Dr. Reddy's Laboratories Ltd

Ladies and gentlemen, good day and welcome to the Dr. Reddy's Q2F520 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing star, then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Agarwal. Thank you and over to you, sir.

Very good morning and good evening to all of you and thank you for joining us today for the Dr. Reddy's earnings conference call for the quarter ended 30th September 2019. Earlier during the day, we have released our results and the same are also posted on our website. This call is being recorded. The playback and transcript shall be made available on our website soon. All the discussion and analysis of this call will be based on the IFRS consolidated financial statements. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy comprising Mr. Erez Israeli, our CEO, Mr. Swamin Chakravarti, our CFO, and the Investor Relations Team. Please note that today's call is the copyrighted material of Dr. Reddy 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 language contained in today's press release also pertains to this conference call. Now, I hand over the call to Mr. Swamin Chakravarti. Over to you, sir.

Thank you. Greetings to everyone. Let me take you through the key financial highlights of the quarter. This quarter we had certain one-off items impacting revenues, gross profit margin, and SG&A, which I would cover as part of the respective section, wherein all the amounts are translated into US dollars at a convenient translation rate of Rs. 70.64, which is the rate as of 30th September 2019. Consolidated revenues for the quarter are at Rs. 4,801 crore, which is $680 million, registering a growth of 26% year-on-year and 25% on a sequential quarter basis. It includes an amount of Rs. 723 crore, recognized as revenue towards the sale of two neurology brands of our proprietary product business. Even after netting off this amount, revenue during this quarter has been the highest ever for DocReddy's. This has been made possible by registering a good growth in the PSAI, Europe, emerging markets and India businesses. However, energy performance could have been better. Consolidated gross profit margin for the quarter is 57.5% with an improvement of 250 basis points on a year-on-year basis and 590 basis points on a sequential basis. Gross margin for the global direct business was 55.5% and for PSAI business was 24.6%. When the overall gross margin is benefited due to revenue recognition of the CP Neuro brand, it was impacted due to certain one-offs including but not restricted to the impact of the voluntary recall of Renitizine in the US market. Adjusted for the one-offs, the normalized gross profit margin for the quarter is about 51.5%. The SDNF spent for the quarter is Rs. 1678 crores i.e. $238 million. As part of our quarterly impairment testing analysis, we concluded that the carrying value of the intangible asset is not reflective of the current market reality for three of the products, namely, Tobramycin, Ramiltium, and Iniquimote Accord Fempeva. While the first two products faced increased competition and substantial price drop during this quarter, we have taken a decision not to launch the first product. Accordingly, an impairment charge of Rs. 365 crores has been considered in the current quarter. Beyond the impairment charge, there have been additional one-offs over Rs. 100 crores, including but not restricted to the cost associated with the sale of two denology brands. Adjusted for the one-offs, the normalized SDN spend is lower on a sequential quarter basis. R&D spend for the quarter is Rs. 366 crores That is $52 million and is at 7.6% of the sales for the quarter. The R&D spend is lower by 11% year on year but higher by 1% on a sequential basis. Considering the current state of activities, we believe that the overall R&D for this fiscal would be in the range of $200 to $240 million. The EBITDA of the quarter is Rs. 1,434 crores. That is $203 million, which is around 29.9% of the revenue. The net tax for this quarter is a benefit of Rs. 326 crores due to recognition of default tax assets for Rs. 522 crores, primarily related to max credit. Pursuant to the recent amendments in the taxes and laws in India, the max rate has been reduced from 21.55% to 17.47%. Consequently, during the quarter, the company has evaluated the recoverability of the unrecovered max credit. and I've heard that it is likely to recover the match credit within the stipulated period as per Income Tax Act. Accordingly, the company has recognized a default tax asset of Rs. 499 crores related to the unrecognized match credit in the current quarter. With this development, the ETR for this finance area is expected to be less than 10%. EPS fourth quarter is Rs. 65.82. Operating working capital increased by around Rs. 350 crores, which is Rs. 49.5 million. This increase is attributable to an increase in receivables in line with the sales increase. The net working capital base has increased by four days against the last quarter. We invested Rs. 108 crores. which is $15 million towards capital investment in this quarter. The free cash flow generated during this quarter was Rs. 874 crores which is $124 million. Consequently, our net debt to liquidity ratio has improved further and is at 0.01 as on 30th September 2019. Foreign currency cash flow ages for the next 6 months in the form of derivatives for US dollar are approximately 300 million dollars, largely raised around the range of Rs 70.20 to Rs 73.95 to the dollar. In addition, we have balance sheet ages of 564 million dollars. We also have foreign currency cash flow ages of 1,650 million rubles at the rate of rupees 1.0813 to the ruble, maturing over next six months. With this, I now request Erez to take to the key business highlights. Thank you, Sharma.

Greetings to all. We had a good quarter and are progressing well in implementing our strategy in the focus spaces we have communicated In this quarter, we generated 870 score rupees in cash, which improves our financial strength and enables us additional means to grow in the future. This quarter, we had a number of one-offs in the financial performance, but we believe that these are not going to impact our strategy and our future growth. Now, let me take you to the key highlights across our businesses. Please note All the references to numbers in this section are in the respective local currencies. Our North America generics recorded sales of $202 million for the quarter and declined by 1% year-over-year and 14% on a sequential quarter basis. The sequential decline was primarily driven by certain issues impacting the quarter such as A. Provisions related to nationwide recall of Ranitidine products due to NDMA impurities limits following FDA's caution. Note regarding the same. We now have a completely suspended the sales of Ranitidine OTC and RX products. And B. Logistics related challenges leading to temporary disruption in supplies which have been addressed since. We expect the sales run rate to normalize from Q3 onwards. During the quarter we launched 8 new products including some first to market and limited competition products like Cardoprost Injectable, Pre-Gabalin, Forza Pretenat Injectable and OTC Web Sodop. We launched 13 products in the first half of the fiscal. While we continue to work towards ramping up our market share across the key launches, we are on track to launch more than 30 new products in the current fiscal. Our Euro business recovered sales of 35 million euros, with a strong year-on-year growth of 50% and sequential growth of 15%. This great performance was driven by increased contributions from new launches with base business performing well across all the European markets. We expect this business to continue to perform well during the balance of the year. Our emerging markets business recorded sales of 820 crores rupees with a year-on-year growth of 10% and sequential growth of 13%. Within EM segment, Russia business grew at 6% year-on-year and two sequential and constant currencies. New launches and higher volumes contributed towards the overall growth, which were partially offset by lower realizations in few of the markets. This quarter witnessed a great milestone for our China business. As many of you may be aware, Dr. Reddy successfully emerged as one of the winners for the supply of olanzapine in the centralized drug procurement program, becoming the first Indian generic company to have prevailed in the new tendering process. This award is a testament to our focus and efforts towards building China as one of our key growth drivers for the company. We remain committed to building a healthy pipeline of products to enable us to support Chinese patients with more such opportunities going forward. Our India business recorded sales of 751 crores rupees with an year-on-year growth of 9% and a sequential growth of 8%. During the quarter, we launched five new brands. After the secondary sales reported by IQVIA, we registered a healthy growth of 13.4% ahead of total market growth of 13.1% for the quarter ended September 2019. We continue to focus and strengthen our prices in India market. Our PSAI business recorded sales of $100 million with a year-on-year growth of 16% and sequential quarter growth of 54%. We had a strong quarter for the business and we expect to build on this momentum going forward. On the R&D front, we filed one ANDA during this quarter, and the filing agenda is expected to ramp up during the balance of the year. As of 30 September 2019, we have 99 cumulative filing spending for approval with the U.S. FDA, including 96 UNDAs and 3 NDAs. During the quarter, we have also filed eight drug master files globally. We continue to strengthen our product portfolio across all of our focus markets. On the quality and regulatory front, we had several audits during the year carried by USFDA and other agencies. And I am quite satisfied with the overall audit outcome. We believe that we should be able to appropriately address Wherever there are, open observation from these bodies. As regards the API Zrikakulam plant, what we call CTO6, we are expecting an inspection from the USFDA in the near future. Our proprietary products business First one, to the closure of the divestiture of our pure neurology branch to Absher-Smith, we recognize income of $105 million during this quarter representing the up-form consideration and discounted value of near-term milestones. Further, we are happy to announce that Sumira, brand for intranasal Sumatriptan, was launched by Absher-Smith in the United States in October 2019. One cohort will remain focused on addressing unmet and under-met medical needs of patients suffering from critical and chronic illness globally. We are focusing on our core capabilities in R&D to build a self-sustained business that can consistently deliver high-value, globally relevant, differentiated products that provide meaningful health economic outcomes to patients and payers. The NDA for DFN 15, which is Oral Celec Opsid, has been accepted by the US FDA and progress on all of our other R&D programs is on track. While we continue to progress well on the organic growth for each one of our focus businesses, we are also evaluating multiple inorganic opportunities which can accelerate our growth journey further to reach more patients and create value for all stakeholders. I am pleased with the shift seen in the organization behavior toward cost consciousness and higher prudence toward cash utilization. We are taking significant effort to improve on multiple health parameters in addition to financial performance and believe that we are progressing well in the right direction. Within this, I would like to open the floor for questions and answers.

Sure, thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask questions may press star and 1 on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask questions, please press star and 1. The first question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.

Good evening and thanks for the opportunity. Sir, two questions. One is on the U.S. business. Just trying to understand the reasons that you have cited in terms of the logistics, the price erosion, volume erosion, and some bit on Renitidine. If you could just break it down So that we know that what is the normalized, if things wouldn't have happened, what would have been the normalized US sales run rate? Would it be similar to last quarter or a tad lower or much lower?

It will be a bit lower than the previous quarter, not much lower.

Okay, so are we quantifying the Renitidine impact and the logistics impact? That would be really helpful.

Ranitidine will be quantified when we are releasing 6K very shortly. That you will find out there. Others are not quantified.

Okay. And with respect to coming back to the normalized run rate, do we expect going forward with these new launches to ramp up coming back to Q1 run rate or how should we think about the rest of the year?

So we are planning to grow. We are not going to disclose specific numbers as we normally do not do. But absolutely the performance of this quarter was impacted significantly or the main difference by the factors that we mentioned. On top of that we had A price decrease on some of the products, so it was not the only reason for that. These two issues naturally will not be there in the Q3, and plus I believe that we will ramp up, so it's supposed to be better. Overall, we are planning to grow in North America.

Okay. And the second question on the key products. If you could share any progress on our biosimilar portfolio which is the Xenoport, Rituximab and the PEG.

So on biosimilar, we are talking about Rituximab. This is the trial is progressing well. On your first question, just to add, naturally on top of it we see an opportunity with Suboxone. and that there is a certain announcement that the AG will not be there. Naturally, it's open an opportunity for us, which we hope to exploit.

So on Juniper, I will tell you the status. We successfully completed the Phase 2b study. Now, it really does support our belief that this may become the first absolute oral code draft of monomethyl fumaric class for treatment of moderate to serious lake surges in the U.S. We are in active dialogue with the U.S. FDA right now for crafting the way forward with respect to the design of the stage 3 trials.

Okay. And we are also developing PEG for Augustan, right?

That is the Fresenius CAVI. We had an agreement with Maskarano, which was acquired by Fresenius CAVI. So they would have the latest status.

Yes, so case 3 was complicated. They are preparing their files for filing. We do not know the date, but they should be filing

Okay, and we do have economic interest, right? Yes, yes, absolutely. Right, perfect. Great, I'll join back the queue.

Thank you. The next question is from the line of Anubhav Agarwal from Credit Suisse. Please go ahead.

Thank you. First question is, can you just elaborate a little bit on this disruption which you mentioned related to logistic issue. Is this Dr. Reddy's specific issues or this was an industry issue?

Dr. Reddy's specific issues, we had the issue with the distribution of the products in the US for a certain period of time.

This was across the basket or this was very few products you had the issue?

It was just an issue in the way we distributed the products. Nothing special and we overcame it.

I'm just trying to understand, so the way it's worded in the press release, it looks like The sales that were lower this quarter is the lost sales. So I'm just trying to understand. Let's say X amount of dollars we showed as lower sales in this quarter.

We had less days that we could ship products. So naturally it resulted that for the quarter we had lower sales.

So, we are right to interpret in terms of that since it has happened in the last month of the quarter, we could not get back to the normalcy during the quarter. Now, things have become normal. So, there have been, you know, some problem in shifting out of the warehouse during the last part of the quarter.

Swaminath, I'm just trying to understand a very simple question. Let's say X million dollars was the sales in each quarter. Are we going to over a period of 2-3 quarters, are we going to get 3x let's say over 3 quarters or are we going to get 2x because of the supply issues?

We did not close sales because of the supply issues.

But are we going to get in the next quarter, is this whatever... Whatever we could not shift in the last quarter, that part of the things would have been shifted in the last month, in this quarter, in the month of November.

So this quarter should show a higher sales for whatever we have done lowest in the second quarter, right?

This quarter should be better than the second quarter, yes.

Okay, and second question was on generic box fund. I just wanted to check that can our capacity support, let's say, if our market share were to double, do we have enough capacity to support that?

Yes.

Thank you. And just one clarity on Generic Fiboxo. We did not get approval of this product. We were one of the shared generic. What was the reason that we did not get approval of this product? Which product, Tanuja? This is generic Uloric. Sorry, Uloric is the brand. Generic Fiboxo stat.

Okay. I don't have the details. I believe that maybe it's because of the CTO6 situation, but I'm not sure about it. Maybe we can give it back to you.

Okay, thank you.

Thank you. The next question is from the line of Neha Manpuria from JP Morgan. Please go ahead.

Thank you for taking my question. Sir, first on the SG&A, on the 100 crores, I understand some part of it is transaction cost related to the proprietary bank sales. But could you give us some color on what the other one-off was? And should we see the SG&A spend continue to decline from the current quarter level like you've indicated? Or, you know, in the second quarter? Or, you know, this is the adjusted for these 100 crores is the new level?

So whatever we can disclose and we need to disclose, these are all to be there in the sixth case. and there will be certain areas where you know there could be specific confidentiality and others that we cannot speak so directly but the crux of the thing is at a normalized level the SG&A actually we are improving and this quarter at a normalized level is lower than the just the previous quarter that means from the Q1 Q2 we have improved on SG&A but because of the one-offs it is It is looking higher.

Okay. So if I were to look at our margin trajectory, given that a lot of our growth is now coming from emerging market India, is it fair to assume that this growth should help improve EBITDA margins? Is that the right way to look at our margins?

Yes. Over time, yes. And that will change? Yes.

And when you say over time, that would be, you know, a couple of quarters or you see that happening more gradually?

So, first, you know, to first appreciate that over the last few years there has been continuous pressure of price ratio. And we, at other hand, we have been constantly, continuously trying to improve productivity and have all the cost excellence programs to neutralize the impact of so serious prices, particularly in the US market. And we have been, you know, trying to keep the gross margin at that level. But at a digital level, overall, since, you know, there are multiple things that we are doing, we have come to a level where we are not very far from the right kind of benchmark for the, you know, for my industry, what kind of visitor we should be having. So that, you know, what dropped was subsequent to the one year situation. I think we are recovering, or at least we have recovered. And as Erez just said, if there is no other specific impact which is dropping down, we hope to continue to increase it.

Understood. And my second question is on the use of cash, particularly after the cash flow in this quarter. You mentioned in the opening comments that we are evaluating quite a few opportunities. Again, are these focused on probably India emerging market? If you could give some areas where we are looking at deploying this cash in?

No, absolutely. We are looking to invest in our spaces, in all the relevant spaces. The primary focus is on branded generic markets, India in particular. This is the primary focus. At the same time, the efforts and the discussions are in each one of the spaces in order to support the growth that is required in the strategy. We are doing it with the following elements. One, it has to support the strategy. It's something that will add and it makes sense for economically and it's better for the sharing that we buy the capability than develop it ourselves. And it's complementary to the organic growth in that space. We will continue to be an organic growth company. So this is a complementary. But naturally the fact that essentially we have no debt and this is going to improve even further in the future If we find opportunity to increase shareholder value by having a good deal, we will not hesitate to do so.

Understood. Thank you so much, sir.

Thank you. The next question is from the line of Damian Tikerai from HSBC. Please go ahead.

Hi, thank you for the opportunity. Sir, can you elaborate a bit more about our progress in China? So are we targeting mainly the tender market or we're looking into other channels also? And any sales target or any guidance we are having for China market in next three to four years? If you can share that.

Sure. So China is a very important market for us. It's one of our leading spaces. In China, we are working in the following channels. One, our original channel that is primarily through our partnership, our JV in China, KRLP, and this is selling and marketing of branded generic products. This is also progressing well and it's growing double digits as we speak. In that space, we are 20 years now and we will continue to be in that space. What was opened up to us, and I discussed it in a couple of the investor meetings, given the new regulations in China, two channels are now open for us. One is direct sales of generic product if they're getting a GA recognition. And when you do that, the idea is to partner. This is not through the partnership, this is where we partner. The third channel is this new procurement program. This is a relatively new development in China, which is probably going to be scaled up, and in which if we have products that meet this criteria, we'll try to participate and win our share as well. We want to grow in all three channels, not just in the last one. And we are happy that we are the first time that we enter into the third channel that I mentioned. We are already in the other two.

Okay, so any target we have in mind, as I said, for near to medium term, where we would like to reach?

Not something that we want to share. We continue to address it. and we hope to file a response to that in the next few months.

For both the products?

For both products. We cannot yet commit to a specific date.

Sure. Thank you.

Thank you. The next question is from the line of Abhishek Sharma from IIFL. Please go ahead.

Yeah, thanks. Can you hear me? Yeah. I have two questions. First on China tender market. Olanzapine, just trying to understand the dynamics of pricing there. How is the pricing for Olanzapine in the market versus the private market? Okay.

We are not showing specific numbers naturally, or pricing per product, but as you can imagine, it's a tender process, so it was significantly lower.

And would that mean that you would sort of look at much higher volumes through the tender market, and is that how you're looking at it? Yes.

It's higher volume, it's lower prices, but it's still very profitable, and you don't need to have the sales and marketing efforts. You don't need to go to physicians and use sales efforts like you need to do, for example, in the second channel that I mentioned. So it's more like, if you wish... The other question was on receivables. There was a sharp jump this quarter despite the fact that there has been a dip in the US. So just wanted to understand that.

Overall working capital fund, I already shared that there is only 4 days increase in the number of days. We are not concerned about it. Whatever jump in this role has happened, it is in line with the sales. Okay. Okay. Yeah, that's all from my side. Next, please.

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

Yeah, thanks for this opportunity, sir. I just wanted to have some more clarity on the Subhokshan. See, recently in the opioid lawsuit settlement, Sir Teva has offered to supply subsidized Subhokshan tablet For a longer period, so what is the business dynamic the sub-auctions, the films will be releasing and whether that would really impact the opportunity what we are targeting. Anyway, we have so far progressed in terms of market share around 15% only in the sub-auction. So what is also has restricted our penetration faster. Anything on the sub-auction side that you can...

First, I would like to address our market share in Suboxone is higher than 15%. Second, there were developments that were shared by Indoor World, I think even yesterday, about the potential exit of the AG. So, naturally, this is open for us and opportunities that we are planning to pursue. As for the TEBRA e-Line, naturally we are not part of that activity, so I am learning about it and we are monitoring it in the same way as others and once we will come we will try to understand the outcome. I don't know what is the case and how it will impact the market.

So is it right that earlier also it has been commented that way by industry people that hardly there is a difference in Subhokshan tablet versus the film version, the sublingual. So is there any practical difference there or it is not and hence there could be a kind of impact if there is a subsidized supply by a large player?

Naturally the film is more advanced version. and it gives a better outcome for the patients that are taking it. That's why the film is growing versus the tablets originally. And in the natural course of this phenomenon will continue. I don't have any visibility if any other development in the market will happen. I cannot speculate on it.

Okay. And second thing, one clarification about this $105 million what you have received from the disposal of the three brands. So initially you were talking about in two trenches like 70-40. So that means it is clear that the entire of the 110 and something like that have already been factored in this quarter, right?

Yes.

Okay. And regards to the European growth, how should one really look at it? We are not performing well in Europe and we made certain adjustments.

to the portfolio, to the team and to our activities and I think now we are starting to bear the fruits of that. Overall Europe will grow significantly of what we are now. The growth now is primarily due to launches of a couple of very good products in various markets.

Thank you sir, thanks a lot. Thank you.

The next question is from the line of Sameer Baisawala from Morgan Stanley. Please go ahead.

Thank you and good evening everyone. Sir, one question on China is to the extent that you are going to do local manufacturing out there, which I think would be a substantial part of your business, how does it make you more competitive than the other local Chinese players? And second, how do you bring to table India's cost competitiveness when you are participating in Chinese market?

Yes, thank you so much. We are making products now. We have a plant that is making products for China, primarily for the KLP products, and we took a decision and we are implementing an expansion for that plant. So this will take some of the goals. On top of it, we are moving few products to a contractor to make in China. There are certain advantages, for example, exemptions from certain tests The second question is on the US pricing environment.

My understanding is over the last two quarters, most companies, both manufacturers as well as your customers, have come back to say that the base business price erosion is roughly about somewhere on mid-single digit, call it 5-7%. But your commentary seems to be suggesting that it's much worse than that. Is that true and is there anything specific to Dr. Reddy's?

So it's not an overall market dynamics, it's a specific situation in which in products that face new competition, normally for that particular product there is a double digit decrease in price in which you can either protect your share or drop the product. And now it depends what is the mix of those in your mix. In our case, for the quarter, it was relatively higher.

Okay, and going forward for the base business price region, what's the outlook for your portfolio?

The same like we would discuss in the past. I don't see any specific outcome. The main erosions I believe going forward will be on new launches that naturally over time the price that we launch with will be different as more competitors will join the game.

Okay, thanks. Just one final one from my side and that's about generic maneuvering. I remember on the last call you mentioned that until you get the full response from FDA and see the new queries from them, you would not know what's the timelines and what kind of complexity and what kind of work is required to be done. So I'm pretty much sure that now you've got all that information. If you can add any more color to what you've already spoken on the call, that'd be great, sir.

We got the CRL, if I'm not mistaken, in August, right? In August. And it was related to some specs of the products that we had to address in certain testing. For that... We had to do some experiments and to buy certain equipment. This is the work that will take a few months, starting from August. And if everything is successful, we will address and answer the CRL. Naturally, we are still very keen on this product.

Okay, great. Thank you so much.

Thank you. The next question is from the line of Ranbir Singh from IDBI. Please go ahead.

Thanks for taking my question. So my question is related to the proprietary products. After divesting these three molecules, what is the outlook there? So what kind of investments we are making and what we are doing actually there? Thank you.

We still have a pipeline of products that we need to finish certain experiments in order to further find a partner for either licensing in or direct shares. So we are looking for either get what we call long-term stream of revenue, which would be more of a licensing in nature of the product, or direct shares, which means a relatively High level of up-front and lower level of royalties going forward. So both models we are pursuing on the project that we have. In addition to that, we are building this team to continue to develop product, this time less dependent on the U.S. market, but rather more globally, in which We want to continue to develop products for animate needs with basically the desire or the ask to have a meaningful stream of revenue from each one of these developments. Directly partnering with a potential partner globally or do it after certain milestones if there is an interest. The new model is pretty simple. Stream of revenue in, then it allows certain stream of revenue out and overall this is going to be going for the profit center for us rather than An investment for a long time.

Okay, so what portion of our R&D is going towards this promised farmer? Relatively small portion. Okay, fine. And secondly on Ranity Dine, I think two events we see that we recalled and that we halted sale on I think last week of September. So in this quarter, virtually, what we have factored in is recalled value and then the discontinuance of sales. So what I wanted to understand is that the entire vanity issue has been factored in this quarter or part of it is likely to come in subsequent quarters also?

We have covered whatever is the impact of voluntary recall. We have covered it fully.

Okay. So what I see that A few other regulators like Australia had given go ahead with Ranitidine in present form to some of your competitors. What I wanted to understand that the standard that USFDA came out for this Ranitidine, is there any further submission or something is happening there to lower their standard so that the Ranitidine, the content of NDMA can be permissible going forward?

I don't know what eventually will be the right level of NDA and where it will lead for us. By the way, it's globally, so we will not sell ranitidine. We have one standard in that respect. We will not differentiate between countries as related to safety of patients. It will be interesting to see if there will be consensus about certain level that is possible to sell with this product and then if we'll have the relevant API that can meet that, we can always consider to go back. But right now we are not aware of that API and that limit.

Fine, fine. And the last one, I couldn't understand that sharp jump in SMGAs, so selling and administration expenses. Could you give some light on it?

One of course is impairment impact which we have taken during the quarter and then I also explained there are certain one-offs which has contributed to more than 100 crores during this quarter. Then of course there is also this cost of sales associated with this PP Neuro brand and that amount already we have taken. Thank you. The next question is from the line of Surya Patra from Philip Capital.

Please go ahead. Just one clarification that whether the Carbofrost which is a F2F and sort of exclusive product opportunity, whether we have gained meaningfully there by this quarter or the true benefit is yet to be seen?

So this product, we have been able to get our market share, though it will ramp up further going forward, but largely market share wise, we are there. Thank you.

The next question is from the line of Surajit Pai from Prabhu Das Leeladhar. Please go ahead.

Yeah, thanks for the opportunity. Could you please tell me, there are two events, what is your logistical challenge? One is your recall of ranitidine. Now these two events, will it lead to some bit of penalty payment going forward as an overhead cost in H2? No. None of them will lead to any kind of penalty payment? No.

Whatever had the penalty that was already booked in this quarter.

Okay, so if there is any penalty you have already booked?

Whatever is related to any activity that related to that, including penalties, was included in the quarter.

As you guided initially on this fiscal, what could be your current guidance in terms of launch of product in this year and what could be the kind of growth we could expect from US revenue year on year?

So as I read in my script, we are still on track for 30 plus products for this fiscal. As for the guidance for sales, we are not giving guidance.

Last question is that regarding Suboxone and their interchangeability between tabs and FIMS. Do you think that this Tabor deal could ultimately erode the sales under Medicare-Medicaid program or some of the insurance formularies might be forcing the users to go for tablets from FIMS?

I mentioned it in previous question. We are not part of the discussion. I don't know what is the further deal. I'm reading about it in the media. And I cannot speculate what will be the outcome of that.

Thank you. The next question is from the line of Nitin Agarwal from IDFC Securities. Please go ahead.

Thanks for taking my question. Swamin, on the SG&A, you talked about the adjustment of 100 crores in the current quarter to get the normalized number. So does this reflect the full impact of the discontinuation of the proprietary business from this quarter onwards?

So, of course, when you say proprietary product business, there is no discontinuation of proprietary product business. There is a, you know, the commercial arms including the sales and marketing for this new franchise now that has been reduced. So, that impact is there, that's helping in terms of its DNA production. Okay.

Now, I just said for that, that's probably reflected in this quarter. Now, going forward, how should we really... Look at the SG&A base, I mean we've done a fairly decent job on this cost over the last 3-4 years. Do we still see an opportunity to keep SG&A in absolute terms at these levels, around these levels? Or one should budget in some amount of inflation as we go through the years?

If the transport spot base has been reduced in North Karnataka, that is not one-off. It is reduced so that it is going to stay. So why should we adjust that? And anyway, what we defocus that we have for productivity improvement and cost experience has given us good results. But we believe that, you know, there is still further scope and we are continuing on this focus.

And secondly, you know, on the U.S. business, you know, in the current quarter, we had about eight odd new launches. And despite that, you sort of mentioned that even just for the two factors you mentioned, The business was lower on a QQ basis, marginally lower on a QQ basis. So in this context, when you look at the business, when we had a reasonable number of launches, what will really be required to move the needle on the business from a revenue growth perspective in the U.S.? Do we need some big blockbuster launches until the time they come through? We will not have a meaningful delta on the U.S. sales? How should one structurally look at this business the way the business is in the U.S. right now?

We had a great portfolio. We just need to sell more of it.

Okay. Thank you.

Thank you. We'll be able to take one last question. The last question is from the line of Aditya Kemka from DSP Mutual Fund. Please go ahead.

Yeah, hi, thanks for the opportunity. Sharman, could you just talk about the gross margin? So your adjusted gross margin for the quarter you said is 51.5%. And if I remember correctly, when we were speaking after the FY19 results, the range that you had cited for your gross margin over the past several quarters was between 53% and 56%. So clearly we are lagging our historical range of 53% to 56% cross motion.

So in the same quarter when I spoke, we also said that how the way we put our business model is expected to deliver north of 50. But it has been fluctuating between these two. And yes, I agree. Last couple of quarters we are I said we can hope to get back to this range but all I can say We have to also understand that there have been impacts of rights violations in the USA and also in Europe. So we have been improving on our cost of success and all. Being in that gross margin range, we are trying to do everything possible. But there is still scope for improvement we will have to do.

Sure, I understand. My only doubt there was that since we are now more inclining towards branded generic businesses versus Europe and US being more generic generic businesses. So from that perspective, ideally our gross margin should have already started reflecting improvement versus what it historically was.

See, what happened in this quarter, we had much higher PSAI. Blasphodo PSI was lower and the mixed changes that will also have its impact on the overall gross margin. So there are multiple factors which contribute to the overall gross margin number.

That's fair enough. Just another clarification on Ranitidine. Where do you sell Ranitidine in Australia?

We say that it is categorically said we have only one quality system which is global. So, we don't go by, you know, respective regulators and their thing, you know. If we have voluntary recall from US market, that means we are not selling Renitiline anywhere in the globe.

Now, my question was, before the voluntary recall, were you selling Renitiline in Australia?

Oh, no, we were not.

Okay. So, just the last question then on R&D expenses. So, could you help us with a budget number there for FY 2021, anywhere you want to guide? FI 20-21 Yeah, your R&D budget for FI 20 and 21, if you could, you know, a percentage of sales.

I have not even started the budgeting process for FI 21. So, if it happens, you know, maybe in next couple of quarters we will complete that. And FI 20? FI 20, as I said today, that given the current set of activities, Thank you everyone for joining us today for the earnings call.

Thank you very much. On behalf of Dr. Reddy's, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.