Dr. Reddy’s Laboratories - Q4 23/24

Transcript

Operator (participant)

Ladies and gentlemen, good day, and welcome to the Q4 and full year FY 2024 earnings conference call of Dr. Reddy's Laboratories Limited. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference, please signal an operator by pressing star and then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Richa Periwal. Thank you, and over to you, ma'am.

Richa Periwal (Head of Investor Relations)

Thank you. A very good morning and good evening to all of you, and thank you for joining us today for the Dr. Reddy's earnings conference call for the quarter and full year ended March 31, 2024. Earlier during the day, we have released our results, and the same is 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 statements. The discussion today contains certain non-GAAP financial measures. For the reconciliation of GAAP to non-GAAP measures, please refer to our press release.

To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's, comprising Mr. G.V. Prasad, our Co-Chairman and Managing Director, Mr. Erez Israeli, our CEO, Mr. Parag Agarwal, our CFO; and the entire 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 outlet without the company's express written consent. Before I proceed with the call, I'd like to remind everyone that the safe harbors contained in today's press release also pertain to this conference call. Now, I hand over the call to Mr. G.V. Prasad. Over to you, sir.

G.V. Prasad (Co-Chairman and Managing Director)

Thank you, Richa. Good morning and good evening to all the participants here. Welcome to the annual earnings call of Dr. Reddy's. I am delighted to be here today, along with the members of the management team and the IR team. As many of you know, I joined the earnings call each year, at the end of the financial year. The FY 2024 marks our fortieth year of serving patients with a legacy of innovation, affordability, and sustainability. Guided by our purpose of accelerating access to affordable and innovative medicines for our patients, in the last four decades, we have moved from our beginnings as an API business to generic and OTC medicines, biosimilars, drug discovery, and services. As we bring to life our credo of good health can't wait, we have accelerated our journey through licensing and collaboration in the areas of novel medicines and consumer health.

We delivered strong financial results in FY 2024. Our growth and profitability in this year have been driven by our performance in the U.S. We have also made significant progress on future growth drivers through licensing, collaboration, and pipeline building. Our focus in 2025 will be to further strengthen our core businesses through superior execution as we invest in to build the future growth drivers. I am grateful to our people, the healthcare community, partners, and stakeholders for the trust they've placed in us. We are committed to increasing the number of patients we serve around the world through our exciting pipeline of products and services. As we do this, we remain committed to the elements of sustainability, preserving the environment, positive social impact, and good governance. With this, I'd like to hand over the call to Parag for taking you through the financial performance of the company.

Parag Agarwal (CFO)

Thank you, Prasad. Greetings to everyone, and I hope you are doing well. I'm pleased to take you through our financial performance for quarter four, as well as for the full year of fiscal 2024. As indicated earlier by Prasad, FY 2024 has been yet another year of outstanding financial performance, with all-time high revenues of over $3.3 billion and highest ever profit. This fiscal, we recorded a double-digit growth in revenue, EBITDA, as well as PAT. For this section, all amounts have been translated into US dollars at a convenient translation rate of INR 83.34, which is the rate as of March 31, 2024. Consolidated revenue for the fourth quarter stood at INR 7,083 crore, which is $850 million, and grew by 12% on year-on-year basis, with a sequential decline of 2%.

Adjusted for brand divestment income in India on a rebased comparator, the underlying overall growth was higher at 17% on year-on-year basis. The underlying year-on-year growth is largely driven by the generic business in U.S. and emerging markets. The QOQ decline is mostly on account of declining revenues from Russia, the U.S., and India. The revenue for the financial year 2024 stood at INR 27,916 crores, that is $3.35 billion, and grew by 14%. The growth was primarily driven by improvement in the base business volumes across several geographies. Consolidated gross profit margin stood at 58.6% for the quarter, an increase of 140 basis points over previous year and 7 basis points sequentially.

The year-on-year increase was on account of improvement in product mix and productivity-linked cost savings, partially offset by brand divestment income during the previous period. Gross margin for Global Generics and PSAI were at 62% and 28.6% respectively. Consolidated gross margin for FY 2024 stood at 58.6% and an increase of 193 basis points over FY 2023. Gross margin for the Global Generics and PSAI business was 62.9% and 22.2% respectively for full fiscal FY 2024. The SG&A spend for the quarter is INR 2,048 crore, which is $346 million, an increase of 13% year-on-year and 1% quarter-on-quarter. The year-on-year increase is primarily on account of investment in sales and marketing activities and new business initiatives.

The SG&A cost as percentage to sales was 28.9%, and is higher by 34 basis points year-on-year and 87 basis points quarter-on-quarter. The SG&A spend for the year is INR 7,770 crores, that is $976 million, and has grown by 13%, largely in line with the business growth. The SG&A percent cost as a percentage to sales was 27.7%, which is in line with the previous year. While we continue to invest in strengthening our existing brands in digitalization initiatives, expanding new businesses to create future growth platforms and developing our talents, we are focused on operational excellence and productivity improvement across all aspects of our operations. We continue to invest in R&D to support future business growth.

The R&D spend for the quarter is INR 688 crore, which is $82 million, an increase of 28% year-on-year and 24% quarter-on-quarter. The R&D spend is at 9.7% of sales and is higher by 119 basis points year-on-year and 200 basis points quarter-on-quarter. The R&D spend for FY 2024 is INR 2,287 crore, that is $374 million, and has grown by 18%. R&D percentage to sales for the year stood at 8.2%, as it is 7.9% during the last fiscal. The increase is primarily on account of higher number of filings and our developmental efforts in building a healthy pipeline of complex products across our markets for both small molecules and biosimilars.

The other operating income for the quarter is INR 666 crore as compared to INR 28 crore for the same quarter last year. The other operating income for the fiscal is INR 420 crore as compared to INR 591 crore last year. The other operating income was lower on account of one-time settlement income reported in the previous year. The EBITDA for the quarter is INR 1,872 crore, that is $225 million, a growth of 15% year-on-year and a decline of 11% quarter-on-quarter. The EBITDA margin stood at 26.4% and is higher by 53 basis points year-on-year and lower by 283 basis points quarter-on-quarter. The EBITDA for the year is INR 8,301 crore, that is $996 million, recording a growth of 13%.

EBITDA margin for the year is at 29.7%, which is largely in line with the previous year. The net finance income for the quarter is INR 102 crores as compared to INR 80 crores for the same quarter last year. The net finance income for FY 2024 stood at INR 399 crores as compared to INR 285 crores last year. Profit before tax for the quarter stood at INR 1,602 crores, that is $192 million, a growth of 21% year-on-year and a decline of 12% over previous quarter. Profit before tax for the year stood at INR 7,187 crores, that is $862 million, recording a year-on-year growth of 19%.

Effective tax rate for the quarter has been lower at 18.4%, and that for the year has been at 22.5%. The ETR during the quarter is lower due to a one-time benefit accruing on account of reversal of a tax provision, remeasurement of deferred tax assets owing to an increase in U.S. state tax liability and adoption of corporate tax rate under Section 115BAA of the Income Tax Act. The ETR was lower for full fiscal FY 2024, mainly due to adoption of corporate tax rate under Section 115BAA of the Income Tax Act of India. We expect our normal ETR to be in the range of 24%-25%.

Profit after tax for the quarter stood at INR 1,307 crores, which is $157 million, posting a growth of 36% year-on-year and a decline of 5% over previous quarter. Profit after tax for the year stood at INR 5,569 crores, that is $668 million, a year-on-year growth of 24%. Reported EPS for the quarter is INR 78.4, and that for the year is INR 334. Operating working capital as of March 31, 2024 was INR 11,293 crores, which is $1,355 million, an increase of INR 462 crores, which is $58 million over December 31, 2023. The increase is mainly driven by higher inventory and receivables.

Our capital investment in this quarter stood at INR 503 crore, which is $60 million, and INR 1,518 crore, which is $180 million during the year. The free cash flow generated during this quarter was INR 529 crore, which is $63 million. The free cash flow generated during this year before acquisition-related payout was at INR 2,672 crore, which is $321 million. Consequently, we now have a net surplus cash of INR 6,459 crore, that is $775 million, as on March 31st, 2024.

Foreign currency cash flow hedges in the form of derivatives for the US dollar are $903 million, hedged around a rate of INR 83.6-84.20 to the dollar, maturing over the next 12 months, with nothing available, which allows participation when USD strengthens. And for the ruble, our RUB 2,550 million at the rate of INR 0.882 to the ruble, maturing in the next three months. With this, I now request Erez to take us through the key business highlights.

Erez Israeli (CEO)

Thank you, Parag, and very good morning or good evening to everyone on the line. FY 2024 has been a year of progress across our businesses. We focused on our strengths while also identifying and maximizing opportunities to diversify and differentiate our business, leveraging new technologies and driving efficiencies. Dr. Reddy's delivered a strong full year performance with the highest ever revenue and EBITDA. Let me take you through some of the key highlights of the year, as well as the most recent quarter. One, we had double-digit revenue growth in Q4 at 12%, and for the full year at 14%. Our reported EBITDA margin stood at 26%+ for the quarter, whereas we ended the full year at a robust 30%+. We delivered higher returns with our annualizing ROC at 35.5%.

Net cash surplus was $775 million as we exited the year. We have consistently maintained the strategic collaboration will play an important role in our growth story. Apart from growing our core business of generics, we invested in businesses of the future under the three spaces of consumer health, digital therapeutics, and access to novel molecules. Recently, we have joined hands with the global FMCG giant, Nestlé, to form a joint venture company to bring pharmaceuticals to consumers in India. The JV will leverage the trusted global brands of Nestlé Health Science and the well-established commercial capabilities of Dr. Reddy's in India. In Q4, we entered into an exclusive partnership with Sanofi to market and distribute its vaccine brand in India. This has taken us to the second position among vaccine players.

Our partnership with Bayer in India for the second brand of the molecules, for the Vericiguat, to bring this new class of drugs in heart failure management to patients in India, in and beyond, and metros in Tier one and Tier two towns, and threatens our play in the chronic segment. Our partnership with PharmEasy enabled us to market Centhaquine in India, which has demonstrated significantly better and promising outcomes in the management of hypovolemic shock. Our long-running strategic collaboration with Amgen was recently strengthened with an agreement to bring to India romosozumab injection under the brand Evenity, which is used to treat osteoporosis in women after menopause who are at high risk of fracture. As part of our self-care and wellness business in the United States, we acquired MenoLabs, a portfolio of women dietary supplement brands from Amyris, Inc.

We entered the U.K. consumer health market with the launch of allergen medication, Histallay. We launched Bevacizumab, our first biosimilar in the U.K. In the digital therapeutics space, after a successful launch in India, the drug-free migraine management device, Nerivio, has now been extended to Europe, starting with Germany and also to South Africa. Further, we have launched condition management program in India called Daily Bloom IBS, India's first ever digital integrated care plan to manage irritable bowel syndrome. In 2023, we had undertaken a pilot launch of direct-to-consumer e-commerce website, Celevida Wellness, for diabetes nutrition. We have decided to wind down the pilot to repurpose our resources to other initiatives. On a regulatory front, the U.S. FDA has provided a VAI status of two of our facilities in Bachupally, Hyderabad.

Our formulation manufacturing facility, FTO 3, following the routine CGMP inspection in October 2023, as well as our R&D facility, following the GMP and pre-approval inspection in December 2023. The U.S. FDA has issued a complete response letter to our biologics license application. This has no impact on the development or manufacturing of any current product pipeline. We will continue to work closely with the U.S. FDA to address and resolve all concerns within the stipulated timelines. We have delivered consistent industry-leading performance across ESG ratings. We have been included in the S&P Global Sustainability Yearbook 2024 for the fourth consecutive year, making it to the top 10% score category for the first time. We received an A rating in CDP Supply Engagement, which is in the leadership range.

Also, we are the only Indian pharma company to get an NA minus rating in climate change and water security for our 2023 CDP disclosures. Through all these efforts, including the learnings from the challenges, we remain committed to meet the unmet needs of patients and to enhance the standards of care. We continue to be a partner of choice, given our commercial strengths and footprint, our stronger governance, ESG, and progressive people practices, and of course, our financial discipline. Now, let me take you through the key business highlights for the quarter and the full year. Please note that all references to the numbers in these sections are in respective local currencies.

Our North America generic business recorded revenue of $392 million for the quarter, with a growth of 26% year-over-year and a sequential decrease of 3%. On a full year basis, we recorded revenues of $1,566.8 million, with a growth of 24% over the previous year. The increase was largely on account of market share expansion in certain key products, integration of the acquired brand portfolio, and product gains. This partially offset by price erosion. We launched five new products during the quarter and a total of 21 products this fiscal. We expect the launch momentum to continue in FY 2025.

Our European generic business recorded revenues of EUR 58 million this quarter, with year-on-year growth of 3% and a sequential growth of 4%. On a full-year basis, the revenues were EUR 228 million, recording growth of 9%. The improvement in the business volume and contribution from new product launch during the year helped offset price erosion. During the quarter, we launched a total of six products across markets, taking the aggregate launch in Europe for the fiscal to 42. Our emerging market generic business recorded revenues of INR 1,209 crore in Q4, a year-over-year growth of 9% and a sequential decline of 6%.

On a full year basis, emerging market revenue was INR 4,864 crore, a growth of 7% on a year-over-year basis; market share expansion and revenue from new products more than offset the unfavorable forex. We launched 17 new products during the quarter across various countries of the emerging markets, a total of 106 products in FY 2024. Within the segment, the Russia business grew by 9% on year-over-year basis, but declined 13% sequentially in constant currency. Similarly, on a full year basis, Russia grew 16%. Excluding the income from brands divested last year, India business recorded a double-digit year-on-year growth of 11% in Q4, a sequential decline of 5% and 5.5% growth for the fiscal. After Curatio, our IPM rank was 10 for the quarters and 11 for FY 2024.

Including the divestment income, our India business recorded revenue of INR 1,127 crore rupees in Q4, with a year-to-year decline of 12%. On a full year basis, revenue were INR 4,641 crore rupees, a decline of 5% over the previous year. Our focused brand approach, Capeloff, sales rep productivity improvement, as they saw steady improvement in our performance during the quarter. Three new brands were launched in this quarter, taking the total number of brands launched to 13 this year. Our PCI business recorded revenues of $99 million in Q4 of FY 2024, with a year-over-year growth of 4% and sequential growth of 5%. On a full year basis, the revenues were $359 million, with a marginal decline of 1% over the previous year.

We filed 48 drug master files this quarter, taking the annual total to 133. We continue to focus on research and development to create robust portfolio product pipeline that will drive future growth. Our R&D investment this quarter stood at INR 688 crores, up 20% year-over-year, driven by our biosimilar product pipeline, as well as the development efforts across generics and our novel oncology asset in Aurigene. Further, we will complement our in-house efforts with partnerships and collaborations to develop innovative solutions. We have done 21 global generic filings, including 9 ANDAs, 1 NDA in the U.S., during Q4 FY 2024. Total number of global filings stands at 43, with 7 ANDAs and 2 NDAs in the U.S.

Our capital allocation priorities remain unchanged, with our number one priority being to reinvest in our business, both in the pipeline as well as building businesses of the future. Our strong balance sheet provides financial flexibility, and we remain committed to pursuing value-enhancing business development transactions to augment our organic growth efforts. As we exit the fiscal year on a positive note, with a robust financial performance and strategic move that took us a step closer toward our medium to long-term goals. I look forward to sustained growth momentum in the base business and a seamless integration of acquired assets in the next fiscal. With this, I would like to open the floor to questions and answers.

Operator (participant)

Thank you very much.

Erez Israeli (CEO)

Thank you.

Operator (participant)

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to please use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Neha Manpuria from Bank of America. Please go ahead.

Neha Manpuria (Senior Analyst)

Yeah, thanks for taking my question. My first question is on the Nestlé JV that we announced last month. If you could give us some color on, you know, when we should start, you know, looking at probably rollout of these brands and, you know, how should we think about ramp up of the entire JV revenue flowing through? You know, will it take a couple of years before it starts, you know, contributing to margins, or would there be some incremental investment required? And just to follow on on that, will this be, you know, will the JV contribution be over and above the double-digit growth in India that we have talked about in the past? Is, is that the way we should think about it?

Erez Israeli (CEO)

So yes, it's going to be above that, and at the same time, it will take time to bring the brands that are currently outside of India to register them, to adjust them to the India regulatory needs or the taste of the people, and obviously to build the brands in India. So the way the JV will work is, both parties are bringing the current nutraceuticals to the JV. And then it is a certain sequence to bring the brands, primarily of Nestlé Health Science, to India: register, qualifying them, building them. Likely that in the first three years it will be some level of investment.

It's not going to be material investment in terms of, total effort, but, the revenues will come, only in the years after that.

Essentially, I should assume that this starts contributing to the India business, probably post FY 2026?

It will be post FY 2026, likely, even, post FY 2027. So the first couple of years will be years in which we will bring those products and build the brands in the certain sequence. So normally people will see the loss, but that's a, this has the potential to be a meaningful business, but it will take time to build it.

Neha Manpuria (Senior Analyst)

Great. And the second question is on the R&D spend. We have a pretty high R&D spend, you know, this quarter. You talked about it in your opening remarks. When can we start seeing the complex product pipeline that we are talking about, or the biosimilars, you know, contribute to earnings, particularly in the U.S. market? You know, should we start seeing... And, of course, some of the areas, if you could talk about, and the guidance for next year for R&D, please.

Erez Israeli (CEO)

Yeah. So, in terms of contribution, in terms of contribution to the growth, the small molecules, we will see that already in FY 2025, some of them, more of them in FY 2026, and some of them in FY 2027, 2028. So this is the pipeline that we have discussed in the past. In terms of the biosimilars, what will come from, internal, activities, likely that in FY 2027, we will start to see the products, coming. The level of, R&D for next year will be, around 8.5%-9%. This is the range that likely we are going to have.

Neha Manpuria (Senior Analyst)

Thank you so much.

Operator (participant)

Thank you. The next question is from the line of Kunal Dhamesha from Macquarie Capital. Please go ahead.

Kunal Dhamesha (Research Analyst)

Yeah, good evening. Thank you for the opportunity. So first one, on the U.S. business, just a clarity. You said that there was a base erosion on a quarter-on-quarter basis, or quarter-on-quarter basis, so would the base include generic Revlimid contribution as well, when you say base erosion?

Erez Israeli (CEO)

You are speaking about North America, Kumar? I did not catch the question. This is about America?

Kunal Dhamesha (Research Analyst)

Yes, yes. North America, we have said that, the quarter-on-quarter decline is due to erosion in, base business. So my question is, would this base business terminology include revenue from generic Revlimid?

Erez Israeli (CEO)

Yeah. So, the quarter obviously include the sales of linaclotide. The decline is a combination of a sequence of service. So it's not a market share loss, it's more of a sequence of supply, as well as certain price erosion that was on the base business, unrelated to linaclotide.

Kunal Dhamesha (Research Analyst)

Sure. And in terms of the U.S. price erosion, while it continues, have you seen any change in the recent trend, where it is again accelerating at a higher pace, you know, in recent months?

Erez Israeli (CEO)

So the overall sentiment is unchanged. Still, the lion's share of the interest, I think, is sustainability of service and supply, and this is still the case. At the same time, we did face competition in some of our big products, and those products we did see price erosion, in which to some extent was compensated by most of other products. So on those specific products, we did see price erosion.

Kunal Dhamesha (Research Analyst)

Sure. And for the next year, how many product launches you are planning for the U.S. market?

Erez Israeli (CEO)

About 20+.

Kunal Dhamesha (Research Analyst)

20+. Okay. Thank you, and all the best.

Operator (participant)

Thank you. The next question is from the line of Saion Mukherjee from Nomura. Please go ahead.

Saion Mukherjee (Head of Equity Research)

Yeah, hi. Thanks for taking the question. Just one question on R&D. We have seen a significant step-up, and as you mentioned, your guidance, it looks like you're talking about more than $300 million of R&D spend next year. You know, if you can provide, like, where this money is being spent in terms of biosimilars or NCE research and other generic activity?

Erez Israeli (CEO)

So the R&D is spent, obviously on the small molecules as well as the big molecules. I think the main contribution to the growth is the timing of the clinical trial of the biosimilar, which is about 20% of the R&D spend. So if you wish, between the small molecules and the big molecules, so you have about 60% that goes to the small molecules, about 20% that is going to the biosimilars, and the 20% that goes to either API or other initiatives, like, licensing in and activities like this.

Saion Mukherjee (Head of Equity Research)

Okay, thanks. And, and my second question would be, you know, how do you see the growth in emerging markets in the years ahead, particularly with respect to China and, you know, some of the key markets like Brazil, if you can talk about your outlook for 2025 and 2026?

Erez Israeli (CEO)

So it will continue to grow. It will continue to grow in double digits. China looks good, we are now consistently submitting 14, 15 products a year. So this likely to continue. And also, we got some interesting approvals. So overall, in constant currency, I believe that we are in a good shape. Obviously, there is a risk of Forex, which is remain the same. We have certain level of protection, but obviously if it will come, it may offset it. But overall, it looks good.

Saion Mukherjee (Head of Equity Research)

Okay, thank you.

Operator (participant)

Thank you. The next question is from the line of Balaji Prasad from Barclays. Please go ahead.

Balaji Prasad (Assistant VP)

Hi, everyone, this is Michaela in for Balaji. Thanks for taking our questions. Can you hear me?

Erez Israeli (CEO)

Yes, yes, please.

Balaji Prasad (Assistant VP)

Okay, great. So we see you launched four new products in the U.S. during the quarter. Could you just provide a little bit more detail on these launches? My second question is if you could provide a bit more detail on the CRL issued to the BLA for biosimilar Rituximab. What are the next steps here, and what does this entail? Thank you so much.

Erez Israeli (CEO)

Yeah. So, on the launches this quarter, as I mentioned, we launched five products during the quarter. We kind of mentioned the names along the way. We will try to provide it to you in a second. As for the CRL, we got certain questions primarily about the CMC of the product, and we are planning to address that around the September timeframe, and to... And then obviously, I'm assuming it's a six-month going after that.... Yeah.

Operator (participant)

Thank you. The next question is from the line of Tarang from Old Bridge. Please go ahead.

Tarang Agrawal (Fund Manager)

Hi, congrats for extremely strong set of numbers for FY 2024. Just a couple of questions. You know, capital expenditures stepped up quite a lot in both FY 2023, FY 2024. If I look at 2024 alone, roughly, INR 2,700 crores of CapEx. You know, so if you could just give us a sense in terms of, a broad, set of baskets where this INR 2,700 crore would have been deployed. So that's number one. Second, the, you know, till date, it's between PNL and, balance sheet, if you could give us a sense on what your cumulative investments in biosimilars has been. And third, just a general sense on, where, your overall biosimilar business is at.

Erez Israeli (CEO)

Yeah. So about CapEx, first of all, and most of our CapEx is going toward expansion. Let's say give or take, around 75% of it is going to expansions. And normally, the other is going what we call maintenance, and maintenance is also whether you need to replace certain stuff or related to compliance or investment in the digital, et cetera. Also, in the future, in terms of distribution of the CapEx, also, for next year, we are investing primarily the CapEx in products that we want to launch and with that capacity, both in the API as well as in our injectable facilities. So, more than 50% of the CapEx is going that direction.

In addition to that, we are building additional capacity in our biologics plant in Bachupally, as well as in our APIs, our services on both biologics and small molecules. So by and large, this is where the CapEx is going. I... Is it sufficient? I don't remember the rest of the question.

Tarang Agrawal (Fund Manager)

Yeah, this is all right. When you say expansion, it is a broad bucket. I mean, it's going into API, injectables, biologics, and originators, right?

Erez Israeli (CEO)

Correct.

Tarang Agrawal (Fund Manager)

Okay. If you could give us an update on your biosimilar business from your own, and what have your cumulative spends been on this business till March 2024?

Erez Israeli (CEO)

In terms of portfolio, just to remind us all, we decided to focus on products that we have a chance to be first to market. When we initiated that strategy, we kind of bypass the products that has a chance to be late to market. Our first meaningful product will come in 2027, and after that, more products will follow. Right now we are not discussing specific names, but that's the overall plan.

What you can assume, and I mentioned it before, that if 20% is going to the R&D, this is give or take also at the level of loss that we have in a year, because right now we don't have the meaningful sales to cover for it. And this is something that, likely to be break even and beyond, be profitable once we will launch in April 2027, our first biosimilar in Europe and United States.

Tarang Agrawal (Fund Manager)

So therefore, would it be safe to presume an investment of anywhere between $50 million-$60 million per annum on biosimilars? Would that be a reasonable estimate from your end?

Erez Israeli (CEO)

Yeah, in the ballpark, yeah.

Tarang Agrawal (Fund Manager)

Okay. Thank you.

Operator (participant)

Thank you. The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.

Tushar Manudhane (Research Analyst)

Thanks for the opportunity. So just on Rituximab, as far as Europe is concerned, where, in India, shared.

Operator (participant)

Tushar, the line for you seems to be a bad connection. Can't hear you.

Erez Israeli (CEO)

Can you repeat the question?

Operator (participant)

You are not audible, Tushar. No, you seem to have a bad connection. I request you to please-

Tushar Manudhane (Research Analyst)

Sure.

Operator (participant)

Reestablish your connection and then get back in the queue.

Tushar Manudhane (Research Analyst)

Okay.

Operator (participant)

Thank you. The next question is from the line of Nimish Mehta from Research Delta Advisors. Please go ahead. Nimish, the line for you has been unmuted. You may proceed with your question.

Erez Israeli (CEO)

Maybe you can move to the next one. Yeah.

Operator (participant)

Yes, we will move to the next question, which is from the line of Nitesh Dutt from Burman Capital. Please go ahead.

Nitesh Dutt (VP of Investments)

Sir, thanks for the opportunity. I have a question on our manufacturing strategy for the India business. So I just want to understand, number one, what percentage of your manufacturing in India is being done in-house, versus outsourced, and are you expecting to maintain a similar mix going forward? And second, for the outsourcing part, how many suppliers do we typically have? Is it like, like a fragmented supplier base or consolidated, amongst a few companies?

Erez Israeli (CEO)

Yeah. So when you say suppliers, you mean global or for India?

Nitesh Dutt (VP of Investments)

For India. For, for India.

Erez Israeli (CEO)

So right now, about 60% of what we do is in-house, and likely that these numbers will increase in the future because we did, we do, have localizations of, of some of these products, in the future. As for the numbers of partners, I don't recall the exact number, but I'm assuming that it's in double digits, likely, but I don't have the exact number, on top of my head.

Nitesh Dutt (VP of Investments)

All right. And then a follow-up on that, the government has been placing a lot of emphasis on stricter implementation of Schedule M norms and quality standards, right? So, how can it impact our procurement strategy on the outsourcing front? So can it lead to some sort of consolidation of supplier base or maybe an increase in the procurement cost, et cetera? Because, if the quality cost increase for our suppliers, then, our costs might increase as well.

Erez Israeli (CEO)

I can tell you that for Dr. Reddy's, we have one standard of quality. We believe that all people deserve the same quality, no matter what is their nationality, and that's the policy of Dr. Reddy's. We encourage everybody to do the same. So for us, any guidance in that direction, we see that as an opportunity. And if there are people that need to upgrade their system, it's good, it's good for India.

Nitesh Dutt (VP of Investments)

All right, thanks. I'll get back in.

Operator (participant)

Thank you. The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.

Tushar Manudhane (Research Analyst)

Am I audible now?

Operator (participant)

Yes. Please go ahead, sir.

Tushar Manudhane (Research Analyst)

Just to understand, with respect to Rituximab for the

Operator (participant)

Sorry to interrupt, but the line is bad again for you.

Tushar Manudhane (Research Analyst)

Okay.

Operator (participant)

May I request you to please move to an area with better network?

Tushar Manudhane (Research Analyst)

Is this better?

Erez Israeli (CEO)

Yes.

Tushar Manudhane (Research Analyst)

Okay. So on Rituximab, we understand that.

Erez Israeli (CEO)

So, rituximab, we are planning to launch in the U.K., and as we speak, we did not do it yet. So, we believe that we should get the approval soon. We are after the qualifications in the U.K., and we are waiting for the inspection of the EMEA as well.

Tushar Manudhane (Research Analyst)

Understood. So secondly, on the inventory, I see quarter-on-quarter reasonable increase. If you could explain that.

Erez Israeli (CEO)

Again, sorry? Again, can you repeat?

Tushar Manudhane (Research Analyst)

There has been reasonable increase in the inventory on a quarter-over-quarter basis.

Erez Israeli (CEO)

You're talking about the what inventory?

Tushar Manudhane (Research Analyst)

Inventory, sir, inventory.

Parag Agarwal (CFO)

Yes, so, yeah, let me answer, let me take that question. The increase in inventory is primarily because of some of the geopolitical risks which are there, which are having some impact on the routes of supply. So we proactively build an inventory to make sure that there is no loss of sales. That's the primary reason for the increase.

Tushar Manudhane (Research Analyst)

Understood. Lastly, sir, the SG&A expense also, we've seen, you know, increase over past three to four quarters. So is this the run rate to consider for FY 2025, or will there be further increase in this?

Parag Agarwal (CFO)

The overall, if you look at the SG&A expenses this year for the full year, as a percentage to sales, it's about 27.7%, which is same as last year. Now, quarter on quarter, you will find situations happening. Broadly, we are investing behind our brands in sales and marketing, behind our capabilities, while also driving productivity. Broadly, I would say that SG&A over the next 12 months or so, the percentage to sales would remain in the same similar range.

Tushar Manudhane (Research Analyst)

Got it. Thanks. Thanks for that.

Operator (participant)

Thank you. The next question is from the line of Ankush Mahajan from Axis Securities. Please go ahead.

Ankush Mahajan (Investment Analyst)

Thanks for the opportunity. So if you see that we have U.S. sales of $390 million, on sequential basis it has decreased. We try to understand, so this decrease in the base business or in the GW Medical business?

Erez Israeli (CEO)

The decline is a combination of the sequential decline. It's part of it is normal pattern of ordering of the products, so. And part of it is some price erosion that we got on a few products. It's a combination of both.

Ankush Mahajan (Investment Analyst)

Sir, what is the guidance of margins, full year guidance of EBITDA margins for FY 2023?

Erez Israeli (CEO)

So as you know, we are not giving guidance. In general, we are repeating that the normal, you know, long-term place that we want to be. So, the 25% EBITDA, the 25% ROC, double-digit growth, it's something that we are consistently saying, that this is the range that we want to be. Sometimes we'll be above it, sometimes we'll be below that, but we feel very comfortable that this is a place in which we can both invest for the future, and it allows us a significant room for improvement and for investing in the future, as well as bring very, very healthy return to the shareholders.

This year we are buying out higher than that, and but there will be timing that it will be, it can be even lower than that, but this is where we feel comfortable to be. So we are not giving a kind of overall guidance, but we are not giving guidance for specific quarters or specific.

Ankush Mahajan (Investment Analyst)

So, when we say 25% EBITDA margins, that includes generic Revlimid also?

Erez Israeli (CEO)

Like I mentioned before, this is our overall guidance, not for specific products. As you can see, when we launched the product, our margins were higher, so you can do the math.

Ankush Mahajan (Investment Analyst)

Thank you, sir. Thank you very much.

Operator (participant)

Thank you. Ladies and gentlemen, to ask a question, you may please press star and one. The next question is from the line of Surya Patra, from PhillipCapital. Please go ahead.

Surya Patra (SVP)

Yeah, thanks for the opportunity. My first question is on the pricing trend that you've been seeing for Revlimid. So, and how sustainable the pricing trend currently that we are having for that? Because there are multiple rounds of new player entry that we have seen, so whether that has impacted the realization potential of the product in the recent period?

Erez Israeli (CEO)

So I'm not going to discuss quantities or prices of this product, as you know. Sorry?

Surya Patra (SVP)

Yeah. On the pricing front, I'm not asking about.

Erez Israeli (CEO)

I just said, I'm not going to discuss pricing or quantities of this product. We need to remain confidential to our agreements. And what we can say is that it's going to stay meaningful product for us throughout the period of Revlimid.

Surya Patra (SVP)

Okay. Then my fourth question would be on the domestic formulation business. So obviously, as per your indication, that you have taken multiple initiatives to either introduce branded products or to expand qualitative products, and long-term sustaining kind of a sustainable growth driving kind of a product for the domestic formulation business. But in the initial period, possibly may not contribute much. So if you can give something, let's say, over a period of three years from now, what is the share of revenue mix that you should be seeing for your domestic formulation business?

Erez Israeli (CEO)

So you can see that we have a flow of agreements that are coming. So what we say, that the base business, the, maybe a step back. The branded generic business that we have in India will grow. This quarter it grew double digits, if you take out the divestments that we had in the same quarter last year, and likely that this will continue. On top of it, we started to launch already products. Some of them we launched in radio, and we launched other products that will come, and this will be on top of it. So naturally, the expectation of India is to grow beyond the growth that is expected from the branded generics.

Right now it looks like a very healthy pipeline that is coming up, on both the NCEs, the pharmaceutical deals that I mentioned, et cetera. The expectation of both businesses, if you ask about the long term, is to be top five in India. If you want an assumption, it's in the neighborhood of around INR 12,000 crore, somewhere in FY 2030. But this is obviously a neighborhood that we are striving to be. We believe that this is what top five people take, will be at that period of time.

Surya Patra (SVP)

Okay. It is safe to believe, sir, that domestic formulation business is going to be the growth leader for Dr. Reddy's over the next few years. Is that safe to believe?

Erez Israeli (CEO)

Yes, absolutely. India is a very important market for us, and we want to grow, and we want to grow the rank. And it's a growth engine, but it's also our main hub for innovation on both the back end as well as the front end... And the main place in which we believe that we can bring value, because most of the people that are collaborating with us have an interest in our brand in India, as well as in our go-to-market capabilities.

Surya Patra (SVP)

My second question is about biosimilars business in the U.S. and in India, and also in collaboration with the R&D partners that you are likely to have. So whether you have talked about 9% kind of R&D spend guidance for the subsequent periods?

Erez Israeli (CEO)

I mentioned that 20% of our R&D is going to biosimilars.

Surya Patra (SVP)

Okay. And, are you indicating, in line with the quarterly trend, R&D spend as a percentage to sales, this is the kind of sustainable run rate you are talking about?

Erez Israeli (CEO)

We believe that it's sustainable for us to be in the what I said, 8.5%-9%, and it could be some fluctuation, depends on the timing of the phase three of the products. But this is... We believe that it's sustainable.

Surya Patra (SVP)

Okay. And, so an extended question to that only, sir. So, we know that, having seen the kind of challenges that is there about biosimilar success in the U.S. business, and the kind of upfront investment that is required for each molecule to develop a biosimilar. So, what is the kind of a right to success that you do think for your biosimilar strategy?

Erez Israeli (CEO)

So I mentioned the timelines before. We, we decided at a time to skip the products that we relate to market, in order to be among the first one to, to launch the products, and we still hope to do that. The second one is that we are not developing only for the U.S. Obviously, the U.S. is a very important market for us, but we are developing globally, and it, it's, and it's actually for us, it's about U.S., Europe, India, and emerging markets. And each one of them on the molecule that we chose is, these are meaningful markets for us.

Surya Patra (SVP)

Okay. Yeah. Sure, sir. Thank you. Thank you all, have a good day.

Operator (participant)

Thank you. Ladies and gentlemen, in order that the management is able to address questions from all participants in the queue, we request you to please restrict your questions to one question per participant. The next question is from the line of Madhav Marda from FIL. Please go ahead.

Madhav Marda (Investment Analyst)

Hi, good evening. Thank you much for your time. Given that India is a core sort of focus market for us over the longer term, just wanted to get your thoughts on any risk that you see from rise of organized pharmacy retailing in the country, like it happened in most developed markets we've seen over the past few years. And the rise of generic drugs in the country, which the government has also tried to push last year, obviously with SHIPA. So just your thoughts on some of these factors, and how they could play out for the country going ahead. Thank you.

G.V. Prasad (Co-Chairman and Managing Director)

So there have been several attempts to make this generic business success. But given the enforcement gaps in quality and concerns about doctors about quality, we feel that the branded generic business will continue for a while. We don't see any imminent danger of it being commoditized by generics.

Madhav Marda (Investment Analyst)

So, given that some of the organized pharmacies coming in, don't they solve for the quality angle?

G.V. Prasad (Co-Chairman and Managing Director)

The organized pharmacies are still a small portion of the overall sales. If you, if you look at the, market share, it's probably, you know, 12%-15% at the most.

Erez Israeli (CEO)

So just to make sure, we do see, obviously, the certain portion of the... Like, by the way, happened everywhere in the world, will become generic, generic. So at the same time, the market is growing as well. We recognized that trend way along back, and I discussed it in previous meetings. This is why our many efforts, and our main effort is about actually true innovation, patent protected, et cetera. We believe that the brands, our brands, that we decided to continue to focus on, will stay for a while, like, Prasad just said.

Madhav Marda (Investment Analyst)

Good. Thank you, sir.

Operator (participant)

Thank you. Ladies and gentlemen, we request you to please restrict your questions to one question per participant. The next question is from the line of Bino Pathiparampil from Elara Capital. Please go ahead.

Bino Pathiparampil (Head of Equity Research)

Hi, good evening. Just a question on couple of products in the US. One, you had acquired the ANDA to generate Lumify from Slayback Pharma. What's the status, when we expecting approval?

Erez Israeli (CEO)

Sorry, can you repeat the product? Sorry, I did not get you.

Bino Pathiparampil (Head of Equity Research)

generic version of NDA from generic version of Lumify, which you acquired from Slayback Pharma.

Erez Israeli (CEO)

Yes. So what is the question?

Bino Pathiparampil (Head of Equity Research)

What is the status? Which I believe it was already filed when you acquired it, when do you expect approval and launch?

Erez Israeli (CEO)

To the best of my knowledge, it's approved product by now.

Bino Pathiparampil (Head of Equity Research)

Sorry, what is it?

Erez Israeli (CEO)

It's an approved product by now. You asked whether it will get approval, it's approved.

Bino Pathiparampil (Head of Equity Research)

Okay, and then timelines for the launch?

Erez Israeli (CEO)

When is the launch?

Richa Periwal (Head of Investor Relations)

We expect the launch to happen in this quarter only.

Bino Pathiparampil (Head of Equity Research)

This quarter. Okay. Second, believe you are also working on some on the peptides. So any update on what- how do you see the Liraglutide opportunity panning out over the next two, three years?

Erez Israeli (CEO)

So yeah, indeed, this is very important segment for us. Long term, we put a lot of efforts. We are still putting efforts on both the API as well as the finished goods globally, and we are planning to go to each one on the market. Specifically for the product, both Victoza and Saxenda, obviously we have what we believe are the date of launch for each one of them, and we want to launch when we can.

Bino Pathiparampil (Head of Equity Research)

Is it like a couple of years away or four years away? What's the rough idea of where you see the opportunity coming up?

Erez Israeli (CEO)

Each one of these products, there is a date, you know. I don't, I cannot say, confirm a date.

Richa Periwal (Head of Investor Relations)

We said it at an appropriate time.

Erez Israeli (CEO)

At this stage, we cannot say. But whenever the market will be open, we are planning to be there.

Operator (participant)

Thank you. Ladies and gentlemen, that will be the last question for today. I would now like to hand the conference over to Ms. Richa Periwal for closing comments. Over to you, ma'am.

Richa Periwal (Head of Investor Relations)

Thank you all for joining us for today's evening call. In case of any further queries, please get in touch with the investor relations team. Thank you once again on behalf of Dr. Reddy's Laboratories Limited. That concludes this conference. You may now disconnect your lines.

Operator (participant)

Thank you. On behalf of Dr. Reddy's Laboratories Limited, that concludes this conference, ladies and gentlemen. We thank you all for joining us. You may now disconnect.