Earnings call: Dr. Reddy's Q3 FY '24 sees steady growth, plans U.S. expansion

In the latest earnings call for Q3 FY '24, Dr. Reddy's Laboratories (NYSE: RDY) reported a 7% year-over-year growth in consolidated revenues, amounting to INR 7,215 crore (approximately $867 million). This growth was primarily driven by the generics business in the United States and Europe. The company also highlighted strategic collaborations and product launches as key business highlights, with a strong focus on expanding their U.S. market presence with upcoming product launches and an emphasis on digital therapeutics in the Indian market.

Key Takeaways

• Consolidated revenues increased by 7% year-over-year to INR 7,215 crore ($867 million), with a 5% sequential growth.
• Profit before tax grew by 12% year-over-year to INR 1,826 crore ($219 million).
• Gross profit margin was reported at 58.5%.
• Selling, General, and Administrative (SG&A) expenses rose by 12% year-over-year, while Research and Development (R&D) spend increased by 15%.
• The Indian market is expected to see double-digit growth in the coming quarters, with a current year-over-year growth of 5%.
• The company is investing in the U.S. market with 26 products awaiting approval and six biosimilars in the pipeline.
• The FDA inspection of one of the company's facilities has been addressed, with a response from the FDA pending.

Company Outlook

• Dr. Reddy's is focusing on licensing and collaborations to bring innovation to India and expects double-digit growth in the Indian market in FY25.
• The PCAI business recorded $94 million in sales, with an 11% sequential growth.
• There are plans to launch around 26 products in the U.S. market within the next two years.
• The company is developing a biosimilar pipeline, with the first product expected to launch in early 2027.

Bearish Highlights

• The Indian business saw a slight sequential decline in sales.
• There is a moderation in growth margins in the generics business, attributed to a mix issue.

Bullish Highlights

• The U.S. market has shown good performance and market share gains, particularly with the REVLIMID product.
• Strategic inventory buildup is underway, with increased inventory in the U.S. to improve customer service.

Misses

• There is no current information on the approval timeline for the generic version of Lumify.
• The risk associated with an adverse outcome at FTO 3 is not considered significant.

Q&A Highlights

• The company is addressing FDA observations and awaiting a response.
• MenoLab's potential contribution to the U.S. business is a couple of million dollars.
• The launch of biosimilar RITUXAN is expected by the end of April, pending FDA approval.
• Dr. Reddy's is investing in capacity for CDMO, expecting growth from tens of millions to hundreds of millions of dollars.

Dr. Reddy's Laboratories remains optimistic about its future growth and market expansion. With a strategic focus on the U.S. and Indian markets, the company is looking to leverage its pipeline of products awaiting approval and its investments in R&D to stay competitive in the pharmaceutical industry.

InvestingPro Insights

In light of Dr. Reddy's Laboratories' (NYSE: RDY) recent earnings call and their strategic business developments, certain metrics and tips from InvestingPro can provide additional context for investors. Here's a closer look at some key insights:

• Dr. Reddy's is currently trading at a low P/E ratio of 18.66 relative to its near-term earnings growth. This could suggest that the stock is undervalued given its future earnings potential, aligning with the company's optimistic outlook for growth in the U.S. and Indian markets.

• With a PEG Ratio of 0.3 for the last twelve months as of Q2 2024, the company is trading at a low earnings multiple, which might indicate a potential investment opportunity considering its growth plans and pipeline of products awaiting approval.

• The stock has shown low price volatility, which may appeal to investors looking for a stable investment within the Pharmaceuticals industry, where Dr. Reddy's is a prominent player.

InvestingPro Tips also reveal that the company has maintained dividend payments for 23 consecutive years and operates with a moderate level of debt. These factors could contribute to investor confidence in the company's financial health and its ability to sustain growth.

For those interested in deeper analysis, InvestingPro offers additional tips, including the company's profitability over the last twelve months and its strong return over the last five years. To access these insights and more, consider a subscription to InvestingPro, which is now on a special New Year sale with discounts of up to 50%. Use coupon code SFY24 to get an additional 10% off a 2-year InvestingPro+ subscription, or SFY241 to get an additional 10% off a 1-year InvestingPro+ subscription.

Stay informed and make more confident investment decisions with the comprehensive metrics and tips available on InvestingPro. There are 11 additional InvestingPro Tips listed for Dr. Reddy's Laboratories, which can be accessed through the InvestingPro platform.

Full transcript - Dr. reddys laboratories (RDY) Q3 2024:

Operator: Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Q3 FY '24 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]. 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: 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 ended, December 31, 2023. Earlier during the day, we've released our results and the same was 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 a reconciliation of GAAP to non-GAAP measures, please refer to our press release. To discuss the business performance and outlook, we have our CEO, Mr. Erez Israeli , and our CFO, Mr. Parag Agarwal, and the entire investor relations team. Please note that today's call is a copyrighted material of Dr. Reddy, and cannot be rebroadcasted or attributed in press or media outlets without the Company's expressed 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. Parag Agarwal. Over to you, Parag.

Parag Agarwal: Thank you, Richa, and greetings to everyone. A warm welcome to our quarter three, FY '24 earnings call. Thanks for joining. I'm pleased to take you through our financial performance for the quarter. For this section, all amounts have been translated into U.S. dollar as a convenience translation rate of rupees 83.19, which is the rate as of December 31, 2023. We continue our growth trajectory in the third quarter and delivered another quarter of financial reserves with the highest ever sale and robust operating profit. Consolidated revenues for the quarter stood at the INR7,215 cross, which is US$867 million, and grew by 7% year-on-year basis and by 5% on a sequential basis. The growth is led by the generics business in U.S. and Europe with contributions from both base business and new product launches. Consolidated gross profit margin stood at 58.5% for the quarter, a decrease of 73 basis points over previous year, and 18 basis points sequentially. The decrease was an account of price erosion for certain of our existing products, partly offset by improvements in product mix and productivity. Gross margin for the global generics and PSAI businesses were at 61.9% and 29.4% respectively. The SG&A spend for the quarter is INR2,023 crores, which is US$2.3 million, and increase of 12% year-on-year and 8% quarter-on-quarter. The year-on-year increase is primarily on account of investment in sales and marketing activities, digitalization capabilities, and new business and innovation initiatives. The SG&A cost as a percentage to sale was 28.0% and is higher by 148 basis points year-on-year and 72 basis points quarter-on-quarter. The R&D spend for the quarter is INR5.57 crores, which is US$67 million, and increase of 15% year-on-year and 2% quarter-on-quarter. The R&D spend is at 7.7% of sales and is higher by 60 basis points year-on-year and lower by 20 basis points quarter-on-quarter. The investments are driven by ongoing clinical trials for differentiated assets, as well as other developmental efforts to build a healthy pipeline of new products across our market for both small molecules and biosimilars. The other operating income for the quarter is INR97 crores as compared to operating expense of INR73 crores for the same quarter last year. The other income was higher on account of sales of non-current assets. The EBITDA for the quarter is INR2,111 crores, which is US$254 million, posting a growth of 7% year-on-year. The EBITDA margin stood at 79.3%. Our profit before tax for the quarter stood at INR1,826 crores, which is US$219 million, posting a growth of 12% year-on-year and a decline of 4.6% over previous quarter. The net finance income for the quarter is INR96 crores as compared to net finance of INR14 crores for the same quarter last year. Effective tax rate has been at 24.5% for the quarter. The effective tax rate was marginally higher in comparison to the same period last year, mainly due to an increase in the proportion of the company's profits coming from high tax utilization, partly offset by adoption of profit tax rate under section 115BAA of the Income Tax Act of India. We expect our normalized EPS for the year to be in the range of 24% to 25%. Profit after tax for the quarter stood at INR1,379 crores, which is US$166 million, posting a growth of 11% year-on-year and a decline of 7% over previous quarter. Reported EPS for the quarter is INR82.7%. Operating working capital increased by INR1,227 crores, which is US$148 million, against that on September 30, 2023, mainly due to increase in inventory and receivables. Our capital investment stood at INR307 crores, which is US$$37 million in this quarter. The free cash flow generated before acquisition related payout during this quarter was at INR22 crores, which is US$2.6 million. Consequently, we now have a net surplus cash of INR5,907 crores, which is US$710 million as of December 31, 2023. Foreign currency cash flow hedges in the form of derivatives for the U.S. dollar, at approximately US$672 million, hedged around the range of INR83.4 to US$84.6 and AUD1.1 million at the rate of INR58.3 to Australian dollar maturing in the next 15 months. With this, I now request Erez to take us through the key business highlights.

Erez Israeli: Thank you, Parag, and very warm welcome to everyone joining us today. I am delighted to report yet another quarter with the highest-ever revenues and robust operational performance. We made the progress during the quarter on strategic collaborations to build mobile therapies for India and to improve our position in new avenues of growth globally. We are also humbled by the recognition received for the progress we have made on our sustainability agenda. Let me take you through some of the key highlights of the quarter. Sales in EBITDA grew by 7% each. The sales growth was primarily given by improved market share for existing products in the U.S, continued momentum in our Euro business, contribution from new products, partially offset by price erosion in certain existing products due to competitive landscape. We generated healthy EBITDA margins at 29% and annualized ROCE at 37%. Net cash surplus was $710 million at the end of the quarter. We entered an exclusive development and commercialization deal with the U.S-based Coya Therapeutics for their products, COYA 302. It is an investigational combination biologics for treatment of neurodegenerative disease, ALS. We received an approval from UK MHRA for proposed bevacizumab biosimilar. We acquired a leading Women's Health and Dietary Supplement portfolio of brands called MenoLab in the U.S. We did a recent entry into the U.K. consumer health space with the launch of anti-fever medicine, Ketorolac Tromethamine And we have taken steps to strengthen our business globally. The U.S. FDA completed a routine CGMP inspection of our formulation manufacturing facility, FTO-3, in October 2023, as well as GMP and pre-approval inspection PI at our R&D facility in December 2023. We issued four authorities with 10 observations at FTO-3 and three observations at our R&D facility. We have submitted a response within the speculative time frame. Our efforts in sustainability and energy continue to gain momentum and external recognition. We are becoming the first Indian pharma company to be featured in the Dow Jones Sustainability World Index of 2023 and retaining our place in the American market index for the eighth year in a row. We awarded gold medal status by EcoVadis. We upgraded in the MSCI ESG rating from BB to BBB. We awarded the Golden Peacock for Corporate Social Responsibility in 2023. Further, we are the first Indian company to pledge toward plantation initiative covering 2,900 hectares by 2028, a start of the World Economic Forum's first organization. Now let me take you to the key business highlights of the quarter. Please note that all the reference to the numbers in this picture are in respective local currencies. Our North American generics business recorded sales of 401 million for the quarter with a 7% growth over the year and a sequential increase of 4%. The benefit of market share extension is certainly a key product. Revenue from new launches and integration of acquired portfolio was partially offset by price erosion due to competitive units. We launched four new products during the quarter. We recently acquired MenoLab Portfolio of Women, Health and Dietary supplement brands in the U.S, which complements well with our U.S. Health Care and Wellness business portfolio. Our European generics business recorded sales of €55 million this quarter, with a year-over-year growth of 8% and sequential decline of 6%. The contribution from new products launched has been proven in the base business volume and offset price erosion. During the quarter, we launched a total of six products across markets. Earlier this month, we entered the UK OTC Consumer Health Market with the launch of Brands Allergy Medication and medication, Histallay, Our emerging market business recorded sales of INR1283crores, a marginal year-over-year decline of 2% and a sequential increase of 6%. The benefit of new products and price increase in certain markets was more than offset by unfavorable products. We are on track to deliver double-digit growth for the year. We launched 13 new products during the quarter across various countries of the emerging markets. Within the emerging market segment, the Russian business grew by 3% on year-over-year basis and 7% on sequential basis in constant currency. Our Indian business recorded sales of INR1,180 crores and reported year-over-year growth of 5% and a marginal sequential decline. We anticipate the base business to deliver double-digit growth in the coming quarters. We are focusing on licensing and collaborations to bring innovation to India. The rollout of Nerivio market, which made our entry into the digital therapeutics. We are seeing adoption by doctors and repeat nurses indicate high patient satisfaction scores. India remains a priority market and will continue to reinforce suppressants and post-emergency business, while investing and building the innovation spaces in line with our strategy. Our PCAI business recorded sales of $94 million with a strong sequential growth of 11% and a marginal year-over-year decline of 1%. Excluding sales of COVID products in the same period last year, sales growth was up in high single digits. We expect sales to improve on the back of strategic collaborations with regional and global players. Last quarter, we invested 7.7% of our revenue to strengthen our R&D capabilities. Our efforts are focused on developing complex value-accretive products, including several generic injectables and biosimilars in line with our patient-centric strategy to enable access and affordability. We also continue to invest in innovative solutions through strategic partnerships, such as recent collaboration with Coya therapeutics on investigational therapies. We have done nine global generic signings, including two ANDAs in the U.S. in Q3 FY '24. We have been recently ramping up inventories to reduce the risk of supply chain disruption and building inventories for our vital products. We are also strengthening our position by building basic task for building commercial infrastructure to leverage our portfolio to expand further. We continue to develop our pipeline and scale up our biosimilar business, being a pivot to growth strategies. Our ability to source experimental innovation through strategic lead development and collaboration will enable us to address unmet needs and patient support the overall growth ambitions of the company. With this, I would like to open the floor for questions and answers.

Operator: Thank you very much. We will now begin the question and answer session. [Operator Instructions] The first question is from the line of Balaji Prasad from Barclays. Please go ahead.

Mikaela Franceschina: Hi. This is Mikaela for Balaji. Thanks for taking our questions. Just two from us. First one is, what is your latest thinking on generic pricing trends, particularly in the U.S.? Could you provide a bit more color on how you see this trending going forward? And second one, what are your thoughts around the Chinese pharma market in 2024? Thanks so much.

Parag Agarwal: I did not get the second one, what is, sorry?

Mikaela Franceschina: The second one was what are your thoughts on the Chinese pharma market in 2024?

Erez Israeli: So the first question, we keep the continuation of the price environment that we saw in the last couple of quarters, so we are looking at the same environment, meaning that relatively to other areas, it's less than it used to be, more focused on service, sustainability of supply, but obviously the business model did not change, and in every place that competitors are coming, we see parts of the index in the same neighborhood, like we have discussed in previous quarters. As for China, we do see very good tracking of approval. And we got nine approvals since the beginning of the fiscal, and three in the last quarter, so for us the momentum continued in China.

Operator: Do you have any more questions from the line of Balaji Prasad?

Mikaela Franceschina: No, that was it. Thanks so much.

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

Kunal Dhamesha: Hi, thank you for taking my question and congratulations on good side of numbers. First one on the U.S. product launch and filing momentum, so if I look at the first nine month data, we have launched 12 products in the U.S., and we have just done eight new filings, and our total pending ANDAs also have come down from 90 [ph] in quarter four FY '22 to now 79. So is it because we are focusing on few therapy areas, more complex, if you can provide some color there would be helpful?

Erez Israeli: So yes, we do have less filings, let's say overall, because we have good focused on products, we believe it's meaningful, but it's still in healthy numbers of files, I believe that you'll see the next coming months more filings that are coming, the timing of those files. On the launch piece, we will have more than 20 this year, and so it looks like a healthy number, but also in the U.S. what is important is the type of product launch, the number of launches, but so far it looks healthy for us.

Kunal Dhamesha: Sure. And then just to follow up on that, I mean, we are now, we have acquired this MenoLab. If you can provide some clarity as to how does this fit into our strategy, what was probably the last 12 months for these brands, and what is the acquisition value that we have paid? And does the increase in borrowing quarter-on-quarter relate to this?

Erez Israeli: So the start of the time of what we call it Horizon-2. We decided to focus in general as a company on three types of segment, NC and NDE, and talking primarily collaborations or DD acquisitions, OTC and pharmaceuticals, and digital therapeutics. Specifically for the U.S., we decided to focus on OTC in several areas including working on digital eye [ph] in private label as well as brands in women's health. So we acquired the Premama in the past, and now we have the complementary products that our brand gets as it works. And the idea is to create a franchise in women's health supplement, so that they kind of diversified the U.S. business to areas that have different pattern of demand and supply and the brand awareness. I don't recall exactly the sales of MenoLab before, but we are talking about the range of millions of dollars. So this is a relatively small group, we believe that we can take it from there.

Kunal Dhamesha: And after this, what would be our U.S. revenue contribution from the wellness product or OTC product? I think earlier we used to provide it in 20F for the quarterly filing, I'm not sure now do we provide that?

Erez Israeli: So the OTC, if I may, on an annual basis should be about 10% give or take of overall OTC.

Kunal Dhamesha: Sure. Thank you. I have more questions. I'll jump back to you.

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

Tushar Manudhane: Thanks for the opportunity. So firstly on the receivables which have increased on a quarter-on-quarter, is this on certain select products or is it across the portfolio, and for which markets?

Parag Agarwal: No, receivables increase is primarily in line with the top line increase. So it's nothing unusual. It's across the markets but largely concentrated in the U.S. So it's in line with the normal top line increase.

Tushar Manudhane: Okay. Secondly, gross margin for PSAI segment has been higher for the quarter compared to the previous quarters. So anything specific you'd like to comment?

Erez Israeli: Yes, we are growing. And because of the nature of the business, it is normally a high level of fixed costs. So when you're increasing the sales, you normally will have better margins. So it's just a reflection of the growth. I'm happy that we are back to growth. It took us quite some time to achieve that. I think now we are two steps in the right direction.

Tushar Manudhane: Okay. Because second quarter PSAI revenue was INR960 crores with 13% gross margin and now it is INR1,013 and the gross margin has improved to almost 22%.

Erez Israeli: Yes, it's a combination again of the mix and the combination of the more sales. And there is nothing unusual in that. It's just a type of growth.

Tushar Manudhane: Okay. And just lastly, considering the launches and the filings and the markets have gained for the existing products, if you would like to share outlook for the U.S business for FY '25, so I think could you share some color on that.

Erez Israeli: We are not getting guidance, but we are supposed to continue to do well in all the levers. So far it looks healthy for both commercial products, service to the customer, price environment. and the unemployment is going to continue to diminish, so all the levers should continue to work well also in the next coming quarters.

Tushar Manudhane: Sure sir. Thank you.

Operator: Thank you. The next question is from the line of Neha Manpuria from Bank of America. Please go ahead.

Neha Manpuria: Thank you so much for taking my question. If I were to look at the SG&A spending increase that we have seen in the quarter or even if I were to look at it over a three-year period. I know you've mentioned that we've been investing in Horizon-2 products, a project that you talk about. But from a monetization point of view, when should we start seeing this contributing to revenue? I'm just trying to understand when should we start seeing operating leverage in the higher spend and do you think this number continues to trend up from where we are?

Erez Israeli: Yes. So part of it which is related to the investment we put now in certain brands in India will give the results already in FY '25, because we're good to make sure we begin. So part of it is related to investment that will take more time as we are putting the money into building products that will be launched in FY '26, '25, '26, and then '27. So likely that this level at least on the value wise will continue to be a bit higher, but I do see more growth in revenue. So overall, it should be in the same environment as it used to be in the past before the COVID. But let's say to your questions, half of it will be already in FY '25 and half of it will be in FY '26 and so on.

Neha Manpuria: And if I were to dig a little deeper on the points on the launches, I know in your analyst meet you've mentioned certain areas that you're working on. But out of the 2025 launches that you talk about in the U.S., can we try to understand as to how many of these could be, the bread and butter launches that we need to offset the business? And how many of these could be meaningful products, some color there would be helpful?

Erez Israeli: Yes. So we have all the own about 26 products that can be launched with this approval. Winning all the [indiscernible] in the market that can be launched, and I'm talking about products that can be meaningful investment for means, probably in tens of millions and more than that. This is what let's say for the second discussion. The question is what combination of that will actually get to the market and what will be the sale, that's of course I don't know, but we are building on that to offset the period after the new development. And in addition to that, we are planning to add the growth in the other levels as well as the potential digital, so the combination of those is supposed to lead in a positive direction.

Neha Manpuria: And just to follow up on that, the 26 products would be, over the next two years, three years; how should I look at the timeline for that?

Erez Israeli: So potentially, with all the courses about this kind of product, I refer to products that are supposed to be in the next two years, '25 and '26, if it's going to '27, there are more products. Of course, subject to approval, subject of course and subject to all the normal challenges that you have been put up to the market, but let's say it's an healthy list of tough to make, tough to develop products..

Neha Manpuria: Understood. And my last question on the biosimilars pipeline. Could we talk about how many products we are developing for the U.S. and European market? And when should we start expecting, some sort of a timeline or let's say a progress update on the pipeline that we're looking at for biosimilars?

Erez Israeli: Yes. So we are talking about six products by effort, again, subject to receiving approval in this timeline, but in subject to patent cases, but the cases is what we are aiming for. If you recall at the time when we had the change that we made after the arrangement of whether time with the next ceremony, we decided to skip a couple of years and to move the products that we have to transfer across the market, which is the strategy. The first product should come in the calendar, the beginning of calendar 2027, and then the rest of the product by FY '30. And of course, we have a bunch of products that we come in between '30 and FY 31, FY '35. So that's right now the case that we are planning for.

Neha Manpuria: Understood. Thank you so much.

Operator: Thank you. The next question is from the line of Damayanti Kerai from HSBC Securities and Capital Markets India Private Limited. Please go ahead.

Damayanti Kerai: Hi. Thank you for the opportunity. My first question is for your India business. So you obviously mentioned you're working on some innovative product digital therapeutics etc. To improve market offering, but I just want to understand like how far these opportunities are right now for you because it appears that these kind of product uptake might take some time. And meanwhile, your India business is I'll say going slowly in the market. So how do you bridge your growth versus market growth till the time those innovative products start delivering results?

Erez Israeli: Sure. First thing, just to calibrate, the part of the reason that people see in single digits is that [indiscernible] the brand that we acquired, the price erosion that we had, which we anticipated is part of the business plan that we took into account when we acquired this brand, contribute about 40% for that decline. Plus, in the base of last quarter, last year, we had also a product that we devastated. So, if we are taking those, we are already in the face of double digits. But going forward, what's more important, we identify brands that should grow even faster than the market. So, I'm talking about brands that we grow at the pace of 1.5 times the market, those specific brands that we are building behind them. And in addition to your point, indeed those pick-up may take time, but it's very significant by time that we are building now. All the products that we are building in addition are better than the current standard of care. So, it will be meaningful growth more in the medium term. In FY '25, I'm expecting to see double digit growth in the business from the business.

Damayanti Kerai: Okay. That's comforting to hear. My second question is on your U.S. business. So, obviously, you delivered very good set of numbers. So, two reasons you mentioned pick-up in market share for some key products, et cetera. So, just want to understand, was there a little bit contribution for third quarter even much higher than what we saw in the first and second quarter? And have you seen, like, what kind of pick-up you have seen on the main portfolio?

Erez Israeli: So that I cannot speak unfortunately on quantity on REVLIMID. I can also say that it's absolutely within our expectation. And I'm expecting to be meaningful also in the future. As for main year, we see pick-up, we see that it is growing. So, so far, it is within our expectation. I'm happy for this acquisition.

Damayanti Kerai: Okay. Thank you. My last question is, can you talk about your progress in some of GLP-1 products specifically for anti-obesity indication, which you might be targeting for, say, U.S. or other export markets?

Erez Israeli: So, we decided, like many others to do in this segment, it's very important for us. It's in our interest from both. The first, we are very much into anti-diabetics not just in India, but also actually globally. And we build ourselves, and the second is the peptides. As a family, we believe that it's a core strength of ours from the API as well as on the sterile facilities that we have. So, the combination of what we want to play in this market very much and also to address some of the needs. So, we are planning to launch globally in all the countries that we have reached these products, and the relevant part of the situation will allow us to do that.

Damayanti Kerai: Okay, Erez. Thank you very much for your answers.

Operator: Thank you. The next question is from the line of Surya Patra from Phillip Capital India Private Limited. Go ahead.

Surya Patra: Yes. Thanks for this opportunity. My first question is on the U.S. business. In fact, the base U.S. business, excluding, let's say, REVLIMID and the recently acquired managed portfolio. It looks like that while we are kind of for scenic, lattice performance, despite the improved pricing scenario in the U.S. So, could you qualify that, whether that is the kind of a trend what we have also seen and what is the kind of a growth that we are anticipating for the base business?

Erez Israeli: So I can confirm that the base business is growing. And we start looking for our ability to invest in both inventories and service and obviously in relation to the customers. I anticipate that this trend will continue, also in the future, and naturally, the geopolitical situation and in certain areas, the concern about sustainability of supply, is an important topic for customers, and we see ourselves as a partner to help them to their challenges. Whether we are successful, we have to see ourselves.

Surya Patra: Okay. Regarding the recent M&A is what we have seen, let's say, leveraging the cash flow generation from the REVLIMID. I think we have done couple of acquisition and already announced three, four odd kind of line-selling arrangements. So cumulatively, all these initiatives should have also contributed to the growth in the base business. So, in fact, could you share that okay, what is the kind of incremental growth that such M&A initiatives would have added to the base business and going ahead over a period of let's say next three, four years, I mean beyond REVLIMID opportunity, so what base business growth that you are anticipating out of the M&A activities?

Erez Israeli: So M&A, I'm not calling it base business, it's by design, most of the companies, most of the M&A's is actually, it's not just M&As, it's we have all kinds of collaboration like the SME, JV's, also M&A, all of that is primarily to strengthen the future portfolio after the start, whether it's in, like I mentioned, it can be on the base product like M&A, but mostly it is about actually what we call Horizon 2 again, in CMD and digital focusing on specific guys and digital therapeutic, so actually most of the efforts are coming from that. In addition to that, we are always looking for opportunity, by the way, it's not the money from the M&A, it's the money that we make also from the M&A, but also from the other activities of the company. How much it will contribute? As much as we'll be able to buy. We potentially have a significant financial capacity. And we are very active in the market at the same time, we are not buying for the sake of buying or for the sake of any other. We buy because we feel it's a good deal for us and it's meaningful for our strategy. So like we said, I said, in fact, we are not doing shopping spree, we are buying that we believe is good for us and strategy for us.

Surya Patra: Is that the inspection outcomes for the virtual facility? So what risk that one should assign to it? Or what is your practical assessment here? So do we find any risk to the existing business, given the kind of number of observations that have been issued to you, and the nature of the observation that has been highlighted?

Erez Israeli: Yes, so you are taking about the FTO-3

Surya Patra: Correct.

Erez Israeli: So first of all, what is the risk that we get in OEI? Is there a possibility for that? Yes, there is a possibility, there is also a possibility but there is a possibility that it will happen. What I can update is that firstly, address all the observations in the stipulated time. After that, we get twice to the FDA with the blessing also of external consultants data that shows that the cover that we put in place is working. This is happening in two installments. One in the center and one in general. And I believe that it's a robust answer, but of course we will wait for the FDA response for that.

Surya Patra: Sure sir. Just one last clarification from my side. Whether you have commented on the MenoLab's size and potential contribution to our U.S. business?

Erez Israeli: No, I did not because I don't remember the numbers. I apologize for this.

Richa Periwal: And we've not disclosed the number, but as Erez has mentioned, a couple of millions is what is there. And as the business progresses, we'll keep updating you.

Surya Patra: Sure. Yes. Thank you, Ma'am. Thanks a lot for all your responses.

Operator: Thank you. The next question is from the line of Bino P from Ilara Capital. Please go ahead.

Bino P: Hi. Good morning. Good evening. Just a couple of quick questions. One, you have this product Lumify, which you have been licensed in the U.S. So is there any timeline we can get regarding the approval of the same?

Erez Israeli: Which product? Sorry I missed it.

Bino P: Generic Lumify.

Erez Israeli: Which one, what?

Bino P: Lumify.

Erez Israeli: I don't have any information.

Bino P: Okay.

Richa Periwal: So I think there actually in the pipeline, we'll keep updating once, when the same approval is in place.

Bino P: Okay. Second on biosimilar RITUXAN, could you give some color on what sort of timelines you have in mind for the launch also, given the recent inspection of USFDA and the outcome, et cetera?

Erez Israeli: So, we submitted it in April. We got the FDA inspection actually on time in October. We addressed the FDA observation. We did not receive any additional information. So, if everything will be without any CRL or any query that will come from the U.S. FDA, the earliest that we can get approval is the end of April. But, of course, it will be like any query or survey.

Bino P: Understood. Okay. And what is you mentioned about this biosimilar pipeline, which kind of starts from [indiscernible] and going into the 30s. Do you have some products which could be among the first wave or the first biosimilar to some of the products within that?

Erez Israeli: This is the intent. All the products that we are developing, we are developing within to be the first or in the first wave.

Bino P: Okay, great. Thank you.

Operator: Thank you. The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.

Shyam Srinivasan: Yes, thank you. Good evening. Thank you for taking the question. It is just the first one is on the overall CDMO kind of space. I know you have a subsidy, but just want to understand are you able to see more demand coming from global innovators towards in-depth companies, including companies like yourself or your subsidiary? So that's the first question. And are you investing in capacities either on the small molecule side or the biologic side for manufacturing for CDMO?

Erez Israeli: So, yes for both. The caveat is still our business is not that big. So I cannot say but it's an overall global trend, but the trend that we see is the growth. And we do invest in capacity both in the lab as well as for production, for products that we have contracts and we know that the capacity will be, of course, depraved by those contracts.

Shyam Srinivasan: So then I'm just trying to understand from a capital allocation standpoint, will this be significant for you or you think we have enough other projects in the pipeline for us to be or do you think this will be a small part and will not be ramping up?

Erez Israeli: With CDMO, it's not -- the overall scheme of some factor, which we love with it, but it's a business that should go from tens of millions of dollars to hundreds of millions of dollars with expectation. But in the overall scheme of things of this, the overall size of the company is relatively small.

Shyam Srinivasan: Got it. Helpful. Just a second, it's a financial question to Parag. I'm just looking at your disclosure around net cash generated after removing taxes. I'm looking at FCS, right? So it's been, the conversion has been low. So just want to understand, I know there has been an acquisition you paid out for in the quarter one, but just want to understand either in terms of CapEx or in terms of intangible buildup, is there something that we need to keep in mind?

Parag Agarwal: So I think the only thing I would point out is what it is mentioned, which is, we are investing in strategic inventory buildup. So we are investing in new product pipeline buildup also in, because of the supply chain, the sea routes disruption, we don't want to, lose any sales. So we are also increasing inventory in our front end market. So it's primarily the working capital impact, apart from the sea level increase, which is aligned with normal sales. So that's the key reason. Otherwise our cash flows on various fronts continue to be healthy, the conversion is healthy.

Parag Agarwal: Got it Parag. Thank you and all the best.

Operator: Thank you. [Operator Instructions] The next follow up question is from the line of Kunal Dhamesha from Macquarie. Please go ahead.

Kunal Dhamesha: Thank you for the opportunity again. Just continuing on the last question on the inventory buildup. So how much of our product would be probably be going through sea route now and anything going to red sea route as of now?

Erez Israeli: So the majority of the products are going through the sea route, Actually, the situation creates an opportunity actually to move something by air. In a strange way, certain products even better to be by air now. But of course, this is a volatile situation and may change. But in general, we are trying to press the majority. The majority means for us it should be 80% plus. The second one is that we are trying to have as much inventory in the U.S. very close to the customer is part of our service. To address customer needs, we feel that as an advantage for us as we can give the customer a service that they may not get from others. So this strategy, of course we have a healthy biological health.

Kunal Dhamesha: Sure. And just one related question in the U.S., over the last three to four quarters, how has the one-time or short-term supply opportunities behaved for you? Are those supply opportunities increasing when we come into you or decreasing in the last three to four quarters?

Erez Israeli: I would say that the one-time situation is not big and there is no tangible trends in that. So it makes more of the effect that if we are gaining share, we are gaining for the long term. This is more something that we are focusing on. And most of the work we have now, this product is no longer in nature rather than one-time buy.

Kunal Dhamesha: So is it fair to say that now the agreements that are being done are for a little longer period of time versus what it used to be, let's say two years back?

Erez Israeli: Every customer has its own pattern. For the procurement I don't want to go into details, but in general, we do appreciate the process. So we are trying to be positioned as a partner for our customers in certain areas.

Kunal Dhamesha: Sure. And one on the India business, so we have said that we want to focus on our key brands. We have identified in India where we want to grow 1.5 times a market rate. Could you provide some ballpark number as to how much of these key brands will be contributing to our India business?

Erez Israeli: So, most of the contributions to this overall competition that India is supposed to be, it will come from those brands. So when they will grow at the pace that you mentioned, the overall India business will grow by double digit.

Kunal Dhamesha: Sure. And the last one, because we are focusing on the GLP-1 opportunities, can you provide some color on how much is our product manufacturing capacity and are we manufacturing anything currently for regulated or semi-regulated market?

Erez Israeli: We are focusing on GLP-1, we are focusing on the other peptides, et cetera. But your point, yes, we are making, but most of the most of the volume is yet to be launched because the products are still under patents or are still under approval process by either ourselves or by partners, experiment partners.

Kunal Dhamesha: Sure. And but any capacity that you want to put out, some of the other global players have put out that they can manufacture their 32,000 liter capacity, to manufacture GLP-1.

Erez Israeli: I'll say, that we invested a lot, capacity, both in the API as well as in the finished product. I will not return out the numbers of the process.

Kunal Dhamesha: Sure. Thank you and all the best.

Operator: Thank you. The next follow-up question is from the line of Neha Manpuria from Bank of America. Please go ahead.

Neha Manpuria: Yes, thanks again for taking my question. Just to confirm out of the 26 products that you mentioned in the US pipeline, which are meaningful, none of these would be from Bachupally. Would that be a fair assumption?

Erez Israeli: None of these, sorry?

Neha Manpuria: Are from Bachupally, FTO 3?

Erez Israeli: In FTO 3, I think we do have two products that are part of that. And so in the case that we will have an issue, we will have to move it to another site if it will come into that situation.

Neha Manpuria: Okay. From a pipeline dependence, upcoming launches, how important would FTO 3 be? Or do you just want to understand the risk in case of an adverse outcome?

Erez Israeli: No significance. Most of the products are all sold with most of them commercial. So, no significance. Obviously, we don't want it. It's not nice to reputation, etcetra. But it's not significant. Most of the growth we have to buy, but not so much.

Neha Manpuria: Got it. And Parag, on the moderation in the, growth margins that we have seen in the generics business. How much of that would be, I mean, the quarter-on-quarter moderation, would all of that be because of pricing pressure? Or is there any other big factor there? I think FX would be the other one, I'm assuming.

Parag Agarwal: More of a mixed issue, Neha. I mean, pricing is obviously there, but it's very stable. So, pricing doesn't stand out. But it's just that, the offset from new product launches, from the product mix has been a bit lower. That's all. So, it's not that the price erosion is higher. Price erosion still remains at the same level. If the upside from the other things that we see in terms of productivity, in terms of product mix, there is some timing issue, I would say there, so, overall, well within the normal range.

Neha Manpuria: So, I shouldn't assume that the incremental business that we've seen in the US, et cetera., is a lower margin business and hence that's reflective in my gross margin?

Parag Agarwal: No, that's not right. Yes, you should not assume that.

Neha Manpuria: Okay, thank you so much. Thank you.

Operator: Thank you Ladies and gentlemen, that was our last question for today. As there are no further questions, I would now like to hand the conference over to Mr. Richa Periwal for closing comments.

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

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