see any impact on the business.
Speaker 15
Copy. So just on this balance sheet side, the other intangible assets, compared to FY20, there's a sharp increase. So if you could just explain that?
Erez Israeli (CEO)
Sharp increase in what, sorry?
Speaker 15
Other intangible assets, line item on the balance sheet.
Erez Israeli (CEO)
Which is the Wockhardt deal.
Speaker 15
Okay. Okay, got it. That's it.
Operator (participant)
Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.
Sameer Baisiwala (Analyst)
Thank you so much, and good evening to everyone. First of all, Swami, congrats on your long innings, and best wishes for the future. My question first is, my first question is on Genentech. If you could just tell us, share with us your commercialization plans, when do you expect to launch? Some flavor around what's holding you back would be great.
Erez Israeli (CEO)
Thank you. We are gearing up for the launch, and when we are ready, we will launch it.
Sameer Baisiwala (Analyst)
So what's the key bottleneck for the launch? Because, you know, you've got the approval, you've got the court decision. It's been a few months. It's still not in the market.
Erez Israeli (CEO)
We are not ready to launch. That's what is keeping us from launching it.
Sameer Baisiwala (Analyst)
Okay, cool. No worries. The second question is on your settlement. I don't know how much you can share. The other two settlements, which was Natco and Alvogen, they have given some sort of a flavor around the entry and the expected market share between 2022 and 2026. Is there some color that you can share, even qualitatively, or the deal with the product?
Erez Israeli (CEO)
No, we cannot share specific numbers, because it's a part of what we discussed in the past. But let's say that I am very pleased with the settlement.
Sameer Baisiwala (Analyst)
... Okay, and do you have permission one more question, and that's around Sputnik V, specifically, vaccine. Sir, will the vaccine require any specialized distribution in terms of refrigeration? You know, and second is, you know, some states have made announcement of giving free vaccines. So would that, would that have any commercial implications for, for you?
Erez Israeli (CEO)
So these products may require cold chain, supply chain, as this product needs to be kept in a very low temperature. So yes, absolutely, it's a consideration for this product. As for any commercial arrangement, we, we did not discuss, and we are not discussing this as any of this at this stage. What we are focusing on is to approve that the product is with the right efficacy and safe. Once we will be, we can prove that, we will worry about prices and commercial terms. Right now, we are not discussing this.
Sameer Baisiwala (Analyst)
Okay, great. I got you and get back. Thank you so much.
Operator (participant)
Thank you. The next question is from the line of Vishal Manchanda, from Nirmal Bang. Please go ahead.
Vishal Manchanda (Research Analyst)
Thank you. Continuing on the subject, so what timeline do you plan to file for the vaccine in India?
Erez Israeli (CEO)
Is that our R&D is going to increase in the next six months, but not just because of Sputnik, but also on other COVID-19 products that we are bringing. At the same time, I think we will be able to contain these costs by improving of the other parts of the business. So, it's something that will be, I think we contain it easily.
Vishal Manchanda (Research Analyst)
Okay. One question on the United States. So if you exclude these nine last products that we launched in the third quarter, what would... How would the base business have behaved? This to be helpful?
Erez Israeli (CEO)
In general, it behaved well. Overall, if you look at, and you can see, for example, IQVIA, you see that in some of the molecule demand were down. Overall, primarily because of the way the market is behaving, at the time of COVID, the ability of patients and doctors to meet, et cetera. So we do see in some molecules, less demand, we see in some molecules, more demand. And overall, we in accordance with what IQVIA stream and also what we feel as well that we took market share. So it's going well for us.
Vishal Manchanda (Research Analyst)
Okay, but price for the base business would be little higher than from that day or other than that?
Erez Israeli (CEO)
Let's say we are not discussing specific prices for products or for segment of products. But overall, the price pressure is more moderate this year than it used to be in the years before, but it will always be there, and this is also the case for this year.
Vishal Manchanda (Research Analyst)
Okay. And, last question on, PSAI, on the API business. What could be the contribution for the COVID-related products in the API business?
Erez Israeli (CEO)
Not much. It's, we are focusing the API for some of them, but it's not a big contribution. Most of the growth comes from, let's call it the normal products that we have. And the growth is attributed to the efforts that we did in the last years.
Vishal Manchanda (Research Analyst)
How much is the pricing for APIs from inaudible?
Erez Israeli (CEO)
I'm sorry?
Vishal Manchanda (Research Analyst)
Pricing.
Erez Israeli (CEO)
You asking the pricing of the API?
Vishal Manchanda (Research Analyst)
Yes, I mean, when we had the pandemic, there was a price market. So, does that continue, is there a pricing currently as well, some views over here?
Erez Israeli (CEO)
I think that the beginning of the pandemic, there was a bit more orders of each product as companies that prepare themselves for potential scenarios. This got normalized by now, and that's how we think also going forward.
Vishal Manchanda (Research Analyst)
So do you think it's possible that the area of inaudible?
Erez Israeli (CEO)
I believe that, in the second half, we will not see the impact of accumulation of inventories. We will, we will see the normal growth that come. So we will not see maybe the full effect, we'll see some of it.
Vishal Manchanda (Research Analyst)
Thank you very much, sir. Thank you.
Operator (participant)
Thank you. The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Surya Patra (Senior VP of Healthcare and Specialty Chemical Research)
Yeah, thanks for this opportunity, sir. So is it possible to have a sense what is the kind of contribution that you have seen from the COVID portfolio between today? Because the sequential domestic growth looks very strong, almost like 50%-60%. Even if we adjust for the Wockhardt, this thing, it is near about 27% odd, kind of. Obviously, there will be a recovery, but in the domestic market. But if you go by the AICB data, that suggests a muted progress in the... So is it fair to say it had a meaningful contribution from the portfolio for the domestic growth this quarter?
Erez Israeli (CEO)
It always helped, but, I would not say that it's a more significant growth. I think all of the businesses perform as well together. So it was a combination of the fact that there is a recovery in the market.
Surya Patra (Senior VP of Healthcare and Specialty Chemical Research)
Mm-hmm.
Erez Israeli (CEO)
As you know, the type of portfolio that we had suffered more during the lockdown, so now the lockdown goes off and it's actually the request-
Surya Patra (Senior VP of Healthcare and Specialty Chemical Research)
Mm.
Erez Israeli (CEO)
as well as work, as well as the, COVID product. So it's, the combination of the three of them.
Surya Patra (Senior VP of Healthcare and Specialty Chemical Research)
Okay. I just take that same question regarding the U.S. So then I think, obviously the growth number for the quarter is really, it look really strong and great. To some extent of this, the base effect is also there, but sure, just give us some understanding that, okay, you have a kind of. Or what would be your oncology portfolio revenue share in the U.S.? And, since there are studies which says that there is a, because of the COVID, the oncology products witnessed a kind of 30%-40% kind of decline over last four, five month period. So what is the kind of impact that you have witnessed, despite which you have delivered this kind of growth?
Erez Israeli (CEO)
Indeed, some of the injectables that we have had less demand, not just by the oncology, and the other hospital-related products that we did see some lesser demand due to COVID. Overall for us, we were able to between the market share and the new products, we were able to overcome or compensate for some of those declining in-person demanded products, as well as for the relevant product increase. So, more volume sale, more new products to compensate for price, as well as less demand in certain products, including some of these injectables.
Surya Patra (Senior VP of Healthcare and Specialty Chemical Research)
Okay. Just last one question, sir, on the vaccine side. So if you can provide some idea that, as far as the commercial launch of the product is concerned, I think the government is indicating about distributing the vaccine or vaccinating or running the vaccination program only through government agencies, then the procurement will be through government agencies only. In that case, do you expect, having seen or knowing the fact that there are multiple domestic leading players out there who are manufacturing and almost looking to launch? So in that scenario, if Dr. Reddy's is thinking about introducing the product in the domestic market, is there any kind of business scope for domestic market?
Erez Israeli (CEO)
You asked about the vaccines, correct?
Surya Patra (Senior VP of Healthcare and Specialty Chemical Research)
Yeah, yeah, yeah.
Erez Israeli (CEO)
The vaccine is only for the domestic market. We don't sell it to other markets. So yes, I believe that there is a great need for this, and, and, I do hope that we will prove that the product is safe and with the right efficacy. I, I'm not sure that... I don't see any competition on that, so I'm not sure what kind of competition you're relating to.
Surya Patra (Senior VP of Healthcare and Specialty Chemical Research)
Okay. Sure, sure. Thank you. It's all good.
Operator (participant)
Thank you. The next question is from the line of Surajit Pal from Barclays. Please go ahead.
Surajit Pal (Analyst)
Thanks for taking my question. Could you please tell me, is there the API manufacturing is a main issue for Vascepa? As well as some litigation issues where some liabilities could come into picture, given that what has happened in other cases in U.S. product.
Erez Israeli (CEO)
You are referring for which product?
Surajit Pal (Analyst)
Vascepa.
Erez Israeli (CEO)
I am only commenting on the... I'm not commenting on the activities around this product. What I said before, we are preparing for launch, and we will launch when we are ready.
Surajit Pal (Analyst)
Any actual, you know, so could you throw some light on when could be that, possibly 3 months, 6 months?
Erez Israeli (CEO)
No, not really. I'm not planning, and not because, because, you can understand that it is strict to do.
Surajit Pal (Analyst)
Okay. Another question is about your [Plerixafor] in the U.S. So currently, I believe we're in ongoing trials, so any development on that?
Erez Israeli (CEO)
Yes, we are accumulating the data, and we will try to seek emergency use authorization in the United States. And if not, we will try to go through the normal pathways of submitting the product. I hope that we will be able to do so.
Surajit Pal (Analyst)
What could be?
Erez Israeli (CEO)
Yes, please.
Surajit Pal (Analyst)
Any timeline on that? Could you throw some possible timeline?
Erez Israeli (CEO)
... I don't have yet the timelines. There are ongoing discussions with the authorities about the type of data they want to see in order to allow emergency use authorization, and we are trying to obtain this data. Everything that we are discussing, it will happen within the next few months from here, but I don't have a specific date within that.
Surajit Pal (Analyst)
All right. Just permission, this last question: Is it your INR 100 million budget for Sputnik V trial, is it budgeted for FY 2021 only?
Erez Israeli (CEO)
I never-
Surajit Pal (Analyst)
Or is it FY 21 and 22, maybe?
Erez Israeli (CEO)
We never took numbers for the R&D phases. 100 million refers to the number of injections that we are getting at the quarter from the Russians. That were the numbers we got licensed to market in India.
Surajit Pal (Analyst)
Okay, thank you, and I'll-
Erez Israeli (CEO)
We never discussed the R&D business.
Operator (participant)
Thank you. The next question is from the line of Nimish Mehta from Research Delta Advisors. Please go ahead.
Nimish Mehta (Founder and Director)
Yeah, thanks for the opportunity. So I'm just trying to understand the gross margin improvement in itself. We have seen a sequential decline of 200 basis points on global generic, whereas we have seen a very large new activity, which has actually been added. So one is the sharp increase in the domestic business, and second is the launch of Ciprodex in the U.S. under generic exclusivity. So both these should have meant that the gross margin, at least on the global generic, should have been far higher sequentially, but why is it that we are looking at a 200 basis point decline. So, you know, what is it I'm missing here, if you can explain a little bit?
Saumen Chakraborty (CFO)
So I have, you know, already said three distinct reasons. One is, you know, lower export incentive, because one month impact is there. Secondly, the adverse forex rate, last quarter it was 75 or so, this quarter it is 73.5. Forex rate is the first impacting. And third is the product mix.
Nimish Mehta (Founder and Director)
I'm sorry to interrupt, does the forex really reflect the gross margin as well, or it is below gross margin that is captured?
Saumen Chakraborty (CFO)
Some impact is there. We have the margin.
Erez Israeli (CEO)
Yeah. So forex impacts the gross margin in the sense the sales basically comes down. So most of our sales happens in USD. So, as it comes down, then the impact goes to gross margin also.
Nimish Mehta (Founder and Director)
Okay.
Erez Israeli (CEO)
Ruble has further been impacted this quarter. That impacted also this.
Nimish Mehta (Founder and Director)
Okay. So, from a, you know, impact perspective, is forex the largest reason why this has happened? I mean, I'm seeing two very strong wins. One is the domestic business, which is sharply up, and second is Ciprodex, both should... I'm just trying to, still understand, like, you know, can it, can the three, elements that you mentioned, after you mentioned them, are they sufficient to compensate for the increase there?
Erez Israeli (CEO)
Yeah. So other than this also, there are other products which have impacted. These two have contributed positively, but there are factors which have contributed negatively. So there is an overall product mix when you see.
Nimish Mehta (Founder and Director)
Understood. Okay. And then I just wanted to know, there is a product, Remodulin, where I think you already have an approval, and I don't think you have indicated it. So what impact is stopping us from launching the product? I understand it could be an important product for Dr. Reddy's, given that it's low competition.
Erez Israeli (CEO)
Yes. So, certain activities which are pending. Maybe once we complete those, then we will launch the product.
Nimish Mehta (Founder and Director)
I see. Any timeline you can give? That will be great.
Erez Israeli (CEO)
As of today, we don't have any specific timeline, but once we have little bit more clarity, we will let you know about that.
Nimish Mehta (Founder and Director)
Okay. Thank you very much.
Operator (participant)
Thank you. The next question is from the line of Shyam Srinivasan from Goldman Sachs.
Shyam Srinivasan (Analyst)
Hi, thank you for taking my question. The first one is on your regulatory inspection outlook. You know, have you started seeing the FDA starting to inspect at least some of your global plants, like the plants in the U.S.? And from a calendar year 2021 perspective, what do you think are some of the changes that companies need to adopt while having to do these regulatory inspections?
Erez Israeli (CEO)
As for the U.S. FDA, we did not have inspections outside of India. As for other agencies, some of them are performing the remote audits. That's the preparation people need to do to be able to either obtain data or using audit remotely, meaning use cameras or using other means to present to the hospitals and get the information that they need. This is a special adjustment that we are doing for some agencies.
Shyam Srinivasan (Analyst)
Next year, do you think this audit, virtual audit could be, you know, in terms of proportion or in terms of criticality of plans, you will definitely need physical inspections, but if others could just keep doing virtual audit, is it on qualitative sense already?
Erez Israeli (CEO)
It is up to the agency. Some agencies already doing, and we even experienced some virtual audits, and some don't, so it's up to them. I believe that COVID-19 and also is here to stay for the foreseeable term, so people will have to take those decisions. Right now, I believe that the inspections if will happen, will be virtual by and large.
Shyam Srinivasan (Analyst)
All right. Thank you. And my last question is on the China business. I think this emerging markets, and maybe what have you done in terms of the China market, this fiscal so far? And the experience of selling clopidogrel, if you can actually walk us through that as part of the GPO. Thank you.
Erez Israeli (CEO)
Yes. So we are continuing with the strategy and actually executing against it, including the product that you mentioned. We are not giving numbers specifically for a product, but the strategy, the way we articulated is working for us, and the China business is growing. And including the products, just to get to the GPO, like the Olanzapine. So that strategy is going well for us, so we continue to do those submissions, as well as focus on those products that are now commercial for us.
Shyam Srinivasan (Analyst)
Thank you, and all the best.
Operator (participant)
Thank you very much. We take that as the last question. I would now like to hand the conference back to Amit Agarwal for closing comments.
Erez Israeli (CEO)
Just before Amit will finish, I want to this audience to thank Saumen. He is not leaving Dr. Reddy's, but he is going to retire in next month, after 19+ years in Dr. Reddy's, and will continue to be with Dr. Reddy's after that. I want to this audience to thank you all for collaboration with Saumen and to thank him in front of you for an excellent service for Dr. Reddy's. And thank you so much for your collaboration all these years with us, and I hope you continue to do that.
Amit Agarwal (Head of Investor Relations)
Thanks, everyone, for joining us today, for joining us. In case of any further query, please reach out to Investor Relations. Thank you.
Operator (participant)
Thank you very much. On behalf of Dr. Reddy's Laboratories Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect the line.