DRREDDYNSEQ2 FY'23November 3, 2022

Dr. Reddy's Laboratories Limited

7,426words
106turns
13analyst exchanges
1executives
Management on call
Erez Israeli
- our CEO; Mr. Parag Agarwal -- our CFO; and the Investor
Key numbers — 40 extracted
Rs.81.37
this section, all the amounts are translated into US dollar at a convenience translation rate of Rs.81.37, which is the rate as of September 30, 2022. Consolidated revenue for the quarter stood at Rs.6
Rs.6,306 crore
1.37, which is the rate as of September 30, 2022. Consolidated revenue for the quarter stood at Rs.6,306 crores, that is US$775 million and grew by 9% year-on-year basis and by 21% on a sequential quarter bas
775 million
f September 30, 2022. Consolidated revenue for the quarter stood at Rs.6,306 crores, that is US$775 million and grew by 9% year-on-year basis and by 21% on a sequential quarter basis. In the same quarter o
9%
Consolidated revenue for the quarter stood at Rs.6,306 crores, that is US$775 million and grew by 9% year-on-year basis and by 21% on a sequential quarter basis. In the same quarter of last year, we
21%
quarter stood at Rs.6,306 crores, that is US$775 million and grew by 9% year-on-year basis and by 21% on a sequential quarter basis. In the same quarter of last year, we had high covid product sales,
59.1%
igh teens in this quarter. Consolidated gross profit margin for this quarter stood at 59.1%, an increase of 565 basis points over previous year and 920 basis points sequentially. The gross
565 basis point
arter. Consolidated gross profit margin for this quarter stood at 59.1%, an increase of 565 basis points over previous year and 920 basis points sequentially. The gross margins were mainly aided by f
920 basis point
it margin for this quarter stood at 59.1%, an increase of 565 basis points over previous year and 920 basis points sequentially. The gross margins were mainly aided by favorable product mix and production linked
65.4%
ts have reduced significantly. Gross margin for the Global Generics and PSAI businesses were at 65.4% and 3.6% respectively for the quarter. PSAI gross margins were primarily impacted due to inventor
3.6%
reduced significantly. Gross margin for the Global Generics and PSAI businesses were at 65.4% and 3.6% respectively for the quarter. PSAI gross margins were primarily impacted due to inventory provisi
Rs.1,656 crore
r sales base. We expect it to improve in the coming quarters. The SG&A spend for the quarter is Rs.1,656 crores, that is US$204 million, an increase of 4% year-on-year and 7% quarter-on-quarter, which is in l
204 million
to improve in the coming quarters. The SG&A spend for the quarter is Rs.1,656 crores, that is US$204 million, an increase of 4% year-on-year and 7% quarter-on-quarter, which is in line with business growth.
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Guidance — 20 items
Amit Agarwal
opening
“All the discussion and analysis of this call will be based on the IFRS consolidated financial statements.”
Parag Agarwal
opening
“We expect it to improve in the coming quarters.”
Parag Agarwal
opening
“We expect our normal ETR to be in the range of 25% to 26%.”
Erez Israeli
opening
“While we wouldn't be able to mention specific sales volume or value arising from Lenalidomide, we expect this product to continue to contribute meaningfully over the next few quarters as well.”
Erez Israeli
opening
“In this quarter, we launched seven products and expect momentum to continue during the balance of the year.”
Erez Israeli
opening
“We expect to continue with the growth momentum in the rest of FY'23.”
Erez Israeli
opening
“We expect this business to continue the growth momentum during the year.”
Erez Israeli
opening
“We expect sales improvement over the next couple of quarters due to increased volume pick up and launch of new products.”
Tarang Agrawal
qa
“Just wanted to get a sense that were the volumes bunched in the current quarter as per the agreement with the innovator or should we expect the volumes committed by Dr.”
Tarang Agrawal
qa
“So, if you could just explain what's happening there, is this supposed to move up going forward or how should we look at it, and what is driving this decline, not specifically for this quarter, but over the last three, four quarters?”
Risks & concerns — 15 flagged
We have been able to manage well the risk arising from the FOREX fluctuations in the current volatile environment.
— Parag Agarwal
In the last few years, we have built a well-diversified business model, which allows us to have multiple growth drivers and reduces the risk of being dependent on a single market or event.
— Erez Israeli
We believe in the current environment of geopolitical and economic uncertainties, inflationary pressure and FOREX volatility, our strategy is allowing us to grow.
— Erez Israeli
Our emerging markets business recorded sales of Rs.1,225 crores with a year-on-year decline of 6%; however, a sequential quarter growth of 36%.
— Erez Israeli
The year-to-year decline was due to a higher base effect as we had covid product sales in Q2 of FY'22, adjusted for this contribution, we have grown.
— Erez Israeli
Our India business recorded sales of Rs.1,150 crores with a year-on-year growth of 1% and a sequential decline of 14%.
— Erez Israeli
Our PSAI business recorded sales of $81 million with a year-over-year decline of 29% and a sequential decline of 12%.
— Erez Israeli
The decline has been due to lower volume pickup by our customers for some of our key products.
— Erez Israeli
We believe that even in the current uncertain environment, there are multiple opportunities to grow our business, and we are committed to pursue this in line with our strategy.
— Erez Israeli
So, if you could just explain what's happening there, is this supposed to move up going forward or how should we look at it, and what is driving this decline, not specifically for this quarter, but over the last three, four quarters?
— Tarang Agrawal
Our gross margin for the quarter, we have reported at 59%, and as I stated it is strong because of favorable product mix including the impact of new product launches.
— Parag Agarwal
I would just point out that even if we take out the impact of new product launches during the quarter, our gross margin is within the normal range that we have been consistently talking about, which is somewhere between 51% to 54%.
— Parag Agarwal
So, it's entirely driven by the jurisdictional mix, and it includes some impact of new product launches, including Lenalidomide.
— Parag Agarwal
Overall, there is some impact of cost inflation, but I think we have had good cost control.
— Parag Agarwal
As a company, we are kind of let's say pretty risk averse in a way that we do not have a single product or a single activity or a single supplier or a single country that we are dependent on.
— Erez Israeli
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Q&A — 13 exchanges
Q
Three questions from my side. The first question is on Lenalidomide. Just wanted to get a sense that were the volumes bunched in the current quarter as per the agreement with the innovator or should we expect the volumes committed by Dr. Reddy’s in the current quarter to probably continue as we proceed? Number two, if I look at the cash flow statement for the business, there's roughly about Rs.600 crores that's been spent on intangibles. So, wanted to understand what is the nature of this, is it a purchase of ANDAs or something else? And the third question is on the PSAI business. I believe th
Erez Israeli
I will take the first and the third, then Parag will take the second question. On the first question, the quantities are within the scope of the agreement that we had with the innovator, and we will continue to sell the product also in the next coming quarters. On the third question, indeed, the volumes of the API, especially on some of the old products went down. And this is the main reason of lower gross margin. This is a very much a fixed cost type of an industry. So, what we see is that likely sales will go up. And naturally with that also, the margins will go up. Now, over time, strategic
Q
Pardon if I'm asking this again, but two questions. One is, how should we think about the base business performance given there is some competition in your key products, would it be largely flattish or it would have come down? And secondly, on the volume restricted launch that you have done for generic Revlimid, most of it is already booked or there is more to be in the financial year '23?
Erez Israeli
So, on the second one, we are going to book sales for this product in Q3 and Q4 and in the years to come. So, it's not that it's one-time. We are planning to continue to sell this product in a meaningful manner also in the next coming quarters. As for the first question, the best way to describe it is we are very consistent, meaning, that even on the long-term basis, and that's something we are trying to be very consistent with our communication, our US activities is growing in the single digit on a multi-year basis, while from time-to-time, we have blips ups and blips down in accordance to th
Q
First one on the gross margin. So, we have kind of improved gross margin by 550 bps. Can you just quantify various moving pieces here? I think we have product mix, PLI approval, FX impact, and then offsetting is a COVID product provision and the price erosion.
Parag Agarwal
Our gross margin for the quarter, we have reported at 59%, and as I stated it is strong because of favorable product mix including the impact of new product launches. So, that's clearly something that's pushing it upward. We have also recognized the benefit of PLI and a few other normal export incentives like DBK, etc., during the quarter. We have also taken a provision of around Rs.100 crores for COVID product inventory as the sales have come down quite a bit as you would know. And there is of course a little bit of cost inflation that is sitting in these numbers. There is some softening we a
Q
My question is on India piece. So, even after adjusting for covid base and sale of some non-core brands for the quarter, sequential growth rate is around mid-single digit, which is lower than market growth of double digit. So, how should we see growth moving ahead and what will be the key drivers? So, a few years back, you mentioned about growing your India sales by almost 50% on the base existing at that time. So, are you broadly on track to achieve that?
Erez Israeli
Yes, we are very confident that we are on track. What you see now is a combination. First, we are long focused. So, as part of our strategy and as discussed in previous meetings, we identified certain segments that we want to focus on. And for those focus to put our resources behind meaningful brands that can grow and sustain for many years as well as investing in what we call Horizon 2, which India is going to be a big outlet for that. As part of this, we are divesting brands as well as focusing on brands, for example, the brands that we acquired recently as well as licensed out in the area o
Q
My first question is on the cash flow that we are likely to be generating from Revlimid. So, in fact, Dr. Reddy's has been a kind of a consistent generator of free cash flow, over Rs.1,000 crores kind of annually. And this Revlimid the way contribution that we are witnessing it is obviously over Rs.1,000 crores kind of per annum contribution that we are definitely likely to see. So, given that your qualitative growth outlook, if you can give some utilizing this cash flow situation, so obviously, your growth can be qualitative and consistent over the next few years, so can you give some clarity
Erez Israeli
Indeed, I agree with you. We are building a very healthy cash flow position and which exactly gets prominence over the others. Capital naturally first the basic use it for CAPEX, to use it for buying and building the future technologies and to use it for our working capital. We will naturally have excess of that. The second is to business development. We are actively looking for deals across all of the geographies which fits our strategy, both on Horizon 1 as well as Horizon 2. We feel also that the geopolitical situation as well as the economy situation create an opportunity for us. In that p
Q
Just a couple of questions. Just a follow-up on this Rs.193 crores government grant. What does it belong to, is it just this quarter or is it related to products sold over the last few quarters?
Parag Agarwal
It is part of the production linked incentive scheme that the government of India has chosen. There are certain products that qualify under the scheme. And this incentive pertains to the sales that have been made in the first half of the year; the scheme started from this fiscal year. Second, your tax rate is a bit high for the quarter. So, has it got something to do with the higher Revlimid profits booked in the US? Is it going to be a higher tax rate whenever there is higher contribution from Revlimid profits? As I said, because of the jurisdictional mix, as you know, we are a global company
Q
Parag, can you just share what was the core EBITDA margins to exclude those one-offs, I mean, versus your 25% ballpark target that you had?
Parag Agarwal
Sameer, first of all, I would not classify this as a core. I think the results we have reported are core, because any new product launch is part of the core, right? I think there are a few moving parts, which I talked about, but let me just list them down again. We clearly have an upside because of new product launches, of which, the generic version of Revlimid is obviously a significant component. It has been a successful high value launch. There is a covid inventory provision that we have made. We have recognized the government grant of Rs.193 crores as we have disclosed. Overall, there is s
Q
Just a follow-up to my first question asked. So, you mentioned there is more to come in Q3 and Q4. Question also was in terms of quantum, have you booked a large amount or expecting qualitatively, if you can comment that it would be similar or lesser?
Erez Israeli
We cannot guide on numbers, but it's going to be meaningful numbers. And to understand this further, I understand NATCO is going to come back in March with double-digit volume share. So, this calendar year or this was fiscal year, that is the volume restricted for everybody or at least you can comment for yourself? We cannot comment on their sales. Our agreement is naturally until 2026. So, there is certain shares that we're doing. We do not want to share any details about the settlement with the innovator. But like we said before, we believe that the quantities and the value can be meaningful
Q
Just a couple of follow-on questions regarding the products in the US again. You have a filing for Lexiscan. I believe there are some litigations going on. Could you give us a latest status update? Do you expect to launch it anytime soon say maybe in the next six, 12, 18 months?
Erez Israeli
I did not pick up the question. Can you repeat? On generic version of Lexiscan, you have a filing in the U.S. for that, which is Regadenoson. Do you have an update or do you expect to launch it in the near future? We have a settlement on that. So, as per the settlement terms, we will launch in the future. Obviously, the settlement terms are confidential, so we cannot discuss the launch timings currently. Second, there was a guidance regarding Rituxan filing in 2023 in the US. Is the arrangement with Fresenius the same in case of Rituxan, the famous Neulasta or do you have a role there? The dif
Q
So, would you be able to quantify your investment in terms of R&D as well as CAPEX for the first half of this year between Horizon 1 and Horizon 2 drivers for our business?
Parag Agarwal
As I have clarified, I think when we had the Investor Day communication, we expect to invest about 50 to 100 basis points of sales in Horizon 2 through our P&L, and we are within that range. At this stage, we are not investing significantly in CAPEX for Horizon 2. And then what would be our CAPEX for this quarter of around Rs.250 crores would be for? The CAPEX for the full year is likely to be around Rs.1,500 crores in that range, and a lot of this CAPEX is towards building capacity for our biosimilar business and for our injectable business. Typically, for a similar plant, what would be the t
Q
Just two questions, sir. On the Revlimid, again, please, so do you think there is another wave of generic launches before January 2026?
Erez Israeli
Likely that more companies will get approval. I do not know exactly when and what is the initial settlement, but likely that before '26 there will be that additional companies getting approval. My second question is on the India business. Two aspects that I would like to cover. One is the OTC and second is your initiative on the digital kind of efforts. So, particularly on the OTC side, you have been one of the established players in the OTC space of US and Russia since long. And now you have been trying to build a similar kind of presence in the domestic market in line with your enhanced focu
Q
I have a couple of questions on injectables. The first part I just want to understand, are we seeing any industry-wide challenges as far as the supply chain channels are concerned because some of the peers have been highlighting for the last few quarters in terms of getting the component or raw materials, so I wanted to understand, are we also facing similar kind of a thing and if that is the case, are we past those headwinds?
Erez Israeli
So, we are naturally dealing with so many products in so many countries. There are challenges here and there, but nothing significant to report on about, nothing that impacts the business and we do not anticipate major disruption as well. As a company, we are kind of let's say pretty risk averse in a way that we do not have a single product or a single activity or a single supplier or a single country that we are dependent on. So, yes, there are challenges here and there, but nothing significant. Secondly, on the long-term strategy for the injectables, I understand we are making heavy investme
Q
Thank you all for joining us for today's earnings call. In case of any further queries, please reach out to the Investor Relations team.
Management
Speaking time
Erez Israeli
26
Parag Agarwal
18
Moderator
15
Surya Patra
11
Bino Pathiparampil
8
Sameer Baisiwala
7
Amit Agarwal
5
Prakash Agarwal
5
Kunal Dhamesha
5
Damayanti Kerai
3
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Opening remarks
Amit Agarwal
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 September 30, 2022. Earlier during the day, we have released our results and the same are also posted on our website. This call is being recorded, and the playback and transcript shall be made available on our website soon. All the discussion and analysis of this call will be based on the IFRS consolidated financial statements. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's comprising Mr. Erez Israeli -- our CEO; Mr. Parag Agarwal -- our CFO; and the Investor Relations team. Please note that today's call is a copyrighted material of Dr. Reddy's 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 a
Parag Agarwal
Thank you Amit and greetings to everyone for the current festive season. This quarter, we had strong financial performance with highest ever Sales, PBT and EBITDA in a quarter. The performance has been supported by the launch of Lenalidomide capsules in the US and rebound of Russia performance over last quarter. Let me take you through the details for the quarter: For this section, all the amounts are translated into US dollar at a convenience translation rate of Rs.81.37, which is the rate as of September 30, 2022. Consolidated revenue for the quarter stood at Rs.6,306 crores, that is US$775 million and grew by 9% year-on-year basis and by 21% on a sequential quarter basis. In the same quarter of last year, we had high covid product sales, adjusted for which we have grown in high teens in this quarter. Consolidated gross profit margin for this quarter stood at 59.1%, an increase of 565 basis points over previous year and 920 basis points sequentially. The gross margins were mainly aid
Erez Israeli
Thank you, Parag. Good morning, and good evening to everyone. I hope you and your loved ones are keeping well. I am pleased to take you through the current quarter’s performance, which is marked by record Sales, EBITDA and ROCE. In the last few years, we have built a well-diversified business model, which allows us to have multiple growth drivers and reduces the risk of being dependent on a single market or event. We believe in the current environment of geopolitical and economic uncertainties, inflationary pressure and FOREX volatility, our strategy is allowing us to grow. While there may be some fluctuation quarter-on-quarter, we focus on building portfolio pipeline across markets, driving productivity, investing for innovation and taking forward our ESG agenda. We believe that our strategy along with a net cash surplus position will enable us to drive sustainable growth in line with our aspirations. Let me share with you some of the key highlights of the current quarter: 1. Successf
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