Dr. Reddy’s Laboratories - Q3 19/20
January 27, 2020
Transcript
Operator (participant)
Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Q3 FY20 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Agarwal. Thank you, and over to you, sir.
Amit Agarwal (Head of Investor Relations)
Very good morning and good evening to all of you, and thank you for joining us today for the Dr. Reddy's earnings conference call for the quarter ended 31 December 2019. Earlier, during the day, we have released our results, and the same are also posted on our website. This call is being recorded, and the playback and transcript shall be made available on our website soon. All the discussions and analysis of this call will be based on the IFRS consolidated financial statement. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's, comprising Mr. Erez Israeli, our CEO, Mr. Saumen Chakraborty, our CFO, and the investor relations team. Please note that today's call is a copyrighted material of Dr. Reddy's and cannot be rebroadcast or attributed in press or media outlets without the company's express written consent.
Before I proceed with the call, I would like to remind everyone that the safe harbor contained in today's press release also pertains to this conference call. Now, I hand over the call to Mr. Saumen Chakraborty. Over to you, sir.
Saumen Chakraborty (CFO)
Thank you, Amit. Greetings to everyone. The current quarter financial performance has been quite good, with the highest ever quarterly sales without any one-off spike, an improvement in both the gross margin and EBITDA margin, and healthy cash generation. However, the profit is impacted by significant amount of impairments taken due to specific triggers occurred during the quarter. Let me take you through these and other major items in some more detail, wherein all the amounts are translated into US dollars at a convenient translation rate of INR 71.36, which is the rate as of 31st December 2019. Consolidated revenues for the quarter are at INR 4,384 crore, which is $614 million, registering a growth of 14% on year-on-year basis. The growth has been supported by a good performance across all our businesses.
On a sequential quarter basis, our reported revenues declined by 9%. In Q2 FY20, we had an amount of INR 723 crore recognized as revenue towards the sale of two neurology brands of our proprietary products business. Adjusted for this, the sequential quarter growth would have been 7%. Consolidated gross profit margin for this quarter is 54.1%, with an improvement of 20 basis points on a year-on-year basis. On a quarter-on-quarter basis, while there is a decline of 340 basis points in the reported gross margin, however, after adjusting for the one-offs in Q2 FY20, the normalized gross profit margin has improved by about 260 basis points. Gross margin for the global generics business is 58.2%, with a quarter-on-quarter improvement of 270 basis points.
Gross margin for the PSAI business is 30%, with a quarter-on-quarter improvement of 540 basis points. The SG&A spend for the quarter is INR 1,267 crores, that is $178 million, which is 28.9% of sales, with the leverage benefit being visible on improvement in sales. In this quarter, we have taken an impairment charge of INR 1,320 crores, led by specific triggers. In December 2019, there has been a generic launch and an authorized generic launch for the product, NuvaRing, which has led to a considerable erosion in the valuation of this product for us. Accordingly, we have taken an impairment charge of INR 1,114 crore, equivalent to $156.5 million.
The balance carrying value of the asset after impairment is INR 308 crore, equivalent to $43.2 million. In addition to this, considering the current market reality, we have taken an impairment charge of INR 206 crores on other intangible assets. R&D spend for this quarter is INR 395 crores, that is $55 million, and is at 9% of the sales for the quarter. The R&D spend has increased by 8% both on year-on-year and sequential quarter basis. The EBITDA for the quarter is INR 1,074 crores, that is $150 million, which is around 24.5% of the revenue.... The net tax for this quarter is INR 42 crores. EPS for the quarter is negative INR 34.37.
Operating working capital increased by around INR 428 crore, which is $60 million. This increase is attributable to an increase in receivables and inventory, partially offset by an increase in payables. The net working capital has increased by three days against the last quarter. We invested INR 121 crore, which is $17 million, towards capital investment in this quarter. The free cash flow generated during the quarter was INR 582 crore, which is $82 million. Consequently, we now have a net surplus cash of INR 414 crore as on 31st December 2019.
Foreign currency cash flow hedges for the next nine months, in the form of derivatives for U.S. dollar, are approximately $210 million, largely hedged around the range of INR 70.43-INR 74.34 to the dollar. In addition, we have cash flow hedges of RUB 900 million at the rate of INR 1.0789 to the ruble, maturing over the next three months. With this, I now request Erez to take through the key business highlights.
Erez Israeli (CEO)
Thank you, Saumen. Greetings to all. I'm very pleased with our continuing improvement in all of our business spaces, and our ability to improve our performance and health metrics this quarter. We have seen strong growth in revenues across our key businesses, coupled with improvement in gross margins, operating expense leverage, and achievement of healthy EBITDA margin. During the quarter, we also turned to net cash surplus and further improved the health of our balance sheet as an outcome of sustained and focused efforts around our businesses. We are progressing well in implementing our strategy across the markets, under the guiding principles of creating more opportunity with less risk. Now, let me take you through the key business highlights. Please note that all references to the numbers in this section are in respective local currencies.
Our North America Generics recorded sales of $225 million for the quarter, with a growth of 8% year-on-year, and 11% on a sequential quarter basis. We launched five new products in this quarter. On a year-to-date basis, we launched 22 products, including four relaunch of the earlier discontinued products. We expect the new launches momentum to continue to deliver with about 30 product launches during this year. We are gradually improving our market share in generic Suboxone, sublingual film product, and several other recent launches like Carboprost injectable and OTC, Fexofenadine, pseudo products. During the quarter, the market for the generic was formed, leading to potential reduction in the size of the opportunity for us.
Based on these changing market dynamics, we have taken an impairment charge in the intangible carrying value, depending upon the various scenarios expected upon our market entry. We continue to work on responding to the CRL, which is expected to go out in the next few months. Our Europe business recorded sales of EUR 39 million, with a year-over-year growth of 59% and sequential growth of 11%. This strong performance was driven by new product launches and improvement in the base business performance, owing to stabilization in supplies. The growth was further aided by the increase in contribution from the three newer markets, which included France, Italy, and Spain. During the quarter, we launched two products in Germany, three products each in UK and Italy, and one product in Spain.
We expect this steady growth momentum to continue as we are building ourselves in these spaces. Our emerging markets business recorded sales of INR 920 crore, with a year-on-year growth of 90% and a sequential growth of 11%. Within the EM segment, the Russia business grew at 70% in constant currency, both year-on-year and sequentially, on the back of sustained base business performance, partially supported with the, with the Rituxan tender supplies. The overall growth in the rest of the emerging market was led by higher volume and new product launches, which was impacted partially due to price erosion in few markets. During the quarter, we launched 17 products across these markets. Our India business recorded sales of INR 764 crore, with a strong year-on-year growth of 13% and sequential growth of 2%.
During the quarter, we launched eight new brands, including the launch of our first brand, Celevida, in the growing nutraceutical space. As per the secondary sales reported by IQVIA, we registered healthy growth of 10.6%, ahead of total market growth of 9.6%, for the quarter ended December 2019. India is a priority market for us, and we continue to focus and strengthen our presence in this market. Our PSAI business recorded sales of $97 million, with a year-on-year growth of 17% and a slight sequential decline of 3%. While there has been good growth in the API product sales, we witnessed a bit of softness in the services components of the business, which is expected to improve in the future. During this quarter, we filed 20 formulation products across global markets, including three ANDAs in the US market.
As of 31 December 2018-19, we have 101 cumulative filings pending for approval with the U.S. FDA, including 99 ANDAs and two 505(b)(2) NDAs. We also filed 20 drug master files globally, including 3 filings made in the U.S. We continue to strengthen our pipelines of products across the markets. On the quality and compliance front, let me provide you a quick update on some of the key manufacturing sites. Last week, the U.S. FDA has initiated the inspection of our API Srikakulam plant, referred as CTO 6, which has been under Warning Letter since 2015. Since the audit is still ongoing, as we speak, we will not be able to offer any comments on the status until the conclusions of the audit.On the other side, pending compliance closure, post the recent audits in the last few months for FTO7 and CTO 11, we have submitted our response to the US FDA and await to hear back from the agency. On proprietary products business, we have received a go date of May 2020 for NDA filing related to DFD-10
We have created multiple growth drivers by extending and leveraging our pipelines and assets to market across the global markets, with limited incremental investment, which provides us a good visibility for a long-term, sustainable growth for the company. In the meanwhile, we continue to focus on productivity, promote the cost of organization, and committed to make it a way of life. Our healthy balance sheet and sustainable cash flow generation will help us to grow faster through efficient capital deployment for both organic strategic initiatives and for inorganic opportunities. And with this, I would like to open the floor for questions and answers.
Operator (participant)
Sure. Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask questions may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask a question, please press star and one. The first question is from the line of Aditya Khemka, from DSP Mutual Fund. Please go ahead.
Aditya Khemka, (Equity Research Analyst)
Yeah, hi. Thanks for the opportunity. So, firstly, on the cost management, so, you know, for the past 4, 5 years now, we have been seeing low single-digit growth in most of our cost components, which includes R&D expense and SG&A expenses. And I understand this has come from a lot of efficiency and hard work from your end, from DRL's end. Could you sort of give us some flavor on, you know, if there was, let's say, 100 is the scale of which cost optimization could have been done when you joined Dr. Reddy's, where are you in that journey to 100? Are you at 50? Are you at 80? Are you at 99? How close are we to sort of achieving the optimal cost structure that you would have desired?
Erez Israeli (CEO)
I cannot quantify it in numbers, but there is still a lot of room to be better. The goal is to be the most efficient company on earth in our space, and we are very far from there. So we will continue to see these efforts also going forward.
Aditya Khemka, (Equity Research Analyst)
Okay. And, just in terms of your, you know, commentary in some earlier calls, where you said that, you know, the ideal metrics that you want to target is a 25% EBITDA, with a 25% ROCE. You think that's something which is achievable over the next two, three years, or you would target that for the next year itself? How would you think about that goal?
Erez Israeli (CEO)
We achieved already for this quarter, 24.5 on the EBITDA overall, so we are very close. I believe that. Also on the ROCE, we are not that far. So I believe that it's achievable. And I believe that it's achievable, basically, not just as an overall, but it's relevant actually for every activity that we want to do, which means that the other ROCE can be even higher in the future. I don't have timeframe or guidance of that, because we don't give guidance, but this is the indication.
Aditya Khemka, (Equity Research Analyst)
Fair enough. On the revenue side, if you could just guide us on, you know, what the domestic business, you know, we have seen a decent turnaround in terms of the growth that we have been doing now. What has changed in the domestic business? What have we changed to achieve this superior growth versus the broader market, and how do you see, you know, that effort sustaining in the future?
Erez Israeli (CEO)
... We decided that we want to win in this market. I think this is the main change, and and we substantiate it by putting relevant R&D for those products, by opening IBUs, by changing the team leadership, by putting commercial excellence. So it's a multiple effort and multiple activities. But I attribute the main success, if you wish, for what we do, is the fact that we, as a management team, decided that India is a priority for us, and we decided that we want to be in the future top five in India, and we are planning to achieve it.
Aditya Khemka, (Equity Research Analyst)
Sure. Just one last question. So now that your balance sheet is a net cash balance sheet, the outlook on any inorganic opportunities and your priorities on that side?
Erez Israeli (CEO)
We are always looking for opportunities, and we are very active on this front. The priorities are emerging markets, and India in particular, and so because this is where the area of focus. Having said that, we said it in the past, and I want to use the opportunity to say it now, we see it as a complementary move, and we don't want to merge both financial risk and business risk. It means that we will not grow more than 2x EBITDA for acquisitions. And we... The primary growth of Dr. Reddy's will be organic.
Aditya Khemka, (Equity Research Analyst)
Fair enough. Thank you, and all the best.
Operator (participant)
Thank you. The next question is from the line of Vishal Gada from Aviva Insurance. Please go ahead.
Vishal Gada (Analyst)
Could you guide us how the China business has performed in the third quarter?
Erez Israeli (CEO)
China did well, and it is growing, and on top of it, we discussed that we won, I think, the first winner, at least outside of China, in the product of Olanzapine. We are not giving specific number for the market, but overall, I'm very pleased with the performance. China grew this quarter as well.
Vishal Gada (Analyst)
Okay. Could you help us with the kind of launches that you're planning for Europe and EM in the coming few quarters?
Erez Israeli (CEO)
We have, what we do in Europe is primarily taking a leverage in the US portfolio in Europe. So most of the launches in Europe in the future will be, primarily injectables, and, and in the case of Germany, it will be also solid dose. So the overall expectation and, our strategy in Europe is to build a healthy organization with better critical mass based on that leverage. And, and give or take, whatever we are launching or launch in the US, we want also this portion of it to submit and launch in Europe.
Vishal Gada (Analyst)
Okay. And the last question is, could you help us as to understand what helped in containing the SG&A costs?
Erez Israeli (CEO)
It's primarily the commercial excellence. We are selling more, but we were able to do it with the same or even less resources in certain other places. Just pure management of a much more stringent focus on KPIs. Nothing special.
Vishal Gada (Analyst)
Thank you.
Erez Israeli (CEO)
In general, nothing we do is special, just more discipline.
Vishal Gada (Analyst)
I'll come back in the queue for more questions. Thank you.
Operator (participant)
Yes, the next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Prakash Agarwal (senior equity research)
Yeah, thanks for the opportunity, and good evening to the team. Just one question on the, you know, the INR 11 billion write-off that we have taken for the NuvaRing product, and we have kept INR 3 billion pending. So I just wanted to understand, has the value with one or two players come off that significantly, or we are going ultra-conservative? Some thoughts.
Saumen Chakraborty (CFO)
These are all trigger-based impairment testing that we do. Given the dimensions or the nature of this thing, we even take an independent evaluator beyond what in management we consider and our statutory auditor. So, of course, there will be various scenarios, various possible eventuality, so with probabilities attached, one takes a decision in terms of the impairment outcome. So pure accounting treatment, we have taken this.
Prakash Agarwal (senior equity research)
Okay. What is our current understanding of the product in terms of, you know, we got a CRL in the past, so when do we plan to get this resolved and get an approval?
Erez Israeli (CEO)
We are planning to submit it in the next few months.
Prakash Agarwal (senior equity research)
Okay. Any color on the expectation on approval, sir?
Erez Israeli (CEO)
... Then it will go to the review. It's six months before without inspection and 10 months out, so if no additional queries. So from that submission, we need to count that time. But of course, it can go to another cycle. We already had two cycles on this one.
Prakash Agarwal (senior equity research)
Understood, fair enough. And, secondly, on, sir, the cost, I think a couple of guys already asked, but just one thought here that, you know, since we are focusing more on the emerging market, which is India, you know, Russia, CIS, where, you know, the cost, is a push model where you need to use your MRs. And, and we have been rightly growing, you know, mid-teens now. So, so I just wanted to understand, I mean, going forward, high single digit or early teens should be the right matrix in terms of cost, or we can still, maintain our low single digit kind of cost escalations? What are the thoughts?
Erez Israeli (CEO)
First, in the emerging market, part of our model is B2C, that using reps, and part of it is B2B. And overall, going forward, B2B, it means we are selling directly to account management hospitals around the world, of course, will grow. So part of it is a mix of business model that we have to take into account as well. Overall, there is a room to grow efficiency also in what we have now, so we did not finish the efficiency activities. And in general, the way you should look at it is the bottom line will always grow faster than the top line.
Prakash Agarwal (senior equity research)
Bottom line would be always faster than the top line?
Erez Israeli (CEO)
Will grow faster than the bottom than the top line.
Prakash Agarwal (senior equity research)
That is great. Okay, thanks. And secondly, just two more updates, if you could help us with the Copaxone expectation now, as well as Revlimid. Thank you.
Erez Israeli (CEO)
We will submit also in the next few months, the CRA.
Prakash Agarwal (senior equity research)
For Copaxone?
Erez Israeli (CEO)
Yes, for Copaxone.
Prakash Agarwal (senior equity research)
Okay. And, sir, any updates on Revlimid expectations?
Erez Israeli (CEO)
We expect it to be an amazing product.
Prakash Agarwal (senior equity research)
Thank you.
Erez Israeli (CEO)
I cannot say more than that, as you can understand.
Saumen Chakraborty (CFO)
We can move to the next person.
Prakash Agarwal (senior equity research)
Yes, please. Thank you so much.
Operator (participant)
Thank you. The next question is from the line of Anubhav Agarwal from Credit Suisse. Please go ahead.
Anubhav Aggarwal (Research Analyst)
Yeah, good evening. My question is on the Russian market. It was quite a strong quarter in this geography, despite a mild winter. So, and in your release, you mentioned about the volumes and realization, both were better in this quarter. So some more explanation will help, just in a quarter, what led to such a strong result?
Saumen Chakraborty (CFO)
This also has been helped by the tender of Ritux that also we got in this quarter.
Erez Israeli (CEO)
So it's a combination of both. We do better on the retail, and we won the tender together. And I attribute it primarily to the commercial excellence program that we put in place, and we are achieving better results with less people.
Anubhav Aggarwal (Research Analyst)
You comment that the volumes and realization were better, largely, that was for Rituxan, is it?
Erez Israeli (CEO)
It's a combination of both retail and the rituximab that we won in Russia.
Anubhav Aggarwal (Research Analyst)
Just to help us, guys, so that we have a better idea. Retail performance, was that out of line with what we've been doing for last 2, 3 quarters, or was it much stronger this quarter?
Erez Israeli (CEO)
I believe that we just... The team performed better. We did not do anything special, and there was no single act or single activity that led to that, because it was across the board. The only one that was, is, a signal out was rituximab, which we mentioned already.
Anubhav Aggarwal (Research Analyst)
Okay. Second question was on the PSA business. Our top line was largely similar sequentially, September to December quarter, but margins were significantly better. Some color will be helpful. Was it like more API, more custom products, or within API, significantly better mix? What was the reason for that?
Erez Israeli (CEO)
The main reason for that is a combination of product mix, so the mix of the product was more profitable. And second, I think we're doing better on cost first.
Anubhav Aggarwal (Research Analyst)
Sorry, what was the second reason?
Erez Israeli (CEO)
That we are doing better on cost. We are more and more cost conscious, and from quarter to quarter, we see the benefit of that.
Saumen Chakraborty (CFO)
Manufacturing overhead is in play.
Anubhav Aggarwal (Research Analyst)
Okay. And just one clarity on the earlier question on NuvaRing, when you responded, that you made several cases and took probability adjusted. So when you do this kind of accounting, do you typically do all probability adjusted scenarios, or is it just you tend to be more conservative and select the most conservative one?
Saumen Chakraborty (CFO)
The accounting standard doesn't allow you to be extra conservative, and it doesn't allow you to be aggressive. So we have to have a very nice balance, and that's why, you know, you, when it is very significant, you actually go out and get a third party also to do the same thing.
Anubhav Aggarwal (Research Analyst)
Okay, sure. Thank you.
Saumen Chakraborty (CFO)
Very good. Good afternoon.
Operator (participant)
... Thank you. The next question is from the line of Neha Manpuria from JP Morgan. Please go ahead.
Neha Manpuria (Senior Equity Research Analyst)
Thank you for taking my question. On the U.S. business, if I remember correctly, there was, other than ranitidine, there was some logistical issues which impacted our revenue, which should have been resolved in this quarter. Given we've had 20-plus launches, you know, in the last 9 months, our revenue does not seem to be, you know, reflecting both resolution of logistical issue or the launches. Am I missing something in the U.S. performance for the quarter?
Erez Israeli (CEO)
I don't know if you are missing. You normally don't miss, Neha, so it's, I'll do my best to explain. Firstly, logistics, this is what was behind us. The ranitidine event was only last quarter. This quarter we did not sell ranitidine. We are still out of the market. And then it's a combination of new product and price erosion, so it's just a mix between the two of them.
Neha Manpuria (Senior Equity Research Analyst)
So is it fair to assume that we are still seeing probably, you know, high single-digit price erosion in our portfolio, despite our concentration being much lower? Because, you know, with the work on market share increase and launches, should there not have been an improvement in the US business versus, let's say, the first quarter you know, in FY 2020?
Erez Israeli (CEO)
Our portfolio is indeed in the price erosion. If you do a year-over-year, it's still nice price erosion. Yes, absolutely we have it. I do agree with you also that the product mix is much more healthy than it used to be.
Neha Manpuria (Senior Equity Research Analyst)
Mm-hmm.
Erez Israeli (CEO)
Naturally, when you launch new product, those products that we launched in the earlier part of the year has also, you know, higher price erosion because it's still within the first year. So that, that's always the case. So for new products, the percentage of price erosion is normally higher than mature products.
Neha Manpuria (Senior Equity Research Analyst)
Understood. And, my second question on the India business, so if you would give us some color on, you know, what is the, you know, MR that we have on ground and, you know, are we seeing an improvement in productivity? Because as per the last reported number of March 2019, there'd been a reduction in the number of MRs that we had in India. So, you know, have we added, you know, deducted how the productivity is improved? Just trying to understand the profitability of the India business.
Saumen Chakraborty (CFO)
Primarily, the sales force productivity has improved considerably. What you see, what we report is the top line growth. Our profitability in India has grown much better than the top line.
Neha Manpuria (Senior Equity Research Analyst)
Do you see more scope for improvements there?
Erez Israeli (CEO)
Yes. Yes, there is, there is scope for more improvement, even in the future. We just started to have fun in India.
Neha Manpuria (Senior Equity Research Analyst)
Okay, understood. Thank you so much.
Operator (participant)
Thank you. The next question is from the line of Kunal Mehta from Vallum Capital. Please go ahead.
Kunal Mehta (Senior Equity Research Analyst)
So thank you for the opportunity. So when you look at your present manufacturing infrastructure, are there any sites where the utilization is below what we would require - what we would like to have, I mean, below 50% or so?
Saumen Chakraborty (CFO)
Yeah, there are, there are sites where utilization is still low, multiple reasons. So there is, again, a scope to improve our, you know, asset capital turnover.
Kunal Mehta (Senior Equity Research Analyst)
Sure. And just, second question, is so over the set of actions which you have taken to improve the turnaround business has been very commendable. But so I would just wanted to understand your view on what sort of precautions are we taking to make sure that the inspections we go through in the next in the future would give us satisfactory outcomes, because any company we see is just probably one bad inspection away from you know affecting their product mix and their growth trajectory. So how would we be dealing with that?
Erez Israeli (CEO)
Since 2015 until today, and increasing every year, we took measurements to be compliant, not just with the United States, all over the world. And it's in the forms of a very, very different quality organization than we used to have five years ago. A very different digital level, most activities are digitized. All the activities that are related to Part 11 are in very, very different level, and so is the resources and the awareness of compliance. I personally believe and so far, the track record for the last few shows that it is working, and one should never be too sure of himself. It's something that we always need to insist on, and we are planning to do so.
So far, so good. Luckily for us, until now, knock on wood, we're not out of that compliance wave, and hopefully, it will continue in the future.
Kunal Mehta (Senior Equity Research Analyst)
Sure. Thank you. Thank you very much for the answer. Thank you, sir.
Operator (participant)
Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.
Sameer Baisiwala (Senior Equity Research Analyst)
Hi, thanks. Good evening, everyone, and congrats on a very good set of numbers. So just on the U.S. market, you had mentioned in your commentary that you saw price erosion in some of your key molecules. Can you just, you know, let us know what is driving this price erosion? I mean, were there new entrants, or was there some other reason?
Erez Israeli (CEO)
It's primarily new entrants, and that launched after us, and some really know well this market. So when there is a new entrant come, especially to one of the key customers, then you either defend your share or lose your share, and that's the mechanism, and that's what happened to us.
Sameer Baisiwala (Senior Equity Research Analyst)
Okay. And I'm sure what you're saying is these are mostly new products. They were not the mature products.
Erez Israeli (CEO)
Also, mature products, but let's say, as we started to launch new products after the growth that we had since October last year, those products that we launched in the late last year and the beginning of this year naturally got higher erosion percentage than the mature products.
Sameer Baisiwala (Senior Equity Research Analyst)
Okay, got it. So just delivering a bit more on this point, not you know going forward, our understanding is that the North American market pricing environment has got a lot better, from mid-teens to high teens, it's gotten down to single-digit price erosion. Is this something that you would also confirm, and how do you see as you roll forward to fiscal 2021 on price erosion?
Erez Israeli (CEO)
So I'm not giving specific numbers. So as there is no overall trend, it's more of what portion of our portfolio is, is seeing this competition, because per product, per customer, it's always double digits. So it now depends on how many of your products are under that kind of regime. Now, in our case, we do see a price erosion also this year, but we are not giving specific numbers.
Sameer Baisiwala (Senior Equity Research Analyst)
Okay, great. Thank you. Just one more from my side. So most companies in Indian generic space have margins mid-20s, and, you know, that's sort of topping it out at EBITDA level. You're already there, and your commentary suggests that you have just started, you know, you've a long way to go. So quite naturally, you expect this EBITDA margin to expand substantially over the next two-year period?
Erez Israeli (CEO)
I believe that we can do much better on the EBITDA. Yes, absolutely.
Sameer Baisiwala (Senior Equity Research Analyst)
Okay, great. I have a few more and get back in the queue. Thank you.
Operator (participant)
Thank you. The next question is from the line of Nitin Agarwal from IDFC Securities. Please go ahead.
Nitin Agarwal (Equity Research Analyst)
Hi, thanks for taking my question. So on this, you know, rituximab launch in in Russia, is it? I mean, this is a one quarter number, or it's gonna be sporadic, or is this something that's gonna continue through the quarters?
Saumen Chakraborty (CFO)
No, Rituxan, we have launched long back in Russia. The way it is get sold is through tendering, and the tender happens in a particular frequency. So this quarter, there was, you know, tender awarded, consequently sales on Rituxan is high. But it is not a new one, but it doesn't happen consistently every quarter.
Nitin Agarwal (Equity Research Analyst)
Okay. There's gonna be a element of lumpiness to these earnings, depending on the tenders there.
Saumen Chakraborty (CFO)
The lumpiness is always there on account of this particular molecule.
Nitin Agarwal (Equity Research Analyst)
Okay, thanks. And, on, you know, just on Rituxan per se, you know, how are we, this whole biosimilar in emerging markets? Beyond Russia, how should we look at this portfolio now?
Erez Israeli (CEO)
We have, Rituximab in the many markets. I don't recall exactly how many.
Saumen Chakraborty (CFO)
14, 15 markets.
Erez Israeli (CEO)
14, 15 markets. And normally, it's like Russia, there is a tender, a tendering or either by hospital per se or by some government bodies advised for the rest of the country. We are now in the middle of a trial for the US market. And the way we look at it, those markets that we like to get the data of the US FDA approval, once approved, will open a new opportunity for us. In a place that will have a good go-to market, we will do it ourselves, and in the place that we don't, we will license it to others.
Nitin Agarwal (Equity Research Analyst)
Thanks. Sir, are there any other products in the biosimilar pipeline beyond rituximab?
Erez Israeli (CEO)
We have 11 more in the pipeline.
Nitin Agarwal (Equity Research Analyst)
Okay, thank you.
Operator (participant)
Thank you. The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Surya Patra (Senior Equity Research Analyst)
Yeah. Congratulations for the great set of numbers. So just, a simple clarification on the gross margin front. Is it fair to believe that there was an element of currency that also played meaningfully for the expansion of the gross margin sequentially this quarter?
Saumen Chakraborty (CFO)
Constant currency, there has been no impact either on sales or profit year-on-year basis.
Surya Patra (Senior Equity Research Analyst)
Okay.
Saumen Chakraborty (CFO)
Specific currency, it could have happened, but it has neutralized. Overall, for the company on a constant currency, it would have been very, very similar to what is reported in growth.
Surya Patra (Senior Equity Research Analyst)
... On the kind of a CapEx trend and the R&D expenses trend, along with the kind of a cost containment pieces that we are seeing, a kind of a flattish R&D spend, and alongside the CapEx also meaningfully has corrected from the last couple of years. So any thought process on the kind of a money free cash flow that we are generating, about the uses of those?
Saumen Chakraborty (CFO)
First, on CapEx, we have spent considerable amount of CapEx over FY, you know, 13, 14, 15, 16. All these years, we have spent considerable amount. Today, as we told that there are some assets in our network, which is quite underutilized. But overall utilization level is also something that we can do much more with the current level of, you know, investment in the network that we have created. Having said that, maybe some specific business, for example, you know, service business, if you have to scale up, then we need to make accordingly investment there to scale up. And also for biologics, you know, if we sell more in different markets, you know, then we need to increase the capacity.
But the level of CapEx that we need to do, we actually alluded, right at the beginning of the year, that, we will not be spending as much as we would have been spending in the past. R&D, on an absolute amount, again, you know, something which will be closer, slightly less than maybe than what we have spent last year. But of course, as a percentage of sales, as our sales goes up, then R&D as a percentage of sales has come down to single digits. Right now, it is around 9%. And, if we can contain on an absolute level, we can improve the R&D productivity, because I always want to emphasize that our focus on R&D is always very high.
You know, we have been focusing on developing our pipeline, expanding our pipeline, and we want to continue to focus on that, but just want to improve the productivity so that we, you know, same level of resource, we can deliver more. In terms of, you know, the cash flow, obviously, if our, you know, margin is better, and if we can improve on a retail level, then consequently, you know, the generation, cash generation can improve. All said and done, working capital, again, in this quarter, we said that our working capital, net working capital, has increased by three days. Suppose, instead of increasing by three days, it would have improved by three days, reduced, then we would have generated more cash flow. So there are always opportunities.
To what extent we do based on, you know, how do we, you know, execute on multiple fronts. The good thing I find with this quarter, in all the businesses we have grown, sometimes we have different... You know, we don't- we haven't put all eggs in one basket, there are multiple baskets. In this quarter, all businesses have grown. So that way it is good, but then working capital front, this quarter was not that great.
Surya Patra (Senior Equity Research Analyst)
Okay. Just on the US business front, in the opening remark, you have mentioned that we have relaunched couple of the discontinued or few discontinued product, and also the kind of filing effort that is also picking up, that is what you were mentioning. And simultaneously, there is a pricing pressure also that you are witnessing, and also you're saying that the focus on the anchor product for the dependency, that is also to some extent, is going away. So that way, what would be the ultimate strategy that you are thinking about US? Well, are you thinking that, okay, whether it is the anchor product or it is a common product, everything that you should be launching, and hence, the quality of earnings in US, that is going to deteriorate? If the...
mean, you're trying to chase growth at the cost of quality, is that the meaning that you are trying to convey?
Saumen Chakraborty (CFO)
First of all, to the last comment, absolutely, we would not grow costs at the expense of quality. Quality is not in the equation of... We will meet the quality standards, for sure, for the U.S. market, and absolutely will not compromise the quality. Okay, so this is one; it's unrelated to policies. So this is a license to be in the business, quality. In the case of the products, no, we will not be dependent on any single products to grow, including United States. The notion of the past, that the company focused on relatively small numbers of assets, either complex generics or biologics or proprietary products for the growth of the company-
Surya Patra (Senior Equity Research Analyst)
Yeah.
Saumen Chakraborty (CFO)
This is a strategy that was indeed in the company until two years ago. Since then, we announced a new strategy in which we have multiple spaces that have synergy among them, much more opportunities, less risk. So we moved from high risk, high reward, to a low risk, very high reward. That's what we moved, and we are not dependent, not on Su- and not on NuvaRing, and not on Nexium, and not on any other big names to grow. In the United States, we will grow because we want to have 350 products. Now we have commercially 120. And this is including the products that we have in the pipeline, plus the products that are in the pipeline of the R&D, plus additional efforts that we have to number of products.
What we want is to give the customer in United States the products that they need, not necessarily focus on specific assets. Naturally, when you, you'll have a broad portfolio, some of your products will give you upside.... What is important to us is that the products will have a low cost in order to allow the right EBITDA and the right ROC.
Surya Patra (Senior Equity Research Analyst)
Okay. But is it fair to, or when any timeline that you are targeting to achieve double-digit kind of a growth again in the US?
Saumen Chakraborty (CFO)
I'm not targeting a double-digit growth. I'm targeting EBITDA and ROC.
Surya Patra (Senior Equity Research Analyst)
Okay. Great, sir. Thank you. Wish you all the best.
Saumen Chakraborty (CFO)
Thank you.
Operator (participant)
Thank you. The next question is from the line of Nikhil Mathur from Ambit Capital. Please go ahead.
Nikhil Mathur (Equity Research Analyst)
Yeah, hi, good evening, everyone. My first question is on SG&A expense. So in fourth quarter FY 2019 and first quarter FY 2020, the proprietary products were out licensed. So my understanding is that there would have been some cost savings in SG&A from that out licensing. So has that has it materialized in third quarter, or for that matter, even in second quarter as well?
Operator (participant)
Participant, please stay connected while we reconnect the management. Participant, please stay connected. We seem to have lost the line for the management. Please stay connected while we reconnect them. Thank you. Ladies and gentlemen-
Nikhil Mathur (Equity Research Analyst)
Hello.
Operator (participant)
Thank you for patiently holding. We have the line for the management reconnected. Over to you.
Nikhil Mathur (Equity Research Analyst)
Yeah, hi. Should I repeat my question? Nikhil from Ambit.
Saumen Chakraborty (CFO)
Yeah, please repeat.
Nikhil Mathur (Equity Research Analyst)
Okay. So, in fourth quarter and first quarter, you would have out licensed your proprietary products. Now, my understanding is that there would have been some cost savings arising from that out licensing. Has those costs come off in third quarter this year, or for that matter, in second quarter as well?
Saumen Chakraborty (CFO)
There will be, if suppose you divert a commercial wing, there are also costs associated in terms of, you know, separating people, so that takes, you know, some time to really get the complete benefit out of that. So maybe, you know, next financial year onwards, we can see a full benefit of that kind of a cost saving. But yes, it has contributed to the overall cost saving to some extent, that I can clarify.
Nikhil Mathur (Equity Research Analyst)
Okay, sir, FY 2021, even if a bit of expense increases because of growth in India and Russian markets, you still do have a lever of this proprietary product cost that can kind of benefit you.
Saumen Chakraborty (CFO)
On proprietary products, earlier what used to have the commercial cost, that is going to be beneficial.
Nikhil Mathur (Equity Research Analyst)
Okay.
Saumen Chakraborty (CFO)
Because we are going to continue to focus on the proprietary products, R&D.
Nikhil Mathur (Equity Research Analyst)
Okay. And second question is on your product launches in FY 21. Can you give some kind of an indication as to what kind of proportion would those be injectables or some kind of complex launches in FY 21? And a question associated to that would be, I believe that there will be a fair share of launches from your partner side. So are most of your partner sides complex sides compliant with U.S. FDA currently?
Saumen Chakraborty (CFO)
Yeah, I don't have the in front of us. Sorry, the segmentation of the product launches, so sorry about that, I don't know. In general, we are not dependent on a specific supplier or a specific vendor or third party to launch a product. Most of the products will be launched out of Dr. Reddy's facility.
Nikhil Mathur (Equity Research Analyst)
Okay, thanks a lot.
Operator (participant)
Thank you. The next question is from the line of Surjit Pal from Prabhudas Lilladher. Please go ahead.
Surjit Pal (equity research analyst)
Hi. Just, 2 to 3 questions. One thing is that, you know, is there any update on Suboxone loss of sales, which you were supposed to receive it from the originator for blocking your launch? That is one. Second thing is that, is there any update on the Duvvada observations? Had it crossed 90 days, and what is the status of the plan currently? And third is that the 30 products which you have guided out of, which 22 already you have launched, any key products, can we expect?
Saumen Chakraborty (CFO)
So on the first question, Suboxone and the bonds that we have, we are still in the legal process, and it will be resolved when the legal process will take its place. So far, we won all the relevant related litigations that were on that. And so it's still a work in progress in that respect. I do not expect that the legal process will end in the next few months. It will probably take more than that.
... But I don't have exactly the indication of how long it will take. As for Duvvada, it was a PAI inspection that was in August. We did not receive yet the EIR, and we are waiting for the EIR. We don't have any additional information on that. We're just awaiting the EIR. And as for specific big products in the rest of the year, again, I'm repeating, none of the products per se will be that important. Some of them can bring nice money, some of them not, but nothing special that we can share.
Surjit Pal (equity research analyst)
Thank you, and all the best.
Operator (participant)
Thank you. We'll be able to take one last question. The last question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.
Shyam Srinivasan (Equity Research Analyst)
Thank you for taking my question, and good evening. Just first one on China and the second GPO for 32 drugs. I know we didn't win anything here, but just wanted to understand, you know, any of the learnings of that you got from Olanzapine in the round one, how did they play out this time? You know, we see the price cuts are very high, 60%-70%, again, in GPO two. So how does this kind of shape your China strategy? So that's my first question.
Erez Israeli (CEO)
It's part of the strategy. Just to remind us all, we have four different spaces in China. One is branded generic, one is selling generics directly to the hospital, one is this tender, if you wish, and one that we are selling services, like API and other activities to Chinese partners. On this front of this GPO model still working all this also for the Chinese authorities, so the next tenders have already different rules. For example, there will be N minus one winners for the next tender, so there is a high, high likelihood or higher likelihood it will be a player in that. But of course, there will be also more winners, and this is the main, the main learning that I can share.
What we will do in China is a clear leverage strategy. We are taking U.S. products or products that we submitted for the U.S. that can meet the Chinese criteria. We are submitting them, we are obtaining approval, and then participating, and do our best to win as much as we can. Even in the cases we will not win, it's a leverage product, so, it's not, it's not a risky move in our case. That's how we plan to do it, but, it's very hard to tell which product will win and which product will not, and what will be the price. Naturally, on this product, on one hand, there is a relatively high price reduction, but on the other hand, you don't need to pay as much because you are not promoting those products, it goes to this tender.
Shyam Srinivasan (Equity Research Analyst)
Yeah. Just, just following up on this, Erez. If... So are you saying, you know, even after these price cuts, this is reasonable money to be made, or you think there is a period of 2-3 years where we have to invest before we start seeing profits come through in China?
Erez Israeli (CEO)
No, every product that we are launching making money, so it's not a period of investment, a period of profit. We are making profit as we speak.
Shyam Srinivasan (Equity Research Analyst)
Got it. Just to follow up again on China, any, you know, the coronavirus is, you know, is making the news. Does it impact our Chinese operations? Or, you know, on the contrary, does it also benefit us in some form of way? Is there any, impact of the virus?
Erez Israeli (CEO)
Naturally, it did not impact the quarter, because it's recent. No, I don't have anything that happens to us in the last few days as of the corona issue, and I hope and wish for everybody that nothing will happen.
Shyam Srinivasan (Equity Research Analyst)
Got it. Thank you. And my last question is on Revlimid. You know, I know you said it's a great product, we get that, but the point is on trial dates. You know, is there you know, our understanding was that the trial has been pushed to second half of calendar year 2020. Could you confirm or just give us details on when are the upcoming dates so that we can look out for this product?
Erez Israeli (CEO)
I'm not aware of a specific date that was scheduled, that's what I know. But from my point of view, versus what we want, the product and the legal process is continuing in accordance to our plans.
Shyam Srinivasan (Equity Research Analyst)
Got it. So it's pretty, Erez, just labeling it. So is it still is not a near-term opportunity? We still think it's probably some time out.
Erez Israeli (CEO)
Yeah, I don't see it in the next few months. It's probably will be after that.
Shyam Srinivasan (Equity Research Analyst)
Got it. Thank you, and all the best.
Operator (participant)
Thank you very much. We'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.
Amit Agarwal (Head of Investor Relations)
Thank you, everyone, for joining us today for the earnings call. In case of any further queries, please reach out to the investor relations team. Thank you.
Operator (participant)
Thank you very much. On behalf of Dr. Reddy's Laboratories Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.