Dr. Reddy’s Laboratories - Earnings Call - Q2 25/26
October 24, 2025
Transcript
Aishwarya Sitharam (Investor Relations Representative)
Good day and welcome to Quarter Two, Fiscal Year 2023. I'm Aishwarya Sitharam and I'm part of the Dr. Reddy's Investor Relations team. I'd like to indicate that all participants will be in the listen-only mode during the opening remarks, and there will be an opportunity for you to ask questions thereafter. Should you need any technical assistance during the call, please use the chat function in your Zoom application. Please note that the chat will not be monitored for any questions to the management. I now hand over the conference to Richa Periwal. Thank you.
Richa Periwal (Head of Corporate Analytics, Corporate Strategy, and Investor Relations)
Thanks, Aishwarya. Good morning, good evening, and a warm welcome to all. We hope you had a joyful and safe Diwali celebration with your loved ones. Thank you for joining us for Dr. Reddy's Laboratories Q2 FY 2026 Earnings Conference Call. We truly value your time and participation. Joining us today are members of the leadership team: Mr. Erez Israeli, CEO, Mr. M.V. Narasimham, CFO, and the Investor Relations team. Earlier today, we released our quarterly financial results. These are now available on our website for your reference. We will begin today's session with M.V. Narasimham providing an overview of our financial performance for the quarter. Following that, Erez will share his insights on key business highlights and our strategic outlook. We will then open the floor for questions. Before we proceed, please note that this call is the proprietary material of
Dr. Reddy's Laboratories and may not be rebroadcast or quoted in any media or public forum without prior written consent from the company. This session is being recorded, and both the audio and the transcript will be made available on our website shortly. All commentary and analysis during this call are based on our IFRS Consolidated Financial Statements. Please note that certain non-GAAP financial measures may also be discussed. Reconciliations to the corresponding GAAP measures are included in our press release. Finally, a reminder that the Safe Harbor provisions outlined in today's press release apply to all forward-looking statements made during this call. With that, let me now hand it over to M.V. Narasimham to present the financial highlights for the quarter. Over to you, M.V. Narasimham.
Mannam Narasimham (CFO)
Thank you, Richa and Aishwarya. Good evening and a warm welcome to all. Thank you for joining us on our Q2 FY 2026 Earnings Call. I'm delighted to take you through our financial performance for the quarter. We delivered a steady performance in Q2, achieving near double-digit growth despite lower Revlimid sales. The acquired consumer healthcare business supported the top-line momentum. EBITDA margin stood at 26.7% for the quarter. All financial figures in this section are translated into U.S. dollars, using a convenience translation rate of INR 88.78. The exchange rate prevailing as of September 30, 2025. Consolidated revenue for the quarter stood at INR 8,805 crore, which is $992 million, a growth of 9.8% year-over-year and 3% on a sequential basis. While U.S.
generics faced pressure from product-specific price erosion and lower Revlimid sales, overall growth was supported by the integration of consumer healthcare business and double-digit growth delivery across other markets, aided by favorable forex. Consolidated gross profit margin for the quarter was 54.7%, a decrease of 492 basis points year-over-year and 223 basis points sequentially. The decrease in margins during the quarter was due to lower Revlimid sales and product-specific price erosion in the U.S. generics, one-time inventory provisions from the discontinuation of certain pipeline products due to technical challenges, and lower operating leverage in PSAI business. Gross margin was 59.1% for global generics and 18% for PSAI. The S&A spend for the quarter was INR 2,644 crore, which is $298 million, an increase of 15% year-over-year and 3% on a sequential basis.
The year-over-year increase was primarily driven by focused investments in the acquired NRT consumer healthcare business and in branded generics, which are key to driving sustainable growth. S&A for the quarter includes a one-time provision of INR 70 crore for a VAT liability in one of our subsidiaries and charges related to a discontinued pipeline product. S&A spend accounted for 30% of revenues during the quarter and was higher by 132 basis points year-over-year and similar levels on a sequential basis. Excluding the one-offs related to VAT provision, S&A spend as a percentage of revenues was at 29.2% in Q2 FY26. The R&D spend for the quarter was INR 620 crore, which is $70 million, a decline of 15% year-over-year and broadly flat sequentially. The decrease was due to reduced development spends on biosimilars during the quarter, as major investments for abatacept have already been completed.
We continue to make focused R&D investments in complex generics, APIs, and biosimilar pipeline while pursuing strategic collaborations to bring innovative assets that support sustainable long-term growth. The R&D spend was 7% of revenues for the quarter, lowered by 203 basis points year-over-year and 26 basis points on a sequential basis. Other operating income for the quarter was INR 267 crores, higher than INR 98 crores in the corresponding quarter last year. This was mainly on account of product-related IP settlement income in the U.S. and one-time reversal of INR 88 crores in liabilities related to discontinuation of the pipeline product. EBITDA for the quarter, inclusive of other income, stood at INR 2,351 crores, which is $265 million, an increase of 3% year-over-year and on a sequential basis. The EBITDA margin stood at 26.7%, lowered by 174 basis points year-over-year and flat sequentially.
Adjusting for the one-time VAT provision mentioned earlier, the underlying EBITDA margin was at 27.5%. Impairment charge was INR 66 crores, including INR 54 crores for property, plant, and equipment at our Middleberg facility following the discontinuation of the pipeline product, Conjugated Estrogen. The remaining charge pertains to products related to intangibles impacted by adverse market conditions. The net finance income for the quarter was lower at INR 77 crores as compared to INR 156 crores for the same quarter last year. The decline in net finance income reflects lower returns from financial investment following a deployment of cash reserves towards acquisition of consumer health care business and other intangible assets in line with our capital allocation strategy. As a result, profit before tax for the quarter stood at INR 1,835 crores, that is $207 million. PBT as a percentage of revenues was at 20.8%.
On an adjusted basis, excluding the one-time VAT provision, the PBT margin was at 21.6%. Effective tax rate for the quarter was at 22.2% compared to 30% in the corresponding period last year. The ETR for Q2 FY26 was lower, primarily due to favorable jurisdictional mix for the quarter. The ETR in the corresponding period last year was higher due to reversal of previously recognized deferred tax assets related to land indexation following amendments introduced through the Finance Act 2024 to Income Tax Act 1961. Profit after tax attributable to the equity holders of the parent for the quarter stood at INR 1,437 crores, which is $162 million, a growth of 14% year-over-year, flat on a QOQ basis. This is at 16.3% of revenues. Diluted EPS for the quarter is INR 17.25.
Operating working capital as of September 30th, 2025 was INR 13,331 crores, which is $1.5 billion, an increase of INR 3 crores, which is $0.4 million over June 30th, 2025. CapEx cash outflow for the quarter stood at INR 511 crores, which is $58 million. Free cash flows generated during the quarter was INR 1,046 crores, which is $118 million. As of September 30th, we have a net cash surplus of INR 2,751 crores, which is $310 million. Foreign currency cash flow hedges executed through derivative instruments during the period are as follows: $502 million hedged using a combination of forward structured derivative contracts scheduled to mature through December 2026. These contracts are hedged at the rate of 86.9% for U.S. dollars. RUB 4.28 billion hedged at a fixed rate of 1.03% per Russian Ruble, with maturity falling within the next four months.
With this, I request Erez to take us through the...
Erez Israeli (CEO)
Thank you, M V Narasimham. Good day, everyone, and thank you for joining us today. We are pleased to report a consistent performance in Q2 FY26, marked by a double-digit growth and steady profitability. This performance was driven by contributions across all key markets, except for the US generic business. During the quarter, we continued to make meaningful progress across our strategic priorities, namely growing the base, scaling our presence in consumer health care, innovative therapies, and biosimilars. We advanced our key pipeline programs, including semaglutide and abatacept. In addition, we have been driving initiatives to enhance cost efficiencies across our operations while simultaneously pursuing business development activity to support sustainable growth in the coming quarters. Let me now walk you through some of the key highlights of the quarter.
Revenue grew by 10% year-on-year, driven by broad-based growth across businesses, benefiting from acquired consumer health care and supported by a favorable forex. Growth was partially offset by lower contribution from lenalidomide and some price erosion in the US in some select products. The EBITDA margin stood at 26.7%. The ROC for the quarter was around 22%. The cash flow from operations was utilized throughout plant expansions and acquisition of strategic brands and securing rights for distribution in defined markets. We closed the quarter with net cash surplus of $310 million, reinforcing the strength of our balance sheet. We strengthened our innovation-led portfolio through strategic collaboration and launches. We entered the anti-vertigo segment with the acquisition of Stugeron and related brands across 18 markets in APAC and EMEA from Janssen Pharmaceuticals.
In India, we strengthened our gastrointestinal portfolio with the launch of two novel drugs, tegoprazan under the brand name of PICCUB and linaclotide under the brand name of Colozo. In partnership with Unitaid, Clinton Health Access Initiative, and Wits RHI, we are working to make lenacapavir, a long-acting HIV prevention tool, accessible and affordable in low and middle-income countries. We continue to make progress on our key pipeline products. The Subject Expert Committee, the SEC, under the Central Drugs Standard Control Organization, has recommended approval for semaglutide injection in India. We received a positive opinion from the European Medicines Agency Committee for Medicinal Products for Human Use for our denosumab biosimilar candidate. The U.S. FDA accepted our investigational new drug's IND application for COYA-302, a partnered novel drug for the treatment of patients with ALS. We also made steady progress on integrating the acquired nicotine replacement therapy business.
We have successfully integrated 2/3 of the business by value, including Canada, Australia, and selected key Western European markets. The next phase will include Southern Europe, Israel, and Taiwan. On the regulatory front, several inspections were completed across our global facilities. In September 2025, the U.S. FDA conducted a pre-approval inspection on our Biosimilar Biologics facility and issued a Form 483 for observation. The agency recently issued a complete response letter in reference to the ongoing resolution of observations pertaining to the biologics license application, the BLA, of our Rituximab biosimilar candidate. We are actively working to address these observations. The U.S. FDA concluded a GMP inspection at our Mirfield API facility in the UK, resulting in issuing a Form 483 containing seven observations.
Additionally, our API site, CTO-5 in Miryalaguda, Telangana, as well as our Middleburgh facility in New York, were classified as VAI following successful GMP inspection by the U.S. FDA. The GMP and pre-approval inspection, PAI, conducted by the U.S. FDA in July 2025 at our formulation manufacturing facility, FTO 11, has been formally closed. We have received the EIR, Establishment Inspection Report, with the inspection outcome categorized as VAI. We continue to be recognized for our industry-leading performance in sustainability. We retained our MSCI ESG rating of A for the second consecutive year. Our ESG risk rating from Morningstar Sustainalytics improved from 23.6 to 18.4, representing a lower ESG risk profile. Our waste management practices were recognized with the Diamond Standard for achieving 99.9% of waste diversion from landfills.
Further, our formulation facilities at Srikakulam, FTO 11, became India's first pharmaceutical facility to receive a Leadership in Energy and Environmental Design Platinum certification for existing buildings from the U.S. Green Building Council. Let me take you through the key business highlights for the quarter. Please note that all financial figures mentioned are reported in their respective local currencies. Our North America generic business generated revenues of $373 million for the quarter, a decline of 16% year-on-year and 7% sequentially. The performance was impacted by price erosion in selected key products, primarily lenalidomide. During the quarter, we launched seven new products and expect launch momentum to continue in the second half of the fiscal. Our European business reported revenue of €135 million for the quarter, growth of 150% on a year-to-year basis and 3% on quarter-on-quarter.
The year-on-year performance was primarily driven by contribution from the acquired nicotine replacement therapy portfolio and new product launches, which offset the pricing pressure. Excluding the NRT, the growth was 6% year-on-year and quarter-on-quarter. During the quarter, we launched eight new generic products across European markets, further strengthening our portfolio. Our emerging market business delivered revenue of INR 1,655 crore in Q2, reflecting a growth of 14% year-on-year and 18% sequentially. Growth was primarily driven by new product launches across markets and aided by favorable forex. During the quarter, we introduced 24 new products across multiple countries, reinforcing our commitment to expanding access and strengthening our market's presence. Within this segment, our Russia business delivered a growth of 13% year-on-year and 18% sequentially in constant currency terms, despite prevailing macroeconomic challenges.
Our India business reported revenues of INR 1,578 crore in Q2, delivering a double-digit year-on-year growth of 13% and 7% increase sequentially. This performance was driven by contributions from new product launches, improved pricing, and higher volumes. According to IQVIA, we have moved up one place to the ninth position in the India pharmaceutical market for the month of September and continue to outpace market growth, with moving annual total MAT growth of 9.4% compared to IPM's 7.8% growth. During the quarter, we launched 11 new brands in addition to the acquired Stugeron portfolio, further strengthening our domestic franchise. Our PSAI business reported revenue of $108 million in Q2 FY2026, registering growth of 8% year-over-year and 13% sequentially. During the quarter, we filed 37 drug master files globally.
We have further sharpened our R&D focus on programs that offer clear differentiation and strong commercial potential in alignment with our strategic priorities. We have rationalized few pipeline products that face extended regulatory uncertainty, limited market opportunity, or increasing competitive intensity. Our focus is anchored around complex generics, GLP-1 molecules, and biosimilars. In addition, we are actively pursuing strategic collaboration and partnership to enhance our innovation ecosystem, accelerate development timelines, and expand our capabilities in emerging therapeutic areas. During the quarter, we completed 43 global generic filings. For the quarters ahead, we are focused on robust execution to deliver on our strategic priority, meaning grow our base business, focus on our key pipeline assets like semaglutide and abatacept, improving operational efficiency and productivity across the value chain, and we continue to actively explore partnership and value-accretive acquisitions that support our strategic vision and innovation momentum while enhancing our capabilities.
These efforts are aimed to drive sustainable growth and deliver long-term value for our stakeholders. I will welcome your thoughts and questions as we move into the QA session.
Aishwarya Sitharam (Investor Relations Representative)
Thank you very much, Erez. We will now begin the question and answer session. To join the question queue, please use the raise hand option available on the bar at the bottom of your Zoom application. If you wish to exit the question queue, you may click on the lower hand option. Participants are requested to not ask more than two questions at a time and to rejoin the queue in case of any incremental queries. I would like to reiterate that the chat will not be monitored for any questions to the management. However, in case of any technical concerns, please do feel free to use the chat option to reach out to us. The first question is from the line of Neha Manpuria from Bank of America. Neha, please go ahead.
Neha Manpuria (Equity Analyst)
Yeah, thanks so much, Aishwarya. Good evening. My first question is on the US business. While I know you talked about product-specific erosion and Revlimid quarter on quarter, should we expect any Revlimid at all in the third quarter? My second question on the US business, we've seen a product discontinuation this year. Last year, we saw Novareng being discontinued. We continue to spend a fair bit on R&D. How should we think about the US product pipeline? Because if I look at Reddy's approval history, while we have got a fair bit of approvals, we haven't really got any meaningful large launch approval outside of Revlimid and probably Vasepa was the last one that I can think about. Erez, just wanted your thoughts on how we should look at some of these more meaningful launches coming through now that Conjugated Estrogen has been discontinued.
How do you think about the US growth?
Erez Israeli (CEO)
Neha, I think there was something with the voice. Just the beginning of your question, I got the rest of it. Just the beginning of your question, I could not hear it. Sorry about it.
Neha Manpuria (Equity Analyst)
No problem. I was asking, is it fair to assume that there would be no Revlimid in the third quarter, or would we still see some bits of Revlimid as a part of the settlement in the third quarter?
Erez Israeli (CEO)
So we should assume that we will have, but less than what was in this quarter. It is likely that it's either going to be the last quarter or maybe some tail that will go into Q4. By and large, Q3 will still have Revlimid in it. On the R&D question, first, I agree with you. There were certain products that we tried for a while to get an approval, and as we did not get, we kind of pulled the trigger on them. We kind of gave ourselves certain timelines that if we don't, we just move on. As we speak, the main products in the United States, as related to R&D, will be the biosimilars. I think the main products in terms of significant growth in the United States will be abatacept. On the small molecules, we do have meaningful products that are coming, primarily peptides, long-acting peptides.
Some of them we missed the first two files, but they are still meaningful. The overall pipeline is about 100 products as we speak, give or take, in the pipeline. Out of that, about, I would say, around 20 that will be considered what you call the complex generics. As we discussed many times in the past, it's hard to predict on these products. Your observation is correct. What we absolutely did is that we're relooking our portfolio and we are focusing on products that we believe that we have a good chance to be first to market as time will come.
Neha Manpuria (Equity Analyst)
Understood, Erez. Erez, if I were to just extend this question then to, let's say, a SEMA filing or a Abaticept filing, what gives you confidence on getting approvals on those filings? Even in case of Abaticept, now that, you know, we have got a CRL on Rituximab. I'm just wondering if I know there's always risk to approval, but how should we think about management's confidence in getting approval for, you know, SEMA in Canada or, you know, next year as we think about Abaticept?
Erez Israeli (CEO)
On Abaticept, let's talk about abatacept. I'll go to SEMA after. On Abatacept, we are supposed to submit the BLA, and I'm very confident about it, at the end of December of this year, calendar year, end of December 2025, which is exactly the date that we aim to. Here, I have a high level of confidence. It's also important to us because it will open the door for us to launch also the sub-Q, which is the more important SKU at the beginning of 2028, subject to settlement, of course, of the IP. The confidence comes that we are not going only with Biocon, but we increase the chance because we will have also for the U.S. a CMO that will make the product. I'm less concerned about the European approval because Biocon was already approved by European, but not yet by the U.S. FDA.
Also, in the case of the U.S., we don't yet know what will happen with the tariff on biologics. While we feel now more comfortable given all the press that likely there will be no tariff, we need to see when the guidelines will come. As a biologic, we don't know, and we feel the need to have a backup also there. If we will not be able to launch from Biocon, will I be able to launch from the United States? This will enable us also a potential challenge if it will happen on tariff. On the SEMA, we are expecting the feedback from Health Canada in the next few weeks. It can be any day, but it can be within the next few weeks, and we'll know if we get a deficiency or not.
I'm certain that we will launch all the 12 million pens that I discussed with you last time. Obviously, if it will not be in Canada, it will be in other places. The launch is going to happen. The question, of course, is if we'll get a CRL or we'll get something in Canada, obviously, the pricing may be different. I'm confident that we will sell the product. The question is which market they will come. Can I guarantee that we'll not get the CRL? No, I cannot. I wish.
Neha Manpuria (Equity Analyst)
Fair enough. Fair enough. Thanks so much.
Erez Israeli (CEO)
Yeah.
Aishwarya Sitharam (Investor Relations Representative)
Thank you, Neha. The next question is from the line of Damyanti Kirai from HSBC. Damyanti, please go ahead.
Damyanti Kerai (Director and Equity Research)
Yeah, hi. I hope I'm audible.
Aishwarya Sitharam (Investor Relations Representative)
Yes, absolutely.
Damyanti Kerai (Director and Equity Research)
Okay. Thank you for the opportunity. My first question is again on Semaglutide. Erez, can you remind us the legal status which was underway in India, litigation with Novo on Semaglutide?
Erez Israeli (CEO)
Sure. We are challenging the patents in India, and it's currently in a high court in Delhi. All the hearings were done, and we are waiting for the decision of the judge. We don't know exactly when she will submit her decisions. It is likely that whoever will not like the decision will appeal. It is likely that it will continue after. At this stage, the hearings are done, and we are waiting for the outcome of the decision of the judge.
Damyanti Kerai (Director and Equity Research)
Sure. Just to clarify, this outcome should not be impacting your plans in the ex-India market, right? The markets outside of India?
Erez Israeli (CEO)
Depends what will be the decision of the judge. What we are seeking, we believe that the patent is invalid. In any case, as we speak today, by the decision that was done in May, we can produce and export. Not to do it in India, but the court in the decision back in May allowed us to continue to make the product and to export it. In terms of in the current state, we can launch in India only at patent expiration, which is right now dated to March 26.
Damyanti Kerai (Director and Equity Research)
Okay. That's clear. My second question is going back to Abatacept. Just clarifying earlier discussions, did you mention you have a CMO in place to manufacture that product in case Bachupally takes some time to get the clearance from the US FDA? What is the arrangement? What kind of risk mitigation strategies are in place?
Erez Israeli (CEO)
Sure. Correct. We will have, I did mention that we will have a CMO in the U.S. to produce abatacept in addition to our capacity that is built in Bachupally, India. It is mitigating three risks...
Damyanti Kerai (Director and Equity Research)
Hello?
Erez Israeli (CEO)
Can you hear me now?
Damyanti Kerai (Director and Equity Research)
Yes, I can hear you now.
Erez Israeli (CEO)
Okay. I'm saying it's addressing three risks. One is in a case that it will be, again, CRL or any regulatory challenges that we will be able to launch from already approved US FDA site in America. Second, if there will be any tariff or any other potential restriction or regulatory burden assets related to make or sell biosimilar in the US. Number three, to increase capacity. It's allowing us more capacity in a case that we will get a nice market share. We are absolutely going with the CMO option in the US.
Damyanti Kerai (Director and Equity Research)
Okay, that's helpful. My last question is for Semaglutide. I understand you're working on your in-house fill-and-finish capacity. So can you share the update on that project?
Erez Israeli (CEO)
It's going on. It will not impact the launches in the next 12 months because by the time that we will have to submit and qualify it, it will be post-approval in all the countries. We are working with the partner that we have today. This is the famous 12 million units that we discussed in the past. This is still relevant, maybe with some upside, but right now, I think we are about the same range. This will happen with the current partners. We will have two cartridge lines in FTO 11, and this will be significantly expanded capacity to many, many more millions. In that respect, it can go to even up to 50 million, but it's all theoretical at this stage. It will be relevant not for the next 12 months, but for the period after that.
Damyanti Kerai (Director and Equity Research)
Oh, sure. That's helpful. I'll get back in the queue. Thank you.
Aishwarya Sitharam (Investor Relations Representative)
Thanks, Damyanti. The next question is from the line of Dr. Bino Pathiparampil from Elara Capital. Bino, please go ahead.
Bino Pathiparampil (Head of Research)
Hi. Good evening, all of you. First question on the India market, India business. You had a strong growth in the quarter. Is there anything in particular that helped you, and was there any impact related to the GST disruption in the quarter?
Erez Israeli (CEO)
We managed well. We managed well the GST. The GST was not a significant obstacle for us. We managed that well. It's just execution of our strategy, the way we discussed it for many quarters. We identify the therapeutic areas that we want to focus on, and we made several inorganic moves to buy brands that allow us relevant access, as well as licensing of innovative products, and just working well. It's likely to continue. We said all along that we believe that innovation will allow us to outpace the market, and we feel very, very comfortable now about that strategy. I think more and more people see that now.
Bino Pathiparampil (Head of Research)
Understood. You have recently done this acquisition of the Stugeron brand from Janssen. Could you give some idea about what sort of revenues does that business have in its acquired form?
Erez Israeli (CEO)
So it is a 100-plus in terms of size, something like that.
Bino Pathiparampil (Head of Research)
$100 million?
Erez Israeli (CEO)
No, INR 100 crore.
100 CR.
CR, CR. This is in India. Yeah.
Aishwarya Sitharam (Investor Relations Representative)
Indian.
Erez Israeli (CEO)
Yeah.
Yeah, Indian.
Bino Pathiparampil (Head of Research)
That is India. Okay.
Aishwarya Sitharam (Investor Relations Representative)
Bino, it's India and emerging markets put together.
Bino Pathiparampil (Head of Research)
It's INR 100 crore. For that, if I'm right, you paid $15 million.
Erez Israeli (CEO)
Correct.
Bino Pathiparampil (Head of Research)
Okay. Understood. Is any benefit of that in the growth for the quarter? Is some 20 days of that part of India business?
Erez Israeli (CEO)
Not much. No, it was very.
Insignificant.
Yeah, you can take it as no real impact.
Bino Pathiparampil (Head of Research)
Got it. My last question on the margin outlook beyond Revlimid. Of course, we keep asking this every quarter. If you look at the current quarter, even with Lenalidomide, if we remove the other income from the EBITDA margin, it is below 23%. With lenalidomide further coming down in the next quarters, it may fall even further. Do you still fully stick that for the full year of 2024-2025, you will get back to 25% EBITDA margin?
Erez Israeli (CEO)
I'm not sure how did you get to the 23%. I'm aware of 26.7%. But never mind. Yeah, absolutely. Lenalidomide is with higher margin. Everybody knows that. Naturally, it's impacting. Anticipating that, we are discussing for four years, we knew exactly when Lena is going to go. It's happening exactly as we discussed. We are addressing it with the lever that I mentioned, growing the base, contain the cost, BD, and focus on these key products. I absolutely believe, and I'm maintaining it, that in the next two years, we will absolutely get back to the growth and to the margins. The question is, what will be the journey in this point of time? The more Semaglutide we will have, the more growth we'll have, the more BD we'll have. We can actually do it much, much faster. We are maintaining our commitment for the margins.
We are maintaining our commitment for growth. The question is, what will be the scenarios between semaglutide, abatacept, and BD primarily? Of course, because on the levers that we can control better, we are very confident that this is the base and the cost.
Bino Pathiparampil (Head of Research)
Understood. Thank you. I'll turn back. Thank you.
Aishwarya Sitharam (Investor Relations Representative)
Thanks, Bino. The next question is from the line of Saion Mukherjee from Nomura. Saion, please go ahead.
Saion Mukherjee (Managing Director and Head of Equity Research)
Yeah, hi. Thanks for taking my question. My first question is on the U.S.-based business. There has been a lot of price erosion over the last three, four years since you have launched Revlimid. How is the base today versus, let's say, before Revlimid? Is it up, down? If you can give some color so that we get a sense where we should assume the number post-Revlimid.
Erez Israeli (CEO)
Sure. It went down. It went down primarily, not so much on volume. There were some products, about, I think, five, that faced competition and price erosion. That's what took it down. It's not significantly down. Most of the decline that you see is Linaclotide, Lenalidomide. If you want to compare, it is down.
Saion Mukherjee (Managing Director and Head of Equity Research)
Do you see it sort of stabilizing now from the current level, or do you think there is scope for further price erosion? If you can just give some color on the pricing dynamics in the US at this point, anything has changed?
Erez Israeli (CEO)
No, no change. I think it's stabilized. I believe that it's stabilized also for a while beside the products here and there. I don't foresee additional trends like that in the coming quarters on the base products. The erosion that will be will be on some of the launch products. The products that we launch, those can still face erosion because not all of them, what you call, exhausted their potential erosion. It's insignificant as we speak.
Saion Mukherjee (Managing Director and Head of Equity Research)
Okay. My second question is on Semaglutide. This $12 million that you mentioned, you feel confident about selling. If not in Canada, where will this volume be absorbed in your view? Which markets?
Erez Israeli (CEO)
Sure. So we are going to either directly or through partners, going to obtain approval in the next, let's say, 12 to 15 months in 87 countries. Most of them are very small. The notable countries, besides Canada, will be India, Brazil, Turkey. We have partners that are selling in several countries of Latin America. I cannot highlight a particular market. Also, in Asia, we have B2B partners that are preparing their own launches. We have partners on both the API as well as on those spends. I believe that the main markets that I mentioned can take, let's say, the lion's share of this quantity. It depends, of course, on the success and how and the date that we'll actually launch. The rest will be taken by the B2B parties. The markets that I mentioned are divided into two types of countries, the COPP countries and the non-COPP countries.
There will be a certain sequence in which it will come to play. So far, in the demands that we have, we have already just the orders that we are discussing. It gives me confidence that if the approvals will come, we'll be able to sell that. Yes.
Saion Mukherjee (Managing Director and Head of Equity Research)
Erez, if I can just add, this is for 2026. What about 2027? How does this $12 million move up in 2027 in your estimate?
Erez Israeli (CEO)
It can move up even to, for sure, to 15. It can move up even further than that. It depends on the evolution of the product. The qualification of FTO 11, which will significantly ramp up the capacity, will be toward the second half of 2027. I'm talking now calendar, not FY.
Saion Mukherjee (Managing Director and Head of Equity Research)
Understood. Thank you. I'll turn back.
Aishwarya Sitharam (Investor Relations Representative)
Thanks, Saion. The next question is from the line of Madhav Marda from Fidelity International. Madhav, please go ahead.
Madhav Marda (Investment Analyst)
Good evening. Thank you so much for your time. I wanted to understand a bit on the, I think we've delivered double-digit growth in the ex-U.S. markets. Are we confident of maintaining this trajectory over the next one or two years? That's my first question.
Erez Israeli (CEO)
Yes, very much so.
Madhav Marda (Investment Analyst)
Okay. Could you highlight any key drivers? Do we have new launches lined up? What can help that steady growth? India, especially, 13% was quite a good number, ahead of markets. I just wanted to understand what could drive it.
Erez Israeli (CEO)
Each one of the markets, we have different drivers. If you want, I can highlight the markets for you, the main markets. In Europe, it's primarily a combination of the NRT business, the leverage of the U.S. portfolio in which the pipeline is coming up, and the launch of biosimilar Rituximab, denosumab, and bevacizumab that we had in the UK. In the case of India, it's obviously primarily our inorganic move that we made on innovation and the acquisitions of brands that we did, in addition to a normal growth that we had on the legacy pipeline. I always mention that in India, our legacy pipeline will be like the market, and what we are adding value is in the places in which we are bringing products better than the standard of care. This is the strategy. Now that we accumulate enough of those, it's starting to be shown.
It took us, I'm sure we all remember, quite a few years to build it. In emerging markets, it's primarily, again, leverage of the generic business, especially on injectable and oncology, as well as biologics. All of our biologics are going to emerging markets. In each one of them, we have, it depends on the market, selective innovation that we also license as part of our deal with India. In the case of Russia, it's primarily our legacy brands, as well as some licensing and acquisitions that we made in Russia on both the OTC as well as the RX. API, it's primarily the focus on peptides. On both, there is also a lot of demand for the peptides on the API side. I hope I covered the markets for you. If I forgot something, please.
Madhav Marda (Investment Analyst)
Makes sense. My second question is just on abatacept. You said we can submit the BLA by end of calendar year 2025. The phase three trial, I'm assuming, is complete now, and we're expecting sort of an update on that in terms of whether that's completed successfully or how should we think about the progress on the trial itself?
Erez Israeli (CEO)
It should be completed very, very soon, and so far, so good.
Madhav Marda (Investment Analyst)
Okay. Understood. Got it. If we file on time, basically, the approval will be in line with the expiry in early calendar year 2027. That's how we should think about it.
Erez Israeli (CEO)
That's the idea, yeah.
Madhav Marda (Investment Analyst)
Thank you.
Aishwarya Sitharam (Investor Relations Representative)
Thanks, Madhav. The next question is from the line of Dr. Kunal Dhamesha from Macquarie Capital. Just a moment, sorry.
Erez Israeli (CEO)
Yeah.
Kunal Dhamesha (Pharma and Healthcare Research Analyst)
Hi, can you hear me?
Erez Israeli (CEO)
Yes, yes, Kunal, please.
Kunal Dhamesha (Pharma and Healthcare Research Analyst)
Hi. Thanks for taking my question. Just the first one on abatacept. The first filing that we'll do would be for IV version, right?
Erez Israeli (CEO)
Correct. Correct.
Kunal Dhamesha (Pharma and Healthcare Research Analyst)
And what kind of further development would the subcutaneous version require?
Erez Israeli (CEO)
Can you repeat? Sorry.
Kunal Dhamesha (Pharma and Healthcare Research Analyst)
Okay. For the subcutaneous version, what further development?
Erez Israeli (CEO)
There is another set of tests that allow us to submit the sub-Q, but it doesn't require additional study.
Kunal Dhamesha (Pharma and Healthcare Research Analyst)
Okay. No phase three, but some form of characterization, etc.
Erez Israeli (CEO)
Correct.
Kunal Dhamesha (Pharma and Healthcare Research Analyst)
The first filing that we'll do by December 2025, would that include Bachupally as a manufacturing source or the CMO as a manufacturing source?
Erez Israeli (CEO)
Bachupally. Bachupally will be start, and the CMO will be a tech transfer from Bachupally.
Kunal Dhamesha (Pharma and Healthcare Research Analyst)
Okay. Tech transfer from Bachupally. It might, so Bachupally would be still the keystone for us in a way.
Erez Israeli (CEO)
Yeah, in the US, I'm absolutely building that we will be able to be, especially for the sub-Q, that the CMO will be enabled as day one launch.
Kunal Dhamesha (Pharma and Healthcare Research Analyst)
Sure. Sure.
Erez Israeli (CEO)
For the mitigation that we discussed before, yeah.
Kunal Dhamesha (Pharma and Healthcare Research Analyst)
Sure. The second one on semaglutide Canada. Basically, over the last, since we talked in the earlier Q1 earnings call, your expectation about the market formation, has that changed now on the day of patent expiry, or how should we think about it given that there are more filers whose filings have been accepted by the regulatory authority in Canada?
Erez Israeli (CEO)
No, nothing changed, at least in my perspective, just to make sure that we are expecting the market to be competitive. There will be multiple players. The question is just the day that we get approval. It's all about that. That did not change. I believe that the market formation will be as expected. Once there is an approval, there is an application for reimbursement. According to the rules in Canada of the pricing, that's how the market will play. Nothing changed in the way I think the game will be played. Now it's about obtaining approval and obtaining a good outcome from the litigation in India.
Kunal Dhamesha (Pharma and Healthcare Research Analyst)
Sure. Lastly, on India, for SEMA, when I look at, we have basically conducted a trial for Ozempic and Rybelsus. Does that enable us to launch the weight loss version, which is Wegovy, as well?
Erez Israeli (CEO)
For Wegovy, we'll have to have an application by itself. We'll have to.
Kunal Dhamesha (Pharma and Healthcare Research Analyst)
It would be a separate application.
Erez Israeli (CEO)
It will be separate.
Kunal Dhamesha (Pharma and Healthcare Research Analyst)
Okay. Perfect. Thank you and all the best.
Erez Israeli (CEO)
Thank you.
Aishwarya Sitharam (Investor Relations Representative)
Thanks, Kunal. The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Tushar, please go ahead.
Tushar Manudhane (Research Analyst)
Yeah, am I audible?
Aishwarya Sitharam (Investor Relations Representative)
Yes.
Tushar Manudhane (Research Analyst)
Thanks. Thanks for the opportunity. Sir, just on a steady, robust traction of biologics across European markets and Indian markets, if you could just highlight how much has been the total biologics sales across different markets on an annualized basis till date?
Erez Israeli (CEO)
Sorry, something in the voice is too low.
Tushar Manudhane (Research Analyst)
Sales global.
Erez Israeli (CEO)
Just to make sure, you ask how our sales evolve in India and Europe? That's what the question is?
Tushar Manudhane (Research Analyst)
Biologic sales, cumulative biologic sales across different markets.
Erez Israeli (CEO)
The market or us? Sorry, sorry.
Aishwarya Sitharam (Investor Relations Representative)
Our sales.
Erez Israeli (CEO)
Yeah. We launched in Europe. Hopefully, I'm answering correctly. We launched in Europe bevacizumab and recently Rituximab in multiple countries, and we will increase the number of countries as time goes by. This is after we got the recent approval for Rituximab for Europe. In India, in emerging markets, we were always there. It is going well. The main program that we will launch in Europe will be denosumab and Abatacept. This is the main pipeline. The same products, obviously, will be launched in the Indian emerging market, but in India, we'll also have Pembro as well as nivo. That's right now the plans in those countries.
Tushar Manudhane (Research Analyst)
Got it. Sir, with respect to Rituximab, now that we are thinking of having a CMO, will that require at least the stability data from the CMO site and hence, maybe more time to sort of get through the regulatory process?
Erez Israeli (CEO)
The CMO that I mentioned is for Abatacept, primarily for the sub-Q, and it will require a tech transfer as well as stability. We believe that we will be able to be ready for the big quantities, which will be in the beginning of calendar 2028. We should be good by then.
Tushar Manudhane (Research Analyst)
Understood. Lastly, on the PSA segment, where there has been improvement in the gross margin quarter to quarter, we are still lower than the historical gross margin. If you can just help understand in terms of the current gross margin and how to think about it over the next one to two years.
Mannam Narasimham (CFO)
We expect, I think, going forward, the PSA gross margin in the range of 20% -25%.
Tushar Manudhane (Research Analyst)
Compared to 15% currently, right?
Mannam Narasimham (CFO)
No, this quarter is 18%. I think here, based on the product mix and then I think leverage of all the wareheads and everywhere, the range you can expect, I think, going forward, is 20% to 25% PSA gross margin.
Tushar Manudhane (Research Analyst)
Got it. You also earlier comment of peptide sales within PSA. If you could quantify how much has that been?
Erez Israeli (CEO)
We build a capacity of up to 800 kg. Naturally, we are not even close right now to this level. Right now, it's very small, but it will grow as it will come.
Tushar Manudhane (Research Analyst)
Got it. Thank you.
Aishwarya Sitharam (Investor Relations Representative)
Thanks, Tushar. The next question is from the line of Kunal Dhamesha from Axis Capital. Kunal, please go ahead.
Hi. Good evening. I would like to understand how your R&D will take shape given that you're developing a few biosimilars like Pembrolizumab and Daratumumab. Of your R&D budget, how much would you be earmarking for biosimilars and origin? Basically, your non-generic business.
Erez Israeli (CEO)
Sure. Just to clarify, Daratumumab, we are not developing. It's a product that we license from Enlios, from a Chinese company. Denosumab was developed by Alvotech, and we have a partnership with them. In that respect, the main products that are done internally are still Abatacept that we basically finished the clinical of it. As you can see, the R&D is about 7% right now of the sales, and likely that it will stay in this range for now.
Sure. Thanks for that. Secondly, again on semaglutide, do you foresee a situation where the market may not turn out to be as favorable as you think in Canada? Because besides the number of filers, which are increasing by the day, there are perhaps risks, let's say, from a compounding pharmacy, which is intending to enter Canada. Even the innovator has seen volume pressures in several markets. There might be a situation where they are aggressive on pricing. Is there a risk of the market deterioration?
First of all, I mentioned all along, I think that the Canada market will be competitive with multiple players. In 33 years that I'm in pharmaceuticals, I learned not to forecast launch. I always mention that it can range from zero to many, many millions of dollars. To answer, I anticipate that Canada is going to be very, very competitive.
Sure. Sorry, if I can.
I anticipate that Canada will be very, very competitive as players will get an approval.
Right. If you don't mind, is there any particular price erosion that we can see from the current level, maybe 80%, 85% kind of price erosion that will eventually settle down to?
I have no clue. I wish I do.
All right. Thank you.
Aishwarya Sitharam (Investor Relations Representative)
Thanks, Kunal. Participants are requested to restrict the number of questions to just one to ensure that everybody in the line gets an opportunity to interact with management. The next question is from the line of Vivek Agarwal from Citi. Vivek, please go ahead.
Vivek Agarwal (VP, Investment Banking)
Hello. Am I audible?
Aishwarya Sitharam (Investor Relations Representative)
Yes, loud and clear.
Vivek Agarwal (VP, Investment Banking)
Yeah, thanks. Thanks for the opportunity. My question is related to NRT and branded markets like India EM. The growth was quite decent across the board and really a commendable job. I am just trying to understand how to look at the investment that you are making behind these markets. Are these sustainable investments or can it be cut down in the future? Thank you.
Erez Israeli (CEO)
First of all, I don't think you see the investment in the emerging markets. As we speak, we got the market in certain waves. The markets that we did not get are still managed by Helion, and we are paying them a fee for doing that for us. Naturally, as the market is coming to us, the fee for Helion is going. Therefore, the margins are going up because we don't need to pay them. We are starting to invest. The markets that we invest are only the markets that we got at the beginning, meaning UK and Scandinavia. Right now, my advice is not yet. It's absolutely not a steady state. We have two more waves to go. Before we go, what I can tell is that so far, it's exceeding our expectation, both on the pace of growth as well as on the margin.
In both cases, it's much better than what we presented internally when we approved the project. It's a kind of a good start, I would call it.
Vivek Agarwal (VP, Investment Banking)
Understand, Erez. Just a related question here. It's on OpEx, basically. On an absolute basis, how should we look at the OpEx in FY 2027? Can it continue to increase, let's say, from 2026 level, maybe relatively at a lower pace, or is there any possibility of absolute decline in OpEx, let's say, in 2027 compared to FY 2026? Thank you.
Mannam Narasimham (CFO)
Vivek, if you look, this quarter, we have a 30%, and then if you adjust the one-off, I think we are close to 29.1% or somewhere. For any of modeling, I think we'll be in the zone of like a 28%-30%.
Vivek Agarwal (VP, Investment Banking)
Thanks, thanks, and that's from my side.
Aishwarya Sitharam (Investor Relations Representative)
Thanks, Vivek. The next question is from the line of Dr. Harith Ahmed from Avendus Park. Harith, please go ahead.
Harith Ahamed (Director and Equity Research)
Hi. Thanks for the opportunity. Just on Rituximab again, given this is the second unsuccessful PAI and CRL that we've had, are there any specific challenges related to this facility? I'm asking also because this is a biologics facility and our track record otherwise on compliance has been quite excellent in recent years.
Erez Israeli (CEO)
There is nothing specific per se. We
It's all, it's obviously, as this is a sterile plant, we have, we got queries that are related to that nature of the site. We believe it's addressable. In the case that they will not, they will come with another set of questions, what we will do is that we will submit, we have an alternate line as a backup, which is FFM2. We feel that FFM2 is the fill and finish, sorry, for those that are on the line. We may need to move the product from one line to another in a case that it will not come well on the first one. It's primarily related to the fact that the first line that we have, FFM1, is some of the design of it raised those queries. Last time, we are addressing it, but if it will not work, we'll have to move to FFM2.
I'm not worried on the not getting approval. I'm certain that we'll get approval. Just to remind all of us, rituximab for us was deliberately chosen in order to start the regulatory process on time to make sure that by the time that abatacept will come, batch will face those kinds of stuff. This is, it's serving its purpose. Hopefully, we can resolve it soon.
Harith Ahamed (Director and Equity Research)
Okay. A quick one on Tocilizumab biosimilar. It's been a while since we got an update on that one. Can you share the status of that program?
Erez Israeli (CEO)
We are not planning to have it as a global product.
Harith Ahamed (Director and Equity Research)
Okay, thank you.
Erez Israeli (CEO)
We will have it only for India.
Harith Ahamed (Director and Equity Research)
Okay. One quick follow-up on the previous question. You know, the cost reductions that we've alluded to in the past, around 500, 600 basis points of reductions. Are these reflecting to a small extent in the first half numbers, or should we wait for the coming quarters for this to actually show up in the numbers?
Erez Israeli (CEO)
Yeah, I believe so. You can see that despite the fact that Revlimid is going down, we are maintaining reasonably our numbers. It's absolutely a reflection of those mitigations. Of course, the full force of it will come as quarters will come. We can also share the number. We believe that with SG&A of around 28% and R&D of around 7%, it comes to the famous five to seven that was set. There is even opportunity for more if we need to. We maintain that we are very, very sensitive to the margins. Naturally, we're discussing it every time. We will absolutely be very disciplined on those.
Harith Ahamed (Director and Equity Research)
Thank you. That's all from me today.
Erez Israeli (CEO)
Thank you.
Aishwarya Sitharam (Investor Relations Representative)
Thanks, Harit. In the interest of time, we will restrict the questions to the next two speakers. Next is Gautam from Leo Capital. Gautam, please go ahead.
Good evening. My question was on the GLP-1. Do you only plan to do fill and finish, or do you also manufacture API drug substances? How much manufacturing capacity do you have, and which markets are we targeting for this?
Erez Israeli (CEO)
We have CTO6 making the API. I mentioned that the overall potential of all the investment that we'll put can reach even 800 kg, but we're very, very far from this output at this stage. We don't need also just that, but we are preparing it not just for Semaglutide and Liraglutide, but also for 40-something peptides that we identified. We are going to develop either by ourselves or with the partners in the next coming years. Right now, we will have sufficient capacity for the demands that we'll have for the Liraglutide, Semaglutide, and the submissions to the relevant authorities of all the peptides that will be off patents, including Tirzepatide. That will be obviously an R&D project, but it's very important to submit it in the relevant markets. We are also making the product. We are making the product.
We are planning to make it in FQ11 and also with the partners. In general, the approach will be that we will have for every important product in-house capabilities as well as partnership capabilities for all kinds of risk mitigations.
Okay. Can you just expand on the fill and finish also? What's the capacity we have and the status on that, and the markets we are supplying for that?
I think we discussed it. We have 12 million pens for the semaglutide with the partner. We have two lines of cartridge that will be in FQ11. They can reach even 50 million, but right now, it's all theoretical. The cartridge lines are on the way, and they will be assembled and will be ready, not for these 12 months, but after.
Understood. Thank you.
Thank you, Gautam. The last question for today comes from Sumit Gupta from Centrum Capital. Sumit, please go ahead.
Sumit Gupta (Equity Research Analyst)
Yeah, hi. Thank you. Good evening. Just one question on the Indian business. Can you segregate the volume and price growth?
Erez Israeli (CEO)
The volume and the price?
Sumit Gupta (Equity Research Analyst)
The price is like in the range of normal 5%. and then the balance growth is mainly from the new products and volumes. Going forward, should we expect this to continue, or can we expect any significant growth in volumes also?
Erez Israeli (CEO)
You should expect to continue. We will have new products, volume, and the price will be in that range that Amit shared with you.
Sumit Gupta (Equity Research Analyst)
Understood. Thank you.
Aishwarya Sitharam (Investor Relations Representative)
Thank you. We reached the end of the call. I now hand the call over to Richa for the closing comments.
Richa Periwal (Head of Corporate Analytics, Corporate Strategy, and Investor Relations)
Thank you all for joining us today. We truly appreciate your continued interest in Dr. Reddy's Laboratories and the time you've taken to engage with our Q2 FY26 results. If you have any further questions or need any additional information, please do not hesitate to contact the Investor Relations team. Have a great day. Stay safe and take care.
Erez Israeli (CEO)
Thank you.