Dr. Reddy's Laboratories Ltd

Ladies and gentlemen, good day and welcome to the Dr. Reddy's Q4 FY20 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 call, please signal an operator by pressing star then zero on your touchtone 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 and full year ended 31st March 2020. Earlier during the day we have released our results and the same are also posted on our website. This call is being recorded and the playback and transcript shall be made available on our website soon. All the discussions 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. Jeevi Prasad, our co-chairman and managing director, Mr. Erez Israeli, our CEO, Mr. Swamin Chaturvedi, our CFO, and the Investor Relations Team. Please note that today's call is a copyrighted material of Dr. Reddy and cannot be read or trusted or attributed in press or media outlets without the company's expressed written consent. Before I proceed with the call, I would like to remind everyone that the safe hardware contained in today's press release also pertains to this conference call. Now, I hand over the call to Mr. G. V. Prasad. Over to you, sir.

Thank you, Amit. Good evening, good afternoon, and good morning to all the participants. I do hope that you and your families continue to remain safe and healthy during these unprecedented times. Let me quickly provide you with an update on the current situation and how we as an organization are playing our part within the overall healthcare system in these extraordinary times. Our foremost priority is to ensure the health and safety of our employees, patients, healthcare professionals, customers, suppliers, and community at large. We have enhanced the safety requirements across all our working locations Enforced physical distancing norms, mandated use of protective gear and enabled remote working across all our global office locations. We have accepted the new reality and swiftly implemented an effective business continuity plan across the functions and have been able to ensure that our operations continue right through the pandemic situation without compromising on the health and safety of our employees. From a supply perspective, together with the inventory on hand and the continued manufacturing support, we have been able to address the enhanced product demand across various markets. We launched several new products, overcame logistical barriers, and through effective customer engagement have continued the business. In the branded markets, we've been able to effectively leverage the virtual connect model to support healthcare professionals, patients, and other people. Overall, we are truly inspired to see how colleagues across the company have risen to the occasion and overcome every obstacle in the way to fulfill our mission which is to ensure continuous supply of medicines to patients and doctors under safe conditions. We are also playing our part of being an effective socially responsible corporate citizen and have extended support to the communities through various initiatives such as supporting the healthcare workers, staff, and police and other public servants by providing them with PPE kits, masks, sanitizers, gloves, as well as food assistance to the marginal sections and migrant worker families. With this, I hand over the call to Salman for taking you all through the financial performance of the company.

Thank you, Prasad. Greetings to everyone. The current year financial performance has been quite good, with the highest saver sales on Evita and a strong free cash flow, thereby turning net cash surplus. Let me take you through the key financial highlights for the quarter and FY20. For this section, all the amounts are translated into US dollar at a convenience translation rate of Rs. 75.39

which is the rate as of 31st March 2020.

Consolidated revenues for the quarter stood at Rs.

4,432 crores that is $588 million and grew by 10% on year-on-year basis and by 1% on a sequential quarter basis. Year-on-year growth has been supported by good performance in North America, the United States, Europe, and Emerging Markets. Sequentially, while there has been good growth in energy in Europe, our branded markets had lower sales. The revenues for FY20 stood at Rs. 17,460 crores, that is $2.32 billion, and grew by 13%. The growth has been primarily supported by improvement in the base business volume, new product launches, and proprietary product out-licensing income. However, poor share impacted due to price erosion. As regards to COVID-19 related impacts, while we saw some incremental sales in certain markets, that is US, Europe, and Russia, due to increase in panic buying, our sales got impacted or deferred in PSAI, India, and few emerging markets. Albeit on an overall basis, there is no major impact on Q4 or FY20.

Consolidated gross profit margin for this quarter has been 51.5%.

It is a decline of 90 basis points on year-on-year basis and a decline of 260 basis points quarter-on-quarter. The sequential quarter decline has been primarily on account of A, impact of changes in the business mix and B, increase in inventory provision or write-offs related to this quarter. Gross margins for the Global Geronics and PSAI were at 55.9% and 28.4% for that quarter. Gross margin for FY20 has been 53.8% against 54.2% in FY19. Gross margin for Global Genetics was 56.8% and PSAI was 24.1% for the full year. The SGMS spent for the quarter is Rs. 1,218 crore, that is $162 million. and declined by 1% year-on-year and by 4% quarter-on-quarter. The SDNF spent for the year is Rs. 5,013 crores, that is $665 million, and has grown by 3%. The SBI cost as percentage to sales declined from 31.6% in FY19 to 28.7% in FY20, indicating the leverage benefit on improvement in sales. The R&D spent for the quarter is Rs. 419 crore, that is $56 million. and is at 9.5% of sales. The R&D spent for the FY20 is Rs. 1,541 crores, that is $204 million. R&D has a percentage to sales stood at 8.8% for FY20 against 10.1% in previous year.

Other income of the year includes an amount of Rs.

345 crores of the settlement income received in quarter one. The EBITDA for the quarter is Rs. 1001 crore, that is $133 million, which is around 22.6% of the revenue. The EBITDA for the year is Rs. 4,643 crore, that is $666 million, and around 26.6% of the revenue. Profit before tax for the quarter is Rs. 714 crores, with a year-on-year growth of 22%. PVT for the full year is Rs. 1,803 crores, a decline of 20% over FY90. This decline was due to the impairment charges of Rs. 1,677 crores taken during the year. Adjusted for this, the PVT would have grown by a healthy 55%. Profit after tax is higher than PVT during the quarter and full year due to recognition of max credit and creation of deferred tax assets in line with the requirements of accounting standards. We expect that the ETR would be around 22% for the next year. Reported EPS for the quarter is Rs. 46.01 and for the full year is Rs. 117.40. Operating working capital increased during the quarter by around Rs. 439 crores, which is $58 million. The increase is primarily attributable to an increase in receivables due to higher sales and delay in certain collections, which we expect to normalize in the current year. Networking Capital Days, however, have remained in line with last quarter, supported by reduction in inventory levels.

We invested Rs.

150 crores, which is $20 million towards capital investment in this quarter. The free cash flow generated during this quarter was lower, at Rs. 7 crores, which is around $1 million, mainly constrained by an increase in receivables. which we expect to improve from current quarter. The free cash flow generated during FY20 is healthy at Rs. 2,313 crores and lead us to now have a net surplus cash of Rs. 397 crores as on March 31, 2020. Our net deficit to equity ratio is at negative 0.03 and reflects our strong balance sheet position. Foreign currency cash flow hedges for the next seven months in the form of derivatives for US dollars are approximately $265 million, largely hedged around the range of Rs. 72 to Rs. 76.3 to the dollar. In addition, we have cash flow hedges of 1 billion rubles at the rate of Rs. 1.0283 to the ruble maturing over next 10 months. With this, I now request PH to take to the key business highlights.

Thank you, Shomen. Good morning, good evening to everyone. I'm very happy with the way we have adapted and continued our focus on execution even during these challenging times. We made good progress to implement our strategy toward diversification, creating more opportunities with less risk, and Attaining Self-Sustainable Business Model for each one of our businesses. The FY20 has been a very good year for us, which is reflected through the following. A, successful in obtaining the VI status for CTO6 after five years and desired outcome for all other site inspections by the U.S. FDA. B, a PBT growth of 55% adjusted for impairment charge taking during the year. EBITDA growth of 36% and improvement in the EBITDA margin. Improvement in the ROCE adjusted for impairment charge stacking during the year. Healthy cash flow generation leading to much stronger balance sheets. Turnaround performance for North America generics and our Europe business. Healthy double digit growth in branded markets. Continue traction toward development of product pipeline across business and productivity improvement seen across manufacturing, marketing, and R&D. Let me now take you to the key business highlights for each of our businesses. Please note that all the reference to the numbers in this section are in respective local currencies. Our North America generics Our North America generic business recorded sales of $250 million for the quarter with a strong growth of 17% year-on-year and 11% on sequential quarter basis. The quarter witnessed an overall increase in demand driven by plenty loading by patients and inventory built up by customers due to COVID-19 lockdowns. Further, we also benefited from continued activity on new product launches Kappel with several gold market shares gained the core sum of key products, including G-Suboxone. In all, we launched five new products in this quarter, including our second CGD product, Naloxone Hydrochloride Injection, a first-to-market generic launch for G-Vimovo and G-Daraferrin. On a full year basis, we launched 27 products, including four relaunched of the earlier discontinued products. We expect the new launches momentum to continue during the year with about 25 product launches lined up despite uncertainties due to COVID-19. On a full year basis, the scale has been $910 million, a growth of 6% over the previous year, signifying the strong reversal in decline weakness over prior three years. Our Euro business recorded sales of 43 million euros with a strong year-on-year growth of 81% and sequential growth of 10%. On a full-year basis, the sales are 148 million euros and has grown at a phenomenal rate of 53%. This performance is driven by improvement in base business, new product launches, and wrap-up in three new markets, France, Italy, and Spain. During the quarter, we launched one product in Germany, three products in UK, two products each in France, Italy, and Spain. The current year has reset a new base for big business, and we look forward to continual growth from here, from Iran. Our emerging market business recorded sales of 804 crores rupees in Q4, with a year-on-year growth of 15%. However, a sequential quarter declined 30%. On a full year basis, emerging market sales has been 3,281 rupees crores and grew a healthy rate of 14%. Within the EM segment, the Russia business in Q4 grew at 9% in cost and quality on a year-to-year basis. But a decline of 70% quarter-on-quarter on a back-off of high base in Q3 owing to one-time supply of Reddy Talks 10-day volumes. In FY20, Russia grew by 9% in cost-to-cost. The overall growth in the emerging market was led by higher volume and new product launches, which was partially impacted due to price erosion in few markets. During the quarter, we launched 10 new products across these markets. Our India business recorded sales of 684 crores rupee with a year-on-year growth of 5%. Over a sequential quarter decline of 10%. The growth was impacted due to logistics-related destruction caused by COVID-19 lockdowns. On a two-year basis, our sales was 2,895 crores rupees, and grew by 11%. As per the secondary sales reported by IQBIA, we registered steady growth of 11.4% ahead of total market growth of 10.8% for the March 2020. Our PCI business recorded sales of 99 million with a year-on-year growth of 3% and sequential quarterly growth of 2%. Here, too, the growth was impacted due to the logistic-related destruction. On a full year basis, the sales were $362 million and grew by 4%, which would lead us to witness a very healthy order book for the business and our hopeful of a good growth coming year. On the quality and compliance front, we have turned a new leaf with the resolution of pending issues for all of our sites. The recent audit outcome for all of site inspection have been positive. Quality continue to remain a key focus area and priority for the company going forward. During this quarter, we find 45 formulation products across global markets, including 300 in the U.S. market. As of 1st of March 2020, we have 99% Humility Filings pending for approval with the U.S. FDA, including 97 ANDAs and two 505 NDAs. We also filed 59 drug master files globally, including seven filings made in the U.S. We continue to strengthen our pipeline products across the markets. We are also working on few molecules related to COVID-19 disease. On our proprietary products business, Recently, USFDA approved our NDAs for oral liquid salicylic acid formulation named Elixir. In this latest product, emerging from Dr. Reddy's portfolio for acute migraine treatment, we are actively working to commercialize this product to our partners. Overall, we are making good progress in building and advancing a strong pipeline of high-value, globally relevant assets. We are continuing our efforts to monetize select assets through partnership and licensing transactions that maximize their value. The Reduxima Phase 3 trial is progressing as per plan and in parallel we are working on multiple other biosimilar products which are different stage of development. Currently, we are going through a phase of uncertain business environment wherein the possibility of volatility remains high. However, there are certain structural tailwinds also for us, such as opportunities for improving our market share across multiple markets and ramping up relevance in our global API business. Overall, we remain hopeful to continue to grow and emerge as a much stronger company, meeting the expectations of all of our stakeholders. And with this, I would like to open the floor for questions and answers.

Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question, may please press star, then 1 on their touchstone telephone. If you wish to remove yourself from the question queue, you may press star, then two. Participants are requested to use handsets while asking a question. Also, as a reminder, in order to ensure that the management is able to address questions from all participants of this conference call, please limit your questions to two per participant. For any further questions, you may come back for a follow-up. The first question is from the line of Yash Gupta from Angel Broking. Please go ahead. Thank you for giving us this opportunity, sir. My first question is on the domestic business. How are you looking at the Indian domestic business for the next two quarters as the MR productivity will come down and the number of prescriptions may come down in the near future?

So, we don't know how the market will evolve. I cannot predict it. We cannot predict it. Naturally, there is going to be an impact on the fact that patients could not visit physicians. And there will be a certain impact on that. On the other hand, we do see also a place in which the demand is higher. So I believe that once the lockdown will be over, India will eventually ramp up to our normal consumption. When exactly it will be, I wish I knew.

Okay, thank you, sir. Thank you. The next question is from the line of Anubhav Agarwal from Credit Suisse. Please go ahead. Hi, good evening. One question is when we look at the IQVI data, it shows that the U.S. generic market volumes were down in the last 45 days in April and May. Just wanted to check how has been the primary sales trend? Have we seen that that impact is largely at the secondary sales or have the primary sales been impacted as well?

So right now we see a healthy demand coming from the customers. So we see the QV numbers as well. Right now what we see is normal activities on our side.

Okay, that's helpful. Second question is on generic suboxone. So earlier you mentioned that you have enough capacity that you could double your market share, the authorized generic suboxone. We are able to take more market share, yes. But we haven't done as well as we could have done. Like Sandoz who exited had 25% share. We could only take 5% share out of that. You're asking if there is a constraint? I don't see a constraint on our side.

There is always a lag between a contracted and actual reported sales.

Okay, you mean to say that you have taken high share? It will reflect in future. Is that what you mean, Sonu? No, I don't want to imply that, but I'm just saying there is always a lag which is there between the two.

That also you need to keep in mind. I'm not implying anything.

Okay, sure. Thank you. Thank you. The next question is from the line of Neha Manpuria from J.P. Morgan. Please go ahead.

Thank you for taking my question. My first question is on the India business. I know that the WCAG deal is still pending, but what's the thought process post the completion of that acquisition? What are the key areas that you want to focus on in that business?

Right now, we are You know, waiting for the closure because the definitive agreement was signed, but the closure is contingent to completion of all the conditions with it. And along with the closure, we'll have the full integration plan and then we can give the full response to your question. Right now it is to be matured.

And by when do we expect the closure for?

Should be happening during this quarter. We'll get back to you whenever it happens.

Sure. My second question is on generic Westpac. You know, post-litigation in the district court. Just wanted to get a sense of where we are in terms of the products with the FDA.

So it's a great win for us. and we believe that this is a product with a lot of potential and right now and as you know there is still a legal process in there and we are working toward exploiting the potential of this one.

But do we have a target action date in this or is there a CRN on this from an FDA perspective?

There is no regulatory issue on this one. Okay, understood.

Thank you. Thank you. The next question is from the line of Prakash Agarwal from Access Capital. Please go ahead.

Yeah, thanks for the opportunity and congratulations on good numbers. So just one statement you made on the U.S. business, COVID-related stocking in the U.S., So, can you quantify that roughly? And also, the stocking continues or the previous participant asked that volumes have come down and you mentioned your volumes are okay. So, are you the beneficiary of some shortages in the market? If you could clarify that as well. Thank you.

So, in the end of March, indeed, there was some piling up of inventories and In the US, preparation for the COVID-19 situation, this is not happening anymore. Now it's a normal trend of activities. There is nothing special now.

Okay, but sir, you mentioned that your sales are okay. I mean, you're not seeing a drop. So I was just thinking... If this one-time COVID restocking is not happening, are the volumes going up due to some shortages or some new launches are taking that share? If you could just clarify that.

First, we have new launches and we launched also in the end of March and we continue to launch also in this quarter. This is absolutely helping us. We have some products in market share and we expect also to get more. Overall, like I mentioned, so far it is normal. I would call it normal way of doing business in the United States.

Okay. And lastly, if you could give any guidance in terms of number of product launches like you gave last year in the U.S. and also outlook on PHA business. Thank you, sir.

So I mentioned in my script it was about 25 products for the U.S.,

Okay, and Outlook for PHI business, since you mentioned you have been filing a lot of DMFs, how should we, since in the past it has been like single-digit growth with muted margins, how do we see this business scaling up over next 12 to 24 months?

It will be a great business going forward. We are not giving guidance, as you know.

Okay, so I have more questions. I'll join back with you. Thank you.

Thank you. The next question is from the line of Litya Balanesh from Frankfurt, Boston. Please go ahead.

Hi, thank you for the opportunity. So the first question is on the US pricing environment. So can you tell us a little bit about what you're reading right now post-COVID? Is pricing better because supply is more important right now than pricing? and my second question was around SG&A and productivity improvement. You've obviously done really well in the recent past. So is this right now at an optimum level or do you think there are more efficiencies to be extracted?

So on the first question, the pricing situation in the US got stabilized over time and every Every year it's getting better. So naturally, there will continue to be price decrease in the U.S. This is the business model, but it got stabilized versus the years before.

But do you think COVID specifically is helping?

Maybe, but it's yet to see. We need more time for that to see the pattern. Right now, I cannot comment on COVID-19. I really don't know. On the productivity, it's not cost, it's productivity. We were able to make and generate the growth actually without adding to our infrastructure costs, including the inflation. So, and this is primarily by leveraging the activities in our sites, in our R&D, in our marketing, to do more, some place to do more with the same samples, some place to do more with less. We are not yet at the productivity level that I'm expected to be. So there is more potential for productivity improvement in the company going forward. In some areas, even much more. We have a quest to be the most productive on Earth in what we do and we are on the way there.

Are there specific areas that you can highlight? Is it, say, post-productivity or manufacturing, cost optimization? What specific levers do you think you'll be focusing on going forward?

First, it's about to leverage the activity globally. If we have one product, we want to sell it in many markets. and to give that service to as many markets as we can from one operation center. Then the manufacturing to do it, to be modernized, digitized facilities that will be able to do it in the most efficient manner. Then the time to market, the cycle time of the activities and of course also the other, it means lean GNA, including the markets. So productivity is everywhere. But the primary cost that we have is naturally on the back end, which is the stuff that we are buying plus the sites that we have.

Thank you.

Thank you. The next question is from the line of Vishal P. from Aviva Insurance. Please go ahead.

Hi, the higher growth in Europe that we saw in this quarter was mainly led by some large tenders or any other important aspects that you would like to point out here?

It was a better performance of the European teams in five countries, primarily Germany, plus new markets that we entered primarily with injectable products, mainly Spain, France and Italy. So it's a combination of the few. It's not just one product in the market. It's an overall activities, better performance of a European team.

Okay. And what would be your guidance for the whole year of 2021 in terms of growth in Europe that you see?

Some qualitative... We are not sharing guidance, sorry.

Okay. And what... Soman, you mentioned that you've expected improvement in receivables gradually. So what will drive the improvement in receivables and actually what caused them to rise?

Could you please repeat your question?

On the receivables, could you elaborate a bit more as to what led to the increase in receivables and what led to the increase in receivables?

Part of the receivables is in line with the increase in sales, but part of the receivables was because of some collection, which we saw in the recent months we have been able to do it. So that's why I say that temporarily what got increased in the quarter ending March will get normalized in the quarter going forward.

This increase was primarily in India?

Overall, it is both in India as well as some other markets. But overall, our cash cycle remains in line with what it was in the previous year.

Okay.

And lastly, some positive perspectives on Sudarshan Filan. So how do you see the pricing, the competition shaping up? Any perspectives on this?

It's going to continue to be great for the forex.

Okay, thank you.

Thank you. The next question is from the line of Kunal Damesha from Systematics. Please go ahead. Hi, thanks for taking my question. So my first question is related to capital deployment. So now that we have net cash plus and we are trying to generate 2,000 plus crore of cash every year, I think the op-ed acquisition that we have done So, in terms of deployment categories, our primary lever for growth has been always on the R&D side.

So R&D and technology along with innovation will be one area of deployment and as I already mentioned that in next year we would like to even spend more on R&D even on absolute amount. So that will be there. In organic growth we have been focusing but very strategically. with the articulation which Reddy has already done earlier in the past. We have chosen specific spaces where we want to attain leadership. In line with those specific spaces, we are thinking strategically about organic growth and we are very comfortable in terms of our balance sheet so it should not be difficult for us If we get the right kind of target to move on in that particular area. We are deploying quite a bit of resource. I will go beyond capital in terms of overall resource, even in terms of capability building, including the digital, because this is one thing which we feel will help us both in terms of improving productivity and creating real differentiation. So there have been certain platforms where we have taken some early advantage, but there are many platforms where we really want to build end-to-end digital capabilities. And that includes application of AI machine learning as well as all the analytics. So there have been, as I talked in my media presentation earlier during the day, The CAPEX cash outflow has been less during FY20 but there were projects which were approved so further investment will be there. Mostly in injectable area and also our biosimilar capacity expansion. So that will be another area of capital deployment which will be there. Beyond that, in terms of our organic expansion, Whether it is in terms of marketing, brand building, and also, you know, in some of the new markets within the emerging markets area, there also we'll be deploying our resources. Does it respond to your question?

Yes, partly. So, on Deepak's side, how much we are planning to put for biosimilar and injectables? So granular details I will not be able to give you but overall the capex for FY21 would be in excess of 1000 crores. And my second question is related to the launches, let's say in Germany, France, in Italy. So the new product launches that we are doing, are we launching the same product that we have in the portfolio? Like you said that you will be leveraging whatever product portfolio we have or as of now we are launching a new product?

Yes, no, that's exactly that. So we, if you recall in previous discussions, we said that we want to leverage our portfolio globally. And the products that we launched are primarily products that we have also in the United States, or we will have in the United States, depending on the time of launch.

And based on that, I say we have a long runway to go in terms of product launches, because we have hundreds of products in the USA.

Yes, and we will have much more in the U.S. and we will have much more in Europe. We just started to have more in Europe. Okay, okay. Great, thank you.

Thank you. The next question is from the line of Sameer Baishiwala from Morgan Stanley. Please go ahead. Hi, thanks and good evening everyone.

Great quarter. Is it possible to update us on generic Copaxone and Nuvarin in terms of timelines to resubmit data with FDL?

Yes, so we are working on both CRLs and planning to submit it within the next few weeks and months.

Okay, great. And what would be your best, would this be getting to market in the current fiscal year?

I don't know. I learned from these two products after we got multiple CRLs, so they're better not to predict. Once we will get approval, we will launch it.

Okay, great. The second question is, can you update us on the business plan for China? In terms of where are we in terms of product filings and how do you see the ramp-up going forward?

China is a very important market for us and we ramped up our activities there and so we are not sharing yet specific numbers for China but let's say the strategy that I communicated in the last meeting in San Francisco is still valid. Okay, one final comment.

In terms of your capacity utilization now, How is it versus pre-COVID across your network?

We never stopped working. We had some bumps for couple of weeks, but we never stopped working. And overall, there will be no impact that is related to COVID-19 production. Great. I've got a few more and get back to you. Thank you so much.

Thank you. The next question is from the line of Kishore Singh from Rotila Oswal.

Please go ahead. Good evening, sir. Just would like to understand gross margin. Is there any inventory-led write-off? If adjusted for that, then what would be the gross margin for the quarter?

I cannot get into that final level of detail. I say that normally, you know, the price, you know, which happens, that We have been always trying to improve productivity and various other measures to contain that. But there was a specific sequential decline. I said the inventory write-off as well as the change in the business mix. Because you have seen there are certain business, for example, Europe has grown tremendously and the branded market sequentially has declined. It has its consequential impact on the overall gross margin for damage.

So would you like to call out for a FY21 range of gross margin?

I have earlier also said the way we put our business model, it is to deliver a gross margin which is north of 50%. If we look at how we have done over various quarters across several years, It fluctuates, but it could be fluctuating from quarter to quarter. There are specific events in that quarter. Normal expectation range will be between 52% to 54%.

Okay, sir. And similarly on R&D, as a percentage of sales?

Difficult to predict. It will depend on how much will be the sales, but R&D on an absolute, as I said, will increase. You can take it up 9-10% of sales, maybe or not.

Just lastly, at least on the India side, it seems the supply side issues are very much resolved in terms of capacity utilization or in terms of the distribution of the product. But is the willingness of patients to reach out to doctors, if that takes time, then would it mean that we just continue to fill the system, the channel, but

So we will naturally, there will be an impact on the market because of that reason that you mentioned and it will also impact us and all of the channels on our case will stay open and we will continue to serve any customers that we may be. I believe that it will improve in the future once the lockdown will be over.

Okay. Thanks, guys.

Thanks. Thank you. The next question is from the line of Nikhil Mathur from Ambit Capital. Please go ahead.

Hi.

Good evening, everyone. I just have one question. Since this COVID outbreak, we have seen that a number of plans, be it for Dr. Reddy or for the industry as a whole, a number of plans have been given clearances by the U.S. FDA But the clearance statuses that has been given is largely voluntary action indicated and very less times has been given an action that's no action indicated. So my simple question here is, does a voluntary action indicated leave room for SBA to come back and cite certain non-compliant issues at a particular facility or are you confident enough that even the VI status, the facilities are quite resolved from a quality of treatment horizon?

So, VAI does not mean they'll come back. It means that the action plan that we submitted is acceptable and the site is clear. NAI is applicable only when there is no action at all. That means there is no 483 at all. So, I don't think it has anything to do with COVID, but it's more about the GNP status of the action plan and accepting the acceptability of that.

Okay, sure. That was the question. Thank you.

Thank you.

The next question is from the line of Janmati Khera from HSBC.

Hi, good evening everyone. Thanks for the opportunity. Sir, can you quantify how much of sales were impacted due to logistic disruption in the quarter and are we remain confident about recovering most of the sales which were delayed?

So, we are again not giving general details of how much has been impacted due to logistics. It has been, like particularly in India, we said that, you know, otherwise we have been growing very well during the year. Last quarter, in the last fortnight of March, there was a genuine problem in terms of, you know, dispatching and we can only recognize revenue subject to the proof of delivery being there at the end of course. So, in terms of recovery, it all depends on how this whole COVID-19 pans out. So, we cannot predict at this point of time, but whatever could not have been described due to logistics when it opened up, it got described, if that is your question.

Okay, sure.

Just to make sure, all the staff that we were not able to recognize in March, naturally we could recognize when it reached the customer level. That's what Sharma tried to say.

Sure. My second question is how we are looking, India, in terms of launches planned. So last year obviously was a very strong year in terms of launches. So how we are planning for next one or two years in terms of new launches for India market?

It's going to continue to be strong for us as well.

Okay, so in the next 25-30 launches a year, that's the range we should look at?

We are not giving guidance on that. It's going to be very, very healthy.

Okay, sure. Thank you very much for my side.

Thank you. The next question is from the line of Alok Balal from CLSA.

Please go ahead.

One question on the injectable pipeline for the US. So your last update says about 30 injectable products awaiting approval. How do you see the launch pipeline for FY21?

It's the same as last time was discussed. Still a big portion of our portfolio in values is in injectables and it will continue to be like this also going forward. Okay. Can you guys ask out of 25 new launches, how many could be injectable? We are not giving this kind of information. Okay. That's it from my case. Thank you.

Thank you. Thank you. The next question is from the line of Aditya Khenpa from DSP Mutual Fund. Please go ahead.

Yeah, hi. Thanks for the opportunity. So, Swamin, did I hear you correctly? So, the R&D budget for FY21, you are saying around 10% of sales?

I didn't say that. I only said an absolute amount will be higher than FY20. It all depends on sales, but I said Approximately, it could be 9-10% of sales. That's what I mentioned.

Okay.

I'm not responsible for that as a guidance.

No, no, fair enough. And secondly, you also guided towards a capex of over 1,000 crores for FI21. Safe to assume a similar run date for FI22 as well?

To be mature to comment on that, I said, you know, some of the Project that we started and approved in FY20. So the task of that is going to spill over to FY21. So for FY21, I couldn't tell. FY22, we cannot talk anything right now.

Right. So my question really is that, you know, if you see on your costing side, be it R&D or your capital expenditure, I see slightly more higher amounts dedicated to R&D and Capex versus six months earlier when we spoke or three months earlier when we spoke. So what is driving this optimism in terms of R&D investments and capital expenditure? Are you guys seeing more demand for which you need more capacity or more opportunities for which you need higher R&D? What is driving this higher expenditure of both R&D and capital expenditure?

When we discussed our strategy, our strategy suggested The leadership in the spaces that we discussed in the past. So if in the past the main investment was towards the United States, now we are doing for a more diversified space. So first of all we have more products to more countries that will require more quantities. The primary investment is that we are going to ramp up to develop more products and more differentiated programs. So it's a combination of both. On the capacity side, it's primarily more investment in injectable products.

Understood. If I might follow up on that.

We're also investing in modernizing some of our older plants. And that will require some level of investment.

Got it, Prasad sir. Thank you. Just one follow-up on that. So, you know, we had earlier alluded to an aspirational target of achieving 25% EBITDA margin by FY22. In the wake of the higher capital expenditure and the slightly higher R&D budget that we are speaking about, do you think that's still an achievable target?

First, I never said FY22. I did say 25%. And I believe that it's achievable and we will achieve it.

Correct. Thank you.

Thank you. Ladies and gentlemen, we'll take the last question from the line of Sanyal Mukherjee from Moorah. Please go ahead.

Yeah, thanks for taking my question.

Sir, just on the biosimilar that you mentioned about Capex there, is it more to do with the regulated markets or the opportunity you see in the emerging markets?

Can you give some more color on that biosimilar business?

So capacity is for overall markets because we are using the product for all the spaces that we are there. We are not dedicating capacity for a specific market. And our products are by and large global. So it's a capacity for each one of the relevant spaces that we have. Especially if you remember that we discussed the space of the hospital product, this is This is the path in which we want potentially to sell to every country that wants to have affordable products with high quality. So this is a truly global business. As for the biologics, again, it's a global market in which we will be self-sustained for the for the United States and Europe. And with a couple of products in which we will have hopefully partnerships that will help us to market those products in those areas and to finance our R&D.

Okay. Okay, thank you. Thank you. Ladies and gentlemen, that was the last question. I now have the conference over to Mr. Amit Agarwal to give his comments.

Thank you everyone for joining us today for the earnings call. In case of any further queries, please reach out to the investor relations team.

Thank you.

Thank you very much sir. Ladies and gentlemen, on behalf of Dr. Reddy, that concludes this conference. Thank you for joining us and you may now disconnect your line.