Dr Reddy's Laboratories Ltd
NSE:DRREDDY
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Estee Lauder Companies Inc
NYSE:EL
|
Consumer products
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Church & Dwight Co Inc
NYSE:CHD
|
Consumer products
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
American Express Co
NYSE:AXP
|
Financial Services
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Target Corp
NYSE:TGT
|
Retail
|
| US |
|
Walt Disney Co
NYSE:DIS
|
Media
|
| US |
|
Mueller Industries Inc
NYSE:MLI
|
Machinery
|
| US |
|
PayPal Holdings Inc
NASDAQ:PYPL
|
Technology
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
1 050.811
1 411.6
|
| Price Target |
|
We'll email you a reminder when the closing price reaches INR.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Estee Lauder Companies Inc
NYSE:EL
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Church & Dwight Co Inc
NYSE:CHD
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
American Express Co
NYSE:AXP
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Target Corp
NYSE:TGT
|
US |
|
|
Walt Disney Co
NYSE:DIS
|
US |
|
|
Mueller Industries Inc
NYSE:MLI
|
US |
|
|
PayPal Holdings Inc
NASDAQ:PYPL
|
US |
This alert will be permanently deleted.
Dr Reddy's Laboratories Ltd
Earnings Call Analysis
Q3-2024 Analysis
Dr Reddy's Laboratories Ltd
The company reported a solid quarterly performance with consolidated revenues of INR 7,215 crores ($867 million), marking an uptick of 7% year-on-year and 5% sequentially. The growth was mainly driven by the U.S. and European Generics segments, which benefited from both a strong base business and new product launches. However, gross profit margins declined slightly by 73 basis points year-on-year to 58.5%, mostly due to price erosion of certain products, offset by improvements in product mix and productivity.
The company is investing in its future growth by increasing its SG&A spend to INR 2,023 crores ($243 million), up by 12% from the previous year, due to investments in sales, marketing, digitalization, and new business and innovation initiatives. R&D expenses rose by 15% year-on-year to INR 557 crores ($67 million), accounting for 7.7% of sales. These investments support ongoing clinical trials and the development of a strong pipeline for small molecules and biosimilars.
EBITDA grew by 7% year-on-year to INR 2,111 crores ($254 million), with a robust EBITDA margin of 29.3%. Profit before tax increased by 12% to INR 1,826 crores ($219 million), while profit after tax also grew by 11% to INR 1,379 crores ($166 million), demonstrating strong profitability despite a marginal decline over the previous quarter. The company reported an earnings per share (EPS) of INR 82.7 and ended the quarter with a net surplus cash position of INR 5,907 crores, highlighting its financial health and liquidity.
The company has been advancing its strategic initiatives, such as acquiring the MenoLab portfolio of women's health and dietary supplement brands in the U.S. and entering the U.K. OTC consumer health market with Histallay, an allergy medication. Additionally, the company made strides in sustainable and ESG efforts, becoming the first Indian pharma company to be featured in the Dow Jones Sustainability World Index of 2023.
While the emerging markets segment saw a marginal year-on-year decline of 2%, new product launches and price increases in certain markets led to a sequential rise of 6%. The India business experienced a year-over-year growth of 5%, with expectations of double-digit growth in the coming quarters. The European Generics business grew by 8% year-over-year, although it faced a sequential decline of 6%. The launch of six new products helped to offset the impact of price erosion.
The company is focused on enriching its product pipeline and elevating its R&D capabilities, with 7.7% of revenue directed toward R&D efforts during the last quarter. This includes work on generic injectables and biosimilars as part of its patient-centric strategy to enhance access to affordable medicine. Nine global generic filings, including two ANDAs in the U.S., were achieved in Q3 FY '24.
The company highlighted several operational achievements, such as FDA cGMP inspection outcomes with observations that are being addressed, and emphasized the building of a resilient supply chain and commercial infrastructure. These efforts are geared toward supporting its broad growth ambitions and enhancing its market position.
You don't have any saved screeners yet
Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Q3 FY '24 Earnings Conference Call. [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 joining us today for the Dr. Reddy's Earnings Conference Call for the quarter ended December 31, 2023.
Earlier, during the day, we've released our results and the same is also posted on our website. The call is being recorded, and the playback and transcript shall be made available on our website soon.
All the discussions and analysis of this call will be based on the IFRS consolidated financial statements. The discussion today contains certain non-GAAP financial measures. For a reconciliation of GAAP to non-GAAP measures, please refer to our press release.
To discuss the business performance and outlook, we have our CEO, Mr. Erez Israeli; and our CFO, Mr. Parag Agarwal, and the entire Investor Relations team. Please note that today's call is a copyrighted material of Dr. Reddy's and cannot be rebroadcasted or attributed in press or media outlets without the company's express written consent.
Before I proceed with the call, I would like to remind everyone that the safe harbor contained in this -- 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 greetings to everyone. A warm welcome to our quarter 3 FY '24 earnings call. Thanks for joining. I'm pleased to take you through our financial performance for the quarter. For this section, all amounts have been translated into U.S. dollars at a convenience translation rate of INR 83.19, which is the rate as of December 31, 2023.
We continued our growth trajectory in the third quarter and delivered another quarter of financial results with highest ever sales and robust operating profit. Consolidated revenues for the quarter stood at INR 7,215 crores, which is USD 867 million and grew by 7% on a year-on-year basis and by 5% on a sequential basis.
The growth is led by the Generics business U.S. and Europe with contribution from both base business and new product launches. Consolidated gross profit margin stood at 58.5% for the quarter, a decrease of 73 basis points over previous year and 18 basis points sequentially.
The decrease was on account of price erosion for certain of our existing products, partly offset by improvements in product mix and productivity. Gross margin for the Global Generics and PSAI businesses were at 61.9% and 29.4%, respectively.
The SG&A spend for the quarter is INR 2,023 crores, which is USD 243 million, an increase of 12% year-on-year and 8% quarter-on-quarter. Year-on-year increase is primarily on account of investments in sales and marketing activities, digitalization capabilities and new business and innovation initiatives.
The SG&A cost as a percentage to sales were 28.0% and is higher by 148 basis points year-on-year and 72 basis points quarter-on-quarter. The R&D expense for the quarter is INR 557 crores, which is USD 67 million, an increase of 15% year-on-year and 2% quarter-on-quarter.
The R&D spend is at 7.7% of sales and is higher by 60 basis points year-on-year and lower by 20 basis points quarter-on-quarter. The investments are driven by ongoing clinical trials on differentiated assets as well as other developmental efforts to build a healthy pipeline of new products across our markets of both small molecules and biosimilars.
The other operating income for the quarter is INR 97 crores as compared to operating expense of INR 73 crores for the same quarter last year. The Other income was higher on account of sale of noncurrent assets.
The EBITDA for the quarter is INR 2,111 crores, which is USD 254 million, posting a growth of 7% year-on-year. The EBITDA margin stood at 29.3%.
Our profit before tax for the quarter stood at INR 1,826 crores, which is USD 219 million, posting a growth of 12% year-on-year and a decline of 4.6% over previous quarter. The net finance income for the quarter is INR 96 crores as compared to net financial expense of INR 14 crores for the same quarter last year.
Effective tax rate has been at 24.5% for the quarter. The effective tax rate was marginally higher in comparison to the same period last year, mainly due to an increase in the proportion of the company's profits coming from higher tax jurisdictions, partially offset by adoption of corporate tax rate under Section 115BAA of the Income Tax Act of India.
We expect our normalized ETR for the year to be in the range of 24% to 25%. Profit after tax for the quarter stood at INR 1,379 crores, which is USD 166 million, posting a growth of 11% year-on-year and a decline of 7% over previous quarter.
Reported EPS for the quarter is INR 82.7. Operating working capital increased by INR 1,227 crores, which is USD 148 million, against that on September 30, 2023, mainly due to increase in inventory and receivables.
Our capital investment stood at INR 307 crores, which is USD 37 million in this quarter. The free cash flow generated before acquisition-related payout during this quarter was at INR 22 crores, which is USD 2.6 million.
Consequently, we now have a cash -- net surplus cash of INR 5,907 crores, which is USD 710 million as of December 31, 2023. Foreign currency cash flow hedges in the form of derivatives for the U.S. dollar are approximately USD 672 million hedged around the range of INR 83.4 to INR 84.6 to the dollar and AUD 1.1 million at the rate of INR 58.3 to Australian dollar maturing in the next 15 months.
With this, I now request Erez to take us through the key business highlights.
Thank you, Parag, and very warm welcome to everyone joining us today. I am delighted to report yet another quarter with the highest ever revenues in robust operational performance. We made the progress during the quarter on strategic collaborations novel therapies to India and to improve our position in U.S. [indiscernible], of course, globally. We are also humbled by the recognitions received by -- for the progress we have made on our sustainability agenda.
Let me take you through some of the key highlights of the quarter. Sales and EBITDA grew by 7% each. The sales growth was primarily driven by improved market share for our existing products in the U.S., continued momentum in our Europe business, contribution from new products partially offset by price erosion in certain existing products due to competitive landscape.
We generated a healthy EBITDA margin at 29% and annualized ROCE at 37%. Net cash surplus was $710 million at the end of the quarter. We entered an exclusive development and commercialization deal with the U.S.-based Coya Therapeutics for the product COYA 302.
It is an investigational combination biologics for treatment of neurodegenerative disease ALS. We received an approval for U.K. MHRA for proposed bevacizumab biosimilar. We acquired a leading women health and dietary supplement portfolio of brands called MenoLabs in the U.S.
With this and a recent entry into the U.K. consumer health space with the launch of anti hay fever medicine Histallay [indiscernible] and we have taken steps to strengthen our [indiscernible] globally.
The U.S. FDA completed a routine cGMP inspection of our formulation manufacturing facility FTO-3 in October 2023 as well as GMP and pre-approval inspect PAI at our R&D facility in December 2023.
We will issue [indiscernible] 10 observations at FTO-3 and 3 observations at our R&D facilities. We have submitted our response within the stipulated time period. Our efforts in sustainability and ESG continue to gain momentum and external recognition. We are becoming the first Indian pharma company to be featured in the Dow Jones Sustainability World Index of 2023 and retaining our place in the Emerging Markets Index for the eighth year in the row.
We awarded gold medal status by EcoVadis. We upgraded MCGI -- MSCI ESG rating from BB to BBB. We are awarded the Golden Peacock for Corporate Social Responsibility 2023. Third, we are the first in company to pledge towards plantation initiative covering a 2,900 acres by 2028 as part of the World Economic Forum first organization.
Now let me take you through the key business highlights for the quarter. Please note that all references to the numbers in these section are in respective local currencies. Our North America Generics business recorded sales of 401 million for the quarter with a growth of 7% on year-over-year and a sequential increase of 4%. The benefit of market share expansion in certain existing key products, revenue from new launches and integration of acquired portfolio was partially offset by price erosion due to competitive environment.
We launched 4 new products during the quarter. We recently acquired MenoLab portfolio women health in dietary supplements brands in the U.S., which complements well with our U.S. healthcare and wellness business portfolio.
Our European Generics business recorded sales of EUR 55 million this quarter with a year-over-year growth of 8% and sequential decline of 6%. The contribution from new product launches including the business volumes help offset price erosion.
During the quarter, we launched a total of 6 products across market. Earlier this month, we entered the U.K. OTC consumer health market with the launch of brand, allergy medication, Histallay.
Our emerging market business recorded sales of INR 1,283 crores, a marginal year-on-year decline of 2% and a sequential increase of 6%. The benefits of new products and price increase in certain markets was more than offset by unfavorable ForEx.
We are on the track to deliver double-digit growth for the year. We launched 30 new products during the quarter across various countries of the emerging markets. Within the emerging markets segment, the Russia business grew by 3% on a year-on-year basis and 7% on a sequential basis in constant currencies.
Our India business recorded sales of INR 1,180 crores and reported year-over-year growth of 5% and a marginal sequential decline. We anticipate the base business to deliver double-digit growth in the coming quarters. We are focusing on licensing and collaborations to bring innovation to India.
A rollout of [ residual ] market which may enter into the digital therapeutics. We are seeing adoption by doctors and repeat purchase indicate high patient satisfaction scores. India remains our priority market and we will continue to reinforce our presence in core generic business while investing in building the innovation space in line with our strategy.
Our PSAI business recorded sales of $94 million with a strong sequential growth of 11% and a marginal year-on-year decline of 1%. Excluding sales of COVID products in the same period last year, sales growth was in high single digits. We expect sales to improve on the back of strategic cooperations with regional and global players.
Last quarter, we invested 7.7% of our revenue to strengthen our R&D capabilities and efforts are focused on developing complex value-accretive products, including several generic injectables and biosimilars, in line with our patient-centric strategy to enable access and affordability.
We also continue to invest in innovative solutions to strategic partnerships such as recent collaboration with Coya Therapeutics on investigational therapy. We have done 9 global generic filing including 2 ANDAs in the U.S. in Q3 FY '24.
We have been recently ramping up inventory to reduce the risk of supply chain disruption and building inventory for our pipeline products. We are also strengthening our position by building best-in-class capabilities in commercial infrastructure to leverage our portfolio to expand further.
We continue to develop our pipeline and scale up our biosimilar business, being a pivot to growth strategy. Our ability to source external innovation through strategic development collaboration will enable us to address unmet needs in patient 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. Just 2 from us. First one is what is your latest thinking on generic pricing trends particularly in the U.S.? And could you provide a bit more color on how you see this trending going forward? And second one, what are your thoughts around the Chinese pharma market in 2024?
I did not get the second one. What is, sorry?
The second 1 was what are your thoughts on the Chinese pharma market in 2024?
So the first question, [indiscernible] continuation of the pricing environment that we saw in the last couple of quarters. So we have relatively same environment, meaning that relatively to other [indiscernible] than it used to be more focused on service, sustainability of supply and -- but obviously, the business model did not change.
And in every place that competitor is coming. We see price erosion, and that's -- in the same neighborhood like we have discussed in previous quarters.
As for China, we do see a very good tracking of our approvals. We got 9 approvals since the beginning of this fiscal and 3 in the last quarter. So far the momentum continue in China.
The next question is from the line of Kunal Dhamesha from Macquarie.
Congratulations on good set of numbers. First one on the U.S. product launch and filing momentum. So if I look at the first 9-month data, we have launched 12 products in the U.S. And we have just 1 new filings and our total pending ANDAs also have come down from 90 in quarter 4 FY '22 to now 79. So is it because we are focusing on a few therapy areas, more complex. If you can provide some color there would be helpful?
So yes, we do have less filings, let's say, overall because our group products we believe input, but it's still a healthy numbers of files, I believe that you'll see in the next coming months more filings coming just timing of those files.
On the launch piece, we will have more than 20 this year. And so it looks like a healthy number. But obviously, in the U.S., what is important is the type of product launch with the numbers of launches, but so far, it is healthy for us.
Sure. And then just a follow-up on that. We are -- now we have acquired this MenoLabs, if you can provide some clarity as to how does this fit into our strategy? What was probably the last 12 months sales for these brands? And what is the acquisition value that we have paid. And does the increase in borrowing quarter-on-quarter relate to this?
So the -- as part of the timing of what we call Horizon 2, we decided to focus in general, as a company on 3 types of segments, I'm talking primarily collaborations [indiscernible], acquisitions, [indiscernible] and digital therapeutics.
Specifically, for the U.S., we decided to focus on OTC in several areas, including working on digital aisle on our private label as well as brands in women health. So we acquired [indiscernible] in the past, and now we -- the complementary products or brand that [indiscernible]. The idea is to create a franchise in women health supplements.
So that's the kind of diversified the U.S. business to areas that have different pattern of demand and supply and brand awareness. I don't recall exactly the sales of MenoLab before, but we are talking about range of millions of product sales. So this is -- so it's relatively small. We believe that we can take it from there.
And after this, what would be our U.S. revenue contribution from the wellness product or OTC product? I think earlier we used to provide it in 20F or the quarterly filing, I'm not sure now that we provide that.
So the OTC, if I may, on an annual basis should be about 10% give or take of the overall U.S. revenue.
The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Sir, firstly, on the receivables, which have increased on a quarter-on-quarter basis, is this on certain select products? Or is it across the portfolio and for which markets?
No, receivable increase is primarily in line with the top line increase. So it's nothing unusual. It's across the market, but largely concentrated in the U.S. It's in line with the normal top line increase.
Okay. Secondly, gross margin for PSAI segment has been higher for the quarter compared to the previous quarters. So anything specific you'd like to comment?
Yes, [indiscernible] because of the nature of the business that it has normally a high level of fixed costs. So when you're increasing the sales, we normally will have better margins. And so it's just a reflection of the growth. I'm happy that we are back to growth, it took us some time to achieve that. And I think now we are -- it looks like in the right direction.
Okay. Because second quarter PSAI revenue was INR 960 crores with 13% gross margin, and now it is INR 1,040 crores. The gross margin has improved to almost 22%.
Yes. So it's a combination, again, of the mix and the combination of more sales. And there is nothing unusual in their future, it's just that type of [indiscernible].
Okay. And just lastly, considering the launches and the filings and the market share gains for the existing product, if you would like to share outlook for the U.S. business for FY '25, end of FY '24. So if you could share some color on that?
[ We now get to U.K. ] we are not giving guidance, but we are supposed to continue to do well in all the levers. So far, it looks healthy for both commercial product, service to the customer, price environment, [indiscernible] is going to continue to be meaningful. So all the levers should continue to work well also in the next coming quarters.
The next question is from the line of Neha Manpuria from Bank of America.
Guys, if I were to look at the SG&A spend increase that we have seen in the quarter or even if I were to look at it over a 3-year period, I know you've mentioned that we've been investing in Horizon 2 product, a project that you've talked about. But from a monetization point of view, when should we start seeing the contributing to revenue? I'm just trying to understand when should we start seeing operating leverage in the higher spend? And do you think this number continues to trend up from where we are?
Yes. So part of it, which is related to the investment we put now in certain brands in India will give results already in FY '25 because of that's the nature of the game. So we are increasing demand. Some of it is related to investments that will take more time as we are putting money into building products that will be launched in FY '26 -- '25, '26 and in '27. So likely that this level of -- that level in the -- at least on value-wise, will continue to be a bit higher, but I do see more growth in revenue.
So overall, it should be in the same environment that it used to be in the past meaning before that. But let's say, to your questions, part of it will be already in FY '25 and part of it will be in FY '26, '27.
And if I were to dig a little deeper on the points on the launches. I know in your analyst meet, you have mentioned certain areas that you're working on. But out of the 20, 25 launches that you talk about in the U.S. Can we try to understand as to how many of these could be the bread and butter launches that we need to offset the base business? And how many of these could be meaningful products? Some color there would be helpful.
Yes. So we have overall about 26 products that can be launched, it will get approval [indiscernible] in the market that can be launched and I'm talking about products that can be meaningful, what meaningful means probably tens of millions or more than that. This is what, let's say, for the second discussion [indiscernible]
The question is what combination of that will actually get to the market and what will be the share there. Of course, I don't know. But we are building on that to offset the period after [indiscernible]. And in addition to that, we, of course, we are planning to have a growth in the other levels as well as potential that will come. So the combination of those is supposed to even address to that.
And just a follow-up on that, the 26 products would be over the next 2 years, 3 years? How should I look at the time line for that?
So potentially, with all the cautious -- about this kind of product, I refer to products that supposed to be in the next few years, '25 and '26. If it went to '27, we had more products. Of course, subject to approval, subject to winning [indiscernible] case and subject to all the normal challenges that we have going to the market, but let's say, it's a healthy list of tough-to-make, tough-to-develop products.
Understood. And my last question on the biosimilar pipeline. Could we talk about how many products we are developing for the U.S. and European market? And when should we start expecting some sort of a time line or let's say, a progress update on the pipeline that we're looking at for biosimilars?
Yes. So we are talking about 6 products by FY '30, and again, subject to receiving approval in those timelines, but subject to winning the patent cases. But at least, this is what we are aiming for. If you recall, at the time when we had the change that we made after the arrangement that we had at the time with the [indiscernible] we decided to skip a couple of years and to move the products [indiscernible] first to market. This is the strategy.
The first product should come in the in calendar -- in the beginning of calendar 2027. And then the rest of the product by FY '30, then of course, we have a bunch of products that will come later between FY '30, FY '31 and FY '35, ongoing. So that's right now the case that we are planning for.
The next question is from the line of Damayanti Kerai from HSBC Securities and Capital Markets India Private Limited.
My first question is for your India business. you obviously mentioned you're working on some innovative products, digital therapeutics, et cetera. to improve market offering. But I just want to understand like how far these opportunities are right now for you? Because it appears that this kind of product take -- might take some time and meanwhile, your India business is, I'd say, growing slowly in the market. So how do you bridge your growth versus market growth till the time those innovative products start delivering results?
Sure. First, just to calibrate, also the reason that people see single digits is that the Cidmus, the brand that we acquired and the price erosion that we had, which we anticipate is out of the business plan that we took into account when we acquired this brand, contributes about 2% of further decline, plus in the base of last quarter last year, we had also products that we divested.
So if we are taking those, we are already in the face of double digits. But I'm -- but going forward, what's more important, we identify brands that should grow even faster than the market. So I'm talking about brands that will grow at the pace of 1.5x the market, those specific brands, we are building behind them.
And in addition to your point, indeed, those pickup may take time, but it's a very significant pipeline that we are building now. All the products that we are bringing in innovation are better than the current standard of care. So it will be a meaningful growth more in the medium term. In FY '25, I'm expecting to see double-digit growth of new business from the [indiscernible].
Okay. That's comforting to hear. My second question is on your U.S. business. So obviously, you delivered a very good set of numbers. So few reasons you mentioned pickup in market share for some key products, et cetera. So just want to understand was REVLIMID contribution for third quarter, even much higher than what we saw in the first and second quarter? And have you seen like what kind of pickup you have seen on the Mayne portfolio?
So you know that I cannot speak unfortunately on quantities on neither REVLIMID. I can also -- I can also say that it's absolutely within our expectations and expecting to be meaningful also in the future. As for Mayne here, we see pickup, we see that it is growing. So, so far, it is within our expectation and I'm happy for this acquisition.
Okay. And my last question is, can you talk about your progress in some of GLP-1 products, specifically for anti obesity indication which you might be targeting for, say, U.S. or other export markets?
So we decided that many others to be in this segment. It's very important segment for us. It's in our interest from both -- first we are very much into anti diabetic, not just in India, but also actually globally. And we build ourselves. And the second is the peptides as a family is -- we believe that it's a core strength of our -- both on the API as well as on the [indiscernible] facility that we have.
So the combination of that, we want to play in this market very much and also to address some of them. So we are planning to launched globally, we mean in all the countries that we have reached these products when the relevant patent situation will allow us to do that.
The next question is from the line of Surya Patra from PhillipCapital (India) Pvt. Ltd.
Sir, my first question is on the U.S. business. In fact, the base U.S. business, excluding, let's say, REVLIMID and the recently acquired managed portfolio. It looks like that Y-o-Y, we are kind of seeing a flattish performance despite the improved pricing scenario in the U.S. So could you qualify that whether that is the kind of trend what we have also seen? And what is the kind of growth that we are anticipating for the base business?
So I can confirm that the base business is growing. And it's after we think to -- our ability to -- in the efforts that we put on both inventories and service and obviously, relationship with customers, I anticipate that this trend will continue also in the future. And naturally, the geopolitic situation and the -- and in certain areas the concern about sustainability of supply is an important topic for customers. And we see ourselves as a partner to help them to with that challenge and whether we have success, we have to see ourselves.
Okay. Regards the, let's say, the recent M&As, what we have seen, let's say, leveraging the cash flow generation from the REVLIMID, I think we have done a couple of acquisitions and already announced 3, 4-odd kind of in-licensing [indiscernible]. So cumulatively, all these initiatives should have also contributed to the growth in the base business. So in fact, could you share that, okay, what is the kind of incremental growth that such M&A initiatives would have added to the base business? And going ahead over a period of, let's say, next 3, 4 years, I mean beyond REVLIMID opportunity, so what base business growth that you are anticipating out of the M&A activities?
So M&As are not -- I'm not calling it base business, so by design, new stuff that we are adding to the company. The -- Most of the M&A is actually -- and it's not just M&A, since we have all kinds of collaboration like [indiscernible], JVs, also M&A, all of that is primarily to strengthen our future portfolio as per the strategy, whether it's in -- like I mentioned, it can be on the best product like Mayne but mostly it is about actually what we call again Horizon 2 [indiscernible] and digital therapeutics.
So actually, most of the efforts are coming from that. In addition to that, we are always looking for opportunity. By the way, it's not the money from REVLIMID, it's money that we make also for REVLIMID, but also from the other activities of the company. How much it will contribute? As much as we'll be able to buy. We potentially have a significant financial capacity.
And we are very active in the market. At the same time, we are not buying for the sake of buying or for the sake of any other. We buy because we feel it's a good deal for us, and it's a meaningful growth strategy. So like we said -- I said in the past, we are not in a shopping spree time what we believe is good for us and strategy.
Sure, sir. Regards the inspection outcomes for the Bachupally facility. So what risk that one would assign to it? Or what is your practical assessment here, sir? Do you find any risk to the existing business given the kind of the number of observations that has been issued to you? And the nature of the observation that has been highlighted?
Yes. So you're talking about the FTO-3 I'm assuming?
Correct. Yes.
So first of all, what is the risk? The risk we will get, is there is a possibility for that? Yes, there is a possibility, there is always a possibility, but there is a possibility that it will happen.
I am -- what I can update is that first we address all the observations in [indiscernible] at a time. After that, we gave a choice to the FDA with the blessing also of external consultant's data that shows that the capital we put in place is working. And this year is happening 2 installments, 1 in December and 1 in January. And I believe that it's [indiscernible], but of course, we will wait for the FDA response for both.
Sure. Sir, just 1 last clarification from my side. whether you have commented on the MenoLabs size and the potential contribution to our U.S. business?
No, I did not because I don't remember the numbers, I apologize for that.
And we don't disclose the numbers, but as Erez has mentioned, couple of millions is what is there. And as the business progresses, we'll keep updating you.
The next question is from the line of Bino P. from Elara Capital.
Just a couple of quick questions. One, you have this product Lumify, which you have been licensed in the U.S. So is there a timeline we can get regarding the approval of the same?
Which product? Sorry, I missed it.
Generic -- Generic Lumify.
Sorry, which one?
Lumify.
I don't have any information -- so -- about it so.
So that is there actually in the pipeline product, and we'll keep updating once when the same approval is in place.
Okay. Second, on biosimilar, Rituxan. Could you give some color on what sort of time lines you have in mind for the launch also given the recent inspection of USFDA and the outcome, et cetera?
So we got a -- we submitted in April. We got the FDA inspection actually on time in October. We [indiscernible] we have given observation. We did not receive any additional information. So if everything will be without [indiscernible] any or any query that will come from the USFDA, the earliest that we can get approval is end of April. But of course, it may be late. It will get any query [indiscernible].
Understood. Okay. And Erez, you mentioned about this biosimilar pipeline, which kind of starts from CY -- calendar year '27 and going into the '30s. Do you have some products which could be the -- among the first wave or the first biosimilar to some of the products within that?
This is the intent. All the products that we are developing, we are developing with the intent to be in the first or in the first [indiscernible].
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
Erez, just the first one is on the overall CDMO kind of space. I know you have a subsidiary. But I just want to understand, are you able to see more demand coming from global innovators towards India-based companies, including companies like yourself or your subsidiary. So that's the first question. And are you investing in capacities either on the small molecule side or the biologic side for manufacturing for CDMO?
So just for both, the [indiscernible] is still our business is not that big. So I cannot say that it's an overall global trend, but the trend that we see is global. And indeed, we do invest in capacity, both on the lab as well as for production for products that we have contracts and we know that it will be -- the capacity will be, of course, will be paid by those contracts.
Sir, I'm just trying to understand from a capital allocation standpoint, will this be significant for you? Or you think we have enough other projects in the pipeline for us to be -- or do you think this will be a small part and will not be ramping up?
The CDMO is not -- in the overall scheme of things [indiscernible] will not be big, but it's a business that should go from tens of millions of dollar to hundreds of millions of dollars that's expectation. But in the overall scheme of things of the overall size of the company, it's a relatively small business.
Got it. Helpful. Just a second, just a financial question, to Parag. I'm just looking at your disclosure around net cash generated after the moving taxes and looking at FCF, right? So it's been the conversion has been low. So I just want to understand, I know there has been an acquisition you paid out for in the quarter 1. But just want to understand, either in terms of CapEx or in terms of intangible buildup, is there something that we need to keep in mind?
So I think the only thing I would point out is what Erez mentioned, which is we are investing in strategic inventory buildup. So we are investing in new product pipeline buildup. Also in -- because of the supply chain, the sea routes disruption, we don't want to lose any sales. So we are also increasing inventory in our front end markets. So it's primarily the working capital impact apart from receivables increase, which is in line with normal sales. So that's the key reason. Otherwise, our cash flow is on various fronts continue to be healthy. The conversion is healthy.
[Operator Instructions] The next follow-up question is from the line of Kunal Dhamesha from Macquarie.
Just continuing on the last question on the inventory buildup. So how much of our product would be -- probably be going through sea route now and anything going through Red Sea route as of now?
So the majority of the products are going from the sea route. Actually, the situation [indiscernible] to move something by air in a [ strange ] way, certain products even better to go by air. But of course, this is a volatile situation and may change. But in general, we are trying to have the majority, the majority means for us, it should be 80%s-plus.
The second one is that we are trying to have as much inventory in the U.S. very close to the customers [indiscernible] to address customer needs. We see that as an advantage for us as we can give the customer a service that they may cannot get from others.
So this strategy, of course, leveraging the fact that we have a healthy balance sheet [indiscernible].
Sure, sure. And just 1 related question in U.S. over the, let's say, last 3 to 4 quarters, how has the onetime or short-term supply opportunities behaved for you? Are those supply opportunities increasing maybe coming to you or decreasing in the last 3, 4 quarters?
I would say that the onetime situation is not big, and there is no, let's say, tangible trends on that [indiscernible] the fact that if we are gaining share, we are gaining for the long term, and this is more something that we are focused on. And most of the growth that we have in our base products is more longer term in nature rather than onetime buy.
So is it fair to say that now the agreements that are being done are for a little longer period of time versus what it used to be, let's say, 2 years back?
Every customer has its own pattern of procurement. I don't want to go into details. But in general, we do see appreciation of the [indiscernible] So we are trying to be positioned as a partner for our customers and certain areas that we feel good.
Sure, sure. And one on the India business. So we have said that we want to focus on our key brands. We have identified in India where we want to grow 1.5x the market rate. Could you provide some ballpark number as to how much of these key brands will be contributing to our India business?
So most of the [indiscernible] double digit is a [indiscernible] will come from those brands. So when they will grow at a pace [indiscernible] the overall India business should grow by double digits.
Sure. And the last one, because you are focusing on the GLP-1 opportunities, can you provide some color on how much is our peptide manufacturing capacity? And are we manufacturing anything currently for regulated or semiregulated market?
We are focusing not just on GLP-1. We are focusing on [indiscernible] like other peptides, et cetera. But to your point, yes, we are making that most of the volume is yet to be launched because the products are still under patent or still under approval process but is there ourselves or by partners, external partners.
Sure. And -- but any capacity that you want to put out like some of the other global players have put out that they can manufacture their 32,000 liter capacity to manufacture GLP-1, any numbers...
Let's say just we invested a lot in our capacity, both on the API as well as on the finished products. I will not refer out the numbers of the [indiscernible].
The next follow-up question is from the line of Neha Manpuria from Bank of America.
Just to confirm, out of the 26 products that you mentioned, Erez, in the U.S. pipeline, which are meaningful, none of these would be from Bachupally, would that be a fair assumption?
None of these, sorry?
Are from Bachupally, FTO-3?
In FTO-3, we do have, I think, 2 products that are part of that. And -- so in the case that we will have an issue, we will have to move it to another site that we have if it will come into that situation.
Okay. From a pipeline dependence, upcoming launches, how important would FTO-3 be, just to understand the risk in case of an adverse outcome?
Not significant. Most of the products are all [indiscernible] most of them commercial, so not significant. Obviously, we don't want it. It's not nice to [indiscernible] et cetera, but it's not significant and most of the growth will [indiscernible] but not so much.
Got it. And Parag, on the moderation in the gross margin that we have seen in the generics business, how much of that would be -- I mean, the quarter-on-quarter moderation would all of that be because of pricing pressure? Or is there any other big factor there? I think FX would be the other one, I'm assuming?
It's more of a mix issue, Neha. I mean, pricing is obviously there, but it's very stable. So pricing doesn't stand out, but it's just that the offset from new product launches from the product mix has been a bit lower. That's all.
So it's not that the price erosion is higher. Price revision still remains at the same level. If the upside from the other things that we see in terms of productivity, in terms of product mix, there is some timing issue, I would say there. So overall, well within the normal range.
So I shouldn't assume that the incremental business that we've seen in U.S., et cetera, is a lower-margin business, and hence, that's reflective in my gross margins?
No, no, that's not right. Yes. You should not assume that.
Ladies and gentlemen, that was our last question for today. As no -- 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 the Investor Relations team. Thank you once again on behalf of Dr. Reddy's Laboratories Limited. That concludes this conference. You may now disconnect your lines. Thank you.