Dr. Reddy's Laboratories Q4 22/23 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 10 speakers on the call.

Operator

Ladies and gentlemen, good day, and welcome to the Doctor. Reddy's Q4 FY 'twenty three Earnings Conference Call. As a reminder, all participant lines will be in a listen only mode. There will be an opportunity for you to ask questions after the presentation concludes. Please note that this conference is being recorded.

Operator

I now hand the conference over to Ms. Richa Periwal. Thank you, and over to you, ma'am.

Speaker 1

Thank you. A very good morning and good evening to all of you, and thank you for joining us today for the Doctor. Reddy's earnings conference call for the quarter full year ended March 31, 2023. Earlier during the day, we've released our results and the same are also posted on our website. This call is being recorded and the playback and transcript shall be made available on our website.

Speaker 1

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 disease performance and outlook, we have the leadership team of Doctor. Reddy's comprising Mr.

Speaker 1

JV Prasad, our Co Chairman and Managing Director Mr. Ives Isoyedi, our CEO Mr. Parag Agarwal, our CFO and the entire Investor Relations team. Please note that today's call is a copyrighted material of Doctor. Reddy's and cannot be rebroadcasted or attributed in press or media outlets without the company's expressed written consent.

Speaker 1

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. Dv Prasad. Over to you, sir.

Speaker 2

Thank you. Thank you very much. Good evening and good morning to all of you. Welcome to this annual earnings call. My best wishes to you.

Speaker 2

I am delighted to be here today along with the members of the executive team. As you may have seen in our published results, This year has been an outstanding year for the company, a year in which we set all time highs in our reported sales, profits and generated a healthy cash flow. And we continue to strengthen our core businesses while investing and building businesses of the future. Our sustained investments are being made to drive manufacturing excellence, strengthen our pipelines And we build we continue to build efficiency and productivity in our R and D as well as operations and continue to augment reaching customers by opening new markets and new channels. Looking beyond the financial performance, during the year, we made Great progress on multiple fronts and we were recognized for these achievements.

Speaker 2

Most notably among these are the recognition by CNBC TV18 under the Master of Risk, Healthcare and Pharma segment And we secured Leadership Bank's scores from CDP for the action on climate change and supplier engagement. We also featured in the Bloomberg Gender Equality Index, the S and P's Global Sustainability Yearbook, The BGSI Sustainable to Index in Emerging Markets category and were also awarded by the Economic Times as being among the best organizations for women in the year 2023. Our largest Philips dosages factory Was recognized by the World Economic Forum as part of its global lighthouse network. These recognitions are an endorsement of our commitment to building a sustainable high performance organization focused on the needs of patients as well as society. I'm excited about how far we have come in the past few years And by the opportunities we have for the future, I will continue to make efforts to bring the life of Credo or Bull Health Can't Wait.

Speaker 2

With this, I'd like to hand over the call to Parag for taking you through the financial performance of the company. Thank you, Prasad. Greetings to all of you and I hope all of you are doing well. I am delighted to take you through our results for the quarter 4 full year of fiscal 2023. FY 'twenty three has been a year of strong financial performance with the highest ever sales, record profitability and robust cash flow generation from operations.

Speaker 2

Let me provide you with a quick rundown of our Q4 and FY 'twenty three financials. For this section, all the amounts are Consultative revenues for the quarter stood at INR 6,297 crores that is US766 million dollars and grew by 16% on year on year basis and declined by 7% on a sequential quarter basis. Year on year growth was driven by growth in both generics and PSAI businesses. This was further augmented Q4 on quarter decline was primarily due to sales volatility in the Energy business. The revenues for the financial year 2023 stood at increased INR24,588 growth that is US2.99 billion dollars and grew by 15%.

Speaker 2

The growth was mainly driven by new product launches partly offset with price erosion. Consolidated gross profit margin for this quarter has been 57.2%, an increase of approximately 430 bps over previous year and declined up 210 bps on quarter on quarter basis. Year on year increase was driven by new product sales with higher gross margin and favorable foreign exchange. Quarter on quarter decline was primarily due to product mix and lower operating leverage, Although partly offset by divestment income, gross margin for the Global Generics and PSCI were at 61.7% and 25.2% for the quarter. Gross margin for FY2023 has been 56.7%, which is an increase of 3 60 bps over FY 'twenty two.

Speaker 2

The increase was driven by new product sales with higher gross margin, High government incentives and favorable foreign exchange, partly offset by the impact of price erosion. Gross margin for the Global Generics and PSAI That is 52.1 percent and 16.2 percent for the year. The SG and A expense for the quarter is increased INR1799 crores That is $219,000,000 and increased by 15% by o y, while it remains flat quarter on quarter. The year on year increase is largely on account of sales and marketing investments and adverse impact of ForEx translation. The SG and A spend for the year is INR6803 crores that is INR828 million and has grown by 10%.

Speaker 2

The NVMe cost as a percentage to scale was 27.7% and is lower by 1 100 basis points over previous year due to better operating leverage. The R and D spend for the quarter is RMB5.27 crores that is US65 million dollars And is at 8.5 percent of sales. Our R and D efforts are focused towards building a healthy pipeline of new products across our markets, including biosimilars. The R and D spend for FY 'twenty three is INR1938 crores that is US236 million dollars R and D percentage to scale for the year stood at 7.9%. The EBITDA for the quarter increased INR131 crores that is US198 million dollars and the EBITDA margin is 25.9%.

Speaker 2

The EBITDA for the year is INR7308 crores that is INR889 million. EBITDA margin for the year It is at 29.7%, which is ahead of our aspirational target of 25%. Our profit before tax for the quarter stood at rupees INR 1326 crores that is US151 million dollars And that for the year stood at, we paid INR 6,037 crores that is US724 million dollars Our profit before tax for the quarter grew by 4 24% year on year and for the year it grew by 87%. Effective tax rate has been at 27.6% for the quarter and at 25.3% for the year. The effective tax rate was lower in FY 'twenty three largely due to changes in the complete jurisdictional mix of earnings.

Speaker 2

We expect our normal ETR to be in the range of 24% to 25%. Profit after tax for the That is US117 million dollars and that for the year stood at INR 4,507 crores that is just $548,000,000 Reported EPS for the quarter is INR 57.52 and that for the year is INR 270.85. Operating working capital reduced by INR354 crores, which is $44,000,000 against that on December 31, 2022, mainly supported by an improvement in receivables. Our capital investments stood at INR258 crores, which is US31 $1,000,000 in this quarter and INR 11.32 crores, which is US138 million dollars during the year. The free cash flow generated during this quarter was at INR1596 crores, which is $194,000,000 The free cash flow generated during this year was at INR 4,009 crores, which is $488,000,000 Consequently, we now have a net surplus cash of INR 5,046 crores that is US614 million dollars as of March 31, 2023.

Speaker 2

Foreign currency cash So, hedges, in the form of derivatives for the U. S. Dollar are approximately US774 million dollars Largely held around the range of INR 82.4 to INR 84.5 plus 7,380,000,000 at the rate of INR 1.045 to the ruble and AUS4.2 million dollars at the rate of INR 57.8 or $7 maturing in the next 12 months. With this, I now request Ira to take you through the key business highlights.

Speaker 3

Thank you, Parag. Good morning and good evening to everyone. As Prasad highlighted, we have delivered strong financial performance in FY 'twenty three. We closed the financial year with double digit top line and bottom line growth EBITDA and ROCE margin exceeding the 25% levels. This impressive performance was reflected in our cash flow, And we continue to have a strong balance sheet.

Speaker 3

We progressed well on our strategic priorities and we're able to invest in our organic capabilities This is developed as opportunities to strive and deliver on our purpose over the long term. Let me take you through some of the key highlights of the year. 1, we witnessed underlying gross momentum in FY 'twenty three across all businesses Adjusted for COVID products contribution during last year. 2, revenue in North America generics And branded markets of Indian EM crossed the $1,000,000,000 mark for the 2nd consecutive year. 3, we divested certain non core brands in India We focus on strengthening the core.

Speaker 3

Our EBITDA is at 30% and our ROCE is at 35%. We generated a strong free cash flow, leading to a net cash surplus of $614,000,000 We also see positive momentum on BPM and As with the acquisition of Novartis Cardiovascular Brands' inbox in India, Main Pharma U. S. Generic prescription product portfolio And Iton's branded and generic injectable products in the United States. Significant progress also made in our biosimilar businesses.

Speaker 3

We see a launch of biosimilar stimulus event, which is PEG filter stream by Fresenius Cab in the U. S. We completed and we saw the completion of clinical studies of rituximab biosimilars and we already filed in U. S, Europe and the U. K.

Speaker 3

MHRA. We saw the completions of Phase 1 study of biosimilar tocilizumab And global Phase 3 study was initiated. Recently, we received approvals for 3 products In China, namely sevelamer, civetine and carboprost and our Bartons, go to GA approval for NiservoLine tablets. We are also progressing well in our digitalization as well as our ESG journey. Our diversified global presence, capability and strong balance sheet make us a partner of choice.

Speaker 3

We continue to work towards strengthening our position as a partner of choice, including in Horizon 2 spaces. From Horizon 2 perspective, we signed some strategic license in field in FY 'twenty three, including the below with cardiac care for the wearable For Aptial fibrillation treatment, with Ranika for the wearable management of migraine, With the New Zealand based WZTL to bring the 3rd generation CAR T asset for clinical trials in India, We joined Xi Biosciences to bring toritanimab to India and other markets. We are investing in developing trials of this DTX CAR T biosimilar asset In keeping with our stated Horizon 2 strategy, we see them as the future growth drivers. Now let me take you through the key business highlights for the Q4 and FY 'twenty three. Please note that all the reference to the numbers in these Our North America generic business recorded sales of $312,000,000 for Quarter with a strong growth of 18% year over year and 17% decline on sequential basis.

Speaker 3

On a full year basis, we recorded sales of $1,268,000,000 With the growth of 26% over the previous year. This growth is largely led by new product launches Such as linalidomide, sorafenate tablets and Temoral gels And growing market share in certain key existing products, which more than offset increased price erosion. We launched 16 products during the quarter And overall 25 products during the year. We expect the launch momentum to further improve in FY 'twenty four. Our Europe business recorded sales of ERL56 1,000,000 this quarter With the year over year growth of 7% and sequential quarter growth of 9%.

Speaker 3

On a full year basis, The sales of $210,000,000 has grown by 9%, driven by base business volume and new product launches. We launched 5 new products during the quarter and certified for the full year in Europe across all markets. We expect this strong momentum to continue in FY 'twenty four. Our emerging market business recorded sales of INR 1114 crores With the year over year decline of 7% and sequential quarter decline of 15%. On a full year basis, emerging market sales has been roughly flat At INR 4,554 crores.

Speaker 3

However, the sales have grown in 13% Adjusted for the COVID related products and divestment income in April 'twenty two, we launched 10 new products during the quarter and 94 new products during the year across various countries of the emerging markets. Within the EM segments, the Russia business in Q4 declined by 34% on a year basis and 70% on a Q basis in constant currency. In FY 'twenty three, Russia business declined by 9% in constant currency. The decline is attributed to divestment of non core brand during the previous year. During the year, there has been normalization in the channel customer stocking level after the uptick seen in Q4 FY2022.

Speaker 3

We have been navigating the evolving geopolitical uncertainties and have managed The ruble currency fluctuation with effective hedging. Our India business recorded Q4 sales of 1293 records of it was a year over year growth of 32% and sequential increase of 14%. On a full year basis, our sales were INR4893 crores with a growth of 17%. Excluding the benefits of the divestment income and adjusted for COVID-nineteen related product, the year over year sales growth For the quarter, it has been 11% and for the full year, it has been 13%. As per our IQ, the report, we are ranked number 10 at MAT March 'twenty three level.

Speaker 3

India remains our priority market and we are committed to continue to grow this Business at a healthy rate. Our PCI business recorded sales of $95,000,000 With the year over year decline of 4% and flat sequentially. On a full year basis, the sales were $362,000,000 with a decline of 12%. The decline was primarily due to high base effect of COVID related products. We expect this business to grow during April 'twenty four.

Speaker 3

Our R and D efforts are focused on developing value accretive products, including several generic injectables and biosimilars, Well, there is a patient need. We have done 195 global generic filing, including 12 ANDAs Filed in the U. S. And 130 Drug Master File Filing Globally, Including 12 Drug Master Files in the U. S.

Speaker 3

During FY 'twenty three, we are on track to accelerate on this in FY 'twenty four. We are progressing well in development of biosimilar products and working on some niche opportunities on our Ryzen two initiatives. Our strong balance sheets provide us financial flexibility to support future growth, invest in these development opportunities, We remain focused on strengthening our core generics and API business and delivering more and more Strong foundation. We are building a pipeline of products to meet the evolving needs of patients and healthcare professionals to investment in internal R and D as well as strategic acquisitions. 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. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Balaji Prasad from Barclays. Please go ahead.

Speaker 4

Hi, this is Mikaela on for Balaji. Thanks for taking our question. Just wondering if you could provide a bit more detail around your deals with Genchi, Discussing what responsibilities will look like on both ends and just what else what really convinced you about their asset and its potential? Thanks.

Speaker 2

Balaji, we were not able to hear you well. I'm afraid you will have to repeat the question. Can you repeat, please? Sure.

Speaker 4

Sure. Is this better? Can you hear me better now?

Speaker 3

Yes, please.

Speaker 4

Okay. Hi. This is Mikaela on for Balaji. Thank you for taking our question. We're just wondering if you could provide a bit more detail around your deal with Junxi, just discussing what responsibilities will look like on both ends.

Speaker 4

And also just wondering what convinced you about this bare asset and its potential? Thanks.

Speaker 3

Thank you. So strategically, we are looking So unmet need, especially in India. And we believe that we are in a great dialogue with the Innovation Industry in China. And we are trying to bring products that we believe that we can bring value. And we believe that this product shows very, very nice results and can be absolutely considered standard of care.

Speaker 3

And we can bring it to India in a very affordable crisis versus the alternatives. And this is our purpose. We are trying to bring Great health in the affordable terms and that's what was the main incentive behind this year.

Operator

Thank you. The next question is from the line of Asurya Patra from Philip Capital. Please go ahead.

Speaker 5

Yes. Congratulations for the great set of numbers. So my first question is on the U. S. Business front.

Speaker 5

So is it possible to share that What is the sequential growth in the U. S. As we would have seen ex of REVLIMID in the current quarter?

Speaker 3

So we cannot give guidance for products with or without, as you know very well. What I can see is that we are very consistent. So likely that we are going to continue to see growth in all of our spaces, Including the United States with and without the product. And it will be driven primarily for the organic activity, specifically for the United States. Besides the Revlimab, we are going to launch somewhere between 25 to 30 products As well as the contribution of our recent acquisitions and likely that we will see also additional activity through the year.

Speaker 5

Sure, sir. Sir, is it possible to give some extra color on the The launch momentum that you have mentioned in your opening remarks for the U. S. Market, which you believe that to be strong In the current financial year?

Speaker 3

Yes. I think that the investment in R and D and especially On products that hopefully are likely to have less competition than the others is paying off. And as well as the type of patent fleet that we will see in FY 2024 as well as the years after. So right now that's the numbers that I mentioned 25 to 30 products, some are it can be meaningful launches With the lesser of the competition. And we will continue to accumulate this kind of product Also in the years after.

Speaker 3

So it's absolutely our strategy in the U. S. And we will continue to focus on that.

Speaker 5

Okay. Sir, my second question is on the composite question, let's say. We are seeing a strong cash accumulation. And simultaneously, we are seeing multiple M and A activities by us to improve our focus on the domestic formulation business, which has now achieved around 20% of the total revenue base. And we are mentioning that this is going to be one of the focus market for us.

Speaker 5

So Could you share your thought process as the kind of capital allocation to build This business in the near future and ultimately what is the kind of a business mix that you want to make achieve it for domestic formulation Considering the potential growth and all that, the potential sales?

Speaker 3

Yes, absolutely. So in India, Our primary growth will come from, 1, focusing on our brands. We identified focus Therapeutic areas as well as the focused brands. And we have doubled down on that by Increasing our footprint by going to more cities, etcetera. So this is one goal.

Speaker 3

Specifically, fair question. The second one is that we are collaborating with the innovation industry in the United States, In Israel, in China and other places as well, of course, with companies and institutes in India To bring innovation to India, we are doing it as both with our own internal R and D as well as with Some of the deals I mentioned in my script and more to come, we are doing it both on Horizon 1 As well as Horizon 2. And our path of growth is people see us as a very Atactic partner being compliant with all the international norms, Given our reputation in the marketplace and we are leveraging it to bring more and more innovation into India. And that's also a part of the capital allocation will go to deals like this. In addition, we are always looking for opportunity also for acquisitions.

Speaker 3

There is nothing that we can report at this stage, But it is absolutely something that we are open to do all the time. For the initial part of the capital allocation, All of our spaces, including U. S, Europe, India, Etcetera, our B2B business, we are looking for potential complementary deals. The type of deals that we are looking for is complementary. We are looking for products that we don't have or capabilities that we don't have.

Speaker 3

Unlikely that you are going to see mega deals or this kind of stuff. This is not our comparison. We are looking for Primarily unmet need for complementary products that will fit our portfolio in this way. So

Speaker 5

Yes, sure, sir. So that is really great to know. And just lastly, Any color that you can add to the PEGS investing expectations in the progress post launch?

Speaker 3

Sorry? Yes. The product, as you know, is marketed by Fresenius. So I don't have any expectation or anything like that. We As a partner, there is certain arrangement with them and us that will be successful, we will be successful as well.

Speaker 5

Sure, sir. Wish you all the best. Thank you.

Speaker 3

Thank you.

Operator

Thank you. The next question is from the line of Damayanti Karai from HSBC. Please go ahead.

Speaker 6

Hi. Thank you for the opportunity. My first question is on the U. S. Business.

Speaker 6

You have been obviously very consistent in terms of new launches. But can you talk a bit more about the kind of Price erosion, which we are seeing in your existing product. And my second part of the question is compared to oral solid In injectables, what kind of price erosion you're witnessing?

Speaker 3

Yes. So the nature of the U. S. Did not change in the last quarter. It's a similar structure of the market and similar behavior of Pleasure.

Speaker 3

Specifically for the quarter, the mix of products that we had, We saw less of the price erosion that maybe a quarter before, but the fundamental Structure of the market did not change. So likely that when we'll face competition in certain products, then we'll see an erosion, That's the nature. But specifically, we saw a better mix this time. Comparing injectables to overall solids, both are very competitive. So it's more of A function of how many players are attracting the customers.

Speaker 3

And so both injectable as well as oral solids can see High level of erosion, but also from time to time product with less competition and therefore Better pricing situation. Sure.

Speaker 6

Thanks for that. My second question is, As you continue to invest in your business and long term growth drivers, how do you see R and D and SG and A cost moving from here on? And you obviously have, I'll say, done better than your aspirational EBITDA margin for this year. But on a More sustained basis, how do you see this like margin trajectory moving?

Speaker 3

So we are maintaining the 25, 25 as a long term and we discussed it in previous meeting. And there will be years and quarters that we will exceed it. There will be maybe also years that it will be below, which has happened also in the past. But we are very much there. What we are doing is that we are allocating the extra results that we invest And especially in R and D, the R and D likely to be somewhere between 8% to 9%.

Speaker 3

Also going forward, and it's naturally nominal, we will grow because we are growing the sales. And this has allowed us to invest in biologics. It's allowed us to invest in our Products that we are partners with other and we need to do some clinical trials. And of course, very important And they are generic R and D, especially focusing on products that matters products that are likely to have less competition.

Speaker 1

Okay. Thank you. I'll get back in the queue.

Operator

Thank you. You have the next question from the line of Neha Manpuria from Bank of America.

Speaker 6

Sir, on the ROW markets, historically, if I exclude the last year because of COVID impact, we have grown that market north of 20% or 25%. As we go forward, should we See the ROW market going back to those levels of growth and this is excluding Russia? That's my first question. And second, on the India business, could you quantify the divestment income in the current quarter? And excluding that, how should we look at growth?

Speaker 6

Is there more divestment that we see From the India perspective? Or do you think this is the base on which we should grow?

Speaker 2

And do

Speaker 6

you think you can grow in line with the market in India?

Speaker 3

Eimia, on the ROCW question, Yes, the answer is yes. We are aiming for our traditional growth and also Give or take with our guidance that range of growth that we saw. And indeed, when you are Taking out all the one offs and the fluctuation of currency, we are growing very, very nicely. This is primarily as we are accelerating The development and the filings of products in all these markets and also focusing on the footprint, especially on the hospital business. So yes, the answer is that we will see a growth and in some of those markets even accelerated growth versus the past.

Speaker 3

As for India, the divestment was INR264 crores and that's the value we got. And specifically, if we see more, yes, from time to time, but nothing It's significant that we are going there. And what we are also very busy with is actually to Bring more and more products and we are enhancing the collaboration, discussions and the BD deals that It will be for India. So it's a kind of organic plus inorganic, but most of the inorganic will come from collaboration Rather than kind of M and A acquisitions of other companies.

Speaker 6

And just to extend the India question, do you think we can grow in line with the market keeping aside the collaborations, etcetera, because that would take Time to reflect the numbers just from the effort that we've been putting in the business over the last few years. Could we see Reddy's go back to or at least Try to get in line with IBM Group?

Speaker 3

We believe that we should be better than the IBM Group.

Speaker 6

In FY 2024 itself?

Speaker 3

In FY 20 24 and after.

Speaker 6

Understood. And one last question, if I may. On the Russia business, I didn't quite catch what you mentioned in the quarter. Was there any specific impact from

Speaker 2

So, Neha, that impact is actually in the base. If you remember, when the conflict started, at that time, yes, there was upstocking. And to that extent, in Q4 same time last year, the base was high and that's impacting the year on year growth.

Speaker 6

Okay. There's nothing specifically in this quarter?

Speaker 3

Yes. So nothing specific happened in this quarter. And most of the sequential decline stuff, it's primarily timing For product, there is a specific timing of tenders of the biologic products and Stuff like that. So we can sell that in Russia's business as usual.

Speaker 6

Got it. Thank you so much.

Operator

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

Speaker 2

Thanks for the opportunity, sir. So my question is related to the G development that has Thank you, the incremental revenue for U. S. Business. So could you throw some light on it?

Speaker 2

What is the sustainability run rate for This is Palujul in upcoming quarters. And excluding the ZREV unit, how do you see the EBITDA margins for the U. S. Business?

Speaker 3

So on the product itself, which is going to continue to be a meaningful product from us, may fluctuate from quarter It is going to be there probably for The entire agreement time lines. The fluctuation is primarily patterns But we as you know, it's a limited volume arrangement, and we believe that it will serve us well to the entirety As for the activities outside of it, We are going to continue to grow. I mentioned just in previous discussions, all the time we have products That have less competition than others. Naturally, this product is bigger than the others, but likely, because in the future, we are going to see products like that. And that's what we are also focusing on.

Speaker 3

And so the profitability as well as the growth of our U. S. Markets We'll continue to be in the same range also in the years to come and quarters to come.

Speaker 2

And so what are our beta margins that we sustainable beta margins?

Speaker 3

Like I mentioned, we are Going to sustain the 25, 25 on the long term basis. We are not guiding to a particular market as you know. But from time to time, we'll be more than that. And there will be maybe times about it. It's also a function of How much we want to put into the R and D?

Speaker 3

Likely that they will be higher through the time that we will have The VLAMED and the combination of other low competition programs.

Speaker 2

Sorry, if I do my Congratulations. And excluding redevelopment, base business is still on the lower side in terms of growth. So any strategy for the base business?

Speaker 3

I don't share that observation.

Speaker 2

Thank you, sir.

Operator

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

Speaker 7

Yes. Thank you for taking my question. So the first question on our strategy to leverage our U. S. Sandvik portfolio for Europe and other market.

Speaker 7

And we have seen significant growth in Europe So roughly over the last 2, 3 years. But in your view, how far along we are in that journey? Let's say, In U. S, we have roughly around 140, 150 products. How many products you would have already launched in Europe?

Speaker 7

How many in pipeline? And Now if you can throw some light there, it would be helpful.

Speaker 3

Yes. We decided to focus on Europe when we took the decision on the diversification. This is working well for us. And in terms of where are we in the journey, somewhere in the beginning. So I do see that most of the growth in Europe are ahead of us and that we are planning to launch many Products in Europe in the next coming years as well as to make other moves, including inorganic.

Speaker 3

So we see Europe as a focused market, especially around Germany. So Germany will be the local market and of course, The rest of the big countries in Europe, we believe that we have to offer including biosimilar. So likely that you'll continue to see growth in Europe also in the next coming years, including the next

Speaker 7

And this liberating of portfolio, when you launch same product, Does it kind of become highly ROIC accretive in your view even beyond what our aspirational target is? Or It helps us achieve that 25% ROIC target on a portfolio level?

Speaker 3

Yes, it's absolutely, yes, it is Because it's primarily leverage. So that's and obviously it's a piece in the puzzle. Europe is still Relatively small compared to the other spaces, but over the time, it's getting more and more All this is impact on the overall average, but it's a yes, it's a great.

Speaker 7

Sure. And the second question on the CTO-one observation, what's the kind of nature of observation? And Manu, Have we submitted the response to U. S. FDA?

Speaker 7

Or are we in the process of submitting a response?

Speaker 3

Yes. It's a minor observation. We will address it. And we did not submit it yet. We just got it.

Speaker 3

I think we are 15 days, it's not mistaken. So We will submit that. It's on time. I believe that this will be okay.

Speaker 7

Sure. Thank you and all the best.

Speaker 3

Thank you.

Operator

Thank you. The next question is from the line of Madhav Marda from FIL Industries. Please go ahead.

Speaker 8

Hi, good evening. Thank you so much for your time. Just had one question. Basically, we've accumulated a lot of free cash flow in recent times and I think Have been doing some M and A activity already. Just wanted to understand given I think in general, a lot of the peers have good free cash So when we're looking at M and A and good assets very aggressively bid, We've seen industry just want to understand that for a good asset, is it easy to get at a good Or how should we think about M and A opportunities given we have a good cash pile available today?

Speaker 3

Yes. So if you recall, it was part of our strategy to close the debt and accumulate cash Anticipating the situation, anticipating at the time the increase in the interest rate and the inflation. So we are now looking for opportunities that one will, of course, fit us strategically and second will be in good valuations. So now I There are certain areas and certain type of products that potentially can get good multiples and that's what we are looking for. In addition to that, we are looking for we are using this money for the type of licensing The type of boosting the portfolio also for the future and the money will be used also for that.

Speaker 3

We are not the type of company that is seeking what we call transformational acquisitions that unlikely that you'll see In our case, but we will see hopefully more deals than we saw in the past.

Speaker 8

So basically, our M and A will be more bolt ons the time that we've done in recent times as well. That's right,

Speaker 3

Let's call it this development, which is including licensing and will include the product acquisitions, collaboration with companies And also, Amadek.

Speaker 8

Got it. Okay.

Operator

Thank you. Thank you. The next question is from the line of Cinderella Thomas Carvalho from GM Financial. Please go ahead. Ms.

Operator

Carvalho, the line

Speaker 1

for questions. Thank you for

Speaker 6

the opportunity. Am I audible?

Operator

Yes, you are audible. Please go ahead.

Speaker 1

So just wanted to clarify this on sorry for asking on generic development again. But is the higher volume share Reflected in this quarter or will it be reflected next quarter?

Speaker 3

If you are talking about the We cannot share in quantity numbers. And what And what I said is it's continued to be meaningful for us and in accordance to the agreement terms Yes, we have.

Speaker 1

Okay. Thank you. And on in your opening remarks, You highlighted about the Chinese product approvals that you have received. When and where should we start reflecting these into earnings? And what is our outlook here, If you can help us understand.

Speaker 3

Yes. This is a reflection of the efforts that we had through the years by submitting And China focusing on those products, which we can get GA status and be one of the Early entry for the market. So I think getting for approvals In less than a couple of weeks, it's a big achievement for a company like us. What we see, we see pickup All the time, it has a significant impact on our results. We will see them all about, Let's say from starting in FY 'twenty four, but more likely we see bigger numbers in 'twenty five to 'twenty six Fiscal, as the submissions and the approvals and the timing of those GRPs will take place.

Speaker 3

That's what we anticipate. And right now, we are in the pace of 50 to 20 product submissions per year and naturally with the cycle of approval is the pattern in China and the timing of the GOPs, It will be more meaningful. But let's say the strategy so far is working well because it's a leverage strategy In which we have an outlet for the very, very important markets, we are very pleased from this approval.

Speaker 1

Thanks. This is helpful. And coming to the PSAI business, compared to your peers, we have not seen the Top line growth, however, the gross margins have definitely improved Q on Q. So how should we see the outlook for this business? We've been positive on growing this business, but does anything change here at this point in time?

Speaker 1

Or is it some Seasonal impact that we have seen in this quarter and we should start seeing growth from next fiscal onwards like how should we read this?

Speaker 3

We will see both. We will see growth and we will see improvement of profitability. For us, this market also in the past And excluding also in this segment, we used to record also COVID sales. So if I'm excluding the COVID, What we saw is at the time, it was a decrease in prices of some old portfolio as well as Increase in some of the raw material. Now we see the reverse.

Speaker 3

What we see that we are launching new products and most of the sales are To more territories, especially in Asia. And we see also a better mix of products. And we see an ease on the supply chain and the to a certain extent procurement. So actually now I see a positive momentum that is building on both growth as well as profitability.

Speaker 1

But we should see this gross margin level sustaining. That's the

Speaker 3

I hope that it will be even enhanced, Not just sustained for sure, but we are aiming for enhancement.

Speaker 1

And the top line, any number that you would like to share like early double digit, Mr. Kapil, this is anything any color which will be helpful.

Speaker 3

No, we are aiming for double digit. We are not guiding it, but we are aiming in double digits All of our markets including our PCI.

Speaker 1

Thank you so much. I'll join back to you.

Operator

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

Speaker 2

Yes. Thanks for the opportunity. So again on North America sales given that FY 'twenty three had certain Trend related exclusivity as well for generic Revlimid and competition to some extent kicking in FY in the coming quarters. So considering these aspects, just would like to understand, we still grow in FY 'twenty four in U. S.

Speaker 2

Sales, North America Flu?

Speaker 3

I believe that we will grow not just because of the product, we will grow because we are also launching 25 to 30 products And the combination of all this mix should grow up in the United States.

Speaker 2

Okay, sir. Thank you.

Operator

Thank you. The next question is from the line of Ashish S. Tavkar from IIFL Asset Management. Please go ahead.

Speaker 7

Yes. Thanks for the opportunity. So I had this question since we have been maintaining this 25% EBITDA margin guidance. But if we just try to strip off some one time big opportunities and say some one off non recurring items, The EBITDA margins on the core business seem to be lower versus what we were guiding for. Azot, just help us understand for FY 'twenty four as we go into FY 'twenty four, Would you like to provide some color as to directionally what we as investors can expect?

Speaker 3

First, I don't share the observation that it's less than what we guide. So that's a starting point, And we may need to clarify. We will I'm maintaining the 25, 25 message on the long term basis, In which we will allow us both to grow, give great return on the shareholders as well as to finance the future. And what you see is that we are building a bigger and better portfolio As time goes by. And plus, the balance sheet is probably the best ever in terms of both cash flow as Well, as no additional substantial risk that exists in the balance sheet.

Speaker 3

So this is, of course, allowing us and much better also utilization of the working capital. So this will allow us That's our CEO also in the future.

Speaker 7

Yes. Fair enough. So lastly on this India business, You did mention that FY2024, you expect to beat the IPM growth. And we have been acquiring assets trying to strengthen our portfolio. What due to the confidence that FY 'twenty four, we can beat the industry growth?

Speaker 7

So just wanted to have some understanding on that.

Speaker 3

I'm confident that we'll do it. And we need to recall that for me, I know that we are looking at Thermal sources like IQV, etcetera. But the most important for me is what is our bottom line growth. And that should be very healthy. So the answer is that I am confident, And I believe that we will go to the top line even faster than we will go to top line.

Speaker 7

Okay. Fair enough. Thanks all the best.

Operator

Thank you. The next question is from the line of Nitin Agarwal from Dam Capital Advisors. Please go ahead.

Speaker 2

Thanks for taking my question. It is on the main portfolio that we acquired in the U. S. Can You want some more color on what opportunities you see in that portfolio in terms of to grow the portfolio from the current side?

Speaker 3

Yes. It's a portfolio that has certain level of lower level of competition, especially in women's health. We are it's allowed us to get back to Nuvamet, something that was missing for us, as you know, through the years. And it's also that there were many products in the pipeline that did not launch and something that We'll be able to do in the future. So if you wish, we have critical impact.

Speaker 3

1, we believe that we can do well With this product, second, we will be able to launch more products. And first, we can launch some of these products in other markets. Relatively, the economy of the deal is relatively attractive for us. So we are very pleased so far with the progress of the main acquisition.

Speaker 2

So I think it's fair to assume given the new product launches that you have

Speaker 3

That's what we are aiming to, yes.

Speaker 2

And from a profitability perspective, is this a business which is higher than our corporate profitability right now?

Speaker 3

It is I don't I cannot share information about specific profitability of products, But we believe that the nature of the products and the mix of the product that have less competition is always favorable There was a high level of competition. This is the nature of the U. S. Market.

Speaker 2

Thanks. And besides this kind of action that you made for this investment that you made with U. S. Generics, do we still are open to keep investing more money in U. S.

Speaker 2

Generics by way of acquisition? This is more of a special case transaction which came our way.

Speaker 3

We are We will continue to look for opportunities in the U. S. Market, including generics. If it will fit the financials and This will be complementary to what we do. So we will continue to look for our proteins both organic and inorganic in the U.

Speaker 3

S, Not just now, also in the future. It is a very important market for us.

Speaker 2

Okay. Thank you.

Operator

Thank you. The next question is from the line of Prakash Agarwal from AXIS Capital. Please go ahead.

Speaker 9

Yes. Hi, good evening. Thanks for the opportunity. Just if I heard that right, just wanted to reconfirm that you mentioned that you expect double digit growth from Cross markets, including the U. S, would that be correct?

Speaker 3

I do, Not necessarily every quarter and not necessarily all the time. But absolutely, this is the long term Aspiration for us, including in the absolutely, that's what we are aiming also in the short term, but I cannot I promise you that it will happen every quarter and every quarter and every situation obviously.

Speaker 9

So asking for fiscal 2024 specifically, sir?

Speaker 3

Specifically, that's what we are aiming. We are aiming for double digit growth.

Speaker 9

And Excluding the acquisition with the base portfolio and some one offs, it is possible as what you see.

Speaker 3

I believe that it's possible.

Speaker 9

Okay, okay. That is helpful. And just a follow-up on this, the U. S. Generic market, I mean many companies have been talking about while price erosion remains more or less There is a lot of volume opportunities that is coming, new business opportunities, etcetera.

Speaker 9

So would you say that we We would have also got these in the last 3, 6 months given there are some U. S. FDA issues with the peer set.

Speaker 3

I'm not sure I understand the FPL comment. Can you clarify that?

Speaker 9

Yes. So what we hear from some of the peers is that they are getting some volume opportunities like new business opportunities, NBOs, where they need to supply a few of the products where earlier they were not contracted, largely due to the U. S. FDA issues by the peers. So are we getting some volume based opportunities to supply in the U.

Speaker 9

S. Market?

Speaker 3

We do from time to time. I would I'm not considering it as a strategic issue, but we do from time to time have a situation. So Give or take, if I saw correctly, about 10% to 15% of the SQ in the United States in some sort of a shortage from all kinds of reasons, Not just FDA, but all kinds of reasons. And in those situation, you are always an opportunity For one time buy and stuff like this.

Speaker 9

And would you have you seen anything incremental in the last quarter is what I'm trying to get some color on. I mean given we have seen some large companies having some

Speaker 3

Yes. So nothing that ICS strategic.

Speaker 9

Okay. And lastly In general, we

Speaker 3

are not building ourselves on failures of others. We are trying to build ourselves with our own capabilities. Fair. Fair.

Speaker 9

And lastly, on the run rate that we see in the past, it was $225,000,000 and then it came back on the base business side $250,000,000 and then we saw some big jumps. And now things are normalizing and you still maintain it is going to be volatile but material. And I also understand that Market share of these Revlimid are it changes, right? It increases every 6, 12 months or maybe calendar year. So would it be fair to say that with the new launches that you spoke about and Revlimid continuing, and this is So in addition to the first question, so that is the key to grow double digit.

Speaker 9

Would that be a fair assessment that on that Revlimid base also you will grow?

Speaker 3

The growth of the in the United States will be from new products as well as volume from other products As well as data posting, so all of that will contribute absolutely. But I cannot guide you on with and without this kind of stuff, I will not be able to do that.

Speaker 9

Okay, okay. Lovely. And lastly, on the while you spoke about growth across markets, would you say that This kind of launch and product visibility across markets, these kind of margins could be sustainable?

Speaker 3

Yes, I believe so. I believe that that's why we are guiding for the 25%, 25%, which We'll be enabling us even to finance Horizon 2. So if you recall, we said that about 50 to 100 basis And we are able to cater that within the margins. And So we are strategically positioned well that we are able to finance our future and at the same time to provide these Margins and I will say to the shareholders.

Speaker 9

But we are doing better than what we are guiding, right? I mean, that's what I'm asking. We'll be able to continue with This kind of performance.

Speaker 3

Now we are doing better and maybe there will be also a period of time that will be not But right now, we are doing better, yes.

Speaker 9

Okay, lovely. Thank you and all the best.

Speaker 3

Thank you.

Operator

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

Speaker 1

Thank you. Thank you, everyone, for joining us today for the earnings call. For any further queries, please reach out to the Investor Relations team. Thank you. Have a great day.

Operator

Thank you. On behalf of Doctor. Reddy's Laboratories Limited, That concludes this conference. Thank you for joining us. You may now disconnect your lines.

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Earnings Conference Call
Dr. Reddy's Laboratories Q4 22/23
00:00 / 00:00