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Dr Reddy's Laboratories Ltd
Earnings Call Analysis
Q2-2025 Analysis
Dr Reddy's Laboratories Ltd
In the second quarter of FY '25, Dr. Reddy's Laboratories reported a remarkable revenue of INR 8,016 crores (about USD 957 million), marking a 17% increase year-over-year and 4% sequentially. This growth was attributed to contributions from all markets, showcasing the company’s broad-based expansion. The earnings before interest, tax, depreciation, and amortization (EBITDA) reached INR 2,280 crores (USD 272 million), which is a 5% increase year-over-year and a 6% rise sequentially. The EBITDA margin was reported at 28.4%, slightly reduced from the previous year yet stable compared to the last quarter. When excluding one-time costs related to acquisitions, the underlying EBITDA margin stands at 29.1%.
Dr. Reddy's made significant strides by acquiring the Nicotinell portfolio in the nicotine replacement therapy category for GBP 458 million and operationalizing a partnership with Nestlé for a nutraceutical product line. The integration with Nestlé allows Dr. Reddy's to broaden its product offerings, though initial revenues from this collaboration have been modest, amounting approximately to INR 50-60 crores. This strategic expansion highlights the company's commitment to enhancing its portfolio through collaborations and acquisitions.
The company is intensifying its focus on innovation, as evidenced by a 33% year-over-year increase in R&D spending, totaling INR 727 crores (USD 87 million), which constitutes 9.1% of sales. This investment aims to develop a robust pipeline of complex small molecules and biosimilars. Dr. Reddy’s strategy is geared towards prioritizing high-value projects, moving away from merely increasing the volume of products filed.
Dr. Reddy’s North America Generics segment saw revenues of USD 445 million, with a 16% year-over-year growth but a 4% decline sequentially. The sequential decline was attributed to inventory adjustments and normal supply chain behavior rather than loss of market share, with management expressing optimism for future growth. In the emerging markets segment, revenue grew by 20% year-over-year, largely thanks to an expanded market share. Notably, the India business grew by 18% year-over-year, bolstered by new product launches and the inclusion of Sanofi's vaccine portfolio.
Management expects SG&A expenses to stabilize between 27.5% to 28% of sales for the full fiscal year and expects R&D investments to remain around 8.5% to 9%. Following the recent stock split and ongoing market investments, Dr. Reddy's anticipates continued revenue growth and operational efficiency improvements. Specifically, guidance for normalized effective tax rates is set at approximately 25%, reflecting stability in the company’s fiscal management.
The company is navigating complex regulatory landscapes, with three U.S. FDA facilities classified as Voluntary Action Indicated (VAI). Positive regulatory outcomes were also noted, including approvals for new oncology treatments. Additionally, Dr. Reddy’s is poised to launch a rituximab biosimilar in the EU, emphasizing its capability in launching high-demand products in competitive markets.
In conclusion, Dr. Reddy's Laboratories demonstrated solid financial performance in Q2 FY '25 through revenue growth across all segments, strategic acquisitions, and robust investments in R&D. While navigating market and regulatory challenges, the company remains committed to enhancing profitability and expanding its product portfolio, making it a compelling case for investors focused on stability and long-term growth.
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Ladies and gentlemen, good day, and welcome to the Quarter 2 FY '25 Earnings Conference Call of Dr. Reddy's Laboratories Limited.
[Operator Instructions]
Please note that this conference is being recorded.
I now hand the conference over to Mr. Richa Periwal. Thank you, and over to you, ma'am.
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 Q2 FY '25 Earnings Conference Call. We have with us the leadership team of Dr. Reddy's comprising Mr. Erez Israeli, our CEO; Mr. MV Narasimham, our CFO, whom we formally call as MVN and the Investor Relations team.
Earlier during the day, we have released our results, and the same is also posted on our website. We kick off today's call with MVN taking us through the financial highlights of the quarter. This will be followed by Erez, sharing his thoughts on operating environment and business performance. post which, we open the forum for Q&A. 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.
This call is being recorded, and the playback and transcript shall be made available on our website soon. All the discussions and analysis of this call will be based on the IFRS consolidated financial statement. The discussion today contains certain non-GAAP financial measures. For a reconciliation of GAAP to non-GAAP measures, please refer to our press release.
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 MVN.
Thank you, Richa. A very warm welcome to all. It is my pleasure to interact with you for the first time and present results for Q2 FY '25. We delivered a strong performance this quarter with broad-based top line growth and healthy operating margin, resulting in highest ever quarterly sales and PBT. As you all know, we completed the acquisition of the NRT portfolio and paid an upfront cash consideration of GBP 458 million. We also completed the transaction with Nestlé India on 1st August, and all business activities of the Nutraceuticals portfolio is now being carried out through our subsidiary, Dr. Reddy’s and Nestlé Health Science Limited.
Following the completion, Nestlé India was allocated share of the subsidiary, representing a 49% stake. We have also recently completed 5 for 1 stock split following the approval from our Board of Board (sic) [ Board of Directors ] and the shareholders.
Let's now look at the financial performance of the quarter. For this section, all amounts have been translated into the U.S. dollars at a convenient translation rate of INR 83.76, which is the rate as of September 30, 2024. Consolidated revenues for the quarter stood at INR 8,016 crores, which is USD 957 million, and it grew by 17% on a year-over-year basis and 4% on a sequential basis.
All markets contributed to this quarter's year-over-year growth. Consolidated gross profit margin stood at 59.6% for the quarter, an increase of 92 basis points over the same quarter of the previous year and a decrease of 81 basis points sequentially. The year-over-year increase was primarily on account of an improved product mix and manufacturing overhead leverage, particularly offset by marginal price erosion in generic markets. The quarter-on-quarter decline was on account of overall mix change. Gross margin for Global Generics and PSAI were at 63% and 30%, respectively.
The SG&A spend for the quarter was INR 2,301 crores, which is USD 275 million, an increase of 22% year-over-year and 1% on Q-o-Q. The year-over-year increase was primarily on account of investments in new business initiatives, building capabilities, higher freight costs, annual merit increase and certain onetime costs related to the acquisition of NRT brands. The SG&A spend as a percentage to the sales was 28.7%, and was higher by 138 basis points on year-over-year and lower by 87 basis points Q-o-Q. Excluding the onetime acquisition-related costs, SG&A spend was at 28.1% of sales. We expect SG&A to be in the range of 27.5% to 28% for the full fiscal.
The R&D spend for the quarter was INR 727 crores, which is USD 87 million, an increase of 33% year-over-year and 17% Q-o-Q. We are developing a robust pipeline of small molecules, biosimilars and novel oncology assets through internal and corroborative efforts to drive future growth. The R&D spend was at 9.1% of the sales, was higher by 115 basis points on year-over-year and 100 basis points Q-o-Q.
We expect the investment to be in the range of 8.5% to 9% for the full fiscal. The other operating income for the quarter was INR 98 crores, lower versus INR 180 crores last year due to onetime product-related settlement income in the United Kingdom in the same quarter of the previous fiscal. The EBITDA for the quarter was INR 2,280 crores, that is USD 272 million, an increase of 5% on year-over-year and 6% Q-o-Q. The EBITDA margin stood at 28.4% to the sale and was lower by 326 basis points year-over-year and higher by 30 basis points in Q-o-Q. Excluding the onetime acquisition-related costs, as mentioned earlier, the underlying EBITDA margin stood at 29.1% of the sales.
Impairment loss of INR 92 crores on intangibles related to a product and the main portfolio that was facing procurement constraints from its contract manufacturers. The net finance income for the quarter is INR 156 crores as compared to INR 123 crores for the same quarter last year. Profit before tax for the quarter stood at INR 1,917 crores, that is USD 229 million. PBT as a percentage of revenue was at 23.9%, excluding the onetime acquisition-related costs and impairment charge as called out earlier, the underlying PBT margin stood at 25.7% of revenues.
Effective tax rate for the quarter was at 30%. Pursuant to the amendment in the Finance Act 2024, resulting in withdrawal of indexation benefit, the company reversed a Deferred Tax Asset of INR 48 crores created in earlier period of on land. Excluding the impact of this onetime reversal, adjusted ETR for the quarter on the underlying PBT is 25.9%. We expect our normalized ETR to be around 25% for the fiscal. Profit after tax, but before minority interest for the quarter stood at INR 1,342 crores, which is USD 160 million. PAT margin was at 16.7% of revenues.
The noncontrolling interest share of profit after tax for the quarter was INR 86 crores. This primarily includes the share of onetime Deferred Tax Asset recognized upon transfer of Dr. Reddy's Nutraceutical brands to the subsidiary. Profit after tax, excluding the noncontrolling interest for the quarter stood at INR 1,255 crores, which is USD 150 million. This is at 15.7% of revenue. Excluding the onetime acquisition-related cost impairment charge, tax reversal and noncontrolling interest share, as indicated earlier, the underlying PAT margin stood at 19% of revenues.
Reported EPS of INR 15.04, the EPS has been derived on the increased number of shares post the stock split and after noncontrolling interest. Operating working capital, as of 30th September 2024 was INR 12,066 crores, which is USD 1,441 million, an increase of INR 511 crores, which is USD 61 million over 30th June 2024. CapEx cash outflow for the quarter stood at INR 735 crores, which is USD 88 million. The free cash flow generated during this quarter was INR 204 crores, which is USD 24 million. Post acquisition-related upfront payout, we have a net cash surplus INR 1,889 crores in USD 226 million as of September 30, 2024.
Foreign currency cash flow hedges in the form of derivatives are as follows: USD 693 million hedged through structured derivative around rate of INR 83.9 to INR 84.1 to the dollar maturing over 12 months, which allows participation when USD strengthened and RUB 5,290 million with the minimum production rate of INR 0.905 to the ruble maturing in next 6 months.
With this, I now request Erez to take us through the key business highlights.
Thank you, MVN, and very good morning or good evening to everyone on the call. Thank you for joining us this time.
Our gross momentum continued in Q2 FY '25 across all markets. It's translating into yet another quarter of highest-ever revenues and operating profit. The quarter witnessed 2 milestones in our journey towards building new businesses. Our venture with Nestlé for nutraceutical products in India was operationalized in August. We also completed the acquisition of Nicotinell and related brands in the nicotine replacement therapy category in September. We continue to strengthen our presence in existing spaces by building best-in-class capabilities and commercial infrastructure to leverage our portfolio globally and by driving operational efficiencies.
We remain focused on our core businesses of generics and API while also investing in our pipeline as well as growth drivers of the future in line with our stated strategy.
Let me take you through some of the other key highlights for the quarter: One, double-digit growth in revenues in Q2 at 17%. Two, both reported EBITDA margins and annualized ROCE were over 28%. Adjusting for onetime expenses related to the NRT acquisitions, the EBITDA margins were higher at 29.1%. Net cash surplus was $226 million. This is after making an upfront payment of GBP 458 million toward the recently acquired NRT portfolio. Our subsidiary, origin oncology announced promising results of Phase I study for India first trial for novel autologous CAR-T cell therapy for multiple myeloma.
Further, the U.S. FDA approved the IND for AUR-112, an asset developed by Aurigene oncology for the treatment of lymphoid malignancies. We have secured a marketing authorization from the European Commission for rituximab biosimilar, a first such MA in Europe. We recently entered into voluntary license agreement with Gilead Sciences to manufacture and commercialize HIV treatment drug lenacapavir in 120-plus countries.
On the regulatory front, the USFDA classified 3 of our facilities as VAI. This included 2 of our formulation manufacturing facilities in Duvvada and Vizag following the routine GMP inspection in May 2024, as well as our API manufacturing facility in Srikakulam, Andhra Pradesh, following their GMP inspection in June 2024. In August, USFDA completed a product-specific preapproval inspection of our formulation manufacturing facility, FTO SEZ PU1, in Srikakulam, Andhra Pradesh, and issued a Form 483 with three observations. We have responded to the observation within stipulated time lines.
In September, USFDA completed the routine GMP inspection of our R&D center in Bachupally, Hyderabad, and closed the inspection with zero observations.
Sustainability continues to remain central to our business strategy, recognizes our focused efforts in sustainability. KPMG India awarded us their ESG Excellence Award in 2024 in line -- in the Large-cap Pharmaceuticals & Healthcare category. So further, we are featured among the top 15 most sustainable companies 2024 by Businessworld India.
Now let me take you through the key business highlights for the quarter. Please note that all the reference to the numbers in this section are in respective local currencies. Our North America Generics business recorded revenues of $445 million for the quarter with year-over-year growth of 16% and a sequential decline of 4%. The increase in sales volume helped offset single-digit price erosion and additional generic competition in certain based products.
We launched 4 new products during the quarter, and we closed the full year with 15 to 20 launches. Our European generic business recorded revenues of [indiscernible] million this quarter with a year-over-year and sequential growth of 7%. The increase was largely contributed by revenues from new launches, partially offset by pricing pressure on certain of our products.
During the quarter, we launched a total of 8 products across markets. Our emerging markets generic business recorded revenues of INR 1,455 crores in Q2, recording a strong year-on-year and sequential growth of 20% and 23%, respectively. On a year-on-year basis, market share expansion and revenue from new product launches in rest of the world markets more than offset the unfavorable ForEx. We launched 22 new products during the quarter across various countries of the emerging markets.
Within this segment, the Russia business grew by 27% year-over-year basis and 23% sequentially in constant currency. India business recorded revenues of INR 1,397 crores in Q2 with a double-digit year-over-year growth of 18% and sequential growth of 5%. The growth was primarily on account of additional revenues from the recently in-licensed vaccine portfolio for Sanofi and new brand launches. As per IQVIA, our IPM rank continues to be at 10. We have launched 3 brands this quarter in addition to integrating the nutraceutical products under our subsidiary, Dr. Reddy's and Nestlé Health Science Limited.
Our PCI business recorded revenues of $100 million in Q2 FY '25 year-over-year growth of 18% and sequential growth of 9%. The year-over-year growth was primarily on account of improvements in volumes and growth in the CDMO business, which is also reported thereunder. We filed 22 Drug Master for globally this quarter. We invested 9.1% of our revenue to strengthen our R&D capabilities. Our R&D investment this quarter stood at INR 727 crores. Our efforts are focused on developing complex value-accretive products, including several demand injectables, peptide and biosimilars, in line with our patient-centric strategy enabling access and affordability.
We have made 60 global generic filings, including 2 ANDAs for the U.S. market during Q2 FY '25. In addition to investing in our development pipelines, we continue to strengthen our presence in our core areas of business while also collaborating to build businesses in 3 areas: consumer health care, access to novel molecules and digital therapeutics. We are also evaluating value-creating inorganic opportunities in existing spaces as well as businesses of the future.
We are certain that this strategic investment capital with our sharp focus on improving efficiencies will enable us to deliver sustainable growth as well as profitability.
And with this, I would like to open the floor for questions and answers.
[Operator Instructions]
Our first question comes from Kunal Dhamesha from Macquarie.
Congratulations on a good set of numbers. First one on the North America business, we have written that the sequential decline is primarily due to volumes. So sequentially, is it fair to assume that the pricing was stable?
The prices are relatively stable in the way we normally calculate them. We did not have a major issues on the big products that we normally discussed. As for the sequential, I would not take it too seriously. Part of it is a normal supply chain behavior that comes into inventory of the distributors or inventory of the retailers, we can definitely guide that we'll continue to grow in America on both the -- also on the base products as well. So I will not read too much into that. You'll see different numbers in the next quarter.
Okay. And this decline in sales volume, one you said is the channel inventory adjustment. And could it also be some seasonal products not kicking in this quarter?
Yes. So it was mostly about supply chain. There is no real decline. So there is no loss of market share or anything like that. Actually, if at all, we have a gain of market share. So I will not say too much about the sequential decline. I think the year-over-year actually reflect the situation.
Sure. And then the second one on the India Business, we have posted around 18% growth. But let's say, if we remove the Sanofi vaccine business, would we be at the double-digit growth for our base business?
It's almost there. It's 9-point-something percent even without the vaccine.
So we have improved a lot from the single digit to low double digit in this quarter?
So yes, we are in the double-digit even without the vaccine, obviously, we are well there. So it's in the right direction. But it's almost there.
Sure. And then do you think that this can again accelerate beyond what we have done in Q2 in the coming quarters, given the launch momentum has been very strong, right? We have been launching a lot of products in India?
Absolutely.
The next question comes from Neha Manpuria from Bank of America.
My question -- 2 part question is related to the U.S. business. Given we have seen a host of facilities being cleared -- clearing inspection in the last few months. When should we start seeing -- while we are launching products, we have not really seen high-value launches from Reddy's in the recent time. So when do you think we launch certain of these limited competition high-value products for the U.S. business? When do we start seeing that?
And second, our R&D has stepped up a fair bit. But I did see filing momentum has been fairly muted. So when does that R&D spend reflects in higher filing or higher-quality filing, better filing and therefore, revenue?
Yes. So on the first question, I hope that you'll see it probably in Q3, but I cannot guarantee that. It's about the ability to get approvals. But we have a couple of kind of products waiting for approval by the USFDA. And I hope already in Q3, we will see that. And -- but let's say, the remainder of the year and for sure, in FY '26, we should see a much better effect on that.
As for the filing of the R&D, we are primarily focusing on the, what I call, high-quality R&D in terms of -- we are not going for the 40 files per year, but we are spending on the, let's say, more selective type of products, but with a higher value. And we are doing globally, not just in the United States. So every product is going globally plus the investment in biosimilar primarily the abatacept. So this is where the R&D money is going to. I believe that it will actually -- there is a better yield and better improvement performance of R&D and we should eventually see it also in the numbers.
Got it sir. And sir, the R&D spend, how much of this would be for biosimilars in the onco asset? And any updates that we can get on the timing for our 2 biosimilar filings?
Sure. So the -- out of the total R&D, 36% is going to both biologics as well as Aurigene. Aurigene is our innovative arm. And the rest of it is going for the generics. The generic is about 50% of the number of the R&D and 14% is attributed to the API. So this is give or take the 5. But about biologics I believe that the most important products we launched in the beginning of 2017, and this is abatacept, we -- and we have a couple of licensing activities that is not impacting the R&D, but will be impacting, obviously, the portfolio that we'll have. One of them is denosumab. And of course, this is on top of what we do now with rituximab and bevacizumab in Europe.
And we were supposed to file [indiscernible] towards the end of this year. Are we on track of filing [indiscernible] the U.S. market?
Yes. So Europe is on time and also the United States will be filed also in the -- by the end of the calendar year.
Next question comes from Amey Chalke from JM Financial.
My first question is on REVLIMID. So in first half, the whatever sales we might have booked for lenalidomide. You expect the sales to be similar in second half? Or you expect the run rate to be on the lower side?
I cannot speak about the sales of REVLIMID per se because of the agreement. But let's say, you are going to see that it will continue to be very healthy also in the remainder of the year and also in FY '26.
Sure. The second question I have, if you can tell us about the preparation for the GLP-1 products for both U.S. and ROW markets, which are going to face patent expiry or where we are going to launch these products so...
Sure. So first of all, on the overall question on CLP-1, it's a very important segment for us, primarily because of focus on peptides, especially on the API side. So we identified close to -- in addition to the semaglutide, liraglutide, et cetera, we are talking about 14 or 15 GLP-1s that are coming up. Obviously, those will -- mostly will be with the patent base that will be in the next decade. But, let's say, we are going for the entire segment as we speak specifically for semaglutide, we are planning to be on day 1 in all the markets that will be open and that we will have, of course, from an IP standpoint, clearance to launch.
And that's basically the plan, and we are ready with our internal capabilities on both API as well as our formulations.
Sure. Just last question I have on the spend. Our SG&A spend, excluding amortization or depreciation, have gone up sharply over the last 2 to 3 years. I understand we have a big opportunity in U.S. where we are generating good profits, which we are reinvesting in the business. But let's say, post FY '26, you expect this SG&A spend to remain elevated like this? Or you expect some correction after?
What we -- indeed, we increased the SG&A within the years, primarily because of the mix of markets that we have. We are focusing more on India, on emerging markets. And these are, as you know, very profitable markets for us. And they paid well also for those SG&A. So we are not investing in the level of SG&A and the B2B market is obviously lower. So part of the SG&A growth is also part of the mix of the market that is changing, and it's actually changing healthy -- in a healthy manner as well.
In terms of the growth of the SG&A, it will be much, much more moderated, I will say flat to moderate, depends on the quarters and the years that we will discuss because we are -- like you said, we had an opportunity to build that kind of a franchise and infrastructure in many, many emerging markets and now it's well established.
Once the caveat for that will be that we're naturally going for India for innovative products. We are licensing those products. Naturally, some of these products will require certain investments. So likely this will do them, but I don't think it will be materially change the level of SG&A, and it's not going to happen also very soon. So that's what we'll have the comprehensive...
So I also just want to add, if you look at objective onetime costs of this quarter or is 28.1% of the sales, and then we expect on a full year basis, it will be in the range of 27.5% to 28%.
The next question comes from Balaji Prasad from Barclays.
This is Mikaela on for Balaji. We're just wondering how you can leverage the situation where make in America for generics gets a stronger emphasis? And if you do increase manufacturing in the U.S., what would this mean for operating margin?
We are not increasing manufacturing in the U.S. The products that we are launching in the U.S. will be made outside of the U.S., primarily in India.
If I got the question right, sorry, if I miss something, please...
The next question comes from Harith Ahamed from Avendus Spark.
My first question is on the rituximab biosimilar, for which we got an EMA authorization recently. So will you be able to share some color on the timelines for launch and our expectations from this particular product? And for the same product in the U.S., I believe we are awaiting clearance of our facility in Bachupally, which was last inspected in October '23. So what is the status of that inspection? Do we have a final classification from the FDA? That's my first question.
Yes. So thank you for the question. So the European launch is planned for February '25. And as for the U.S., we did submit our response to the U.S. FDA. And obviously, we will wait for this approval likely that it will be in the first half of FY '26. So of course, it depends upon when we will get the approval from the U.S. FDA.
Okay. And on generic lowering for which we've disclosed a INR 90 crore impairment this quarter. So can you share what percent of the intangibles related to this product has been impaired? What I'm trying to understand is whether this product is completely out of our expectations? Or do you still expect some revenues from this product?
So we have provided the full carrying value because the existing contract manufacturing organization is unable to supply the product. Hence we have provided 100% of the carrying value.
Okay. Sir, last with your permission. The intangibles related to the Haleon portfolio acquisition, which I believe is around INR 5,500 crores. Over what time frame will be amortizing this? I'm trying to understand the impact in our P&L.
So largely around 20-plus years. I think it's -- currently, we are just evaluating. I think it will be somewhere, I think in the 22 to 23 years range.
The next question comes from Damayanti Kerai from HSBC.
My question is on R&D. So you mentioned you are focusing on high-quality R&D. So can you just talk us about like the segments or products, which you are working on? And do you think you can launch some material products in, say, next 1 to 2 years in the U.S. market, specifically, which can help you to cover up some sales lost on the REVLIMID part. So that's my first question.
So on the first part of the question, like I mentioned to Neha, about 50% of the R&D goes to generics. So this is primarily peptides and injectable, especially complex injectables. The biologics is going primarily on the pipeline that we have, but most of the money in the short term will go on the clinical trials of Abatacept.
And then we have the investment in the next set of products for first to market, which will come later. This is on the API side, mostly GLP-1 type of the product and the oncology products of origin. So this is one.
On the second part of the question, yes, there is a healthy pipeline of about 20-plus products that -- of that nature that have relatively higher value. Of course, most of them are approval dependent. So it's hard to know when exactly we will launch them, but we are ready for that, and they should contribute to that. And this is including, obviously, semaglutide in which there is a patent that we were asked before about that and which will be launched once there will be a market openness for this.
Sure. My related question is you mentioned peptide GLP-1 is one of your focus segments. So I just want to understand -- on the R&D part, I understand you are covering the entire product basket, which will open up in market in coming years. But on the manufacturing part, do you have in-house manufacturing capability or you intend to get it done through some manufacturing partners?
So we are going to make it in-house, both the APIs as well as the finished dose. So -- and we are primarily dependent on our own internal capabilities.
Okay. So mostly, it will be done in-house and maybe some parts can be done through external parties?
Yes, yes, absolutely. The part that is not done by us is the device. Device itself, we are not making. But the API, our main strength is on the API as we have those certain technology, primarily in the macro that allow us to scale it up very, very nicely. And this is probably our biggest advantage so far in this segment.
Sorry, I think I missed. So you said API is your strength, but the formulation that can be done through CMOs? Is that right?
So we are making the API. We are making the formulations. We can also use CMOs for formulation, but primarily, it will be made by us. And the part that we have to buy is the device, the device we are buying.
Okay. Understood. My second and last question is on the Nestle JV. So you concluded the deal in August. Like what kind of sales or any number you have booked in second quarter? Or like -- and from here on, what kind of ramp-up you see in terms of like putting more products in the portfolio or in terms of revenue, how should we see updates there?
So right now, it's very small. It's in terms of cost because most of the Nestle products are not yet registered and brought to India. So the main intent of this franchise is to bring the Nestle product -- Nestle brands actually that are very successful outside of India to India and to bring them over time.
So at this stage, we are talking about tens of crores. It's -- but let's say, it's not a material around, let's say, somewhere between INR 50 crores, INR 60 crores. It's not significant. The main impact will come, obviously, from the ability to grow the brands in the future.
So this is the kind of business that it will take us time to scale it up. But it's -- but we believe that it's a very good and very sticky for many, many years to come.
The next question comes from Bino Pathiparampil from Elara Capital.
Just following up on a previous answer, Abatacept, you said could be a launch in early '27. Did you mean calendar '27?
Yes, calendar '27, yes.
Okay. And I was looking at the Russia growth adjusted for the currency fluctuations, it means the first half growth in Russia, CIS is a bit muted, probably around the mid-single digits. Any particular reason? And what's the outlook for the rest of the year?
So like I mentioned, Russia is doing really, really well. So in constant currency, we grew 27%. And indeed, there is some devaluation, but I think we have also the right difference for it. So overall, this is likely what you're going to see this high level of double digit is exactly what we're going to continue to see in Russia.
You have some seasonality in Russian products. So not every quarter is growing in the same way. But overall, this is the level of growth, especially as some of our peers are not investing in Russia the way we do, and we are gaining rank as we speak.
Okay. And one last question on PSAI. There is a lot of optimism in the market around the CDMO part -- CDMO business opportunity coming India's way. Are you seeing that helping your PSAI business in any way?
So it does contribute to our growth. It's -- for us, strategically, I see the CDMO, primarily as an area in which help us to build relationships and build capabilities, especially in R&D as the CDMO is working on the products of the future, and it allows us to scale ourselves both small molecules as well as in big molecules. It's also contributed to the growth.
And I hope that we will be able to see triple digit on sales of API, if not next year or the year after, but in this range of time. So it's a nice growth. In addition to that, most of the growth in the PCI comes from collaborations and the partners that we have across the globe, this is important pillar, strategic pillar for us as part of the B2B business.
The next question comes from Surya Patra from PhillipCapital.
Sir, my first question is on the Nicotinell business integration. So having completed the transaction, if you can share your thought process now about your growth plans, your integration strategy across -- of this business across various markets and your margin and cost positioning for that business?
Sure. So we are going to get the market in a certain sequence. And just to make sure that I'm explaining it in the right way, naturally, it's a carve out of brands from activity that Haleon is having today. So for some of those countries, we have to create either legal entity or sales force or distribution agreement or any of that. So there is an agreement of sequence of countries in which we are going to get in which we will be ready to accept those countries with relevant infrastructure, both internal and external.
The starting market will be U.K. in April and in the next 12 to 14 months, we should get more than 80% of the sales managed by us. Until then, it will be managed by Haleon.
Obviously, in terms of numbers, we will start to recognize them already in Q3. So from Q3 onwards, you will see the full impact of that, including some commissions that we need to pay for Haleon for doing the work for us during this period of time.
We see 3 types of synergies that will come once we will manage it directly. One is our ability to invest and focus on those brands. This we feel that this brand has certain lack of focus or lack of attention for several years. And we believe that by doing that, we can increase the growth. By the way, the brand is growing single digits already today.
And second, we can bring it to more markets, more countries. And #3, much more important, we appreciate that there is a lot of changes we can do in terms of innovation, different products, different packaging, different life cycle management of the brand, et cetera.
So between the 3, we believe that we can add value to these brands. And so right now, focus is on the integration, like I mentioned, to get it and to build the infrastructure. And post that, obviously, to invest and to grow it further.
Sure, sir. Second question is about the CDMO business again. Because of the -- our manufacturing base and positioning within U.S, whether this BIOSECURE Act development, that will offer any kind of a meaningful kind of footprint for our CDMO operation, which has been kind of relatively muted or seeing a kind of muted performance since some time. Do you expect any kind of meaningful kickstart to those kind of a momentum there?
We do see more projects that are coming on the biologics side of the CDMO, which is relatively new to us, but we definitely see that the BIOSECURE Act as you mentioned brings more attention to this segment. And yes, I believe that it will translate to future business. And yes, I do see an opportunity. I cannot tell you that it's huge at this stage, but it's absolutely in the right direction.
Okay. Just last one clarification for the U.S. business growth. You mentioned you are seeing some volume-related impact in the quarter. But is it possible to give some sense, excluding of the lenalidomide, what is the kind of -- means, some color to the growth Y-o-Y for the quarter or for the first half what growth that we would have seen for the base business?
So again, like I mentioned to Kunal, I would not read too much on the sequential. On the year-to-year, we are growing the base business, and it's not just good enough. So we are growing that. And I will not read too much about the Q-on-Q because it's...
No, I wanted to just on a Y-o-Y basis, sir, for the first half?
Y-on-Y, we're growing.
The next question comes from Tarang Agarwal from Old Bridge.
Congrats for a very strong set of numbers. Three questions. First on Russia. The INR 600 crores investment in working capital what's driving this now? And basically, just wanted to understand or get a bit more color on the business in terms of how working capital intensive is that business, some dynamics on the market. Some point, I think DRL had a 2.5% market share in that market. How has that moved? And what's the volume market share there?
This is like a working capital that too we have managed that working capital through factoring and short-term loans. Now it is because of the -- it is becoming costlier. And then as a group, when we evaluated this working capital funding as an equity from India to [ subsidiary ] is beneficial at overall level. That's why we get infusing as an equity towards working capital requirement. And yes Erez,.
As for the market share, I don't remember exactly the numbers, but we definitely increased market share and increased our ranking in Russia. So we're clearly growing primarily because of focus. It's U.S. companies that's still focusing on this market and companies with less focus. I think this is going to very much to our side.
I think that our -- that our overall -- our overall -- in terms of market, I think we are -- in all that both in months as well as quarters, we are growing faster than the market in all segments [indiscernible].
Just to get a sense, I mean, how big is the covered market in Russia where Dr. Reddy's operate? And I mean, it's a sizable business now almost $300 million. So how big is the market? And my sense is that the end market may not be growing, but from your vantage, could you expect this business to grow at the same speed as which you probably see your India business growing?
I believe so. I believe that you are going to see continuous growth. Indeed, the market itself is not growing in volume, but obviously, value, you see a growth because, of course, the situation in a country, price increases, et cetera.
Okay. Sure. Second, on CapEx, overall, if I see the trajectory over the last 3, 4 years, we see a lot of investments in R&D buying products between market access and as intangibles. In terms of physical infrastructure, if you could give us a sense how -- where are you in terms of your utilizations between your injectables, your oral solids and your API business? And what are the kind of investments that you're looking in terms of expanding your physical infrastructure from hereon?
Yes. So most of our investment is in the following spaces. We are investing in our injectables. We are investing in our biosimilars. And we are investing in the -- in our API business. And most of the investment in the API business, which is about right now, let's say, give or take 50%, it is 50% of the CapEx is primarily to build capacity for the GLP-1 as well as the other peptides in the pipeline that we discussed before. There are many, many peptides not just GLP-1. And we are gearing up for the launches of some of these products in FY '25, '26, '27, et cetera.
Some of the GLP-1 in terms of API can be very, very big. And we -- I believe that we are one of the most reliable suppliers today, not just to ourselves, but also to the entire industry of the API, and it's actually very big opportunity for us in that respect. So let's say, between the injectables, the biosimilars and the peptide is the lion's share of the physical infrastructure. And all of it is in India.
Sure. And last question on the Nestle JV. How long should the current capital contribution between you and the partner should hold the JV in good stead? I mean how far along will we see till further capital contribution of the JV?
So I believe that it will take us a couple of years to build a meaningful size, any meaningful brand recognition, primarily because the brands are new. It's not a brand that we take from India. It's a brand that we need to build. The idea is to build the #1 nutraceutical company. Both companies see this for the long term. But unlikely that we'll see a major contribution to profit in the next coming years. So it will be -- I don't think we will -- it will be primarily investment and whatever will be unlikely that we'll reinvest. So it's primarily more of a longer-term type of activity. But like I mentioned before, I believe very sticky and very meaningful.
[Operator Instructions] The next question comes from Kunal Randeria from Axis Capital.
On denosumab, the first biosimilar launch in the U.S. should be in year '24. Given that you are yet to file for it, just wondering how many players do you expect will be ahead of you when you eventually launch?
You are talking about the denosumab?
Yes.
Denosumab, it depends, of course, on the success of the others, but it should be somewhere between #3 to #5, I believe.
Right. And would this be like a late FY '26 launch?
It should be a FY '26.
Got it. Got it. Secondly, Erez 2.5 years back, when had you shared your vision in Horizon 2...
Kunal, maybe request you return to the question queue for the next question, please.
The next question comes from Anubhav Agrawal from UBS.
Just one question on SG&A. So this year, we'll be about 27.5% to 28%. Can you qualitatively give a sense that once -- I mean in a more normalized stage once the generic REVLIMID is more normalized, let's say, FY '27, once you have ramped a biosimilar portfolio also infrastructure for that. what would this number look like in a rough range? And so when I look at pre-COVID, you guys are doing 29%, 30%. Would you go back to that? Or would you retain 27%, 28%. Can you give a rough sense in a more normalized stage?
I believe it will be in the same range for next year at this point of time, but it will not increase significantly.
Yes. But next year, you still have the support of generic REVLIMID. So I'm just trying to understand, one, let's say, one-off revenues are not there. On a more sustainable base business, what would this -- would you go back to pre-COVID number 29%, 30%? Or would you still be at 28%?
Sorry, just I understand you're talking about growth?
No...
So what -- yes, yes. What I'm just saying, I think as I explained earlier, our new products also kicking and thereby like a top line will come. So hence, we believe it will continue to be in the -- around that range.
Sure. And you're saying that this is beyond next year as well, same range of 28% continues per year?
Around that range even we cannot give exact guidance for the next quarter, it would be largely in that range.
[Operator Instructions] The next question comes from Vishal Manchanda from Systematix.
On rituximab biosimilar launch in Europe, would you be selling on your own? Or you would have a partner there? And what is the -- how long would you take to ramp that up to its full potential?
We will sell on our own. We have a list of primarily tenders that we know we can participate and hopefully, we'll be successful in them. But let's say, on the B2B side of the biosimilar, it should be relatively fast in according to the date in which the tenders will be open. On the -- in Europe, you have also the physician countries. This, obviously, will have to do some [ network ] and it will take some time. But yes, there is no reason why we should not see this as relatively fast.
And would this be a $100 million plus opportunity for you?
I cannot guide there that much. I don't think it will come to this range, but I'm not -- I cannot quote numbers for this one.
The next follow-up question comes from Kunal Dhamesha from Macquarie.
Yes. So just for Abatacept time line that we have given, it is for the biosimilar launch, not new indication that our partner is trying. Is it correct understanding?
Sorry, I'm not sure I got the question. On the biosimilar, sorry?
So abatacept, I think we are developing biosimilar, and we have outlicensed this biosimilar to Coya for the indication of ALS, right? So the launch time line that we are talking about is for the biosimilar version that we are developing, right?
Correct. Correct. Correct. This is not for the Coya product, the Coya product will come whenever they will finish the clinical trial.
And what stage of development are we on the biosimilar side in terms of the clinical trial or filing?
We are in Phase III, and we are supposed to gear up to submit and to launch it in the end of calendar '26 beginning of '27.
Okay. So as of now, let's say, patient enrollment and all will be over? Do we have that details?
We are -- I don't know if it's over or soon to be over, but in a very advanced stage.
The next question comes from Surya Patra from PhillipCapital.
Just one clarification, sir. When we talk about the GLP-1 API capability. So here, we do say that it is complete end-to-end integrated at our end itself.
So we have the API. I just want to make sure that we have the API. We are making also the finished product. So in that respect, it's completely back integrated and we are buying the device, if I got the question right.
Yes, within API, it's capability -- complete chain manufacturing capability that we have. And hence, it is a full end-to-end integrated operation for us?
Yes, it is.
As there are no further questions, I would now like to hand the conference over to Mr. Richa Periwal for closing comments.
Thank you all for joining us for today's evening call. In case of any further queries, please get in touch with Aishwarya or myself. Thank you once again on behalf of Dr. Reddy's.
Thank you. On behalf of Dr. Reddy's Laboratories Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.