Dr. Reddy's Laboratories Ltd

Ladies and gentlemen, good day and welcome to the Q4 and FY21 earnings conference call of Dr. Reddy's Laboratories Ltd. As a reminder, all parent-spend 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 10-0 on your touchstone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Agarwal, Head of Investor Relations at Dr. Reddy's Laboratories Ltd. Thank you and over to you, Mr. Agarwal.

Thank you. 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 fully-arranged March 31, 2021. 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 statements. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's, comprising Mr. J.V. Prasad, our co-chairman and managing director, Mr. Erez Israeli, our CEO, Mr. Parag Agarwal, 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 outlet without the company's expressed written 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. Jeevi 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 will remain safe and healthy during these challenging times. I would like to start this call by thanking all our teams from the bottom of my heart for the work they are doing for COVID patients in India and the rest of the world. I also want to thank all our teams who are ensuring the safety of our frontline workers and teams by ensuring all the precautions for COVID. All of us at Dr. Reddy's are driven by our purpose and believe that good health can't wait. We are motivated to serve patients in every possible way and with utmost urgency. This is reflected in the multiple collaborations we have entered to develop and commercialize a wide range of preventive and curative options for COVID treatment. As you already know, we launched Sputnik V vaccine today and we have also, over the past few weeks, ramped up our supply of multiple medicines, including Remdesivir, to meet the surge in demand. We are also working on the launch of newer treatment options which we bring to the market in the next few months. We have also ensured that supplies of our existing medicines are continued uninterrupted and we continue to meet the market demand for all our markets. Being sensitive to the current realities, we are extending help in all possible manner to our employees including additional insurance coverage, Converting some of our residential training facilities into dedicated in-house treatment facilities, supporting people with their virtual doctor consultations, arrangement of medicines, oxygen, and any other required support. While we do all this, we remain committed to our strategy of attaining market leadership in our chosen spaces, driving operational excellence with continuous improvement, and focus on patient-centric product innovation. Each of our current business will continue to drive growth for the next few years, but we are also investing in building for the future through advancing science, digitalization and innovation. These are extraordinary times and call for finding solutions rapidly and making them available to as many people as possible in the shortest possible time. This is what is driving us and we are all committed to playing our part in helping people to get back to health at the soonest. With these hoping remarks, I hand over the call to Parag for taking you through the financial performance of the company for the quarter and for the year. Over to you Parag.

Thank you Prasad. Greetings to everyone and thanks for joining this call. During these prolonged COVID times, I hope you and your families are keeping safe and healthy. I am pleased to take you through our results for the quarter 4 and full year of fiscal 2021. It is yet another year of good financial performance with highest ever space in EBITDA and a strong cash flow generation from operations.

I am so sorry to interrupt you sir. May I request you to come a bit closer to the phone?

Yes. Is that better?

Slightly better. Thank you.

Okay. It is yet another year of good financial performance with highest ever sales in EBITDA and a strong cash flow generation from operations. The PDP adjusted for impairment in both the year and for out-licensing and settlement income in FY20 grew by 45% for the year despite COVID-related challenges. Let me take you through the key financial highlights for the quarter and financial year 2021 in a bit more detail. For this section, all the amounts are translated into U.S. dollars at a convenient translation rate of Rs. 73.14, which is the rate as of 31st March 2021. Consolidated revenues for the quarter stood at Rs. 4,728 crores, that is U.S. dollars 646 million, and grew by 7% on year-on-year basis, and declined by 4% on a sequential quarter basis. Year-on-year growth has been supported by a growth in most of our businesses. Sequential decline was primarily due to lower sales in branded markets and recognition of milestone income in Q3. The revenues for the financial year 2021 stood at Rs 18,972 crores i.e. USD 2.59 billion and grew by 9%. Existence for keeping Nero outlicensing income during FY20 The growth stood at 13.5%. The growth is supported by new product launches, contribution of portfolio acquired from WorkHard, improvement in the base business volume, a scale-up in new markets, and favorable price. Consolidated gross profit margin for this quarter has been 53.7%, an increase of 220 basis points year-on-year, and decline of 10 basis points on quarter-on-quarter basis. The year-on-year increase is primarily attributable to improved product mix and productivity, partly offset with lower export incentives and price erosion in the generic market. Growth margin for the global generics and PSAI were at 57.9% and 31.7% for the quarter. Growth margin for FY21 has been 64.3% which is an improvement of 50 basis points over financial year 2020. Growth margins for the Global Generic and CSCI were at 59% and 29.5% for the year. The annual expense for the quarter is reduced 1428 crores, that is US$195 million, an increase of 17% year-on-year and a decrease of 1% quarter-on-quarter. The year-on-year increase is primarily due to additional expenses incurred with the integration of business acquired from Lockhart, higher trade costs, investments in digital capability building, and higher filing costs. The average expense of the year is between 5,456 crores, that is US$746 million, and has grown by 9%. The SD&J cost as percentage to sales was 28.8% which is similar to previous year. The RMD spent for the quarter is received 409 crores that is US$56 million and is at 8.7% of sales. The RMD spent for financial year 21 is received 1654 crores that is US$226 million. R&D percentage to sale is still at 8.7% for FY21 which is in line with previous year. The improvement in R&D productivity is reflected in higher silence across our markets. The EBITDA for the quarter is Rs. 1133 crores i.e. $1.55 million and the EBITDA margin is 24%. The EBITDA for the year is reduced 4748 crores that is US$ 649 million. EBITDA margin for the year is at 25% which is in line with our expiration target. Our profit before tax for the quarter stood at reduced 807 crores that is US$ 110 million and that for the year stood at reduced 2832 crores that is US$ 387 million. Effective tax rate For the quarter has been 31.4%. The ETR has been impacted due to de-recognition of default tax assets related to depreciation and goodwill, pursuant to a recent change in income tax regulation. Effective tax rate for the year has been at 32.4%, higher primarily due to non-recognition of default tax assets on losses arising out of impairment. We expect our normal ETR to be in the range of 25 to 26%. Profit after tax for the quarter stood at Rs. 554 crores and that for the year stood at Rs. 1,915 crores . Reported ETF for the quarter is Rs. 33.29 and that for the year is Rs. 116.14. Operating working capital decreased by Rs. 139 crores have been bad on December 31st 2020 mainly driven by decrease in receivables partly offset with increase in rents. Our capital investment stood at 288 crores which is US$39 million in this quarter and this is 974 crores which is US$133 million during the year. The free cash flows generated during this quarter was at Rs. 792 crores which is USD 108 million mainly supported by profitability and decrease in operating working capital. The free cash flow generated during this year post-acquisition was at Rs. 761 crores which is USD 104 million. Consequently, we now have a net surplus cash of Rs. 751 crores That is US dollar 102 million as of March 31st, 2021. Foreign currency cash flow hedges in the form of derivatives for the US dollar are approximately US dollar 675 million, largely hedged around the range of between 74.6 to 77.6 to the dollar, global 7200 million at the rate of between 0.9906 to the ruble, Australian Dollars 10 Million at the Rate of Retrieve 57.70 Australian Dollars and South African Grands 148 Million at the Rate of Retrieve 4.96 to South African Grands Maturing in the next 12 months. With this, I now request Erez to take us through the key business highlights.

Thank you, Farag. Good morning and good evening to everyone. I hope that you and your loved ones are staying safe and well through this surge of pandemic in India. I'm quite happy with the way we have been able to manage our business operation during these unprecedented times. While we have made significant efforts to bring to market a range of COVID-related drugs as part of our part in the fight for global pandemic, we remain committed to a long-term strategy and continue to push our agenda forward towards accelerating growth in children areas. The full year 21 has indeed been a milestone year for us, which is reflected in the following key highlights. The successful completion of clinical trials for Sputnik V vaccine in India leading to an eventual launch today. Development and launch of several COVID-related drugs Successful integration of business acquired from WorkArt in India Healthy sales growth supported by all our major markets Attaining EBITDA margin of 25% consistent with our aspiration ROC adjusted for impairment charges also move on toward our aspirational target Healthy cash flow generation leading to much stronger balance sheet Scaling up of products development pipeline for all of our businesses and Productivity Improvement Across Manufacturing, R&D and Commercial section of the business. Now let me take you to the key business highlight of our business. Please note that all the reference to the numbers in these sections are in respective local currencies. Our North America generic business recorded sales of $237 million for the quarter, with a decline of 5% year-over-year and a growth of 1% on a sequential quarterly basis. On the back of much higher base of March 2020, which was driven by pantry loading by patients and significant inventory build-up by customers due to the COVID-19 lockdowns at that time. On a full-year basis, the sales for the business were $948 million, a growth of 4% over the previous year. Despite all the industry-level headwinds and COVID-related slowdowns, the energy business has managed to grow for the second year in a row. We launched six new products during the quarter, including bijabitrine tablets, which has been granted CGT status, Overall, the year we launched 28 new products, including one re-launch. We expect this strong new launches momentum to continue through the current year, as well as with similar number of launches. Our Euro business recorded sales of 45 million euros this quarter, with a two-year growth of 4% and sequential quarters decline of 5%. On the full year, On a full year basis, the sales are 178 million euros and has grown at a strong rate of 20%. The growth is driven by both new product launches and improvements in volumes since across the markets. During the quarter, we launched three new products in Germany, four in the UK, one in Italy, and two in Spain. During the full year, we had 14 new launches across our markets in Europe. We are extremely pleased with the strong turnaround witness in both our key and pure generic businesses of energy and Europe. Our emerging markets business recorded sales of 885 crores rupees with a year-on-year growth of 10% and sequential quarters decline of 8%. On a full year basis, emerging markets sales have been 3,509 crores rupees and grew at 7%. Within the EM segment, the Russian business grew by 10% on an year-on-year basis and declined by 11% on a quarter-to-quarter basis in constant currency. The quarter-on-quarter decline has been largely due to a market slowdown seen in this quarter. In April 2021, Russian business grew by 1% in constant currency. Our business in China has performed well during the quarter. We've launched 31 new products across emerging markets. Our India business recorded sales of 845 calls with a year-over-year growth of 23% and a sequential decline of 12%. The sequential decline was driven by reduced demand for COVID drugs during this quarter, The infections remain low and similarly patterned in our portfolio. On a full year basis, our sales was 3,342 crores rupees and grew by 15%. Adjusted for sales contributions from the portfolio across the workout, we grew at 8% during Q4 and 2% the full year. While we saw an increase in physical connects with the healthcare professionals during Q4, The physical activity has again reduced significantly in the recent months due to the COVID surge. During the quarter, we launched two new products in the Indian market. After the Acuva report of March 2021, we have now ranked number 11 in the MQT and MAT basis. Our PCI business recorded sales of $108 million. With a strong year-on-year growth of 9% and sequential growth, a quarter growth of 14%. On the full year basis, the sales were 431 million with a strong growth of 19%. While there may be fluctuation in quarters and quarter growth trends for this business, owing to change order book cycles, we believe that there is a reasonable headroom for sustained growth in both API as well as custom services business. On the R&D front, we continue to strengthen our pipeline of products across the markets. We focus R&D investment in value-assertive assets. During the quarter, we filed 57 drug master files globally, including seven filings made in the U.S. We have also filed 60 formulation products across global markets, including 11 NDAs and one NDA in the United States. In addition to these new filings, We have filed multiple supplements and variations as part of Manufacturing Robustness and Cost Determinants, an initiative to enhance our overall competitive position in the U.S. market. As of March 31, 2021, we have 95 cumulative filings pending for approval with the U.S. FDA, which includes 92 AMDAs and three 505s.

Ladies and gentlemen, we lost the line of the current speaker. We would request you to please hold the line while we join in back to the call. Ladies and gentlemen, we have Mr. Israeli Reconnected. Over to you, sir.

Yeah, sorry about this disturbance. Apologies for the inconvenience. We are progressing with phase three trials. We took the next wave of biosimilar products. which are a different stage of development. In our proprietary products business, we are progressing with phase 3 trials for EQAD 7 for CTCL indications. Additionally, efforts are underway to globally monetize key approved and one market assets. During the current quarter, we outlicensed to Epifarm SAS the development, registration, commercialization of the rights of Elixid, which is the cell of Elixid oral solution for the EU5 and markets. While the current business environment continues uncertain, going to global pandemic, we believe that the foundation is solid and there are multiple growth levers available for us to sustain these growth trends in FY22 and beyond. Our growth would be primarily driven by the organic moves focusing around pipeline monetization, productivity enhancement, Reddy's Laboratories Ltd, Sanjay Sharma, Sushrut Kulkarni, Bhethanabottla Prasad, Kallam Satish Reddy, Krishna Venkatesh, Mannam Venkatanarasimham, Motupalli Venkatanarasimham, Motupalli Venkatanarasimham, Motupalli Venkatanarasimham, Motupalli Venkatanarasimham,

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. Anyone who would like to ask a question, please press star and one at this time. 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.

Yeah, hi, good evening and thanks for the opportunity. So first question is on the Sputnik 5. Just wanted to understand the opportunity better. So it's about 100 million plus doses and how should we think about since we have the marketing, you know, and how should we think about in terms of monetization, monetizing this opportunity and in

Yes, so first, just to put the database together, we have the rights for the first 250 million doses for India, which translates to 125 million patients. And the initial quantities will come from the important rights. That will come out of Russia. And in the meantime, we have six contractors in which we are qualifying to make the product locally in India. This is for the country of India. In addition, there are discussions with the RGIF for specific clients, as well as additional engagement for the future for India. and we are also in discussions with them about quantities and rights as permitted for other countries. So this is the overall view that we have at this stage of scoping.

Yeah, but I mean just trying to understand the modeling purpose, even if we assume that we make 100 rupees, 10% on The current price, I mean, the sales opportunity could be as high as 2500 crores?

You know that we are not giving guidance and we cannot give. Today we announced that the price for the important route will be 945 rupees per The global pricing of Sputnik as decided by the Russians is about $10. That's what we can share.

Okay, got it. And my second question is on the margin trajectory. So clearly we have seen some improvement versus last quarter which had some one-offs. But we are still that below the quarter one, quarter two, which had obviously lower cost due to lockdowns. And we are a little behind then our 25% aspirational guidance. So, I mean, how do we see this achieving in 22?

We are very much on the way there. We are not giving again guidance, but in terms of aspiration, we are very much there. We also put certain efforts in order to make our activities more robust so we invested a little bit more than the average in terms of building capabilities for the future including digital activities so in that respect we are very much committed to the Thank you.

Ladies and gentlemen, in order to ensure that the management will be able to address questions from all participants, we would request you to please limit your questions to two at a time. Should you have a follow-up question, please rejoin the queue. Thank you. The next question is from the line of Damayanti Kirai from Major CC Securities and Capital Markets. Please go ahead.

Hi, good evening and thank you for the opportunity. My question is on US business. So we are seeing their consistent launch of around 20-25 products per year. But our quarterly sales rate is generally staying within 240-250. So can you please provide some color on how should or what can drive US sales meaningfully from current quarterly run rate and what is the price erosion level currently for your portfolio?

There is some disturbance.

I'm sorry to interrupt. May I request a participant to please mute yourself while you're not speaking? There's some disturbance from your mic. Thank you. You may go ahead.

So the U.S. models will continue to be that way. So specifically now the price of oceans is... Not as big as it used to be, but the model is the same. If certain numbers of our products will face competitions, especially with the big customers, those of course will face price pressure and this trend will continue also into FY22. If it's going to be a single digit or double digit, I don't know. The model will continue accordingly. What will continue to grow is the type of products that we are developing. As you know, we have some more and more. You are seeing CGP and you see products that have higher value. At the same time, it's not just about sales, it's about profit. We are taking multiple activities to reduce the cost, to change the cost structure of our molecules, of both the API and the pharma. And as this will continue, the improvement in the profitability of the US will go higher. So it's a combination of... Focusing on the relevant products, which I believe that our portfolio is very promising, productivity, increased market share, the same things that this market had many years ago, I think we are implementing it every quarter better and better.

And my second question is on India part. So fourth quarter definitely has some impact of seasonality. But barring seasonality and uncertainties around current COVID situation, how do you see India business progressing in next few quarters?

India, first of all, I'm very, even though People are losing confidence in India. I personally, as well as the company, very much believe in India. And India is a very, very important, not just market for us, but we are part of the effort to fight pandemic in India. So I do see growth in India. We launched several COVID products and relaunched also, so products like Eremetrivir and Parvipiravir. as well as Sputnik today and more products will come. So our COVID portfolio is getting more and more robust as time goes by. In addition to that we improved our capabilities and there is a better focus on the big brands in India which I believe will grow as well. So overall I am very bullish about India. Thank you for your answers. Thank you. The next question is from the line of Kunal Dhamesha from MTA Global. Please go ahead.

Good evening and thank you for taking my question. So first is on EBITDA margin as we continue our journey towards our aspirational goal of 25% EBITDA margin. But from here, what are the three key drivers of the EBITDA margin expansion in your view in order of importance? Obviously, there would be product mates, etc. But in the order of magnitude, which you believe could have a greatest impact on our journey? If you could share that, that would be great.

Yes, sure. The main drivers are common, although it sounds common to you, but it has, of course, different magnitude as even in a point of moving forward. One is the focus on the relevant portfolio. We built a future portfolio which I believe is very attractive and we will very much focus on that. This portfolio will be bigger as well as more profitable. The second piece is that we are going to increase our productivity level of the existing portfolio. and we have various initiatives that are related to that for quite some time and they are very good. And our entire operations, which is including two, Labels 1 is overall a productivity initiative in the way we conduct our operation and the second is digital technology. We invest heavily into digital. We very much believe in digitalization as well as in automation. And this is yielding a very promising result. The third is we are increasing market share in those products on both the branded market as well as the unbranded. Then on top of it we are bringing relevant products like COVID activities which is also meeting the need of the hour as well as helping ourselves in those relevant markets to facilitate additional capabilities. And on top of it we are going to go and try to exploit our financial capacity for more busy activities. I hope these are the leaders and that all of them should increase our EBITDA in the future.

So, thank you for that and the follow-up would be, you know, we have been speaking a lot about digital changes and we are investing heavily Would you like to quantify what is our investment of, you know, quantum of investment till now and, you know, is it likely to go down drastically in, you know, near term or maybe medium term and, you know, it will also come up with its own cost savings which would realize over a period of time. So, any color you would like to provide here?

So the kind of I can say that if you, in FY21, we put CapEx, so on the operating expenses, most of the goal is this investment. So whether it's in R&D or in digital or activities that are related to digital. So the goal that we have in this is to If they're related to inflation or to debt. And the growth in CapEx is also related to debt in addition to scaling up our injectable operations in order to facilitate robust launches of products that will come in FY23 and FY24. So, if I call correctly, we had about, we will take a little bit less than 1,000 calls of CapEx in FY21, which is more than the years before. It's primarily to prepare for that.

Sure. And the investment in digital will come down? Do you foresee that it will come down once we are through the cycle and it can come down drastically coming quarter?

The investment in digital will be invested more in the future and it will replace manual activities so overall our expense base will go down. Sure, thank you.

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

Thank you for taking my question. My first question is just a continuation of the operating costs. If I look at the SD&A spend, in the last two quarters, it's been inching up about 150-140 crores. How should I look at this going forward? Do you think the pace of, you know, the increase would be higher as we, you know, invest in digital, you know, try to launch more products? Or, you know, do you think this is the level which is enough to sustain the growth that we had planned for the next two years?

I think there is more growth in this.

Yeah, there is more growth.

Do you want to take it?

Yeah, I can take it, Erez.

Okay, please, please.

Yeah, so the SGMJ expense as a percentage of sales for the full year, as you know, is flattish compared to last year. It has gone up in the last few quarters, primarily driven by two factors. One is we are prioritizing the supply and availability of our products across all markets. And because of COVID impact, the freight costs are higher. and the sea air ratio is slightly adverse because we are prioritizing the supplies. And the second reason is the increased investment that we are making behind digitalization and also higher product filing costs. The levers which impact FG&A are clearly the investments that we make on one hand and the productivity that we are driving. On the other hand, from one part to another, you can expect fluctuations. As you know, we are actually living in very uncertain times right now. And the impact of COVID also impacts this line. So I would say that going forward, you can expect to see higher investment in virtualization, as it is mentioned. You can also see some of this will get offset by productivity. So this is, I think, is going to be the shape of every end of any problem.

Okay, understood. And Erez, in your opening comment, you mentioned about, you know, Russia market seeing some disruption in the quarter, which led to the quarter-on-quarter growth. If you could give some color on that and, you know, was this, you know, something one-off, like Channel D is talking, what led to this disruption?

Can you repeat? I could not hear it. Sorry. You mentioned quarter on quarter market share?

Yeah, for Rashi, I think in your opening comments you mentioned some impact in the fourth quarter because of slowdown or disruption in the market. So if you could say some color of that?

Yes, the... The demand from the customers in this quarter was less than usual and less than anticipated. It's probably the financial situation of those customers as well as a relatively low season. As you know, our products are very seasonal and this was the Q4. I do not see that as a chronic issue. I see that as something that is primarily related to this period of time.

Understood. Thank you so much.

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

Thank you so much and good evening everyone. Erez, first question is on Sputnik. What's the time frame within which you think you can supply 250 million doses that you have contracted for India? And when do you think that the local manufacturers will start giving you the supplies?

Yes, thank you. So I anticipate that between now and July, maybe August, the primary supply will be from Russia. and only the first quantities will come from the Indian manufacturers hopefully by August, September if it's delayed. It depends of course on the qualifications of those sites and their ability to meet the bridging studies, etc. But this is at least the anticipation. If this plan is in force, we can deal with these quantities within 12 months.

Okay, excellent. And the second question, Erez, is on the U.S. two products. One is Kovan 500 milligram powder. I think you launched the other two forms, but this one is pending FDA approval. So I was holding it back, and when do you see this getting approved? And second is on Icosepan, that's Wasepa. What's the outlook for the launch and when do you think you can have sort of a smooth supply of API?

Yes, so if you can take the first one because I don't recall the status of it, bear with me and that will give you the details of it in a second. As for the second, we Indeed, we faced a shortage of supply. I believe that whoever can eat and we are going to launch within the next give or take two months.

Yeah, and on the first one, G1 500 mg sachet, we expect it sometime in this year. Okay, that's very broad, Amit. It is not expected in next one or two quarters, but maybe during H2 of the year, we expect.

Okay, Erez, I missed your point on, you said you'll launch it in next couple of months, but you said something about the API supply. Would it be with a smooth supply or would it be with a limited supply?

With smooth supply.

Oh, excellent. Super. Sir, with your permission, one last question, if I may. And that's about your 95 pending, you know, filings with FDA. So three of them are NDAs. Are these generic, you know, REMS kind of product or are these specialty branded kind of products?

More of a generic product. More of the generic products, not the specialty products which we were having like in proprietary product segment.

Okay, got it.

These are basically generic products to a type of ID2 app. Okay, got it. Thank you.

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

Yeah, hi. Good evening, everyone. So my question is around a recent product that you have launched in collaboration with Grand Pharma, which is Type FNM. I want to understand, now with the company having invested so much on injectables capacity, fast track record on injectables, why does Dr. Abhi still have to work with the contract manufacturer with such injectable products?

I can answer that.

I think the PNAMs require dedicated facilities, which we don't have. And Gland has dedicated a line to PNAMs, so we're using that capacity. Our capacity is between oncology and multipurpose. Pencil-ins, PNAMs, all of these require specialized, dedicated facilities.

Okay, and would it be possible that in one year, two years, three years, I think, in such products, Dr. Reddy's develops some capabilities and hence, you won't need to profit share on such products? I didn't understand the question. What was the question?

Can you repeat?

My question is that in one year to a three year time frame, is the company looking to establish capabilities in this space so that in future, whatever opportunities are there, the company doesn't have to profit share with the contact manufacturer?

I don't think we will ever say that we will do everything in-house. There will always be opportunities to create value through partnerships and Dr. Reddy's has gained a lot through many partnerships. So, I will not say that we will do everything in-house. Of course, whether it is a business case or in volume, the risk capability will do that, but we will not say that we will do everything in-house.

Okay. Okay. And just one more question. Does Dr. D's have any ambitions or plans to enter the U.S. respiratory genetics business? Because a couple of large-cap companies are quite heavily invested in that particular space. Do you see that as an opportunity for Dr. D's as well, sometime down the line? You talk about respiratory products? Yes, inhalation products, respiratory products.

It's not a big space for us, but, you know, it's something we don't know what we'll do in the future at this time, but right now we're not investing a lot in inhalation.

And any reasons why you would not be investing in that?

We are in many areas, and also we find this area is becoming very crowded.

Okay. Okay, sure. Thank you.

Thank you. The next question is from the line of Ranveer Singh from Sunidhi Security. Please go ahead.

Yeah, thanks for taking my question and good evening everybody. My question again relates to that just wanted to understand the price which has been fixed right now is for imported This is a price that is related to the approved important product. And if and when we will have an approval for the contract manufacturers,

I hope we will be able to offer a cheaper price to the market. Okay.

And second question again on Sputnik. Whether RADF has got a manufacturing agreement with all five players and these manufactured products will be distributed through you or they will have a separate distribution agreement with them?

For the first 250 million vaccines, we have the rights from all of these parties. What will happen after that, we will have to discuss and agree with RDS and of course those contractors. At this stage, they are all working for our distribution. Okay.

And the last one, if I can. You saw news yesterday that you have a licensing deal for a silk therapy product called TRG1801. So, just we wanted to understand more details on it. So, what is the outlook? What kind of market actually it will cater to? And what prospect we can expect from it?

I will take it. Thank you. So this is a cell therapy.

It is in early stages of development with our licensing partner.

It's not going to be a big product. It's a niche therapy. But it is an area we want to explore because we have a strong presence in oncology, in small molecules as well as biologics. We are getting into this to offer an affordable alternative to Indian patients. and in their process pick up the skills of cell therapy. We will have a facility which will take the cells, convert them into CAR-Ts and then administer them to the patients. It's an entry into a new space but in a therapeutic area which is very key to Dr. Reddy's. At this time it is too early to predict what will be the margin and all that because we have to go through the clinical development and all of that. But our objective in this is to make Thank you. The next question is from the lineup.

Shyam Srinivasan from Goldman Sachs.

Hi, thank you for taking my question. Just a clarification on the specific supplies again. When it is locally manufactured and I think Erez you said that largely supplies will ramp up when the local manufacturers start. I thought there was a rule which says that 50% of the locally manufactured vaccines should be given to the central government and 50% to state and private. Would that rule apply to you as well?

I think to the domestic manufacturer, it could be applicable as they stand. But these rules are evolving every day, as you can see. So it's hard for us to predict when supplies ease in the next few months, what exactly will happen. But you're right about that rule for Indian developed and manufactured medicines. But there are contracts also that Russia, RDIF has signed with the local companies. So we'll have to see how the situation evolves But we will do whatever the government mandates us to do.

Got it. And just a linking question on the export opportunity for Sputnik V. Given the constraints around local and the different tiers that you are going to be dealing with, do you think the export opportunity could be a much larger opportunity given our presence in emerging markets?

I'll take it. Yeah, I'll take it. The export, we have two routes for engagement with RDF. One product is made in Russia and goes to other countries and that we have several discussions and we do see an opportunity for those markets out of that route. Ask for a potential additional capacity in Russia and The intent is that India will be a big hub for Sputnik also in the future and therefore a portion of that quantity once we fill what is needed for India will be also for export.

Thank you. And my last question is on... But this is not concluded at this stage. It's in discussions. Thank you, Erez. And my last question is on the PSAI business. We've seen good growth and looking at the press release, it seems to suggest it's largely volume-led growth and we have seen price erosion. So what is the sustainability of this in the fiscal 22 and from a capacity for API and PSCI, are we good? And is that inventory-led demand that we actually saw in the first half of last year, do you think it's continuing or what's driving this volume development?

Yes, so I think what the main drivers of the business is a good execution on our end in order to provide products in the right service in the right course, especially giving the time with the relevant cost. So it's primarily driven by focusing on those products in which we can have a global market share and this is the main drivers. In terms of geography, it's primarily driven by Asia, China, Japan, Korea, as well as some products in the United States. As for the future, Thank you, Erez. All the best.

Thank you. The next question from the line of Alok Dalal from CLSA. Please go ahead.

Yes, hi, good evening. Any updates on COPAT zone and new wiring filing?

We got the recent CRL and we are still working on its solution. This is for both product areas? You asked about Copaxone, no? What was the question, sorry? We are still waiting for the feedback.

Yeah, go ahead. So I was asking about an update on Copaxone and Nuvalink.

Yeah, yeah, so Copaxone I gave you. We are still working on the CRL that we received in January and and in the case of Novaland, we submitted the CRM response in December and we are waiting for the feedback which likely to come 10 months from submission. So, we will get it by October.

Okay. Will these be FY22 launches? Unlikely for both of them. Okay. And second and last question. How should we think about the capital allocation strategy next 2-3 years and how important will acquisitions be a part of this? How important will acquisitions or inorganic growth be a part of this approach?

Yes. So we do have a very, very good balance sheet and a relatively big financial capacity. So we are looking for opportunities all the time and we will begin to take a deal that will find the suitable for our strategy. Having said that, we are not, I said it in the past, this is still the philosophy of the company, we are not in a shopping spree. We are going to go after assets that fit us well. Primarily the focus will be products, brands, or certain capabilities that we want. It's globally, but the main focus will be India in emerging markets. Okay.

And Capex will be higher than FY21?

Apex will be around the same numbers, maybe a bit higher if everything will go through. It depends, of course, on the COVID-related activities and restrictions that we will be able to do. I'm assuming that it will be give or take around the same neighborhood that we had in 2021.

Okay, thank you for taking my question.

Thank you. Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to Mr. Ahmed 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. Stay safe and healthy. Thank you.

Thank you. On behalf of Dr. Reddy's Laboratories Ltd, that concludes this conference. Thank you for joining us and you may now disconnect your line.