Dr. Reddy’s Laboratories - Q2 23/24
October 27, 2023
Transcript
Operator (participant)
Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Q2 FY 2024 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Richa Periwal. Thank you, and over to you, ma'am.
Richa Periwal (Head of Corporate Analytics, Corporate Strategy, and Investor Relations)
Thank you, Darwin. A 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 ending September 30, 2023. Earlier during the day, we've released our results, and the same is also posted on our website. This call is being recorded, and the playback and transcripts shall be made available on our website soon. All the discussions and analysis of this call will be based on the IFRS consolidated financial statements. The discussion today contains certain non-GAAP financial measures. For a reconciliation of GAAP to non-GAAP measures, please refer to our press release. To discuss the business performance and outlook, we have our CEO, Mr. Erez Israeli, and our CFO, Mr. Parag Agarwal, along with 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 I proceed with the call, I'd 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. Parag Agarwal. Over to you, Parag.
Parag Agarwal (CFO)
Thank you, Richa, and a warm welcome to our quarter two FY 2024 earnings call, and a thank you to everyone joining today. We have built on our positive momentum and delivered another strong quarter of financial results with highest ever sales and record profitability. In the financial overview section that I will cover today, all the amounts are translated into U.S. dollar at a convenient translation rate of INR 83.08, which is the rate as of 30th September 2023. Consolidated revenues for the quarter stood at INR 6,880 crore, that is $828 million, and grew by 9% on year-over-year basis and by 2% on a sequential basis. The growth was driven by the generics business, mainly in U.S. and Europe.
Consolidated gross profit margin for this quarter has been 58.7%, a decrease of around 40 basis points over previous year and broadly flat sequentially. Gross margin for the global generics and PSAI business were 63.6% and 17.8% respectively. The SG&A spend for the quarter is INR 1,880 crore, which is $226 million, an increase of 13% year-on-year and increase of 6% quarter-on-quarter. The year-on-year increase is primarily on account of investment in sales and marketing, digitalization and other business initiatives. The SG&A cost as a percentage of sales were 27.3% and is marginally higher by 106 basis points year-on-year and 105 basis points quarter-on-quarter.
The R&D spend for the quarter is INR 545 crores, that is $66 million, and is at 7.9% of sales. Our R&D investments are driven by ongoing clinical trials on differentiated assets, as well as other developmental efforts to build a healthy pipeline of new products across our markets for both small molecules and biosimilars. The EBITDA for the quarter is INR 2,181 crores, that is $263 million, and the EBITDA margin is 31.7%. Our profit before tax for the quarter stood at INR 1,913 crores, that is $250 million, an increase of 19% year-on-year and 4% over previous quarter. The net finance income for the quarter is INR 123 crores. Effective tax rate has been at 22.6% for the quarter.
The effective tax rate was lower than the previous year, mainly due to adoption of corporate tax rates under Section 115BAA of the Income Tax Act of India. We expect our normal EPS for the year to be in the range of 24%-25%. Profit after tax for the quarter stood at INR 1,480 crores, that is $178 million. Reported EPS for the quarter is INR 88.8. Operating working capital reduced by INR 598 crores, which is $72 million, against that on June 30, 2023, mainly due to decrease in receivables. Our capital investment stood at INR 322 crores, which is $39 million in this quarter.
The free cash flow generated before acquisition-related payout during this quarter was at INR 1,447 crore, which is $174 million. Consequently, we now have a net surplus cash of INR 5,906 crore, which is $711 million as on September 30, 2023. Foreign currency cash flow hedges in the form of derivatives from the U.S. dollar are approximately $648 million, largely hedged around the range of INR 82.9-INR 84.5 to the dollar. RUB 247.5 million at the rate of INR 0.98 to the ruble, and AUD 2.7 million at the rate of INR 58.06 to Australian dollar, maturing in the next twelve months. With this, I now request Erez to take us through the key business highlights.
Erez Israeli (CEO)
Thank you, Parag, and a warm welcome to everyone participating in our earnings call today. As always, we appreciate your interest in our company. We are pleased to report a quarter with the highest ever revenue, EBITDA, profit before tax and profit after tax. We saw growing momentum in our products and businesses. Our geographic diversification, productivity improvement in operations, enabled operating margin delivery. We continued strategic progress on our various key initiatives to ensure that we are well positioned for differentiated and competitive growth. Let me take you through some of the key highlights of the quarter. Sales for quarter two grew 9% and EBITDA grew by 30%, reflecting the portfolio strength and continued momentum in US and Europe. We generated healthy EBITDA at 32% and annualized ROCE at 39%.
High cash generation leading to net cash surplus of more than $712 million at the end of the quarter. A few developments in our global biosimilar journey in the quarter include receiving of GMP certificate, indicating closure of inspection by the U.K. MHRA for our Bachupally biologics facility. A pre-approval inspection by the U.S. FDA of our biologics facility based in Bachupally concluded with nine observations. We will address them within the stipulated timeline. CAR-T (DRL-1801) approved for clinical trials in India. The leading financial publication, Financial Express and EKI in a joint study, have named Dr. Reddy's as the leading company in ESG in India and across sectors.
The company received SA8000, a multi-site certification, including CTO six unit, six CTO units and ten formulation units at Biologics, and has been successfully audited and awarded compliance to ISO 14001:2017. This demonstrates organization commitment to our social goals and accountability. We were conferred with the prestigious Golden Peacock Award for Excellence in Corporate Governance of 2022. Now let me take you through the key business highlights for the quarter. Please note that all references to these numbers in this section are in representative local currencies. Our North America generic business recorded sales of $384 million for the quarter, with strong year-over-year growth of 9%, while being broadly flat on sequential basis.
The growth was supported by market share expansion in certain existing key products and complete integration of Mayne portfolio, which more than offset price erosion. We launched four new products during the quarter. Our Europe business recorded sales of EUR 59 million this quarter, with a year-over-year growth of 12% and sequential increase of 4%. The contribution from new product launches and improvement in base business volumes more than offset price erosion. We launched a total of 20 products across markets during this quarter. Our emerging markets business recorded sales of INR 1,012.16 crore, a marginal year-on-year decline of 1% and sequential increase of 5%, primarily impacted by seasonality and unfavorable FX. While we may experience QoQ volatility, full year outlook is on track.
We launched 32 new products during the quarter across various countries of the emerging markets. Within the emerging market segment, the Russia business grew by 4% on year-on-year basis and 9% on sequential basis in constant currency. Our India business recorded sales of INR 1,186 crores and reported year-on-year growth of 2% and sequential increase of 3%. Excluding loss of revenues from NLEM-related price reduction, India business grew in mid-single digits. Our focus on profitable growth, coupled with sales and marketing execution, have led to gradual improvement in business performance. We further made forward strides to access new growth levers and drive differentiation. We signed a new licensing deal with Hengrui for pyrotinib. We launched Nerivio in India, our first digital therapeutic products, addressing unmet need of migraine patients.
We launched a direct-to-consumer platform, celevidawellness.com, for serving the needs of diabetic patients in India. India remains our priority market, and we'll continue to strengthen presence in core generic business while investing and building the innovation spaces. Our PSAI business recorded sales of $85 million, with a year-over-year growth of 8% and sequential increase of 4%. We expect sales to improve over the next couple of quarters on back of increasing volume pickup and strategic collaboration with regional and global players. We invested 7.9% of our revenue to empower and enhance our R&D competency. Our efforts and are focused on developing value-additive products, including several generic injectable biosimilars, where there is a patent, patient need.
We have done six global generic filings, including two ANDAs and one NDA filed in the United States during quarter two of FY 2024, and are on track to accelerate in the balance of year FY 2024. We remain focused on building best-in-class capabilities and commercial infrastructure to leverage our portfolio to expand further. Our ability to adapt, strong execution, and financial muscles will enable us to grow our core business and build pipeline of products to meet patient needs. I am pleased with the progress that we have made so far this year, and that we have a clear plan in place to move forward at a pace to deliver on our key objectives and support the overall growth ambitions of the company. 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 a question 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 while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Balaji Prasad from Barclays. Please go ahead.
Mikaela Franceschina (Research Analyst)
Hi, this is Mikaela on for Balaji. Thanks for taking our questions. Given India remains a priority market for you, can you just provide an outlook on your Indian market, and just elaborate a bit more on the evolution in your India focus? Thank you.
Erez Israeli (CEO)
So the main focus is, and the main effort is actually licensing and collaborating with the partners to bring innovation to India. This is the most important initiative that we have for India. In addition to that, we identify focused portfolio in which we are growing, and indeed, by the way, this focus portfolio is growing very, very nicely. Indeed, the overall performance of the portfolio that we have today is growing in mid-single digits. Part of it is also because, as per the plans, we have, obviously, Cidmus, that we have a price erosion as expected when required, if it meets our expectation from business case, but naturally has contributed also to this decline.
If you wish, the portfolio that we are focusing on is actually growing double digits, and likely that's what, that's what you're going to see from quarter to quarter, that we are actually improving our performance.
Mikaela Franceschina (Research Analyst)
Great, just one follow-up, if I can. What kind of innovations in therapeutic areas are you targeting? And just how willing are partners to launch in India when you approach them about these deals? Thanks.
Erez Israeli (CEO)
There is actually enthusiasm, too. Naturally, India is an important country, everybody understands that. There is always concern about the price points, about the adoption of. India has certain requirements that are relevant for to localize the product, whether it's local production or local trials or maybe different position of the product. But in general, people understand that India is an important market, important country, and they want to have a presence here, and they want to work very much with a reputable company, and we are one of them. The, as, sorry, I lost the first part of the question.
Mikaela Franceschina (Research Analyst)
Just what kind of innovations in therapeutic areas specifically are you targeting?
Erez Israeli (CEO)
Yes, sorry about that. We are targeting primarily areas like cardiovascular, diabetes, CNS, oncology, especially in area in which we can find standard of care or something that is better from the current standard of care. So what is driving us is primarily if we see an innovation that are addressing those areas, this is also the areas in which we, at least in our analysis, we find the utmost unmet need.
Operator (participant)
Thank you. The next question is from the line of Kunal Dhamesha from Macquarie. Please go ahead.
Kunal Dhamesha (Research Analyst)
Hi, thank you for the opportunity. So the first one on the main observation for the biologics plant that we have received, can you please elaborate what is the nature of these observations, and whether we need to undertake some corrective and preventive actions there?
Erez Israeli (CEO)
I believe that those observations are addressable. We are going to address all of them in the beginning of November. Some of them will require us to create a CAPA, which means that we need to produce certain products for a certain period of time, in order to show certain consistency of data, which will take us to January. But overall, I believe that this is addressable.
Kunal Dhamesha (Research Analyst)
Sure. And second one on the PSAI business. So if I look at the gross margin for that business has gone down. Obviously, there is some growth on a quarter-on-quarter basis and year-on-year basis. But is it primarily due to you know, the unfavorable pricing environment? And if that is the case, do we get the benefit of lower API prices in our global generic business, if that is, like, more widespread pricing decline in APIs?
Erez Israeli (CEO)
Hey, I don't see such a decline in the API like it was in previous years. Most of the growth is coming when new products and launches that likely to happen by the customer of our API of our PSAI business. So if you wish, we are now selling the API that will sell them in the next period of time, the next quarters. What we see now is the impact of the new portfolio that we worked on it in the last couple of years, which is replacing the old portfolio from the decade before. And as time will go by, we will launch more and more of these products and this product, and you'll see acceleration in growth because of that.
Kunal Dhamesha (Research Analyst)
The gross margin for this business, will it also improve? Because it has come down to now around 13%.
Erez Israeli (CEO)
So as we grow the sales, we normally grow the gross margins, because it's a kind of have relatively higher level of fixed costs. So as you grow, you're also increasing your margin. That's what is likely to happen.
Parag Agarwal (CFO)
But I'll try to clarify, the gross margin for this business, we have reported as 18% during the quarter, not 13%.
Kunal Dhamesha (Research Analyst)
Okay. Sure. I'll check. Yeah. And then, lastly, you know, we have mentioned price erosion in U.S. as a growth track, you know, at least on a quarter-on-quarter basis, perhaps. Now, this price erosion this quarter, is it limited to few large products such as vasopressin, or it is more broad-based price erosion that you are witnessing?
Erez Israeli (CEO)
The price erosion always affects certain products that have that went into either a bid or RFP or competitive situation in that particular quarter. It's never broad. But it's a relatively to other years, this year it's more moderate than it used to in other years.
Kunal Dhamesha (Research Analyst)
Lastly, on the same thing, you know, the shortage situation and then, you know, some of the short-term contracts, et cetera, are those opportunities continuing into quarter two and probably in quarter three? That is what the trend you are seeing?
Erez Israeli (CEO)
Yes, absolutely. Absolutely the focus in the U.S. on continuity, service, and sustainability of supply. Absolutely.
Kunal Dhamesha (Research Analyst)
Thank you.
Operator (participant)
Thank you. The next question is from the line of Neha Manpuria from Bank of America. Please go ahead.
Neha Manpuria (Senior Analyst)
Thanks for taking my question. First on the main acquisition. You know, when we'd announced this acquisition, it had a revenue base of about $65 million-$70 million. You know, post nearly five to six months of integration into the Reddy's portfolio, have you seen traction in terms of our ability to gain more volume, you know, in the product? Because we don't see that in a product like NuvaRing, which is, you know, stuck at that 2%-3% market share, or, you know, how should we look at that acquired portfolio going forward?
Erez Israeli (CEO)
Each one of these products has different timing in which customers are putting their RFP or open for those kind of discussions. I believe that this will grow and will pick up volumes as these timelines will be there. So, and most of those discussions will likely to happen in the second half of the year. So, so far, I'm happy with this deal. It's meeting our expectations, and likely that we'll see growth in the next two quarters.
Neha Manpuria (Senior Analyst)
On NuvaRing, sir, any reason why it's, you know, stuck at about the 2%-3% market share, despite, you know, the launch in February?
Erez Israeli (CEO)
Timing of the discussion with customers.
Neha Manpuria (Senior Analyst)
Okay, understood. My second question is on the India business. You know, we have guided to wanting to grow higher than the market, double digit in this business, but, you know, for several quarters now, that hasn't been the case, at least if you look at the market data. You know, when do we think we get to that growth trajectory and the collaborations and licensing that we talked about? You know, when do you actually see that materialize and flow through numbers?
Erez Israeli (CEO)
Likely that we are going to see it already this year, this fiscal. The, and, in terms of, the innovation, what we're seeing now is the launch of deals that we signed a year ago. So it takes about 12-18 months from the time that you sign a deal until you get your product approval. Naturally, we need to go through the regulatory process. In some of the cases, we need to do clinical trials and then regulatory process, and then it takes, a bit longer. And, this is also right now the main efforts in terms of building the portfolio in India. In each one of them, it's about to bring the products that are either going to be the standard of care or better than the current standard of care.
In addition, the business, the products that we are focusing on in India are growing in double digits, and likely that they will be more dominant in the future in this space.
Neha Manpuria (Senior Analyst)
So, just to understand, you know, this correctly, we are saying that we will be able to achieve double-digit growth in India this year?
Erez Israeli (CEO)
I believe that in the end of the year, we should see a double-digit growth and to continue on in the quarters after.
Neha Manpuria (Senior Analyst)
How many of such licensing deals have we completed in India so far? You know, just to get a broad sense, and is there any monetary value that we can attach to, you know, this is the potential market opportunity or market size of this, of these deals?
Erez Israeli (CEO)
I hope I'm giving you the right numbers, but it should be around 10. And we are normally going for a product that will be at least 100 Cr. And of course, some of them can be much more than that.
Neha Manpuria (Senior Analyst)
Understood. Thank you so much, sir.
Operator (participant)
Thank you. The next question is from the line of Saion Mukherjee from Nomura. Please go ahead.
Saion Mukherjee (Head of Equity Research)
Yeah, thanks. Sir, can you tell us on biosimilar rituximab, what's the timeline you're looking at now for the, for the U.S. and European markets?
Erez Israeli (CEO)
We submitted it in April. We just got the pre-approval inspection, so we will answer it by November. So now we hope that it will stay on course, and let's say if everything will be okay, we will be able to launch it in the beginning of FY 2025.
Saion Mukherjee (Head of Equity Research)
Okay. And if I look at quarter-on-quarter revenue in the U.S., which is sort of flattish, can you just share the dynamics with respect to main contribution Revlimid and the base business, how each of these buckets have moved quarter-on-quarter?
Erez Israeli (CEO)
Most of the growth came from volume growth and the main.
Saion Mukherjee (Head of Equity Research)
Okay. And finally, on the U.S., you know, how many launches we are expecting for the full year, how much we have done so far in the first half? And, how should we think about material launches from your pipeline, if you can guide something in terms of timeline, you know, where you could expect some, you know, material launches to happen?
Erez Israeli (CEO)
Sure. So this year we are still on track with the 25-30 launches, and we have identified a group of between something similar 25-30 products, which are material that will be launched in FY 2025, in FY 2026 and FY 2027.
Saion Mukherjee (Head of Equity Research)
How many is the 25 products you're saying across these three years?
Erez Israeli (CEO)
25-30, because, you know, there's some uncertainty about time of approval, so that's what we can guide.
Saion Mukherjee (Head of Equity Research)
You know, so I mean, when you say material, what kind of revenue potential typically, you know, a product with material contribution would contribute?
Erez Israeli (CEO)
It has to be at least with a single digit in millions of dollars of sales.
Saion Mukherjee (Head of Equity Research)
Okay. Yeah, thank you.
Operator (participant)
Thank you. The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Surya Patra (SVP of Healthcare and Specialty Chemical Research)
Thanks for this opportunity, sir, and congrats on the great set of numbers. So first, clarification about the government grants. So in fact, in the previous year, we have seen something around INR 300 crore. In the first half, it is more than INR 200 crore that we have already booked. So what is the visibility here, and how long this can sustain? And, this is relating to the PLI only or something else?
Parag Agarwal (CFO)
So this includes PLI, but it also has the other export incentives that we are entitled to. Overall, our PLI scheme and the other export incentives this year.
Surya Patra (SVP of Healthcare and Specialty Chemical Research)
Mm.
Parag Agarwal (CFO)
Will be markedly higher than last year. Quarter-on-quarter, there is always a fluctuation, because we have to recognize this in line with the entitlement sales growth that we show as per the scheme. There are quarter-on-quarter fluctuations, but for the year as a whole, we will be higher than last year.
Surya Patra (SVP of Healthcare and Specialty Chemical Research)
But this is sustainable, sir?
Parag Agarwal (CFO)
Yes, it is, it is. For the next several quarters, we expect it to be meaningful.
Surya Patra (SVP of Healthcare and Specialty Chemical Research)
Okay, fine. My second question is about the sustainability of the U.S. business. Basically, having seen the run rate of around $300 million, $380 million, $390 million kind of quarterly run rate and kind of the ramp-up we have witnessed in case, in terms of Revlimid. Can we see a kind of progressive performance in the overall U.S. business going ahead? I'm saying progressive because I believe in terms of the volume limit condition, whatever that is there in case of Revlimid, every trail month that should see a kind of upward move. Considering that, how should we see the U.S. business going ahead, in terms of the quarter result rate and all that?
Erez Israeli (CEO)
The quarters can fluctuate. We discussed it in the past, because the quarter is very much depends on the ordering pattern, patterns of this product.
Surya Patra (SVP of Healthcare and Specialty Chemical Research)
Okay.
Erez Israeli (CEO)
But overall, you should see growth.
Surya Patra (SVP of Healthcare and Specialty Chemical Research)
Okay. Okay, fine, sir. And my second question is about this European business. So in the first half, both the quarters, we have seen a kind of very strong growth, more than 20% kind of growth. What is driving that? And is it the launch of the biosimilar, introduction of the new product, or even the pricing scenario, any improvement in the pricing scenario there, the demand situation doing? Could you give some sense about the Europe, why is it delivering this kind of growth, and whether it is sustainable even in the subsequent period?
Erez Israeli (CEO)
So it's primarily new product launches. There is also some volume growth with, of the base business. And, just more market share participating in more tenders. Most of our growth coming from, injectables and, and just winning tenders.
Surya Patra (SVP of Healthcare and Specialty Chemical Research)
Okay. Since we are now seeing progress in regulatory point of view, as well as the launch point of view, in terms of biosimilars, so is it possible to share some update about the pegfilgrastim success in the U.S. and non-U.S. market? And/or even generally for biosimilar, what is the, let's say, annual or quarterly run rate that we are currently having? If you can give some sense, that would be really helpful, sir.
Erez Israeli (CEO)
Just to remind, peg is not our product, it is a product that was part of the arrangement that was done many years ago with Medtronic, that after that was got to Fresenius. They are selling it, we are getting only royalty, so by design, it's not a big amount. Most of our activities in the biosimilars today are in emerging markets, primarily rituximab, and five other products, so India, Russia and other emerging markets. We are ramping up that activity, it is very important to us. We are going to have, in the next two years or so, about five phase III of biosimilars to be launched globally, including the United States. The main ramp up in biosimilars would, for us, will be probably from 8.27 onwards.
Surya Patra (SVP of Healthcare and Specialty Chemical Research)
Okay. Okay. Just last one question, sir. So in fact, obviously, there is a kind of a strong cash flow that we have been seeing, also supported by Revlimid. But whatever the case be, but we have been seeing a quarterly run rate of, let's say, INR 1,500 crore kind of a cash flow, free cash flow, and already we have a INR 6,000 crore kind of cash in books. So, could you give some sense what incremental growth this, this fund can add to the overall visibility of our growth for next, let's say, next one or two year, or over a period of three years?
Erez Israeli (CEO)
No, the beauty of that is that we can use this money for deals. Now it depends what deals we are going to have, and in what multiples we will have them. I hope I understood the question right. So what we want to do with this money is primarily use it for inorganic activities, which can serve us both in the short term, like we did with Mayne, as well as in the longer term, for example, to acquire assets or products that we can launch in years after. But absolutely, this is the main use of the money, and this should help us to generate growth. But the timing of it, of course, is not certain, because we don't know what type of deal and when it will impact us.
Surya Patra (SVP of Healthcare and Specialty Chemical Research)
Sure. Sure. Yeah. Thank you, sir. Wish you all the best.
Erez Israeli (CEO)
Thank you.
Operator (participant)
Thank you. Ladies and gentlemen, if you wish to ask a question, you may please press star and one. The next question is from the line of Aman Vij from Astute Investment Management. Please go ahead.
Aman Vij (Head of Research)
Yeah. Thank you, sir. Question is on our diabetic portfolio. So if you can talk about how well are we placed as a company to take the advantage of the upcoming GLP-1 opportunity that is coming? So in terms of launch ready, are we ready? Whenever the expiry happens, we'll be there. And do you think this product category can be like a $300 million-$500 million kind of category for the next five years?
Erez Israeli (CEO)
We are going to be there, definitely, day one. As for the size, I don't know, but, obviously, I have a great belief in this category.
Aman Vij (Head of Research)
Sorry, in terms of the important dosages, are we present in all of them? If you can talk about the same.
Erez Israeli (CEO)
Don't want to discuss specific, because we did not make it public. But we should have all the relevant ranges, depends on the geography and depends on the country, but we see this category as a global category for us to launch in all the markets that we have a presence.
Aman Vij (Head of Research)
You are saying we are ready in terms of whenever expiry happens, if we have FTF file, we can launch in the next day itself?
Erez Israeli (CEO)
We are ready.
Aman Vij (Head of Research)
Sure. My second question is on this other biosimilar, which I think we have on the osteoporosis side. If you can talk about the opportunity in U.S., because I believe there's a patent expiry coming up. So, are we planning to launch in the U.S. market? And if yes, do you think we can take, like,
Erez Israeli (CEO)
Which product?
Aman Vij (Head of Research)
Yeah, I was talking about osteoporosis, teriparatide, and there are one or two more products that we have. So, I was trying to understand that U.S. patent, the expiration is coming up, so, do you think we can have a good market share in U.S. market with our biosimilars?
Erez Israeli (CEO)
Yeah. So I'm not calling teriparatide, biosimilars. For me, these are still, equivalent to, to small molecules. So biosimilars are not normally used for products that are bigger, like, like, But specifically for this product, absolutely, I believe that it will be very nice for us. And we will be ready to launch it when it's possible.
Aman Vij (Head of Research)
Oh, sorry, on the timeline, so I believe it will be in the next few months only, right? On the U.S. launch of this product.
Erez Israeli (CEO)
I don't want to speculate on time at this stage.
Aman Vij (Head of Research)
We are ready to launch whenever it happens.
Erez Israeli (CEO)
We will be ready.
Aman Vij (Head of Research)
Sure. These are my questions. Thank you.
Operator (participant)
Thank you. Participants, you may press star and one if you wish to ask a question. The next question is from the line of Tushar Manudhane, from Motilal Oswal Financial Services. Please go ahead.
Tushar Manudhane (Research Analyst)
Yeah, thanks for the opportunity, sir. Just on this e-commerce story, so we would like to understand, you know, what kind of strategy behind it, what kind of investment are we taking in this particular, sorry.
Erez Israeli (CEO)
Investment of what? Sorry.
Tushar Manudhane (Research Analyst)
E-commerce.
Erez Israeli (CEO)
In e-commerce? It's not a big investment, but it allows us additional channel for our product as well as other nutraceuticals. And, I believe that it's a very nice another channel and another part of the capability that we have now, but it's not a big investment.
Tushar Manudhane (Research Analyst)
Okay. But in addition to the nutraceutical products, will we be also having this, prescription-based product on this platform?
Erez Israeli (CEO)
No, this specific platform is direct to consumer, that you mentioned, which means that it's nutraceuticals and products that do not require prescription, OTC.
Tushar Manudhane (Research Analyst)
And so secondly, just on the trade receivables, there's been reasonable reduction if I compare quarter-over-quarter. Any read-through on that?
Parag Agarwal (CFO)
Sorry, Tushar, your voice is not clear. Can you repeat that question?
Tushar Manudhane (Research Analyst)
Is it better? Is it better?
Parag Agarwal (CFO)
Yeah. Yeah.
Tushar Manudhane (Research Analyst)
There has been good reduction in the trade receivables, quarter-on-quarter. Any read-through on that?
Parag Agarwal (CFO)
It's normal. There's nothing unusual. I think it's. It depends on the credit period and the cycle and the receipt of orders. So we obviously keep a very tight track of all our receivables and collect on time, so nothing unusual in this. Yeah.
Tushar Manudhane (Research Analyst)
Okay, sir. Thank you. Thank you very much.
Operator (participant)
Thank you. The next question is from the line of Devang Sarogi, an individual investor. Please go ahead.
Devang Sarogi (Shareholder)
Sir, are we looking at any 505(b)(2) opportunities in the U.S. market?
Parag Agarwal (CFO)
Sorry, which opportunity in which market?
Devang Sarogi (Shareholder)
505. 505(b)(2) opportunities.
Erez Israeli (CEO)
For which product? Sorry.
Devang Sarogi (Shareholder)
In general.
Erez Israeli (CEO)
505(b)(2) that requires sales force, we will not do. 505(b)(2) that is interchangeable, we would love to do.
Devang Sarogi (Shareholder)
Okay. What would be the price erosion for the quarter?
Erez Israeli (CEO)
What is the?
Devang Sarogi (Shareholder)
Price erosion.
Parag Agarwal (CFO)
The price erosion, you know, it's, we are finding the trends to be stable, Tushar. So if you look at the last few quarters, we had seen price erosion moderating, and we are now seeing it around the same level. So but from one quarter to another, it will typically fluctuate between the high single digits to low double digits.
Devang Sarogi (Shareholder)
Okay. Are we going to see any price increases, as many suppliers are going out of the market?
Erez Israeli (CEO)
We are not giving.
Devang Sarogi (Shareholder)
Or it will be, or it will be, product specific?
Erez Israeli (CEO)
It's normally product specific, and we are not building if there is a shortage situation, and there will be a good supply, but we are not building into our models any price increases.
Devang Sarogi (Shareholder)
Thank you, sir.
Parag Agarwal (CFO)
Yeah, whenever there's an opportunity, opportunistic, not strategic. Yeah.
Devang Sarogi (Shareholder)
Thank you, sir.
Operator (participant)
Thank you. The next question is from the line of Damayanti Kerai, from HSBC. Please go ahead.
Damayanti Kerai (Analyst)
Hi, thank you for the opportunity. My question is on India business. So first of all, can you, like, tell us how much India sales is currently contributed by chronic therapies? And then second part of my question is, how many sales representatives you have for your India business, and do you have plan to expand on it?
Erez Israeli (CEO)
The chronic is about 35% of,
Damayanti Kerai (Analyst)
Yeah
Erez Israeli (CEO)
Of the business. And as time goes by, because what most of what we will launch, especially innovation, will be more chronic in nature, this will grow. As for the numbers of sales people, if I remember correctly, it's a little bit more than 6,000 people, and will grow as we will bring the innovations. So accordingly, we would adjust the numbers.
Damayanti Kerai (Analyst)
Okay, but right now, you do not have any particular need to expand your sales force? As you said, you're focusing more on innovative products, as in when you launch, you will decide accordingly.
Erez Israeli (CEO)
I don't see a need to increase. It's more about the productivity of the team and the coverage of this team. But it's not so much about the numbers of the people. But if we need more, we will have more.
Damayanti Kerai (Analyst)
Okay. I think this question was earlier discussed. So India, despite many efforts from your end, we have been seeing sales largely remain range bound, somewhere, say, INR 12 billion a quarter or so. So, when we can see significant step up coming up, so, any timeline if you can indicate, because I guess for last six to eight quarters, sales were broadly in this range.
Erez Israeli (CEO)
I think you're going to see an improvement already this year. I think indeed the focus, we took two decisions about India, just to remind, and this is the effect that it comes with it. One, we decided to focus, and we actually made quite a few deals of divesting brands. So we kind of trimmed down the base portfolio, because we do not believe that, of course, the changes that will happen with all the challenges of generic, brand and generics we have in India, this brand likely to be successful, and we felt that it was a good deal for us.
Second, we also acquire a brand, for example, Cidmus, which we knew at the time that it would face price erosion. It matched the business case that we had on it. I believe that already the brands that we are focusing on are growing in double digits, plus we are going to launch more and more innovation and have more and more collaborations. So we start to see this year, and as we will add products to the portfolio, it will continue to grow. It's a focused market for us, it's a strategic market for us, and we will grow it.
Damayanti Kerai (Analyst)
Sure. My second question is if you can talk a bit about your progress for the China market, how many approvals you have got, and what kind of filings have been done so far?
Erez Israeli (CEO)
We are actually very pleased with the progress over there, and especially since April, where the number of approvals start to pick up. And I think that we had four approvals, and this month, I think we got additional two approvals, so six altogether. And we are also filing more than 15 products a year now. I think we can get even 13, if everything will go well. And most of our products are among the first wave, and normally among the first three. So it's a very interesting area for us in China. At the time, we thought that the ramp-up will be earlier than what I communicated in the past, but COVID, zero COVID, and also our own execution may be late, but now it's absolutely very good.
Damayanti Kerai (Analyst)
Sure. So with this portfolio build-up, should we assume China portfolio could start contributing meaningfully from next fiscal, or it will be a bit long-term in nature?
Erez Israeli (CEO)
No, no. From next fiscal, absolutely.
Damayanti Kerai (Analyst)
Okay. Okay, that's clear. And my last question is, how should we look at your R&D spend going ahead, as you focus more on differentiated products for your global global segments?
Erez Israeli (CEO)
likely that it will grow, because we are investing more and more, more and more in biosimilar, so we, and we will continue, of course, to invest in the new molecules. So you're going to see a moderated growth, but also the sales will grow. So let's say the in terms of percentage, it should be give or take, in the range that we are today. Maybe a bit higher. Yeah.
Damayanti Kerai (Analyst)
Okay. That's helpful. Thank you, Erez.
Erez Israeli (CEO)
Sure.
Operator (participant)
Thank you. The next question is from the line of Gagan Thareja from ASK Investment Managers. Please go ahead.
Gagan Thareja (Analyst)
Yeah. Good evening. I hope I'm audible?
Operator (participant)
Yes, you're audible, sir.
Gagan Thareja (Analyst)
Okay. The first question is on the India business. If you knock out the discontinued products from the base quarter one or 2Q of FY 2023.
Operator (participant)
Sorry to interrupt. You are audible, but I think you're too close to the mic.
Gagan Thareja (Analyst)
Okay. Is it better?
Operator (participant)
This is much better, sir. Please go ahead.
Gagan Thareja (Analyst)
Okay. So, so my question is that, you know, adjusting for the discontinued products, what would have the India sales growth been year-on-year for the quarter?
Erez Israeli (CEO)
Without these products and without NLEM, we are about mid-single digits for the quarter.
Gagan Thareja (Analyst)
Okay. And for U.S., from 1Q to 2Q, would there have been a material difference in the Revlimid sales for you?
Erez Israeli (CEO)
I cannot discuss the quantities of Revlimid sales.
Gagan Thareja (Analyst)
No, I don't want you to enumerate the number. I'm just asking, would it be a reasonable assumption or inference that there won't have been a material change in Revlimid sales from the first quarter to the second?
Parag Agarwal (CFO)
The most of the growth, like Erez said earlier, has come from the base business and also the main portfolio.
Gagan Thareja (Analyst)
Okay. Right, and India, is it a correct surmise that you're saying that India, you'll exit FY 2024 with a double-digit sort of growth rate? That's Q4, you'll be able to do a double-digit sort of a growth rate, and you will probably be improving from 2Q to 3Q and from 3Q to 4Q. Is that a correct inference?
Erez Israeli (CEO)
That's what we are trying to do, absolutely.
Gagan Thareja (Analyst)
Right. Okay, thank you. I'll get back in the queue.
Operator (participant)
Thank you. The next question is from the line of Saion Mukherjee from Nomura. Please go ahead.
Saion Mukherjee (Head of Equity Research)
Yeah, thanks for the follow-up. My question is around, you know, you mentioned about inorganic activities. You know, the cash balance is significant, and it could continue to rise. You know, if you look at, you know, the acquisitions and deals that you've done, they are much smaller in size. So one is that, you know, it seems that. So basically, the question is: Are you looking at larger deals going ahead? Is there more activity that you're seeing on the M&A side? And related to that, what's the level of leverage that as a company you would be comfortable with?
Erez Israeli (CEO)
So we are looking for all deals, small and bigger than usual for us, as needed, but we are not in a rush. It has to be a good deal. It has to be something that will match our strategy, something that we believe can contribute to our growth, either products that we want or capability that we are missing. We are not in a rush to spend this money, in that respect. Also, the money is yielding very nicely now, by investing it. As we speak, we are participating in quite a few processes, and we'll see what we need. Likely that we will spend eventually this money, but it's important for us that it will be the right strategic deal for us.
We are not looking for transformative deals. We are looking for complementary activities to our organic strategy.
Saion Mukherjee (Head of Equity Research)
Any view on leverage, Parag, as to at what level of leverage you would be comfortable with?
Parag Agarwal (CFO)
See, we can, I would say 2x EBITDA is what we would be willing to go for. Beyond that, we would not like to take a financial risk.
Saion Mukherjee (Head of Equity Research)
Okay. Okay, thank you.
Operator (participant)
Thank you. The next question is from the line of Neha Manpuria from Bank of America. Please go ahead.
Neha Manpuria (Senior Analyst)
Thanks for the follow-up. Parag, sir, on the, you know, SG&A expense that seems to have inched up, you know, quarter-on-quarter. You know, just wanted to get a sense on, you know, where are we investing, and how should we look at that number, you know, over the next few quarters, and probably FY 2025?
Parag Agarwal (CFO)
Overall, Neha, the increase in SG&A, if you see year-on-year, I think it's gone up by 13%. Apart from the normal inflation, it's largely because of investments behind our brands. Also, we are investing in digitalization. I have spoken about it a few times extensively, both in the front end as well as in R&D and in our manufacturing facilities, like last year, FTO 3 was named as Digital Lighthouse. We are now working on getting more facilities certified as a Digital Lighthouse, because we believe that in the medium term, the digitalization is going to make a big impact by, you know, improving quality, reducing quality incidents, improving productivity and costs, and so on. So these are the areas where we are investing.
If you, if you look at overall, quarter-over-quarter, we will see fluctuation, but in aggregate, SG&A as a percentage of sales, last year we were around, you know, it used to be, few years back, we were at 30%-31%, and we have been gradually dropping to 29%-28% kind of a range. So I wouldn't like to comment on quarter-over-quarter, but for the full year, I would say, yeah, that, that's the range we'll be around.
Neha Manpuria (Senior Analyst)
Got it. Thank you so much, sir.
Operator (participant)
Thank you. The next question is from the line of Kunal Dhamesha from Macquarie. Please go ahead.
Kunal Dhamesha (Research Analyst)
Hi, thank you for the opportunity again. So the first one on the in-licensing innovation deals that we are doing for India, can you highlight what are, what is the typical payback period for these kind of deals?
Erez Israeli (CEO)
So normally, the payout is very good because we hardly put in down payments for that. And so most of the deals have very small down payment. And normally, we are getting healthy margins that enable us to fund our front-end investments. So normally the payout will be within the first three years, taking into account the time that it takes to build brand. So most of the investment is actually not because of the payout to the partner, but rather the investment in building brand in a country like India, which normally takes about three years.
Kunal Dhamesha (Research Analyst)
Sure. Sure. And, let's say for markets like India, are these deals some of these innovators would be doing it more on a profit share basis, or are they more interested in, let's say, upfront payment and then some royalties?
Erez Israeli (CEO)
So most of the deals will be certain milestones and some royalties, and giving us the flexibility to market it in the place that we want and with the right mix of SG&A. So that's normally will be the case, but we will also have cases in which it will be profit shares.
Kunal Dhamesha (Research Analyst)
Sure. Second question on the biosimilar business, now that we are kind of close to launching our first biosimilar in the U.S., be somewhere in FY 2025, what type of front-end investment would we be looking for, for sales force or, you know, the formulary access personnel, AI, and how much drag it could be on our SG&A?
Erez Israeli (CEO)
So the product that will be launched, the rituximab that will be launched in the U.S., will not be launched by us. So this is a sales force that is with our partner. The products that we will launch will be from FY 2027 onwards, and for that we will have to build a sales force.
Kunal Dhamesha (Research Analyst)
Okay. Perfect. Thank you, and all the best.
Operator (participant)
Thank you. The next question is from the line of Surya Patra, from PhillipCapital. Please go ahead.
Surya Patra (SVP of Healthcare and Specialty Chemical Research)
Yeah, thanks for the opportunity. So just one clarification I wanted to have. In terms of the margin profile, let's say, for India, India business and the base U.S. business, let's say, excluding Revlimid. So what could be the differentiator in terms of the margin profile of these two businesses?
Parag Agarwal (CFO)
We don't disclose geography-wise margin, but I can confirm that the margin profile of India business would be better than our North American business.
Surya Patra (SVP of Healthcare and Specialty Chemical Research)
Okay. And even the Russia would be similar to India or slightly lower than India?
Parag Agarwal (CFO)
Yeah, Russia is also a branded generics market, and therefore, its margin profile is also quite healthy.
Surya Patra (SVP of Healthcare and Specialty Chemical Research)
Okay. Sure, sir. Okay. So that means Russia is in between of India and U.S., that is how we should think?
Parag Agarwal (CFO)
No, I'm not ranking the markets. I'm just pointing out that both Russia and India are branded generics business, and therefore, their margin profile is better than the unbranded businesses in U.S. and Europe.
Surya Patra (SVP of Healthcare and Specialty Chemical Research)
Sure. Okay. Yeah, thank you, sir.
Operator (participant)
Thank you. We have no further questions. I would now like to hand the conference over to Miss Richa Periwal for closing comments. Over to you, ma'am.
Richa Periwal (Head of Corporate Analytics, Corporate Strategy, and Investor Relations)
Thank you all for joining us for today's earnings call. In case of any further queries or clarifications, please do not hesitate to get in touch with the investor relations team. Thank you once again.
Operator (participant)
Thank you. On behalf of Dr. Reddy's Laboratories Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.