Dr. Reddy's Laboratories Ltd

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 September 30th, 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 transcripts shall be made available on our website soon. All the discussions and analysis of this call will be based on the IFRS Consolidated Financial Statement. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy comprising Mr. Erez Israeli our CEO, Mr. Swamin Chakraborty our CFO, and the Investor Relations Team. Please note that today's call is a copyrighted material of Dr. Reddy and cannot be rebroadcasted or attributed in press or media outlets without the company's express written consent. Before we proceed with the call, I would like to remind everyone that the safe harbor contained in today's press release also pertains to this conference call. Now, I hand over the call to Mr. Swamin Chakraborty. Over to you sir.

Thank you Amit. Greetings to everyone. I hope all of you are keeping safe and healthy. I am glad that we continued with our momentum of new product launches, productivity improvement and strengthening of COVID-19 portfolio while delivering the promise of serving our patients Unabatedly even during these challenging times. The current quarter was witnessed with strong sales growth across all our key markets. Healthy gross margin, significant leverage benefit on SG&A which resulted in a healthy EBITDA and profit margin. Let me take you through these in a bit more detail. For this section, all the amounts are translated into U.S. dollars at a convenience translation rate of Rs. 73.54, which is the rate as of 30th September 2020. Consolidated revenues for the quarter start at Rs. 4,897 crores, that is $666 million. and grew by 2% on a year-on-year basis. The year-on-year growth adjusted for proprietary products outlicensing income of Rs. 723 crores is recognized in the same quarter of previous year stood at 20%. Growth is primarily on account of new product launches across markets, volume traction in base business, and integration of business acquired from Hukat. Our energy business grew by 28%, Europe business grew by 36%, India business grew by 21%, Emerging markets business grew by 4% and PSAI business grew by 20%. Sequentially, our revenues grew by 11% Supported by gradual improvement in the volume pickup in India, Russia and other markets, new product launches and full quarter impact of the business occurred from Bhukan. Sequentially we saw 46% growth in India, 6% growth in both energy and euro and 8% growth in emerging markets. Consolidated gross profit margin for this quarter has been 53.9%. Although on a reported basis it declined by 360 basis points year on year, adjusted for outlicensing income during previous year, there has been an increase. This increase was driven by improved productivity, forex finances and product mix partially offset with price erosion. Sequentially, margin declined by 210 basis points due to lower export incentives, adverse forex stakes, and product leaks. Gross margin for the Global Generics and PSAI were at 59.4% and 26.8% for the quarter. The SGM spent for the quarter is Rs. 1311 crores. that is $178 million. A decrease by 1% year-on-year and an increase of 3% quarter-on-quarter. The sequential increase is primarily attributable to incremental costs arising with the integration of acquired business from mocha and increased sales and marketing related activities post-unlock. Fresh cost has shown a reduced increase Producing Trends Post Unlocked with Improvement in Career Availability. However, so far as productivity is concerned, SG&A has a percentage of sales at 26.8% to reflect an improvement of 80 basis points year-on-year and 200 basis points quarter-on-quarter. The R&D spread for the quarter is Rs. 436 crores i.e. $59 million with an increase of 19% year-on-year and 10% sequentially. This trend is in line with the increase in the number of R&D projects including development of COVID-19 products. As a percentage of sales, however, R&D was at 8.9% of sales. The EBITDA for the quarter is Rs. 1267 crore i.e. $172 million. EBITDA margin is at 25.9%. So we are pressing our aspirational target of more than 25%. Profit resource tax for the quarter is Rs. 862 crore i.e. $117 million. with a year-on-year growth of 12% and a sequential decline of 2% after absorbing an impairment charge of Rs. 78 crore on certain products in line with the requirement of the accounting standard. Effective tax rate for the quarter is at 11.6%. The ATR has been lower due to recognition of deferred tax receipts for one of our subsidies. We expect the ETR to be around 25% for the full year, as alluded earlier. Profit of the tax for the quarter stood at Rs. 762 crores, that is $104 million, which is 15.6% of the revenue. The reported earning per share for the quarter is Rs. 45.83. Operating working capital increased by Rs. 21 crore, which is $3 million. There has been an increase of Rs. 200 crore each in the receivables and inventory, which are in line with the growth in business. This was partially offset by the increase in the trade table. However, when we measure working capital in number of days, that has improved by 5 days. We invested Rs. 250 crores which is $74 million towards capital investment in this quarter. The free cash generated during this quarter was Rs. 603 crores which is $82 million. Our net debt as on September 30, 2020 was Rs. 136 crores. Our net debt to equity ratio is at 0.01 and continues to reflect our strong balance sheet position. Current currency cash flow hedges for the next 11 months in the form of derivatives for US dollars are approximately $305 million, largely hedged around the range of Rs. 74.4 2 rupees 76.7 to the dollar. In addition, we have cash flow ages of 2.1 billion rubles at the rate of rupees 1.031 to the ruble, maturing over the next 9 months. With this, I now request today to take to the key business highlights.

Thank you, Soman. Good morning and good evening to everyone. I hope you and your families remain safe and healthy during these difficult times. I am pleased to see our employees and business partners have responded to the current challenging environment and came up with innovative solutions with speed and agility to ensure that we continue to serve patients across our market. I want to thank them all. We continue to progress well on our transformation journey with consistent improvement in performance across all financial and health parameters. We have yet again delivered strong financial performance this quarter and recorded the highest ever quarterly sales of 4,897 core groups. Healthy EBITDA margins of 25.9% annualized and annualized ROC of 23.6%. and consistent generation of free cash flows. The strong balance sheet position and low level of net debt give us reasonable headroom to invest for future growth. Despite COVID-19 impacting fundamental demand, we saw healthy growth across all our businesses during the quarter. The market demand in India, Russia and other branded markets have witnessed sequential improvement However, it is yet to fully recover to pre-COVID levels. The quarter was supported by new products launch momentum across the markets, strong pick up in the sales of brands acquired from WorkHard in India, and overall cost leverage benefit. We continue to progress well in line with our strategy, and believe that we are moving in the right direction with diversified leaders of future growth on the back of expansion in market share across key markets and further improvement in productivity. We have also progressed in our effort towards this global fight against COVID-19. As you are aware, we entered into a deal with RDIF, Russia for sputnik V vaccines to conduct clinical trials and distribution in India. We are going to initiate combined phase 2 and 3 clinical trials for the vaccines candidate very soon. In addition to that, we are working towards the development and launch of multiple products as treatment options for COVID-19 in our various markets. Now let me take you through 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 generic business recorded sales of $247 million for the quarter, with a strong growth of 22% year-over-year and 8% on sequential quarter basis. The growth was supported by new product launches of setting the lower volume uptake in select molecule segments, impact by lower doctor visits, and elective procedure in the hospital. We launched nine products during the quarter, including some limited competition products, such as first-to-market products, triple-cloxacillin dexamethasone, ortic suspension, OTC diclofenacil, OTC olopatidine eye drops. With strong new launch momentum witnessed in H1, We are well on track to launch more than 30 products during this fiscal, exceeding our initial expectation of 25 launches. We believe that the H2 is likely to remain busy in terms of launches, and we would also include few niche and limited competition products. Our Europe business recorded sales of 43 million arrows, with strong year-to-year growth of 22% and sequential growth of 2%. The growth was driven by new product launches since across the markets. During the quarter, we launched three products in Germany and one product in each in the UK, Italy, Spain, and Austria. In line with our strategy to expand our presence across Europe, leveraging our deep pipelines, we forward into Austria market in the current quarter beyond our EU five countries. Our emerging market business recorded sales of 864 crores rupees with a year-on-year growth of 4% and sequential quarter of 8%. Within the emerging market segment, the Russia business grew by 4% on a year-to-year basis and 26% on the quarter-to-quarter basis in constant currency. The market demand has been gradually improving after COVID-19 related decline witnessed in Q1. We also saw similar improvement trend in our CIS market Our business in China is also continuing to perform well in this quarter. During the quarter, we launched 28 new products across emerging markets. Our India business recorded sales of 912 crores rupees with a year-over-year growth of 21% and a sequential growth of 46%. The strong growth in this quarter was supported by sequential improvements in the market demand after a lighter Q1 due to COVID-19 related lockdowns. The sales was also supported with strong contributions made by the business acquired from Workout, which has been performing quite well and ahead of internal expectations. We launched seven new products in the Indian market, including the two COVID-19 treatment drugs, Avigan or Fabipiravir tabs, and Remexivir injection. Our PCI business recorded sales of $150 million, with an year-on-year growth of 14% and sequential quarter growth of 1%. We believe this continuous strong demand was in part due to higher API inventory level being carried. By our customers who prepare for any potential COVID-19 related disruption, this demand is likely to get normalized in the coming quarters and as inventory catches up with end consumption. However, we expect this business to be a key growth driver supported by our focus on new product development, improvement in cost position, and tailwind due to evolving market dynamics. On the R&B front, we continue to strengthen our pipeline of products across the markets. During this quarter, we filed 27 formulation products across global markets, including two ANDAs in the United States. As of 30th September 2020, we have 94 cumulative filing pending for approval in the US FDA, including 92 ANDAs and two 505 NDAs. We also filed 39 drug master files globally, including one filing made in the U.S. market. We have significantly strengthened our development pipeline across markets, including development of multiple products related to COVID-19. In the coming months, this will increase our investment in R&D and accelerate our submissions of new product filings. On biologics form, the phase three trials for etuximab is progressing well. In parallel, we are working on the next wave of biosimilar products which are at different stages of development. On our proprietary business, we continue to actively progress toward building a sustainable globally relevant pipeline. Simultaneously, we are continuing our effort to monetize select assets through partnership and licensing transactions that maximize their value. We continue to progress on our growth agenda complemented by inorganic moves. After the successful integration of the business acquired from WorkHard, we continue on our journey to evaluate more opportunities to help us achieve our strategic priorities. Having sailed through successfully over the last two quarters in the current volatile market environment, we remain committed to do our best and meet the expectation of all of our stakeholders. With this, I would like to open the floor for questions and answers.

Thank you very much. We will now begin 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, 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.

The first question is from the line of Prakash Agarwal from Axis Capital.

Please go ahead.

Good evening to all. So my first question is if you could help us understand you know the volume or the market opportunity for Remdesivir and Paripiravir.

Yes, Remdesivir We built certain capacity for India, so currently we are marketing it in India and it's going very well. And we are expanding our capacity to ability to help both increasing demand from India as well as from other emerging markets. As for Fabi Piravir, we have set of clinical trials. On top of what is the original technology of this product, we have now trials conducted in the Kuwait as well as in the Emirates. And the additional trials will be conducted in the U.S., Canada, and India to allow as variety of potential data as well as indication. And we will try to seek emergency use authorization if the data of course will support it.

Fair enough, but just if some color could be given in terms of volume that you are selling currently or some data, what is the market share you would have in the industry that would be helpful. We are not disclosing that at the moment. Okay, fair enough. Sir, second question on the gross margin understanding. So you clearly mentioned that export incentive is partly the reason and price erosion. So what our understanding is only the September month it was not there. So have we accounted export incentive till August? and how do we account going forward since there is a statement by the Ministry that there would not be any export incentive going forward. So how do we look back and what is the outlook on the gross margin both for Global Genrix and the PHI business?

So you are right in this quarter it was one month impact that is September. and starting from next quarter or not, it will be full quarter impact of the export incentives. So that has some impact in the gross margin going forward. And I clarified that we look at year on year and quarter on quarter on a like to like basis. If you compare year on year, last year definitely gross margin was very high. Beyond the normal range that earlier I alluded to. There could be, if you look at multiple quarters, you know, over the years, if you see our gross margin, there would have been always fluctuation quarter to quarter. But there is a kind of a range which we will feel is a normal range. One odd quarter, because our exception is higher than that, maybe one odd quarter it could be What standard? I believe 63.9 is very much within the normal range. Sequential decline yes some part is also for the forex in the Q1 US dollar was more than 75 rupee and now it is 73.5 so that has an impact just one month of these export benefit withdrawal it has an impact and of course Beyond that there are so many multiple factors which includes product mix, business mix, business segment mix, everything. So fluctuations are bound to be there. It's very difficult for us to give any kind of specific outlook. But all that we can say is that we have continuous effort to not only improve productivity which is in the SDNA line or and other overheads but also improving the cost of revenue. That effort is a continued effort.

Okay, so what I understood was the normal range would largely be maintained despite the export incentive for the full quarter being not there going forward. Would that be correct understanding?

No, I said 53.9 falls within the normal range. I said so far as export incentives is concerned, in this quarter this was one month impact and this is not only for us, this is withdrawn by the government earlier than what earlier one thought that was supposed to be in December end. We just started in September and going forward this will become a normal phenomenon. That means there will be export incentives will not be there. So our effort will be to what extent you can utilize by improving You know, in terms of cost of living, how do you improve, you know, how do you improve? Many other things.

Thank you, sir.

Thank you. Before we take the next question, we'd like to inform participants that in order that the management is able to address questions from all participants in the conference, please limit your questions to two per participant. Should you have a follow-up question, we request you to rejoin the queue. The next question is from the line of Damyanthi Kerai from HSBC.

Please go ahead. Damyanthi Kerai from HSBC, you may go ahead with the question.

Hello, am I audible?

Yes, you are.

Okay, yes. Thank you for the opportunity. My first question is regarding SG&A cost trend going ahead. So I understand the second quarter reflects impact of I'll say full integration of WCAG portfolio and now with things opening up in Indian market. We assume there will be incremental cost coming up on the marketing and promotional side. So how do you see SG&A cost moving in coming quarter?

So first we have been able to contain a lot of cost because on manpower cost front I think the contentment is quite good. and in terms of SG&A as a percentage of sales, you get a leverage if you are getting more and more sales and this quarter has been very good on sales, like as I already told it is on 40% growth. If that happens, then yes, productivity improves definitely. Yes, you are right on an absolute basis. The more we start spending on marketing and sales, On an absolute term, the DNA may increase, but our effort will be always how do we keep on improving the DNA product.

Sure, thanks for that response. And my second question is regarding the update on recent cyber attack. So after this incident, do you believe you need to invest more in resources to secure up your system? What kind of investment you are looking up there?

So we have been you know building up both in terms of you know digital initiative, increasing our digital footprint as well as all information security measures. So there has been always you know attacks which would have been happening and to a great extent we have been able to guard up most of them but in this particular case you know the Cyber attacks happened and so we have as we have already you know given to desktop exchange our notification we took as I believe the right kind of steps in terms of isolating the impacted IT service part and then taking help of international experts In cyber security to really contain and restore from our backup very systematically in a very controlled manner and very cautiously and by this time our most of the critical applications have been enabled and are being enabled also So, but at any point of time, nobody can take, you know, things in a complacent manner so far as cyber attack is concerned. It's an ongoing effort by whoever wants to do anyway. But yes, we have been doing in the past. We are doing more I10 surveillance at this point of time and we will continue to do. But it's not always a matter of ignorance. There is always you can reduce the time but you cannot eliminate the possibility. So no matter what you invest. It is almost like you know zero defects can be a target but that's an ideal. The more you improve your sigma level the possibility of defects per million comes down. Anyway we can get some comfort of whatever the security that we can build but You can only minimize but you cannot possibly eliminate because there are so many things which are happening on in terms of creating newer and newer strains and other way of attacking.

Sure. Thanks for your response. So I have more questions. I'll get back in the queue. Thank you.

Thank you very much. The next question is from the line of Neha Manturia from J.P. Morgan. Please go ahead.

Thank you for taking my question. You know just to you know delve a little bit more on the SG&S trend. I understand your outlook but if I look at the trend in this quarter versus the last quarter given we have the work hard you know integration and normalization in our branded businesses to some extent. Could you explain the reason for you know such a moderate increase on an absolute level? I understand the operating level operating leverage but you know What helped you know offset the increase that we saw because of the other two factors?

We brought as I told that we have been able to contain various components of the HB&A course and specifically when you do things more digitally and virtually then the sales and marketing expense will be a little bit lower. But there has been always a sustained effort on improving containing cost. So it has been going on and we can only disclose as much as we can. So I don't know. The rate which went up sharply in the previous quarter, there has been a little bit reduction which I have already said in my script.

And so this digital marketing which helps control costs, that should be sustainable, right? Or do you see this more as the markets are opening up, probably we go back to physical marketing?

Yes, so we are going to be more productive and we're going to use more digital marketing absolutely going forward. So we are actually even at the beginning of the journey. And I do see ourselves even increasing the level of digital marketing and some of it will be on the expense of the, let's call it, veteran marketing practices. So more and more we are going to be more and more digital and more productive on the HNA.

My second question is on the ROW market. If I exclude Russia CIS, there seems to be a moderation quarter on quarter. Was there any specific reason for that?

There have been some countries like Vietnam, Jamaica, where the sales have been lower in this quarter.

But a 20% decline quarter on quarter?

Yeah, it has happened. Some of the smaller markets are dependent on the specific products that sometimes tenders of hospital and stuff like this. Some of those markets were affected also by COVID. So I think overall, I think we have a very healthy performance in emerging markets. I'm actually very pleased given the challenges that we are in this quarter in some of these markets.

Thank you. Thank you.

The next question is from the line of Nithya Balasubramaniam from Bernstein Research. Please go ahead.

Yeah, hi. My question was on the Sputnik 5 vaccine and the trials you're now conducting in India. If you can help us understand what's the size of the patient pool of your clinical trial and any visibility you can give us on timelines as to when the clinical trial results would be available and when you could launch the product.

So everything is tentative because we need to be also successful with the trials. We are talking about Phase 2, which is about 100 patients, which will start very soon. And about 1,500 that will be on top of the trials that are conducted in Russia or the global trials for India. which will be conducted right after will be, of course, of the full authorities. If everything will go well, and, of course, it's a big if because many things need to go right, it can be as soon as end of March, but, of course, it can also be after that depends, of course, on the relevant results as well as the requirements of the authorities.

Got it.

So the 40,000-patient clinical trial that RDIF is conducting, what is the visibility on the trial data for that phase three trial? How is it recruiting?

What we have is the relevant part of the India arm of test. It's on top of what they do in the global trial.

I understand, but I thought you mentioned that this data will be kind of a bridging study over and above the data that you will have from the large-scale clinical trials. Would you need both for an approval in India?

Yes, we will have to have both.

Hence, the question is, is there any visibility on when there might be some data coming out of the larger-scale clinical trials?

I don't have a specific date on that, but what I gave you as the best case scenario is available today.

Got it. Just one more related question on the 100 million doses that we saw in the press release that you will be able to supply of this vaccine. Have capacities actually been identified?

Yes, we are working on it, and I hope that it will be ready by the time that we can commercialize the product.

So assuming everything goes well and you have the right data and you have the approval by March, you will have capacity scaled up to 100 million doses or would that happen over a period of time?

We will have a capacity that we will build over time. At that point of time, we will not have 100 million available. It will come in a certain space over the time.

Thank you so much.

Thank you. The next question is from the line of Komal Damesha from MK Global. Please go ahead.

Thank you for taking my question. So first question is on the vocard business now that you have integrated it for full one quarter. So any synergy potential that you identify because there is a lot of overlap that we have in terms of acute therapies.

I'm very pleased with this integration as well as from the product, as well as from the people that join us from Workout. So like I think we discussed in previous meetings, the Workout deal gives us both synergies on both top line and bottom line, and we are actually now executing on both. So we can sell more in less cost.

What would be our current sales force in India?

Excuse me, sorry, can you repeat?

What would be our current sales force in India?

We are not discussing numbers of people. Sorry?

It will be around 6,500. The overall?

Yes. 6,500 people.

Okay, thank you. And the second question is on the euro. We have seen significant growth in Europe this year driven by new product launches and new geographies. But if you can provide some color in terms of how much runway do we have in terms of new product launches. So suppose we have X product right now in the EU5 market. Can we go to 2X or 3X in next 3-4 years or maybe it is 5X and will all those products be from our US portfolio or whatever we are developing globally. If you can give some color on that.

Yes, the color is that we just started to expand in Europe. I believe that we will grow much, much more and we're just in the beginning of launching products. We are not giving guidance for the future, but naturally our bases are now very low and there is a lot of room for us to grow in Europe.

Okay, and any qualitative commentary on margins on Europe? Whether they will be in line with company margins or

No, we don't disclose that.

Okay. Thank you.

Thank you. The next question is from the line of Sushar from Motilal Oswal. Please go ahead.

Just extending the Europe question, now there is another wave of COVID. Do we see any near-term impact on the business?

Another wave of COVID in Europe.

Yeah, I hope not and so far I do not see any impact on the business.

Sir, just on this balance sheet side, the other intangible assets compared to FY20, it is a sharp increase. So, could you just explain that?

Sharp increase in what, sorry?

Other intangible assets in the balance sheet.

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

Thank you so much and good evening to everyone. First of all, Swamin, congrats on your long inning and best wishes for the future. My question first is, my first question is on generic Vatsapa. If you could just tell us, share with us your commercialization plans, when do you expect to launch, some flavor around what's holding you back would be great, thanks.

Vatsapa. Vatsapa. Vatsapa.

We are gearing up for the launch, and when we are ready, we will launch it.

What's the key and bottleneck for the launch? Because, you know, you've got the approval, you've got the code decision, it's been a few months, still not in the market?

We are not ready to launch.

That's what is keeping us from launching it.

Okay, cool, no worries. So the second question is on your Resume settlement. I don't know how much you can share. But the other two settlements, which was Natco and Alvagen, they had given some sort of a flavor around the entry and the exit market share between 2022 and 2026. Is there some color that you can share even qualitatively would be great because it's a big product?

No, we cannot share specific numbers because it was part of what we discussed in the past. But let's say that I am very pleased with the statement.

Okay, and with your permission, one more question, and that's around Sputnik V vaccine. Sir, will the vaccine require any specialized distribution in terms of refrigeration? And second is, you know, some states have made announcement of giving free vaccines. So will that have any commercial implications for you?

These products will require cold chain, supply chain, as this product needs to be kept in very low temperature. So yes, absolutely, it's a consideration for this product. As for any commercial arrangement, we did not discuss and we're not discussing any of these at this stage. What we are focusing on is to prove that the product is with the right efficacy and safe. Once we can port that, we will worry about prices and commercial terms. Right now, we are not discussing that.

Okay, great. I'll get back to you. Thank you so much.

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

Thank you. Just to continue on the Sputnik 5, what is the spend on trials that we plan to conduct for the vaccine in India?

We are not showing specific numbers. What I can say is that our R&D is going to increase in the next six months, not just because of Sputnik, but also on other COVID-19 products that we are bringing. At the same time, I think we will be able to contain this cost by improving on the other part of the business. So it's something that will be, I think, can contain it easily.

Okay. One question on the United States. So if we exclude these nine large products that we launched in the second quarter, how would have the base business behaved? Some perspective on this would be helpful.

In general, it behaves well. Overall, if you look at prescriptions and you can see, for example, like uvea, you see that in certain the molecule demand went down overall, primarily because of the way the market is behaving at the time of COVID, ability of patients and doctors to meet, etc. So we do see in some molecules less demand, we see in some molecules more demand, and overall we, in accordance to this last report I see, and also what we feel as well, that we increased market share. So it's going well for us.

The price erosion for the base business would be made to high single digits somewhere there, or better than that?

There is no, let's say, we are not discussing specific prices for products or for sub-segment of products, but overall the price pressure is more moderate this year than it used to be in the years before, but it will always be there, and this is also the case for this year.

Okay, and just a last question on the API business. What could be the contribution for the COVID-related products in the API business?

Not much. We are producing the API for some of them, but it's not a big contribution. Most of the growth comes from, let's call it the normal products that we have. And the growth is attribute to the efforts that we did in the last two years.

and how has been the pricing for APIs, some perspectives? Pricing.

You asked about pricing of the API?

Yes, I mean, when we had the pandemic, there was a tight market. So does that continue? Is there a price theme currently as well? Some views over here.

I think that at the beginning of the pandemic, there was a bit more orders of these product tests for companies that prepare themselves for potential scenarios. This got normalized by now, and that's how we see it also going forward.

So do you think the 30% runway for year-on-year 200 continues for the second half as well?

I believe that in the second half we will not see the impact of accumulation of inventories. We will see the normal growth that comes. So we will not see maybe the full effect. We'll see some of this. Thank you very much, sir.

Thank you. Thank you.

The next question is from the line of Surya Batra from Phillip Capital. Please go ahead.

Thanks for this opportunity sir. So is it possible to have a sense what is the kind of contribution that we would have seen from the COVID portfolio sequentially because the sequential domestic growth looks really strong almost like 46% even if we adjust to the record this thing it is near about 27 odd percentage kind of. Obviously, there will be a recovery in the domestic market, but if you go by the AIOCD data, that suggests a mutate process will be. So is it fair to say a kind of meaningful contribution from the COVID portfolio for the domestic growth this quarter?

So COVID helped, but I would not say that it's the most significant growth. I think all of the businesses perform as well together. So it was a combination of the fact that there is a recovery in the market. As you know, the type of the portfolio that we had suffered more during the lockdown, so now the lockdown was open, it absolutely helped us, as well as the COVID product. So it's the combination of the three of them.

Okay. If I just take that same question regarding U.S. So, then I think obviously the growth number for the quarter is really, they look really strong and great. Some extent of this base effect is also there, but here just if you can give us some understanding that okay, see you have a kind of or what would be your oncology portfolio revenues there, portfolio revenues there in the US and Since there are studies which says that there is a, because of the COVID, the oncology products witnessed a kind of 30-40% kind of decline over the last 4-5 months period, so what was the kind of impact that you have witnessed, despite which you have delivered this kind of growth?

Indeed, some of the injectables that we have a headless demand. Not just by the oncologist and the other hospital related products that we did see some less of demand due to COVID. Overall for us, we were able to, between the market share and the new products, we were able to overcome or compensate for some of those Declining in certain demand of products as well as for the relevant price decrease. So more volume share, more new products compensate for price as well as less demand in certain products, including some of these injectors.

okay this last one question sir on the vaccine side so if you can provide some idea that so far is the commercial launch of the product is concerned I think government is indicating about distributing the vaccine or vaccinating or running the vaccination program only through government agencies then the procurement would be through government agencies only In that case, do you expect having seen or knowing the fact that there are multiple domestic leading players are there who are manufacturing and almost hoping to launch. So in that scenario, if DRL is thinking about introducing the product in the domestic market, there is any kind of business scope for domestic market.

You asked about the vaccines, correct? Yeah, yeah, yeah. Vaccine is only for the domestic market. We don't have it for other markets. So, yes, I believe that there is a great need for this, and I do hope that we will prove that the product is safe and with the right efficacy. I'm not sure that I don't see any competition on that, so I'm not sure what kind of competition you're related to.

Okay. Sure, sure. Thank you. We will see you all very soon.

Thank you. The next question is from the line of Surjeet Pal from Prabodha Filadhar.

Please go ahead. Thanks for taking my question. Could you please tell me is this the API manufacturing is the main issue for Vespa? As well as some litigation issues where some, you know, liability could come into picture given that what has happened in other cases in U.S. product.

Gurjeet, you are referring for which product?

We are not commenting on the activities on this product. What I said before, we are preparing for a launch and we will launch when we are ready.

Any actual, could you throw some light on when could be that possibility, three months, six months?

Not really. I'm not planning, not because that, because you can understand that it's a sensitive information.

Okay. Okay. Another question is about your Fabry Pyramid in US. So currently, I believe ongoing trials. So any development on that?

Yes, we are accumulating the data and we will try to seek emergency use authorization in the United States. and if not we will try to go to in the normal patterns of register in the product. I hope that we will be able to do so.

And what could be... Yes, sorry. Yes, please. Any timeline on that? Could you throw some possible timeline?

I don't have yet the timeline. There are ongoing discussions with the authorities about the type of data they want to see in order to allow emergency use authorization, and we are trying to open this data. Everything that we are discussing will happen within the next few months anyway, but I don't have a specific date within that.

All right. With the permission, this last question is that your 100 million budget for Sputnik V trial, is it budgeted for FY21 only? Or is it across FY21 and FY22?

We never put numbers for the R&D expenses. 100 million refers to the number of injections that we are getting as a quota from the Russians. That's what the numbers we got licensed to market in India. Okay. Thank you. We never discussed the R&D budget.

Thank you. The next question is from the line of Dimesh Mehta from Research for Delta Advisors. Please go ahead.

Yeah, thanks for the opportunity. Sir, I'm just trying to understand the growth margin of the global generate. We have seen a substantial decline of 200 daily points on global generate, whereas we have very small and very large two activities which are actually called diabetes. So one is the sharp increase in the domestic business, and second is the launch of the products in U.S. under monetary exclusivity. So both these should have meant that the cross margin at least on the global generally should have been far higher sequentially but working as we are looking at the 200 basis point decline. So what is that I'm missing here? If you can explain that would be great.

So I have already said three distinct reasons. One is You know, lower export incentives because one month impact is there. Secondly, that was forex rate. Last quarter it was 75 or so. This quarter it is 73.5. So forex rate is at first impacting.

And third is the product. I'm sorry to interrupt, but does the forex really reflect the gross margin? Or it is below gross margin that is captured?

So, some impact is there in terms of margin? Yes.

So, Forex impacts the gross margin in the sense the sale basically comes down. Most of our sales happens in USP. So, as it comes down, then the impact goes to gross margin also. And the ruble has further been impacted this quarter.

So, that impact is also there.

Okay so from a you know impact perspective is forex the largest season by this has happened I mean I am seeing two very strong events one is the domestic business which is sharply up and second is the both should have and I am just trying to still understand like you know can extend the three elements that events to the factor we mentioned in it are they sufficient to compensate for the increase there

So, other than this also there are other products which has impacted. So, these two have contributed positively, but there are factors which have contributed negatively. So, there is a overall product mix when we say.

Understood. And second I just want to note, there is a product Remodeling where I think we already have an approval and I do not think we have been mitigated. What impact is stopping us from launching the product? I understand it could be an important product for Dr. Reddy given that it's low competition.

Yes, so there are certain activities which are pending so maybe once we complete those then we will launch the product.

I see, any timeline you can give that will be great.

As of today, we don't have any specific timeline, but once we have a little bit more clarity, maybe this is ready to work on that.

Okay, thank you very much.

The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.

Hi, thank you for taking my question. The first one is on the regulatory inspection outlook. Have you started seeing the The FDA is starting to inspect at least some of the global plants like the plants in the US. And from a calendar year 2021 perspective, what do you think are some of the changes that companies need to adopt while having to do these regulatory inspections?

So as for the US FDA, we did not have inspections outside of India. and as for other agencies, some of them are performing remote audits and that's the preparation people need to do to be able to either obtain data or having audit remotely meaning use cameras or using other means to to present to the hospitals and give the information that they need. This is a certain adjustment that we are doing for some agencies.

Do you think, so next year, do you think this audit, virtual audit could remain, you know, in terms of proportion or in terms of criticality of plans that we need physical inspections? Others could just keep doing virtual audit. Is there some qualitative sense of it?

It is up to the agency, some agencies already doing and we even experienced some virtual audits and some don't, so it's up to them. I believe that COVID-19 unfortunately is here to stay for the foreseen short term, so people will have to take those decisions and right now I believe that the inspections, if will happen, will be virtual, by and large.

Thank you. And my last question is on China business. I think pick up, I think this is the 20th product in all energy market and what can be done in terms of China market this fiscal so far and the experience of selling floppy doggrel if you can, if you can actually walk us through that as part of the GPO. Thank you.

Yes, so we are continuing with the strategy and actually executing well against it, including the product that you've mentioned. We are not giving number specifically for the product, but the strategy, the way we articulated is working for us, and our China business is growing. and including the products that we get to the GPO like Olanzapine. So in that respect, it is going well for us. So we'll continue to do both submissions as well as to focus on those products that are now commercial for us.

Got it. Thank you and all the best.

Thank you very much. We'll take that as the last question. I would now like to hand the conference back to Mr. Amit Agarwal for closing comments.

So just before Amit will finish, I want to to this audience to thank Roman that is not leaving Dr. Reddy's but is going to in next month and going to retire and after 19 plus years in Dr. Reddy's and will continue to be with Dr. Reddy's after that and I want to this audience to thank you all for collaboration with Herman and to thank him in front of you for an excellent service for Dr. Reddy. And thank you so much for your collaboration all these years with us and I hope you continue to do that.

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