Dr. Reddy's Laboratories Ltd

Ladies and gentlemen, good day and welcome to the Dr. Reddy's Laboratories Ltd Q3 FY21 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 touchstone phone. Please note that this conference is being recorded I now hand the conference over to Mr. Amit Agarwal from Dr. Reddy's Laboratories Ltd. Thank you and over to you sir.

A 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 December 31, 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's, comprising Mr. Hriday Vigraili, our CVO, Mr. Parath Adarwal, our CFO, and the investor relations team. Please note that today's call is a copyrighted material of Dr. Reddy's and cannot be rebroadcasted or attributed in press or media outlets without the company's express consent. Before I proceed with the call, I would like to remind everyone that the safe harbor contained in today's press release also pertains to this conference call. Now, I hand over the call to Mr. Taraz Adarwal. Over to you, sir.

Thank you, Amit, and greetings to everyone. I hope all of you and your families are keeping safe and healthy. I am pleased to take you through our financial results for the quarter 3 of fiscal 2021. We had yet another quarter of good performance in terms of revenue growth and EBITDA margin, though the profits were impacted by impairment charge taken during the quarter. Let me take you through these in a bit more detail. For this section, all the amounts are translated into US dollars at a convenience translation rate of 573.01 which is the rate as of 31st December 2020. Consolidated revenues for the quarter stood at 4,930 crores that is 675 million US dollars and grew by 12% on a year-on-year basis. Growth is primarily on account of new product launches across markets. Our North American generic business grew by 9%, Europe business by 34%, India by 26%, emerging markets by 5%, and PSEI by 1%. Sequentially, our revenues grew by 1% supported by volume pick-up in India, emerging markets, and Europe, however impacted by price growth in the North American business and lower volumes in the PSEI business. During the quarter, We recognize milestone received towards AUR 102, one of the programs of our origin discovery business. Consolidated gross margin for this quarter has been 53.8%, a decline of 30 basis points year-on-year and 10 basis points on quarter-on-quarter basis. The decline is primarily on account of price erosion and lower export benefits. However, supported by milestone income receipts towards AUR 102 compound and productivity improvement. Growth margin for the global generics and PSAI businesses were at 57.6% and 25.3% respectively for the quarter. The FD&A expense for the quarter is between 1439 crores, that is US dollars 197 million, An increase of 14% year-on-year and an increase of 10% quarter-on-quarter. The increase in expenses is due to investments made in sales and marketing in branded markets, digital capability building, higher sales costs, and certain one-time expenses pertaining to this quarter. At V&A, the percentage of sales was 29.2%, which is within our normal range. The R&D spent for the quarter is Rs. 411 crores and is at 8.3% of sales. The product development activities continued normally during the quarter, including development of COVID-19 related products. The editor for the quarter is Rs. 1,185 crores Abita Margin is at 24% and it is closely tracking our aspirational targets of 25%. In this quarter we have taken an impairment charge of Rs. 597 crores that is 82 million USD. The impairment has been taken primarily on three products related intangibles acquired from Teva in the year 2016. These are for the Mullery, Centamine and Cofilamide. and Sexy Goodkin and Matt Thurman. We do a quarterly impairment testing analysis and as part of it we concluded that the carrying value of certain of our intangible assets are not reflected of the current market reality and hence in line with the requirements of the accounting standards we took this charge. Consequently, our profit before tax for the quarter stood at rupees 284 crores. That is 39 million US dollars. Effective tax rates for the quarter has been 93% higher due to non-recognition of default tax asset and losses arising out of impairment. We expect our normal ETR to be around 25% before the impact of impairment charges. Profit after tax for the quarter is still as it is 20 crores, that is $3 million. Reported ETS for the quarter is reduced 1.19%. Operating working capital increased by approximately Rs 600 crores which is 82 million US dollars. There has been an increase of approximately Rs 300 crores each in the receivables and the inventory. Increase in receivables was partially due to reduction in discounting of receivables and the balance is in line with the normal business trend. Increase in Inventory was due to a planned increase in inventory for certain products to deal with any potential supply disruptions. We invested Rs. 287 crores towards capital investments in this quarter. The free cash flow was a net outflow of Rs. 58 crores after payouts for the banks acquired from Denmark for the Russia and CIS markets. We had a net cash surplus as on 31st December 2020 of Rs. 84 crores, that is 11 million USD. Foreign currency cash flow hedges for the next 15 months in the form of derivatives per USD are approximately 535 million USD, largely held around the range of Rs. 74.5 to Rs. 77.6. In addition, we have cash flow hedges of rubles 550 million at the rate of 1.0021 to the ruble, maturing over the next 15 months. With this, I now request Erez to take to the key business highlights. Over to you, Erez.

Thank you, Farhad. Good morning and good evening to everyone. Hope you are having a happy, safe and healthy beginning of the new year. The year of 2021 has started with a hope and visibility around life returning to normal after a significant healthcare crisis and socio-economic disruption caused by COVID-19 in 2020. The vaccinations program has started in several countries and we are continuing to contribute our bit in this fight against the global pandemic. Recently, after the approval from DCGI, We have initiated the Phase 3 clinical trials of Sputnik V vaccine in India. The vaccine's efficacy is confirmed at 91.4% based on the data analysis of the final control point of clinical trials in Russia. The efforts have strengthened our partnership with RDIS and have been confirmed as the preferred marketing partner to enable the safe and expeditious distribution of the vaccine in India. During this quarter, we continued in our growth journey and achieved higher ever quarterly sales, healthy EBITDA margins, and once again turned net cash positive as of December 2020. We saw healthy growth across our branded markets in Europe. While the market demand in India, Russia and other branded markets has witnessed sequential improvement over the last couple of quarters, it is yet to recover to pre-COVID levels. We continue to progress well on our strategy of diversified business model and creating the right levers of growth for each one of our businesses. This includes building a healthy product pipeline, focus on productivity, improvement in marketing capability, and straightening of processes led by digitalization initiatives. The strong balance of positions allow us to continue to invest in the right set of opportunities for future growth. Now, let me take you through the key business highlights for each one of our businesses. Please note that all references to the numbers in these sections are in respective local currencies. Our North America generic business recorded sales of $235 million for the quarter, with a growth of 4% year-over-year and a decline of 5% on a sequential quarterly basis. While the new product launches momentum continued through the quarter, we faced incremental competition, late pricing erosion in certain base portfolio products. We are at the end of the quarter, We also witnessed signs of COVID-driven slowdown in demand levels, especially at the retail and hospital level, impacting resourcing. We launched five new products during the quarter. Sapotrin tablets, Simacalset, Saksilin Hulin injection, and relaunched OTC from Motivin tablets in the U.S. and after a 19 injection in Canada market. During the nine months in current fiscal, we have already launched 22 products, including one e-launch. As we continue to maintain the launch momentum for the rest of the year, resulting in around 30 launches for the fiscal, we remain focused on ramping up of the market share across key recent launches. Our Europe business recorded sales of 47 million euros with strong year-to-year growth of 20% and sequential quarter growth of 9%. The growth is driven by new product launches seen across the markets. During the quarter, we launched three new products in Germany and one product each in UK, Italy, France and Spain. Our emerging markets business recorded sales of 962 crores a piece with a year-on-year growth of 5% and sequential quarter growth of 11%. The year-on-year growth adjusted for the forex trade impact has been also in double digits. Within the emerging market segment, the Russian business grew by 4% on a two-year basis and 17% on the quarter-to-quarter basis in constant currency. The market demand has been gradually improving after COVID-19 related declines. We also saw similar improvement trends in our CIS markets. Our business in China also continued to perform well in the quarter. During the quarter, we launched 27 new products across the emerging markets. We also completed acquisition of select anti-allergy brands from Glenmark to Russia and CIS markets. Our India business recorded a sale of 959 crores rupee With a year-over-year growth of 26% and a growth of 5%, the strong growth in the quarter was supported by gradual improvements in the market demand. The brand requires a walkout are also performing well. We are progressively adopting digital platforms to improve connection with the various stakeholders, physician community, and Channel Partners to expand access and leverage demand patterns. During the quarter, we launched 70 products in the India market. After the October report of December 2020, we have been ranked number 9 for the month of December and 11 on MQT and MET basis. Our PCI business recorded sales of $95 million with a year-on-year decline of 2% and sequential quarter decline of 17%. As alluded to in the last quarter, part of the high growth in the first half of the financial year was driven by a higher supply for humans inventory level being carried by our customers in response to the COVID-related disruptions. This part of demand has largely been normalized. At strategic level, we continue to believe that our PSI business is well positioned to benefit from the evolving structural shifts in the industry as we continue to invest into new product development and cost reduction initiatives. On the R&D front, we continue to strengthen our pipeline of products across the market which focus R&D investments toward value-adjusted assets. During this quarter, we filed 57 formulation products across global markets, including two AMBAs in the United States. As of December 31, 2020, we have 89 communities filing claims for approval in the U.S., FDA, which includes 87 AMBAs and two 505B2 AMBAs. We also filed 45 drug master files globally, including five filings made in the U.S., We are also progressing with stage 3 trials for etuximab and working on the next wave of biosimilar products which are different stage of development. We remain committed to strengthen our products type and across markets as one of the key leaders for driving our future goals. As the uncertainty surrounding COVID progressively recedes, we remain focused on our key strategic priorities of building sustainable growth stories and growth Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchstone telephone.

If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The first question is from the line of Shanti Patel. From Shanti Patel Investment Advisors, please go ahead.

Light on capacity utilization in respect of various verticals and question number two, this impairment loss, how it is determined and will it be reversed in future if situation changes? Please throw some light on that.

Yes, so we had a pre-given event of the launch of Nubrand by Teva and we are working according to the good accounting practices as this is a pre-given based event. We are still planning to launch these products and I don't There is no plans to reverse, but I hope and believe that we will launch this product and make money from them.

Mr. Patel, does that answer your question?

Capacity utilization. What is the capacity utilization in respect of the various verticals?

The capacity realization? That is correct.

We have enough capacity for the verticals. I'm not sure I understand the question.

Capacity utilization means suppose we can produce 1,000 units. Today we are producing only 900, so 90%. So that way, what is the installed capacity and how much we are producing? The ratio.

I got it.

I'm saying again, we have enough capacity for all the verticals.

The only places in which we need additional capacity is in the injectable arena and primarily for the years of FY23 and FY24 as well as the biologics. We have enough for the growth in the oral solid. Okay. Thank you. Thank you.

Thank you. The next question is from the line of and Rashmi Sancheti from INCRED Research. Please go ahead.

Thanks for the opportunity. If you can highlight what kind of growth we are seeing in India business ex-work hard integration.

We are not releasing the growth. I mean, you want to answer it?

Yes, Rashmi, thanks for the question. Excluding Vokhaar portfolio, our base business grew at about 8% during the quarter.

Okay. And so for the 9 months?

For the 9 months, also the business grew in single digits.

Single digits. Okay, sir. And so related to the Vokhaar integration expenses in this quarter, Is it going to continue in the subsequent quarter or this is one-off and this will be only in this quarter? And if you can quantify how much that additional cost has come?

We have now specifically integrated the Lockhart portfolio into our business. and what we are now, what RP&L reflects are the normal ongoing expenses. So there are no one-off expenses pertaining to the rock hard business in RP&L this quarter.

Okay, but that integration expenses, will it continue in the subsequent quarter or it is already over by third quarter?

So, Rishmi, this integration expenses, there is nothing integration expenses. It is the same force like we have Sushrut Venkatanarasimham, Motupalli Venkatesh,

Are we going to maintain our 30 product launches guidance in US for this entire year? We have already launched around 22 products.

Yes, we are going to do this in this year.

And finally, last on the pricing on the base portfolio, are we seeing a huge price erosion in double digit sort of or it is a mid single digit price erosion? And with the traction in launches, will it go down or it could remain at the same level?

Thank you, sir. Thank you and all the best. Thank you.

The next question is from the line of Damyanti Kerai from HSBC Securities and Capital Markets. Please go ahead.

Hi, thank you for the opportunity. Continuing on the U.S. business, while we are seeing a healthy number of launches, but on the filing side, I believe it's been a bit muted for the last few quarters, and we are also having around 87 pending and us And in the past, you already expressed your goal about increasing your US sales by 50% in next three years. So how do you see a pickup happening on the ANDA filing front? And second question on the US business is any update on Vasefa and remodeling generic launches?

So on the filing, I think we are going to see much more filings next quarter. It's in line with what we discussed in previous meetings, so we are in the same place, just in terms of distribution between the quarters. As for the TETA, we are preparing for the launch of the product. Sorry, there was another one?

Remodeling?

Renovating will be some time away. It will take some time for us.

Okay. Okay. And my second question is on the impairment part. So for acquiring eight andas from Teva, we paid around 350 million. And if I'm correct, we have already taken impairment of around 250 to 60 million due to change in market conditions. So Do you feel like the remaining asset value can also be impaired if we see further deterioration in the market conditions?

We are not expecting additional developments.

Sorry, I didn't get that.

We are not expecting additional developments.

And my final question, how should we look at API business growth picking up from here? Obviously, 1H was very strong, but as you said, it's normalized now. So how should we look at that part of business?

We are going to grow this business on both the experimental cells as well as what's most important for us is the deck integration. So we are working on both and we are going to see growth in the API in the future.

Okay, sure. Thank you.

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

Hi, thanks for taking my question. So the first question is on the other expenses. So I think in the opening remarks, our CFO said that there was some one-time expense that was included. So can you throw some light on what was the nature of the expense and can you quantify it?

Yes, thank you for the question, Kunal. One of the expenses that I referred to are primarily two. One is COVID-related freight expenses have been at the higher end as we know for the last two quarters since COVID started. And we are not seeing any moderation in the rates yet. It's a very marginal reduction. And we do think as the situation normalizes and COVID comes under control over the next few quarters, this is going to reverse. So that's one reason I mentioned as one-off. And secondly, we also have some one-off mitigation expenses that we have recognized during the quarter, which are non-repairing in nature.

If I see the quarter on quarter, last quarter our HC&A expense excluding DNA was around 983 crores and this quarter it is somewhere around 1120 crores. So can you attribute the entire increase to that because we have said that VOCAD integration costs were already there in quarter 2. So the entire thing is related to and the trade costs would also be there in quarter 2, right? So then the entire difference is coming from the one-time litigation costs.

No, that's not right, Kuan. Let me give you the shape of the increase. So, as I said in my remarks earlier, the largest increase is driven by investment behind sales and marketing in the branded markets. In markets like India and Russia, we are seeing the market growth is showing some gradual signs of pickup and we want to make sure that we invest ahead of the curve. So, we have started in a cautious manner Investing behind our brands in these markets. The second thing that we are investing behind is our digital capabilities. We have a very ambitious program in place where we want to digitize our code, our quality systems, our manufacturing plants. The way we manage the entire process of product selection to launch. And also we are digitalizing our front end. The way we go to market, the way we engage with the doctors. So I would say that investment behind brands and capabilities is a large part of this increase. And the rest, as I said, is some bit of freight. In this quarter we have seen higher freight costs compared to the previous one. To some extent, it was also because of a higher A to C shipment, partly COVID related, but also partly the mix between A and C shipments.

Okay. So do you think that this investment in the brands and sales and marketing will continue for like next three, four quarters before it kind of normalize? Or how should we look at it? Like, is this the new normal of SDNA, like 1100 crores?

See, as you know, Kunal, we don't give any forward-looking guidance. So, at the same time, I would like to say that the investment in sales and marketing, we do expect it to continue, but I must also point out that we evaluate return on investment on a continuous basis. And if we are finding sales growth Thank you for that. And the second question is more of a housekeeping question. So I think we took Rs. 156.5 million of impairment charge for new wiring in Q3 of 2020.

and we took another 40-45 million this quarter. So that adds to around 200 million. But the purchase price allocation that we did for this product was around 185 million. So I'm not able to, you know, what am I missing here? Like did we capitalize some of the R&D expense that we did on the product?

Yeah, that's a good question, Kamal. The difference is because of the interest that has been capitalized in line with the accounting standards.

Okay, okay. Thank you. Thank you for taking the question.

Thank you. The next question is from the line of Nitya Balasubramanian from Bernstein. Please go ahead.

Yeah, thank you. So my question is a follow-up on the SG&A expenses. So in the last quarter, at least in branded markets like India, China, Russia, I'm assuming that all the clinics are open, the debts are back on the ground. So the kind of savings you probably realized in Q1 and Q2, most of the costs are likely to have come back. Is that also partially the reason why it's gone up? And should we now assume that there are no longer any lockdown-related savings in the base anymore?

I think to a large extent, I would say it is getting normalized. That's true, Nitya. I would not say we are back to pre-COVID levels. But yes, it is getting normalized. So that's a fair statement.

So can I take that to mean it's likely to inch a little higher because it's not fully back?

Yes, it will gradually pick up. But as I said earlier, we maintain a very tight control on our investments and we link it to sales growth. So it is linked to ultimately these investments are linked to the growth that we can deliver. But yes, you can expect that gradually we will go back to pre-COVID level.

Okay, understood. Thank you. The second question was on some of the material products that you have filed in the US or are likely to file. So if you can give us an update on where you are on NuvaRing, Copaxstone, I think you mentioned you refiled. Do you have a tag date that you can update us on those two products?

Yes, I'll do that. So, on November, we submitted the response to the CRL in December, and now the ball is back to the court of the USFDA, so we will wait for the response from the FDA, and accordingly prepare for a launch. As for Copaxone, we received the CRL, and we are now addressing it. This is the status of these two assets.

Sorry Mr. Reza, I hope I got that right. You have received another CRL on Copaxone and you are preparing a response. Did I hear that right?

Yes.

Any timelines on when you are likely to resubmit?

We are still testing but I believe it will be within the next few months.

Thank you. Thank you. The next question is from the line of Vishal Manchanda from Nirmalbhang Institutional Equities. Please go ahead.

Thanks for the opportunity. On the domestic side, is there a feasible element to the VOCAD portfolio? Kind of so, is Q3 a large quarter for the VOCAD portfolio or is it like normal across all quarters?

There is no significant seasonal element, I would say. As I said earlier, WalkHard portfolio is performing well. It is exceeding internal expectations. And we believe that we will maintain growth at similar levels for this portfolio.

Okay. And second one on the Sputnik vaccine. So, just wanted to understand whether this would involve marketing and you would need to distribute it in the private market or would this be sale to the government and whether you would also be allowed to sell in markets outside India?

So, we are planning to go to both the government as well as the private market. Of course, in accordance to the guidance that will come from the Indian government about priorities and how do they see that. So this is still in discussion or will be in discussion also in the future. And what was the second part of the question, sorry?

Would you also be allowed to sell it outside India in emerging markets?

Yes, so we are discussing with RBIF options to increase the collaboration also to other markets.

Okay. Thank you. That's all from me.

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

Thank you for taking my question. If I heard the number correctly, you said that, you know, excluding work hard, our India business is growing about 8% in the quarter. which would imply that work hard revenues are pretty much back to their peak sales level. Is that correct? And if that is the case, how should we look at momentum for work hard from here? What will drive incremental growth or what you're indicating inline growth for work hard from here?

I believe that the work hard products will continue to grow from here as well.

And what would drive that growth, Erez, since most of the low-hanging fruit is already there in the numbers?

I think that it was primarily our ability to invest behind these products and to full-stack the activities that these products demanded. I think this is both the sell synergy as well as the cost synergy that we anticipated to have, and it is working well so far.

Okay, understood. Okay, I'm not sure if I caught this in your opening remarks, but our working capital seems to have increased in the quarter, both receivable and inventory. Could you indicate if there was anything specific here, you know, that you would like to point out?

Yes, Neha. So, on receivables, approximately, they increased 300 crores. I would say roughly around one-third or slightly higher than that is because of lower discounting of receivables in the US and that's because we are no longer finding it economical because of the drop in interest rates in India. So that's the fundamental reason. The second reason is an increase because of normal phase growth that we see. And finally, the milestone payment that we have received from Origin is another driver. But overall, I would say the receivables increase is due to the underlying business drivers. On inventory, again, part of it is because of phase growth. and the rest of it is a planned increase. We want to make sure that our safety stock levels are adequate and there is absolutely no disruption as we enter Q4. So these are the reasons for the increase in working capital. I hope I've answered the question.

Understood. Okay, fair enough. Just one more clarification on the U.S. business. The price erosion that we saw quarter on quarter, was that related to any specific product? Or was it across assets and across the portfolio and that could probably continue?

It's touched more than one product, so it's not specific. It's like the normal course of business. But it's not the entire portfolio. So like always in the United States, when competition is coming, we need to react to it if we want to defend the service, which is what happened in this case as well.

Thank you.

Thank you. The next question is from the line of Kunal Mehta from Vellum Capital. Please go ahead.

Thank you very much for the opportunity. Sir, my first question was on new-wearing. So, just wanted to understand the rationale behind the write-down of the entire product because I think it's still a viable product and of course, from an onyx perspective, when you consider the 5-year period, it's practically neutral because it just accelerates the amortization. But, wanted to understand the rationale behind writing down this whole product.

No, the rationale is we have a pre-giving event with the launch of Teva, so it changes, of course, the model around this product, and actually address the CRL only now, and depends, of course, on the time that we will obtain approval, and according to good accounting standards, we have to depreciate these assets, so... But yes, you are right, we are still committed to this product. Hopefully the deal will approve the product and we can launch it and make money out of it.

So the second question I had, I wanted to understand regarding the emerging markets. So I'm sure in the opening remarks you mentioned that all of the filings which you have done this year, especially in this quarter also, Most of these are dedicated to the emerging markets, ex-US, I would say ex-US markets including Europe and Russia, CIS and the other emerging markets, also smaller ones. So just want to understand, while the, of course, there is a lot of understanding available to understand the US portfolio in a sense, but on the emerging market side, could you please give us an understanding of the new product launches which we have jotted down, which we have targeted over the next two, three years? I mean, in any sense, could you give us on Let's say if we are targeting these markets to grow by let's say maybe 15% over the longer 2-3 years perspective, then any target whereby what would be the contribution of the new product launches for these markets?

So you know we are not giving targets but I am expecting especially on the institutional and hospital that these products will significantly Contribute to the growth in this area. As you recall, when we discuss our strategy, we are taking a global product portfolio and try to find a market that's flexible in order to get much more dollar sales for investment in R&D. And that's what we are doing. So we are going to see more and more filings in the rest of the market. In the rest of the markets, some of them, most of the development that we are doing now, we are doing globally, not necessarily for a specific market. So it's in line with the strategy that we have discussed, and what you see is the starting of the fruit of this exhibition. We are going to find more and more.

Understood, understood. Just a last final question from my end, sir. I just wanted to understand the strategy which we have on the injectable side. Could you give us a number from the outstanding portfolio of outstanding filings in the US ENDAs? How many are on the injectables? And if you could break it down between complex and I would say rather simple ones on the injectable side. Of course, I was looking at, you've mentioned in your 20 years that, you know, from the U.S. business, roughly one-fourth comes from the injectable portfolio. I'm again talking about the financial 20s. So any, I would say any perspective on how we want to take this business ahead because I think considering the fact that I think majority of the, I mean a good portion of the off patent products are now in this portion of the market. So for the next five years. So any perspective on how we want to take this business ahead?

In the US? Yes, of course. Our objective is global products. and we want to develop and most of our investment is in debt areas for global products including the U.S. The impact on the U.S. is that more and more injectable products will be filed in the U.S. So proportionally the injectables will be higher than they used to be in the past. So if the U.S. complex and injectables will grow The weight of the injectables will be bigger in the future.

Correct sir. Thank you. Thank you very much. All the best for the future.

Thank you. The next question is from the line of G Vivek from GS Investment. Please go ahead.

My understanding correct that the tailwind our pharma sector was having due to COVID is now weakening and are we back to the time of price erosion getting on very severely instead of the single-digit price erosion due to consolidation we faced? You are talking about the United States? Yes, US and rest of the entire world market, basically the tailwind due to COVID for pharma sector in India were responsible for very good performance in Q1, Q2 and that is now weakening.

So we are in the 10th course of the market. But we are not yet in the pre-COVID level or the pre-COVID behavior and there are still impacts of COVID in certain areas. For example, in the U.S. we do see still that certain products are affected by the ability of people to meet and stuff like that. We do see that these products are softer than they used to be. In terms of price erosion in the U.S., it's primarily related to competition. So when competition is coming, this is what is causing price erosion and so much COVID impact. In the case of India, we absolutely see a pickup. The Q3 was a quarter in which by and large the activities of India came almost to a full normality. We are not there yet, but we are almost there.

Is the similar situation prevailing for injectables also, or is it mostly for oral solids? Injectable also, the price erosion is severe?

The price erosion is affected by both injectable and oral solids. It's not related to carbon, it's related to competition that is common between both segments in the case of the United States.

And the good part for our company was all our five plants were FDA approved, and maybe after some gap also. And now FDA inspection has again begun in India, and any FDA inspection due for any of our plants in India?

We did not get any requirements from the US FDA yet. In general, it's good news that the US FDA is starting inspections soon.

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

Thanks for taking my question. It is on the U.S. business. During the year, we've launched, as you mentioned, 24 products so far, but there's not been much pickup in our accordingly sales run rate number. So what do you mean your assessment is really take to meaningfully move this number from this 240 to 45 that's being sort of stuck around for the last couple of quarters?

Sorry, I could not hear well the question. Can you repeat it please? Sorry.

So my question was, you know, we've had 24 new launches during the year in the US, but our run rate still is sort of continues to be below sub to around $240 million per quarter run rate. So in your assessment, what will it take for us to really break through, to meaningfully scale up from these levels, given the fact that the number of launches clearly has not been a hundred so far. We've done a fairly large number of launches even this year.

So, you know, the number of the launches and also the type of products that we are launching. It's a combination of, first of all, I believe that the portfolio moving forward is attractive. The products that we are launching should give us the growth we are looking for. So it's not just the quantity, but it's also what you call the quality, the size of the product that is going to be launched. And some of the products coming up are interesting.

And secondly, on the gross margin, you know, we've had a fairly sharp drop in the gross margin, the generic business, the SCOTR, if you're just for the licensing income. Now, how should we read this? I mean, is this the new normal to go with, given the fact that the export incentives are no longer there? And how should we sort of model in the generic gross margins now going forward, the generic business gross margins?

Yeah, like we shared in the past, we are not managing the gross margin per se. We are actually managing day-by-day. We are maintaining what we are staying and sticking to the 25-25 that we shared in the past. And we are already in this neighborhood and planning to stay in this neighborhood maybe even more for a while. A gross margin is a matter of mix of activities. So, for example, if we have a great product that will give us 50% gross margin and it will be profitable, we will take it. So we are not managing the percentage, we are managing the nominal gross margins. And in general, what we said, and we are still there, that we will stay around the neighborhood of the gross margin that we were in the past. Thank you very much. Best of luck.

Thank you.

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

Thank you and good evening everyone. So this is an important round, which is Vatsapa. So let me ask a question on this. I'm not sure how much we can talk. But would it be like your regular, you know, high value launch? Or, you know, would it be volume constrained like the first entrant with the lower margins and it would improve as you go along? So any thoughts would be very, very helpful. Yes, Amir, yes.

I cannot tell you this. It's absolutely going to be an important launch for us. That's all I can say. But I'm not going to discuss quantities or anything like that for obvious reasons.

Okay. Sir, can you confirm that this would be a regular high-value launch for you?

It should be a high-value launch for us, yes.

Okay, great. Thank you. So second question is on Sputnik 5. Just if you can tell us what's your sourcing plan for the vaccine? And second, is there any change to your earlier launch timelines and 100 million volume target? That'd be great.

So the 100 is now 125. This is one update. And we are discussing in all countries. We are now rolling up, actually we initiated already phase 3, the 1600. And by March, we hope we can submit it to DCGI, the NHPCU authorization application. And if we will get it, we can launch it in March.

Okay, and what about the sourcing plan? I mean, would you be taking from your partner RDIA or would you also be doing some manufacturing? So, a little bit from Russia and most of it from India with two partners.

Okay, got it.

Very helpful. The other question is on the origin outsourcing of AUR 102. This is pre-phase one sort of outlining to XLXS. So, you know, it's a very early stage out licensing thing. So what's the thought process behind this? You could have taken it to phase two or even early phase three and then put it out licensing.

Yes, so we and Povigin develop over the years very interesting pipelines. Some of them we are planning to continue to develop to a later stage. Some of them we are planning to Monetizing early stage in order to allow Origin to be self-sustained in terms of risk reward management. So I think that Origin has a very, very interesting pattern going forward. So those that we want to keep and continue to invest beyond that we will not monetize in early stage, we will do it later.

Okay, one final one if I can. Parag, if I'm not wrong, you mentioned that the EBITDA margin sort of internal aspiration is 25%. And if so, if you could say that, and you are very close to that already. So what's the outlook for margins and what are the levers for that? Thank you.

Yes. So as I said, our aspiration and need is to deliver 25% EBITDA on a sustainable basis. And while we are in the neighborhood of 25%, we are not yet able to consistently deliver 25% and we have a number of levers to get there. I think the biggest lever obviously is top line growth and second is productivity that we are driving very hard across the value chain. I can talk about it in detail. We drive product reformulation, the chemistry, how we can run our machines more efficiently, how to improve the yields, finding alternate vendors for our materials and so on. And also in sales and marketing and so on. So productivity is a big driver and we want to make it a habit. But I must point out that as we drive productivity, we also need to invest some of it back into the business behind our brands and behind capabilities. You know, digital capabilities I spoke earlier. So it's very important that we drive the levers that can potentially improve the margins. But we also invest behind the business so that we can deliver sustainable growth in the future. So I would say that we are in the neighborhood of 25% EBITDA aspiration. And I think you can expect that in the next few quarters, we should be in that range.

OK, great. Thank you very much. Very helpful.

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

Yeah, thanks for the opportunity. Just to follow up on this, you clearly mentioned 25% over a few quarters on a sustainable basis. But if I get my maths right, particularly this quarter, if you strip the licensing income, then you are around 21%. You mentioned that there are some structural cost, you know, upgradation which would happen or will continue over a few quarters. So I'm just trying to get these two together that currently we are at 21%. Last two quarters were 25%. How, I mean, there's a 400 basis gap here. Actually, we are not near 25. So if you could explain that. You want to say that the cost is truly one-off here, so that would be helpful. Thank you.

No, that's not right that the cost is entirely one-off. Let me clarify that first of all, the impact of the origin milestone payment is around 1%. We have delivered EBITDA margin of 24% during the quarter and even if our EBITDA margin is around 23% excluding the milestone payment, it is within normal range. I must also say that we do drive out licensing in a number of our businesses like Propriety Products and Origin and biologics business fairly regularly. So I'm not sure it is fair to exclude or include a milestone payment. As I said earlier, we are driving productivity and we are also investing behind the business. We are right now in the neighborhood of 25% margin. and we will continue to drive that as our long term aspiration.

Okay and can you confirm like you know the increase in expenses are recurring apart from the small one-off you mentioned and you can quantify that one-off please?

I don't think I can quantify the one-offs. In terms of the increase in cost as I said it is an investment behind our brands. We do expect it to continue, but it is also linked to growth. So we have a process to manage return on investment and therefore it is linked to growth. So in summary, I think this level of investment we expect to continue, but it is directly linked to the space growth that we can deliver.

Perfect, that helps, very helpful. Secondly, sir, on China, so I think with COVID everything is muted, but what is the ground level action in terms of You know, the filing momentum, how it has been in the last nine months, and, you know, is it starting to pick up, and when do we see the next round of approvals for us?

So, China is doing very well for us. We are also growing in China, despite COVID, and we already filed 15 products, and out of a list of about 100 products in the title, so we are very much on track with the These are plans for China.

Sorry, you mentioned 16 products filed and growing double-digit. Did I hear that right, sir? What I said is 15 and I did not say anything about the digit. Okay, okay. But we are growing in China despite COVID. We are growing in China and despite COVID even nicely.

and we already submitted 15 products on top of the products that we already have in the market.

Perfect. That is very helpful. Thank you. And sir, on the API, PSAI business that we have, so clearly, you know, the first two quarters very heavy. You mentioned stocking, supply disruption. So how do we see the outlook going forward given that in the last call we mentioned that It's strategically important to us and we want to invest in this business. We will grow our API business.

It will grow. Maybe not quarter on quarter, but it will grow. It will grow and it's very important for us and we are going to increase also the level of back integration of our companies.

And it has two parts if I'm not wrong, the API and the pharma services. So, and then you carved out the origin out of it. So, you know, I just wanted to understand the growth trajectory for each of the business.

Growth will grow.

We are not giving guidance, but growth will grow. Okay, understood. And lastly, sir, on Pegfield Gas, Tim, is there any update in terms of where we are in the overall approval scheme?

Which one, sorry?

Yes, Prakash.

So that program is run by Fresenius as part of the product.

We haven't heard anything about approval, but we expect in FY22, but we do not have any confirmed date. Okay.

Thank you and all the rest.

Thank you. Ladies and gentlemen, due to time constraint, we will take that as a last question. I now hand the conference over to Mr. Amit Agarwal for closing comments.

Thanks 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. Ladies and gentlemen, on behalf of Dr. Reddy's Laboratories Ltd, that concludes this conference. Thank you for joining us and you may now disconnect your lines.