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Dr Reddy's Laboratories Ltd
Earnings Call Analysis
Q2-2024 Analysis
Dr Reddy's Laboratories Ltd
Dr. Reddy's Laboratories Ltd., a global pharmaceutical company, reported a robust performance for the quarter ended September 30, 2023, with consolidated revenues reaching approx. $828 million (INR 6,880 crores), marking a 9% increase year-over-year and a 2% increase sequentially. This growth momentum was primarily fueled by the generics business in the U.S. and European markets. However, the company observed a slight decrease in gross profit margin by around 40 basis points from the previous year, settling at 58.7% for the quarter.
Dr. Reddy's enhanced operational efficiency led to a growth in profits before tax of 19% year-on-year to approximately $230 million (INR 1,913 crores), coupled with a marginal 4% increase from the previous quarter. The EBITDA margin stood at a strong 31.7%, showcasing the company's ability to maintain profitability in the face of competitive pressures. Sales and EBITDA increases were notably pronounced in the U.S. and Europe, reinforcing the company's strategic focus on these markets.
The company's selling, general, and administrative (SG&A) expenses rose 13% year-over-year to approximately $226 million (INR 1,880 crores), attributed to investments in sales, marketing, digitalization, and other business initiatives. Dr. Reddy's continued commitment to innovation was evident in its R&D spend of about $66 million (INR 545 crores), or 7.9% of sales, primarily funneled into clinical trials on differentiated assets and the development of a robust pipeline of new small molecule and biosimilar products.
The North American generics business was a significant contributor to growth, with sales of $384 million, a 9% year-over-year increase, buoyed by market share expansion despite flat performance sequentially. The European segment also turned in a strong performance with sales of EUR 59 million, registering a 12% increase from the prior year and a 4% increase sequentially, propelled by new product launches.
Emerging markets experienced a slight year-on-year decline of 1% in sales, totaling approximately INR 1,016 crores, though this was offset by a 5% sequential increase. Despite some volatility, the outlook for the full year remains on track, supported by the launch of 32 new products across these markets. The Russian business within this segment recorded a 4% year-on-year growth. Dr. Reddy's Indian operations reported a 3% year-on-year and sequential growth, with sales of INR 1,186 crores. When excluding the loss of revenues from price reductions mandated by the National List of Essential Medicines (NLEM), the Indian business experienced mid-single-digit growth.
Dr. Reddy's financial health remained strong as evidenced by a net surplus cash position of approximately $711 million (INR 5,906 crores), achieved through effective working capital management and an impressive free cash flow generation of $174 million (INR 1,447 crores) for the quarter. The company's effective tax rate for the quarter was 22.6%, with an expectation of a normal annual rate in the range of 24% to 25%. Consequently, the profit after tax for the quarter amounted to approximately $178 million (INR 1,480 crores).
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Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Q2 FY '24 Earnings Conference Call. [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.
Thank you, [ Arvind ]. 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, 2023. Earlier during the day, we have released our results, and the same is also posted on our website. This call is being recorded, and the playback and transcripts 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, along with 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 outlet without the company's expressed written consent.
Before I proceed with the call, I'd 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.
Thank you, Richa, and a warm welcome to our quarter 2 FY 2024 earnings call, and thank you to everyone joining today. We have built on our positive momentum and delivered another strong quarter of financial results with higher ever sales and record profitability. In the financial overview section that I will cover today, all the amounts are translated into U.S. dollars at a convenience translation rate of INR 83.08, which is the rate as of 30th September 2023.
Consolidated revenues for the quarter stood at INR 6,880 crores, that is USD 828 million and grew by 9% on year-on-year basis and by 2% on a sequential basis. The growth was driven by the generics business, mainly in U.S. and Europe. Consolidated gross profit margin for this quarter has been 58.7%, a decrease of around 40 basis points over previous year and broadly flat sequentially. Gross margin for the Global Generics and PSAI business were 63.6% and 17.8%, respectively.
The SG&A spend for the quarter is INR 1,880 crores, which is USD 226 million, an increase of 13% year-on-year and increase of 6% quarter-on-quarter. The year-on-year increase is primarily on account of investments in sales and marketing, digitalization and other business initiatives. The SG&A cost as a percentage to sales were 27.3% and is marginally higher by 106 basis points year-on-year and 105 basis points quarter-on-quarter.
The R&D spend for the quarter is INR 545 crores, that is USD 66 million and is at 7.9% of scale. Our R&D investments are driven by ongoing clinical trials on differentiated assets as well as other developmental efforts to build a healthy pipeline of new products across our markets for both small molecules and biosimilar. The EBITDA for the quarter is INR 2,181 crores, that is USD 263 million, and the EBITDA margin is 31.7%. Our profit before tax for the quarter stood at INR 1,913 crores, that is USD 230 million, an increase of 19% year-on-year and 4% over previous quarter.
The net finance income for the quarter is INR 123 crores. Effective tax rate has been at 22.6% for the quarter. The effective tax rate was lower than the previous year's mainly due to adoption of corporate tax rates under Section 115BAA of the Income Tax Act of India. We expect our normal ETR for the year to be in the range of 24% to 25%. Profit after tax for the quarter stood at INR 1,480 crores, that is USD 178 million. Reported EPS for the quarter is INR 88.8. Operating working capital reduced by INR 598 crores, which is USD 72 million against that on June 30, 2023, mainly due to decrease in receivables. Our capital investment stood at INR 322 crores, which is USD 39 million in the quarter. The free cash flow generated before acquisition-related payout during this quarter was at INR 1,447 crores, which is USD 174 million. Consequently, we now have a net surplus cash of INR 5,906 crores, which is USD 711 million as on September 30, 2023.
Foreign currency cash flow hedges in the form of derivatives for the U.S. dollar are approximately USD 648 million, largely held around the range of INR 82.9 to INR 84.5 to the dollar, RUB 2,475 million at the rate of INR 0.98 to ruble and AUD 2.7 million at the rate of INR 58.06 to Australian dollar maturing in the next 12 months. With this, I now request Erez to take us through the key business highlights.
Thank you, Parag, and a warm welcome to everyone participating in our earnings call today. As always, we appreciate your interest in our company. We are pleased to report the quarter with the highest revenue, EBITDA, profit before tax and profit after tax. We saw growing momentum in our products and businesses. Our geographic diversification, productivity improvement in operations enabled operating margin delivery. We continued strategic progress on our various key initiatives to ensure that we are well positioned for differentiated and competitive goals.
Let me take you through some of the key highlights of the quarter. Sales for quarter 2 grew 9% and EBITDA grew by 30%, reflecting the portfolio's trends and continued momentum in U.S. and Europe. We generated healthy EBITDA at 32% and annualized ROCE at 39%. High cash generation leading to net cash surplus of more than $712 million at the end of the quarter. A few development in our global biosimilar journey in the quarter include receiving of GMP certificate indicating closure of inspection by the UK MHRA for Bachupally biologics facility. A pre-approval inspection by the US FDA of our biologics facility based in Bachupally concluded, with 9 observations. We will address them within this stipulated time line. The CAR-T asset ‘DRL-1801’ approved for clinical trials in India.
The leading financial publication -- Financial Express and ECube in a joint study has named Dr. Reddy's as the leading company in ESG in India across sectors. The company received SA8000, a multi-site certification includes CTO 6 unit -- 6 CTO units and 10 formulation units in biologics. And has been successfully audited and awarded compliance to ISO 20400:2017. This demonstrates organization commitment to our social goals and accountability. We were conferred with the prestigious Golden Peacock Award for Excellence in Corporate Governess of 2022.
Now let me take you through the key business highlights for the quarter. Please note that all references to these numbers in this section are representative local currencies. Our North America generics business recorded sales of $384 million for the quarter with strong year-on-year growth of 9%, while being broadly flat on a sequential basis. The growth was supported by market share expansion in certain existing key products and complete integration of main portfolio, which more than offset price erosion. We launched 4 new products during the quarter.
Our Europe business recorded sales of EUR 59 million this quarter with a year-on-year growth of 12% and sequential increase of 4%. The contribution from new product launches and improvement in base business volumes more than offset price erosion. We launched a total of 20 products across markets during this quarter.
Our emerging markets business recorded sales of 1,012 -- INR 1,016 crores, a marginal year-on-year decline of 1% and sequential increase of 5% primarily impacted by seasonality and unfavorable products. While we may experience q-on-q volatility, full year outlook is on track. We launched 32 new products during the quarter across various countries of the emerging markets. Within the emerging markets segment, the Russia business grew by 4% on a year-on-year basis and 9% on a sequential basis in constant currency. Our India business recorded sales of INR 1,186 crores and reported year-on-year growth of 3% and sequential increase of 3%. Excluding loss of revenues from NLEM-related price reduction, India business grew in mid-single digits. Our focus on profitable growth coupled with sales and marketing execution have led to gradual improvement in business performance. We further made following strides to access new growth levers and drive differentiation.
We signed a new licensing deal with Hengrui for Pyrotinib. We launched Nerivio in India, our first digital therapeutic products addressing unmet need of migraine patients. We launched a direct-to-consumer platform Celevidawellness.com’ for serving the needs of diabetic patients in India. India remains our priority market and we'll continue to strengthen the presence in the generic business, while investing and building the innovation spaces.
Our PSAI business recorded sales of $85 million with year-on-year growth of 8% and sequential increase of 4%. We expect sales to improve over the next couple of quarters on back of increasing volume pickup and strategic collaboration with regional and global players. We invested 7.9% of our revenue to empower and enhance our R&D competency. Our efforts and -- our focus on developing value-accretive products, including several generic injectable biosimilars where there is a patent -- patient need. We have done 6 global generic filings including 12 ANDAs and 1 NDA filing in the United States during quarter 2 of FY' 24 and are on track to accelerate on this in the balance of year FY '24.
We remain focused on building best-in-class capabilities and commercial infrastructure to leverage our portfolio to expand further. Our ability to adapt strong execution in financial matters will enable us to grow our core business and build pipeline of products to meet patient needs. I'm pleased with the progress that we have made so far this year and that we have a clear plan in place to move forward at the pace to deliver on our key objectives and support the overall growth ambitions of the company.
With this, I would like to open the floor for questions and answers.
[Operator Instructions] The first question is from the line of Balaji Prasad from Barclays.
This is Mikaela on for Balaji. Given India remains a priority market for you, could you just provide an outlook on your Indian market? And just elaborate a bit more on the evolution in India focus?
So the main focus is -- and the main effort is actually licensing and collaborating with partners to bring innovation to India. This is the most important initiative that we have for India. In addition to that, we identify focused portfolio in which we are growing. And indeed, by the way, this focus portfolio is growing very, very nicely. The overall performance of the portfolio that we have today is growing in mid-single digits. Part of it is also because as per the plans, we have obviously seen most that -- we have price erosion as expected when required if it meets our expectations from a business case, but naturally has contributed also to this decline. If you look the portfolio that we are focusing on actually growing double digit. And luckily, that's what you're going to see for quarter-over-quarter that we are actually improving our performance.
Great. And just one follow-up, if I can. What kind of innovations in therapeutic areas are you targeting? And just how willing are partners to launch in India when you approach them about these deals?
There is actually enthusiasm to -- naturally India is an important country, everybody understand that. There is always concern about the price point, about the adoption of India and certain requirements that are relevant for -- to localize the product, whether it's local production or local trials or maybe different position of this product. But in general, people understand that India is an important market, important country, and they want to have a presence here, and they want to go very much with a reputable company, and we are one of them. The assay -- sorry, I lost the first part of the question.
Just what kind of innovations and therapeutic areas specifically are you targeting?
Yes. Sorry about that. We are targeting primarily areas like cardiovascular, diabetes, CNS, oncology, especially in an area in which we can find standard of care or something that is better from the current standard of care. So what is driving us is primarily, if we see an innovation that are addressing those areas, this is also the area in which we, at least in our analysis, we find the utmost unmet need.
The next question is from the line of Kunal Dhamesha from Macquarie.
So the first one on the 9 observations for the biologic plant that we have received. Can you please elaborate what is the nature of these observations? And whether we need to undertake some corrective preventive actions there?
I believe that those observations are addressable. We are going to address all of them in the beginning of November. Some of them will require us to create a CAPA which means according to producer the product success until the time, in order to show certain consistency of data, which will take us to January. But overall, I believe that this is addressable.
Sure. And second one on the PSAI business. So if I look at the gross margin for that business has gone down. Obviously, there's some growth on a quarter-on-quarter basis and year-on-year basis. But is it primarily due to the unfavorable pricing environment? And if that is the case, do we get the benefit of lower API prices in our global generic business, if that is like more widespread pricing decline in APIs?
I don't see such a decline in the API like it was in previous years. Most of the growth is coming when new products and launches that likely to happen by the customer for API or PSAI business. So if you wish, we are now selling API that will serve them in the next period of time, the next quarters. The -- what we see now is the impact of the new portfolio that we worked on it in the last couple of years, which is replacing the old portfolio from the decade before. And as time will go by, we will launch more and more of this product and you'll see acceleration in growth because of that.
And the gross margin for this business will it also improve because it has come down to now around 13%?
So as we grow the sales, we normally grow the gross margins because it's a kind of -- have relatively higher level of fixed cost. So as you grow, you're also increasing your margin. That's what is likely to happen.
To clarify the gross margin for this business, we have reported as 18% during the quarter, not 13%.
Okay. Sure. I'll check. Yes. And then lastly, we have mentioned price erosion in U.S. as a growth drag at least on a quarter-on-quarter basis, perhaps. Now this price erosion in this quarter is limited to few large products such as vasopressin or it is more broad-based price solution that you are witnessing?
The price erosion always affects sales and products that went into either bid or RFP or competitive situation in that particular quarter, it's never broad. But let's say, relatively to other years, this year, it's more moderate than we used to in other years.
And lastly, on the same thing, the shortage situation and then some of the short-term contracts, et cetera, are those opportunities continuing into quarter 2 and probably in quarter 3. That is what the trend you are seeing?
Yes, absolutely. Absolutely, the focus in the U.S. on continuity, service and sustainability of supply. Absolutely.
The next question is from the line of Neha Manpuria from Bank of America.
First on the main acquisition. When we announced this acquisition, it had a revenue rate of about $65 million, $70-odd million. Post clearly 5, 6 months of integration into the Reddy's portfolio, have you seen traction in terms of our ability to gain more volume in the product because we don't see that in products like NuvaRing, which is stuck in that 2%, 3% market share? Or how should we look at the acquired portfolio going forward?
Each one of this product has different timing in which customers are putting their RFP or open for those kind of discussions. I believe that this will grow and will pick up volumes as these time lines will be there. So -- and most of those discussions likely to happen in the second half of the year. So far, I'm happy with this deal. It's meeting our expectations and likely that you will see growth in the next 2 quarters.
And on NuvaRing, sir, any reason why it's stuck at about the 2%, 3% market share despite the launch in Feb?
Timing of the discussions with customers.
Okay. Understood. My second question is on the India business. We have guided to wanting to grow higher than the market double digit in this business. But for several quarters now, that hasn't been the case, at least if you look at the market data. When do we think we get to that growth trajectory and the collaborations and licensing that we talked about? When do you actually see that materialize and flow through numbers?
Likely that we are going to see it already this year, this fiscal. The -- and in terms of the innovation, what we see now is the launch of deals that we signed a year ago. So it takes about 12 to 18 months from the time that you sign a deal until you get your products approval. Naturally, you need to go to the regulatory process. In some of the cases, we need to do clinical trials and then regulatory process and then it takes a bit longer. And this is also right now the main efforts in terms of building the portfolio in India. In each one of them, it's about to bring the products that are either going to be the standard of care or better than the current standard of care. In addition, the business and products that we are focusing on in India are growing in double digits. And likely that they will be more dominant in the future in that respect.
So just to understand this correctly, we are saying that we will be able to achieve double-digit growth in India this year?
I believe that in the end of the year, we should see double-digit growth and to continue in the quarters after.
And how many of the licensing deals have been completed in India so far? Just to get a broad sense? And is there any monetary value that we can attach to this is the potential market opportunity or market size of these deals?
So I hope I'm giving you the right numbers, but it should be around 10. And we are normally going for a product, it will be at least [ 100 CR ]. And of course, some of them can be much more than that.
The next question is from the line of Saion Mukherjee from Nomura.
Yes. Sir, can you tell us on biosimilar rituximab, what's the time line you're looking at now for the U.S. and European markets?
We submitted it in April. We just got the preapproval inspection. So we will answer it by November. So now we hope that it will stay on course and -- let's say if everything will be okay, we will be able to launch it in the beginning of FY '25.
Okay. And if I look at quarter-on-quarter revenue in the U.S., which is sort of flattish, can you just share the dynamics with respect to main contribution REVLIMID and the base business, how each of these buckets have moved quarter-on-quarter?
Most of the growth came from volume growth and demand portfolio.
Okay. And finally, on the U.S., how many launches we are expecting for the full year, how much we have done so far in the first half? And how should we think about material launches from your pipeline? If you can guide something in terms of time line, where you could expect some material launches to happen? .
Sure. So this year, we are still on track with the 25 to 30 launches. And we have identified a group of between something 25 to 30 products which are material that will be launched in FY '25, in FY '26 and FY '27.
How many of sir, 25 products you're saying across these 3 years.
25 to 30 because there's some uncertainty about time of approval. So that's what we can guide.
And I mean, when you say material, what kind of revenue potential typically our product with the material contribution would contribute?
It has to be at least with a single digit in millions of dollars of sales.
The next question is from the line of Surya Patra from PhilipCapital.
Congratulations on good set of numbers. So first, clarification about the government grants. So in fact, in the previous year, we have seen something around INR 300-odd crores, in the first half it is more than INR 200 crores that we have already booked. So what is the visibility here? And how long this can sustain? And this is relating to the PLI only or something else?
So this includes PLI, but it also as the other export incentives that we are entitled to. Overall, our PLI scheme and the other export incentives this year, would be marginally higher than last year. But quarter-on-quarter, there is always a fluctuation because we have to recognize this in line with the entitlement, sales growth that we show as per the scheme. So there are quarter-on-quarter fluctuations. But for the year as a whole, will be higher than last year.
But this is sustainable, sir?
Yes, it is. It is. For the next several quarters, we expect it to be meaningful.
Okay, fine. My second question is about the sustainability of the U.S. business. So basically, having seen the run rate of around 300 -- $380 million, $390 million kind of quarterly run rate. And kind of the ramp up what we have witnessed in case -- in terms of our agreement. So can we see a kind of progressive performance in the overall U.S. business going ahead. I'm saying progressive because I believe in terms of the volume limit condition, whatever that is there in case of their limit, every 12 months that should see a kind of upward move. So considering that, how should we see the U.S. business going ahead in terms of the quarterly run rate and all that?
The quarters can fluctuate. We discuss it in the past because the quarter is very much depends on the ordering patterns of this program. But overall, you should see growth.
Okay. Fine, sir. And my second question is about this European business. So in the first half, both the quarters, we have seen a kind of very strong growth of more than 20% kind of growth. What is driving that? And is it the launch of the biosimilars, introduction of new product or even the pricing scenario, any improvement in the pricing scenario there, demand situation improving. Could you give some sense about Europe, why is it delivering this kind of growth? And whether it is sustainable even in the subsequent period?
So it's primarily new product launches. There is also some volume growth of the base business. And just more markets and participating in more tenders, most of our growth coming from injectables and just winning tenders.
Okay. Since we are now seeing progress in regulatory point of view as well as the launch point of view in terms of biosimilars, so is it possible to share some update about the pegfilgrastim success in the U.S. and non-U.S. market? And -- or even generally for biosimilar, what is the, let's say, annual or quarterly run rate that we are currently having? If you can give some sense, that would be really helpful, sir.
So just to remind, preg is not our product. It is a product that was part of the arrangement that was done many years ago with Merck Serono, after that was brought to Fresenius. So they are selling it, we are getting only royalty, so by design it's not a big amount. Most of our activities in the biosimilars today are in emerging markets, primarily rituximab and in fact other products, so India, Russia and other emerging markets. We are ramping up that activity, it is very important to us. We are going to have in the next 2 years or so, about 5 Phase 3 of biosimilars to be launched globally, including the United States. And the main ramp-up in biosimilars for us will be probably from FY '27 onwards.
Okay. Okay. Just last one question, sir. See, in fact, obviously, there is a kind of a strong cash flow that we have been seeing also supported by REVLIMID, but whatever the case be, but we have been seeing a quarterly run rate of, let's say, INR 1,500 crores kind of cash flow -- free cash flow. And already, we have a INR 6,000-odd-crores kind of cash in books. So could you give some sense of what incremental growth this fund can add to the overall visibility of our growth for next, let's say, next 1 or 2 years or over a period of 3 years?
The beauty of that is that we can use this money for deals. Now it depends what deals we want to have and in what multiples we will have them. I hope I understood the question right. So if it will -- what we want to do with this money is primarily for inorganic activities, which can serve us both in the short term like we did with Mayne as well as in the longer term, for example, to acquire assets or products that we can launch in years after. But absolutely, this is the main use of the money, and this should help us to generate growth. But the timing of it, of course, is not certain because we don't know what type of deal and when it will impact us.
[Operator Instructions] Next question is from the line of Aman Vij from Astute Investment Management.
The question is on our diabetic portfolio. So if you can talk about how well are we placed as a company to take the advantage of the upcoming GLP-1 opportunity that is coming? So I believe you have some FDA filings in that. So in terms of launch ready, are we ready whenever the expiry happens we'll be there? And do you think this product category can be like a $300 million to $500 million kind of category for next 5 years?
So we're going to be there, definitely day 1. And as for the size, I don't know. But obviously, I have a great belief in this category.
And in terms of the important dosages, are we present in all of them and if you can talk about the same?
I don't want to discuss specifics because we do not make it public, but we should have all the relevant ranges. Depends on the geography and depends on the country, but we see this category as a global category for us to launch in all the markets that we have a presence.
And you are saying we are ready in terms of whenever expiry happens, if you have FDA file we can launch in the next day itself?
We are ready. .
Sure. My second question is on this other biosimilars, which I think we have on the osteoporosis side. If you can talk about the opportunity in U.S. because I believe there is patent expiry coming up, so are we planning to launch in the U.S. market? And if yes, do you think we can...
Which products?
Yes, I was talking about osteoporosis teriparatide and there are 1 or 2 more products that we have. So I was trying to understand that U.S. patent, the expiries coming up. So do you think we can have a good market share in U.S. markets with our biosimilars?
Yes. So I'm not calling teriparatide as biosimilars. For me these are still equivalent to small molecules. Biosimilars are not normally for products that are bigger like the mabs, et cetera. But specifically for this product, absolutely, I believe that it will be very nice for us. And we will be ready to launch it when it's possible.
Sorry, on the time line, so I believe it will be in the next few months only, right, on the U.S. launch of this product? .
I don't want to speculate on time at this stage.
But we are ready to launch whenever it happens?
We will be there.
[Operator Instructions] The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Just on this e-commerce foray, so would like to understand what is the strategy behind it, what kind of investment are we thinking in this particular foray?
Investment of what, sorry? In e-commerce? It's not a big investment but it allows us additional channel for our products as well as other nutraceuticals. And I believe that it's very nice and other channels and another part of the capabilities that we have now in India. That is not a big investment.
Okay. But in addition to the typical nutraceutical products, we would be also having this prescription-based product on this platform?
The specific platform is direct to consumer that you mentioned, which means nutraceuticals and products that do not require a prescription, OTC.
And sir, secondly, just on the trade receivables have been reasonable reductions if I compare quarter-over-quarter. Any read-through over there?
Sorry, Tushar, your voice is not clear. Can you repeat that question?
Is it better?
Yes.
There has been good reduction in the trade receivables quarter-over-quarter, any read-through over there?
It's normal. There's nothing unusual. I think it depends on the credit period, the cycle and the receipt of orders. So we obviously keep a very tight track of all our receivables and collect on time. So nothing unusual in this, yes.
The next question is from the line of [ Devang Saraogi ] An Individual Investor.
Sir, are we looking at any 505(b)(2) opportunities in the U.S. market?
Sorry, which opportunities in the U.S. market?
505(b)(2) opportunities.
For which product, sorry?
General.
So 505(b)(2) that requires sales force, we will not do. 505(b)(2) that is interchangeable, we would love to do.
Okay. And what would be the price erosion for the quarter?
What is there?
Price erosion. Yes, price erosion, we are finding the trends to be stable, Tushar. So if we look at the last few quarters, we had seen price erosion moderating, and we are now seeing it around the same level. So -- but from one quarter to another, it will typically fluctuate between say, high single digit to low double digits.
And are we going to see any price increases as many suppliers are going out of the market?
We are not building on that.
Or it will be product specific?
It's normally a product specific, and we are not building on that. If we -- if there is a shortage situation and we will supply, but we are not building into our models any price increases.
Yes, whenever there's an opportunity -- opportunistic, not strategic.
The next question is from the line of Damayanti Kerai from HSBC.
My question is on India business. So first of all, can you tell us how much India sales is currently contributed by chronic therapies? And then second part of my question is how many sales representatives you have for your India business? And do you have plans to expand on it?
The chronic is about 35% of the business. And as time goes by because most of what we launched, especially they would be more chronic in nature, this will grow. As for the numbers of salespeople, if I remember correctly, it's a little bit more than 6,000 people. And we'll grow as we will bring the innovations. So accordingly, we would adjust the numbers.
Okay. But right now, you do not have any particular need to expand your sales force, as you said, you're focusing more on innovative products as in when you launch, you will decide accordingly?
I don't see a need to increase, and it's more about the productivity of the team and the coverage of this team. And -- but it's not so much about the numbers of the people. But if we need more, we will have more.
Okay. I think this question was already discussed. So India, despite many efforts from your end, we have been seeing sales largely remain range bound somewhere say $12 billion a quarter or so. So when we can see a significant step-up coming up. So any time line, if you can indicate because, I guess, for the last 6 to 8 quarters, sales were broadly in this range.
I think you are going to see an improvement already this year. Indeed, we -- the focus -- we took 2 decisions about India, just to remind, and this is the effect that it comes with it. One, we decided to focus, and we actually made quite a few deals on divesting brands. So we kind of trimmed down the base portfolio because we do not believe that, of course, the changes that will happen with all the challenges of generics and branded drugs we have in India, this plan is likely to be successful, and we felt that it was a good bet for us.
And second, we also acquire a brand, for example, Cidmus which we knew at the time that we will face price erosion, it matched the business case that we had on it. I believe that already the brands that we are focusing on are growing double digit, plus we are going to launch more and more innovation and have more and more collaborations. So you will start to see this year. And as we will add products to the portfolio, it will continue to grow. It's a focus market for us. It's a strategic market for us and we will grow it.
Sure. My second question is, if you can talk a bit about your progress for the China market. How many approvals you have got? And what kind of filings have been done so far?
We are actually with the progress over there, especially since April, where the number of approvals start to pick up. And I think that we had the 4 approvals. And this month, I think we got additional 2 approvals so 6 together. And we are also filing more than 15 products a year now. I think we can get even to 18 if we -- everything will go well. And most of our products are along the first wave and normally among the first three. So it's a very interesting area for us in China. We -- at the time, we thought that the ramp-up will be earlier than what I communicated in the past, but COVID and also our own execution may be late, but now it's absolutely bearing fruits.
So with this portfolio buildup, should we assume China portfolio could start contributing meaningfully from next fiscal? Or it will be a bit long term in nature?
No, no, for next fiscal absolutely.
Okay. Okay. That's helpful. And my last question is, how should we look at your R&D spend going ahead as you focus more on differentiated products for your global segments?
Likely that it will grow because we are investing more and more in biosimilars. So -- and we will continue, of course, to invest in the new molecules. So you're going to see a more directed growth. But also the sales will grow. So let's say, the -- in terms of percentage, it should be, give or take, in the range that we are today. Maybe a bit higher.
The next question is from the line of Gagan Thareja from ASK Investment Managers.
I hope I'm audible?
Yes, you're audible, sir.
So the first question is on the India business. If you knock out the discontinued products from this quarter 1 of 2Q of FY '23...
Sorry to interrupt, you were audible, but I think you are too close to the mic.
Okay. Is it better?
This is much better, sir. Please go ahead.
Okay. So my question is that adjusting for the discontinued products, what would have the India sales growth being year-on-year for the quarter?
So without these products and without NLEM, we are about mid-single digits for the quarter.
Okay. And for U.S., from 1Q to 2Q, would there have been a material difference in the REVLIMID sales for you?
I cannot discuss the quantities of REVLIMID.
I don't want you to enumerate the number. I'm just asking, would it be a reasonable assumption or inference that there wouldn't have been a material change in the REVLIMID sales from the first quarter to the second?
Most of the growth, like Erez said earlier, has come from the base business and also the main portfolio.
Okay, right. And India, is it a correct surmise that you're saying that India you'll exit FY '24 with a double-digit sort of growth rate, that's Q4 you'll be able to do a double-digit sort of growth rate. And you will probably be improving from 2Q to 3Q and from 3Q to 4Q. Is that a correct inference?
That's what we are trying to do, absolutely.
Next question is from the line of Saion Mukherjee from Nomura.
My question is around -- you mentioned about inorganic activities. The cash balance is significant, and it could continue to rise. If you look at the acquisitions and deals that you've done, they are much smaller in size. So one is that it seems that -- are you -- so basically, the question is are you looking at larger deals going ahead? Is there more activity that you're seeing on the M&A side? And related to that, what's the level of leverage that as a company you would be comfortable with?
So we are looking for all deals, small and bigger than usual for us as needed, but we are not in rush. It has to be a good deal. It has to be something that will match our strategy, something that we believe can contribute to our growth. Is there products that we want or capability that we are missing. We are not in a rush to spend this money. In that respect, also the money is yielding very nicely now by investing it. We are -- as we speak, we are participating quite a few processes and we'll see what will yield. Likely that we will spend eventually this money. But it's important for us that it will be the right strategic deal for us. We are not looking for transformative deals. We are looking for complementary activities for our organic strategy.
And any view on leverage, Parag, as to what level of leverage you would be comfortable with?
See, we can -- I would say, 2x EBITDA is what we will be willing to go for. Beyond that, we would not like to take a financial risk.
The next question is from the line of Neha Manpuria from Bank of America.
Parag sir, on the SG&A expense, that seems to have inched up quarter-on-quarter. I just wanted to get a sense on where are we investing? And how should we look at that number over the next few quarters and probably FY '25?
So overall, Neha, the increase in SG&A, if you see year-on-year, I think we've gone up by 13%. Apart from the normal inflation, it's largely because of investments behind our brands. Also, we are investing in digitalization. I have spoken about it a few times, extensively both in the front end as well as in R&D and in our manufacturing facilities. Like last year, [ HQ3 ] was named as Digital Lighthouse. We are now working on getting more facilities certified as Digital Lighthouse because we believe that in the medium term, this digitalization is going to make a big impact by improving quality, reducing quality incidents, improving productivity and costs and so on. So these are the areas where we are investing.
If you look at overall quarter-on-quarter, we'll see fluctuation. But in aggregate, SG&A as a percentage of sales, last year we were around -- it used to be few years back we were at 30%, 31%, and we have been gradually dropping to 29%, 28% kind of a range. So I wouldn't like to comment on quarter-on-quarter, but for the full year, I would say that's the range we'll be around.
The next question is from the line of Kunal Dhamesha from Macquarie.
So the first one on the in-licensing innovation deals that we are doing for India. Can you highlight what is the typical payback period for these kind of deals?
So normally, the payout is very good because we hardly put in down payments for that. And so most of the deals have very small down payments. And normally, we are getting healthy margins that enable us to buying a transfer plus investment. So normally, the payout will be within the first 3 years, taking into account the time that it takes to build brand. So most of the investments is actually not because of the payout to the partner but rather the investment in building brands in the country like India, which normally takes about 3 years.
Sure. Sure. And let's say, for markets like India, are these deals -- some of these innovators would be doing it more on a profit share basis? Or are they more interested in, let's say, upfront payment and then some royalties?
So most of the deals will be certain milestones and some royalties, and giving us the flexibility to market it in places we want and with the right mix of SG&A. So that normally will be the case, but we will also have cases in which it will be a profit sharing.
Sure. And second question on the biosimilar business now that we are kind of close to launching our first biosimilar in the U.S., probably somewhere in FY '25. What type of front-end investment would we be looking for, for sales force or the formulary access personnel? And how much drag it could be on our SG&A?
So the product that will be launched, rituximab that will be launched in the U.S. will not be launched by us. So this is a sales force that is with our partner. The products that we will launch will be from FY '27 onwards. And for that, we will have to build the sales force.
The next question is from the line of Surya Patra from PhilipCapital.
Sir, just one clarification I wanted to have. In terms of the margin profile, let's say, for India business and the base U.S. business, let's say, excluding REVLIMID. So what could be the differential in terms of the margin profile of these 2 businesses?
We don't disclose geography-wise margins, but I can confirm that the margin profile of India business would be better than our North American business.
Okay. And even that Russia would be similar to India or slightly lower than India?
Russia is also a branded generics market, and therefore, its margin profile is also quite healthy.
Okay. Okay. So that means Russia is in between of India and U.S. That is how we should think.
No, I'm not ranking the market. So I'm just pointing out that both Russia and India are branded generics business, and therefore, their margin profile is better than the unbranded businesses in U.S. and Europe.
We have no further questions. I would now like to hand the conference over to Mr. Richa Periwal for closing comments. Over to you, ma'am.
Thank you all for joining us for today's evening call. In case of any further queries or clarifications, please do not hesitate to get in touch with the Investor Relations team. Thank you once again.
On behalf of Dr. Reddy's Laboratories Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.