Dr. Reddy's Laboratories Ltd

Ladies and gentlemen, good day and welcome to the Dr. Reddy's Q1 FY24 earnings call. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing star and then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Richa Periwal from Investor Relations Team. Thank you and over to you, ma'am.

Thank you, Dragan. Thank you. 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 June 30th, 2023. Earlier during the day, we have released our results and the same is 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. The discussion today contains certain non-GAAP financial measures. For a reconciliation of GAAP to non-GAAP measures, please refer to our press release. To discuss the business performance and outlook, we have our CEO, Mr. Ilaiz Israeli, and our CFO, Mr. Parag Agarwal, along with 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 expressed written consent. Before I proceed with the call, I'd 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. Parag Abharwan. Over to you, Parag.

Thank you, Richa. Greetings to everyone and a warm welcome to our Q1 FI 2024 call. We had a strong start to the year with robust sales and record profitability. I'll start today with an overview of our financials for the quarter. For this section, all the amounts are translated into US dollar at a convenient translation rate of rupees 82.06, which is the rate as of 3rd June 2023. Consolidation revenues for the quarter stood at rupees 6,738 crores, that is 6.81 million, and grew by 29% on year-on-year basis and by 7% on the sequential quarter basis. Adjusted for brand divestment income on a rebate comparator, the underlying growth was higher at 35% on YOY basis and 12% sequentially. The growth was driven by the generous business mainly in US, MRV markets and Europe. Excluding the one-off gains from brand divestment, loss of revenue for divested portfolio and MGM related price reduction, India business registered a high single digit growth. Consolidated gross profit margin for this quarter has been 58.7% and increased of 880 basis points over previous year and 150 basis points over previous quarter. The improvement in gross margin was primarily driven by favorable product mix, supply productivity savings, better manufacturing leverage partially offset by brand divestment income during previous period. The growth margin for the global generics in PSPI were at 63.9% and 15% for the quarter respectively. The SG&A spent for the quarter is Rs. 1,770 crores which is $0.216 million, an increase of 14% year-on-year while a decline of 2% quarter-on-quarter. The year-on-year increase is in line with business growth and is on account of investment in sales and marketing, digitalization, and other business initiatives. The SBA cost as a percentage of sales was only 6.3% and is lower by 340 basis points year-on-year and 230 basis points quarter-on-quarter due to better operating damage. The R&D spent for the quarter is Rs. 498 crores, that is $0.61 million, and is at 7.4% of sales. Our R&D efforts are focused towards building a healthy pipeline of new products across our market, including biochemical development. The EBITDA for the quarter is 2,137 crores, that is near $260 million, and the EBITDA margin is 31.7%. This is largely driven by growth margin expansion and productivity initiatives across the value chain. Our profit before tax for the quarter stood at 1,846 crores, that is US dollar 225 million, an increase of 26% year-on-year and 39% over previous quarters. Effective tax rate has been 24% for the quarter. The effective tax rate was higher than the previous year, mainly due to changes in the company's jurisdictional mix of earnings. We expect our ETR to be in the range of 24% to 25%. Profit after tax for the quarter of student rupees 1,403 crores, that is US dollar 171 million. Reported ETR for the quarter is received 84.22%. Operating working capital increased by 710 crores, which is $87 million. I do that on March 31st, 2023, mainly due to an increase in receivables and inventory. Our capital investment stood at 362 crores, which is just $44 million in this quarter. The free cash flow generated before acquisition-related payout during this quarter was at Rs. 674 crores, which is US$ 82 million. Consequently, we now have a net surplus cash of Rs. 4,985 crores, that is US$ 608 million, as of June 30, 2023. Foreign currency cash flow hedges in the form of derivatives for the U.S. dollar are approximately U.S. dollar 783 million, largely hedged around the range of rupees 82.7 to repeat 84.4 to the dollar, rubles 6,775 million at the rate of rupees 1.02 to the rubles, and Australian dollar 3.7 million at the rate of rupees 67.9 to Australian dollar maturing in the next 12 months. With this, I now request Erez to take us through the key business highlights.

Thank you, Parag, and a warm welcome to everyone participating in our earnings call today. As always, we appreciate your interest in our company. We have commenced Fiscal 2024 with a robust first quarter performance. Our sales for quarter one grew 29%. and EBITDA grew 20% reflecting the strengths of our portfolio and well-diversified geographical state. Adjusted for settlement income in the current and base period and brand divestment in base period, our sales for quarter one grew 35% and our EBITDA grew 111%. We improved the drivers in our core business for sustainable growth through productivity improvement, market share gains, and new product launches. We are making considerable progress across our strategic priorities. Let me take you through some of the key highlights of the quarter. One, sustained strong revenue growth driven by momentum in the U.S. and Russia markets. Two, generate healthy EBITDA at 32% and annualized ROCE at 39%. High cash generation leading to net cash short loss of more than $608 million at the end of the quarter after paying the consideration towards main portfolio acquisition. Four, completion of commercial integration activities and lots of main farmers acquire generic prescription portfolio. Five, received approval for four products in China, including our partner products since April 23rd. Sixth, embark trade generics in India and launch a dedicated trade generic division. Through this initiative, we will be increasing our participation in retail pharmaceutical markets. Seven, enter child nutrition space in India with the launch of Cellar Health Kids Grammys. Eight, biologics license application for purpose by a similar Rituximab candidate, DRL, accepted by U.S. FDA, EMA, and NHRA for review. This is another key milestone in our global biosimilar journey. Nine, for raising to fast-growing OTC wellness space in the U.S. with the relaunch of recently acquired brand of PreMama, a portfolio of high-quality dietary supplements designed to support the entire motherhood journey. 10, collaborate with Mark Cuban Cost Plus Drug Company, and then increasing access to essential medication for Wilson disease patients, and enter into in-license agreement with Tenshi Kaizen for launch of Lorapidine for private label of this business. 11, enter into agreement with Bill and Melinda Gates Foundation to develop injectable contraception drugs for low and middle income countries in Asia and Sub-Saharan Africa, including India. This initiative will strengthen our portfolio in the women's healthcare space. 12. Successfully conclude the GSFDA inspection of the Falling 4 facility recently. Our API site, CTO1 and CTO3 at Bolaram, our formulation site, FTOICZ-U2, and our API site, CTO6, at Srikakulam. We continue to maintain a state of constant vigilance and compliance at our manufacturing sites. 13. Released our first integrated report, which we weaves together the material aspects of our business and their interplay with our purpose, value, strategy, governance, performance, and outlook. 14. The Financial Times of London named us as the Asia-Pacific Climate Leader of 2023. This award is to appreciate companies that have achieved the greatest reduction in their greenhouse gas emissions intensity and make further climate-related commitments. Now, let me take you to the key business highlights for the quarter. Please note that all references to the numbers in these sections are in respective local currencies. Our North America generic business recorded sales of $389 million for the quarter with a strong year growth of 69% and a 25% increase on sequential basis. The growth was bolstered by linoleumide sales, new product launches such as Riga-denosome injectable cyclose rinse capsules integration of main portfolio, and market share expansion in certain key existing products, which more than offset price erosion. We launched eight new products during the quarter and expect the launch momentum to continue during FY24. Our Europe business recorded sales of $57 million this quarter with year-on-year growth of 13% while working flat sequentially. The growth is attributable to increase in base business volumes and supported by new product launches. We launched 10 new products during the quarter and expect the launch to continue during the balance of the year. Our emerging market business recorded sales of 1,155 crores rupees with a strong year-on-year growth of 28% and a sequential increase of 4%. We launched 27 new products during the quarter across various countries of the emerging markets. Within the emerging market segment, the Russia business grew by 77% on year-on-year basis and 7% on sequential basis in constant currency. The growth is driven by pick-up, in allergy season, and further aided by lower rates. Our India business recorded the sales of 1,148 crores rupees and reported the growth of 14%. Excluding revenue from brand divestment, loss of revenue from divested portfolio, and NLM-related price reduction, the business grew in a very high single digit. India remains our priority market and we are progressing well on our innovation model. We have signed two innovative deals in this quarter and expect this to be an important growth driver in the years ahead. We are creating several growth engines for India business, including ramping up growth of existing portfolio, scaling up recently acquired brands, continuous improvement of field stock productivity, and foreign-linked trade generics. Our PCI business records sales of $82 million with a year-over-year decline of 11% and sequential decline of 14%. This has been due to lower volume pickup by customers for some products during the quarter. We expect sales to improve over the next couple of quarters on the back of increasing volume pickup, launch of new products, and collaboration opportunities. Our R&D efforts are focused on developing value-affiliated products, including several generic injectable biosimilars where there is a patient need. We have filed four NDS in the U.S. during Q1 of FY2014, and we are on track to accelerate on this balance in the year of FY2014. We are improving our operation and processes to increase efficiency and overall productivity. Our strong balance sheet provides financial flexibility to support future growth, and we will continue to maintain a disciplined approach to cash management and acquisitions. I am confident we will continue to grow the growth momentum, strengthen our core business, and build a pipeline of products to shape a healthier world. And 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 a question may press star and one on their touch tone 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. The first question is from the line of Kunal Damesha from Macquarie. Please go ahead.

Hi, good evening. Thank you for the opportunity and congratulations on the good set of numbers. First, on the U.S. revenue growth, so on a sequential basis, we have seen a significant uptick as well. Would you be able to give us some color as to which were the primary driver? Was it the acquisition? Was it the lenalidomide uptake? In order of their quantum, if you can provide, even qualitatively would be very helpful.

Yes. So this water, we had several growth engines. So it's not just the lenalidomide. We grew market share in key products. This was, let's say, more than previous quarters. We saw relatively less price erosion than we normally do. We had the main acquisitions that contributed to that, and Lina. So it's a combination of all of them. Even without Lina, it was a very healthy growth. in the US. Sure.

And just continuing on that, in terms of price erosion, across companies there is now consensus that the price erosion has reduced. But do you see that this reduced price erosion to continue for some time or is it more of a transitory phenomena which could kind of go away?

The model hasn't changed, so in terms of price erosion, it's obviously a function of how much competition you got for your baseline on products that did not yet, if you wish, erode to their potential. So I believe that in our case, we probably will see something similar also in the next coming years.

Perfect. Thank you. I have more questions. I'll join next time.

Thank you. The next question is from the line of Damayanthi Kirai from HSBC. Please go ahead.

Hi. Thank you for the opportunity. Continuing in the U.S. business, so as you mentioned, even without Lena, the base business has grown very well for you sequentially. So can you elaborate a bit more whether you are seeing a lot of supply opportunities emerging in the market due to problems at some of the competitors, etc.? ? And do you believe these opportunities will sustain for next few quarters? That's my first question.

So it's a combination of timing of RFPs, a combination of a set of situations that happen to products in which we could supply more. Not necessarily a supply shortage, but it could be service or other supply disruption situations that that happens, and also activities that we did with certain customers as well. So overall, let's say it's primarily volume-based growth that's based on agreements with customers.

And do you believe this volume-based growth opportunity will continue at least in near term?

I believe that the trends will continue, yes.

Okay, my second question is on your R&D initiative. So Biosimilar, you mentioned, can you talk about updating your global portfolio, which is for all the markets where you're focusing?

So Biosimilar is a global initiative for us. We are planning to be in all the markets, including the United States, with our portfolio. We are working on about 11 biosimilars as we speak, and some will be launched before 2030 and some after 2030, starting probably in the beginning of 2027. At the time, I don't want to discuss specific products, but let's say that this is a very important initiative for us, And we believe that it's a place that we want to be a serious player.

Sure. And my last question is, how do you see your EBITDA margins moving up in the next few years, excluding red limit, if you can provide some color on it?

So I'm maintaining, and for me, we've been in this discussion in the past, I'm not taking this product out or another product, because every year we have those products that contribute more to our performance. I'm still maintaining the long-term average of the 25-25, knowing that right now with linoleumide we will probably be above it, but Overall, this is the area that I'm still maintaining that we feel very comfortable, that will allow us to fully finance all of our growth aspirations. So what we are moderating now is the level of investment that we want to put. Naturally, the more we have, the more we can invest into the future, which is what we are planning to do. But let's say in the next coming quarters or as long as... we have this limited volume agreement in place, likely that it will be above the threshold of 25%.

Okay. Thank you. Thank you.

We have the next question from the line of Balaji Prasad from Barclays. Please go ahead.

Hi. This is Michaela on for Balaji. Thanks for taking our questions. Can you just talk a bit more about what led to the growth seen in Russia and how sustainable this growth is? Thanks.

In Russia, part of it is seasonal. We have most of our businesses in Britain, and we are also playing in the biosimilars. So in these specific waters, we enjoy the seasonality of the allergy as part of it, as well as the growth of the big brain in there. I believe that the growth momentum will be in Russia. We are expecting a good year in that respect. We are also, I think so far, hedged well on the ruble and protected it well. So in that respect, the combination of investing in our brands and enjoy the growth momentum that comes from the relevant products that we have, plus a good defense on the whole, that will help us to achieve these results.

There is also, in fact, of a low base in the growth that we have reported this quarter. And as you know, by its very nature, the Russian market is volatile. So there will be fluctuations from one quarter to another, but we are going ahead of the market.

Thanks so much.

Thank you. The next question is from the line of Surya Narayan Patra from Philip Capital India Private Limited. Please go ahead.

Yeah, thanks for the opportunity and congratulations for the great set of numbers, sir. So my first question is on this managed portfolio that has been acquired. So what is the kind of size that we would have seen this quarter out of that? And also if you can give some clarity about the profitability of this portfolio. I'm asking this question because it looks like exploring the revenue performance, your base business has seen a sequential improvement. So from that angle, I was just trying to understand the contribution from the acquired operation in the U.S. its profitability versus the company's blended base business profitability.

So, indeed, our base business did well, even without Lena Dulemont. We closed the deal and practically started to sell at the end of April, and we are actually launching product after product through this period of time. I believe that the main pickup will be in the next coming months when customers will open their bids and we will be able to bid more. So overall, let's say that the contribution of mail will be more significant in the next quarter than it can in this quarter.

Okay. So is it kind of still a $100 million annualized high? Yes, in that range. Okay, sure. The second question is that regards the linear leader mind. So we have almost kind of approaching to finish the first year of supply. And obviously... For the prescription trends, we see that, okay, we have already kind of been giving 6% kind of volume share now. So is it fair to believe this is the kind of first-year number and we should see a progressive improvement in the volume share going ahead?

So, you know, we cannot share a specific number on these products. We are in the

in agreements in which the volume... But this is there in the public domain in terms of the RX volume, so that is why I am asking questions.

I appreciate the question, but I cannot share. I have the full knowledge of the quantities, obviously, and I cannot share them. But what I can say is that this kind of levels of sales of... The nodule might likely to continue and fluctuate from a quarter to quarter. Okay. Based on the supplier, based on the orders and based on the preference of customers. But we believe that it will continue to play, to be an important selling product until the end of the agreement, which is likely to be in January 26th.

Sure. My last question is about the PSI business. We have seen sequential correction in the revenue as well as the margins there. And you have also mentioned in your opening remarks that there is an inventory rationalization trend that is ongoing. So do you think this is a kind of a couple of quarter more kind of a situation and do Generally, the APIs and the manufacturing supply opportunity kind of business are likely to face this inventory destocking kind of a trend and could have impact on the margins generally in the near term.

I think during the quarter, we have a certain pickup that is related to timing. of picking up the orders primarily. So I believe that it will cross itself actually relatively fast already from next quarter. So overall, I'm confident that our API business will grow this year.

Sure, sir. I have a couple more. I'll join this. Thank you. You all the best.

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

Thanks for taking my question. My first question is on the India business. I look at the number that we reported in fourth quarter and strip out the brand divestment. Based on that, we've seen a pretty sharp increase on that base in the first quarter. Did the trade generic I know we officially announced the launch in July, but was there any contribution at all of the trade generic business in the first quarter? Or if you could give us some color in terms of what's driving the improvement that we're seeing and how much more can this continue to... I know you talked about a bunch of initiatives, but how should we look at growth in this business from the high single digit that you pointed in your opening remarks?

Yes, thank you for that. The traditional did not yet contribute much because we just recently launched it. And so most of the growth happened from our branded generics, our key brands that we are focusing on. These trends are likely to continue to progress and actually going to improve. The activities I mentioned and the We discussed in quite a few occasions on our journey for top five, it's a combination of both the innovation as well as the investment in the portfolio that we have, including the payment. So most of the deals that we sign and going to design, we have actually quite a few deals that are in discussions, is to bring to India. Actually, Horizon 2 that we have discussed in the past is all about to bring innovation to India, mostly licensing in some product acquisitions and some potential partnerships with other players. These partnerships that will likely to have an impact on from FY25, FY26 onwards. FY24, which I believe we will grow significantly, will come primarily by the current branded generics or the focus brands that we have. Sorry for the long answer. Yeah.

Yeah, understood. Thank you so much, sir, for that. Second, in your remarks, you also mentioned approvals in China. Now, if I look at my ROW business, excluding Russia and CIS, we are pretty much in the range that we've been doing for the last four or five quarters, the 400 crore range. When do we see meaningful contribution start from China or when do we see it? How does the step up from this level happen in the emerging market business?

Yes, so all the EM markets are actually growing in double digits. Obviously, Russia being a very big market in that space, when it's growing 77% overshadowed the others. So all of them will grow in double digits, not just with Russia. As specifically for pickup in China, we are now starting to see the results, so likely that this trend of approvals will continue. Most of the values we will start to see, if you call it a leap or more significant growth in April 25, but we will see already in April 24 a certain growth. But the level that we have discussed in the past of aspiration in China

And my last question, Parag, in terms of our, you know, investments in the business, should we expect our absolute SG&A and R&D spend to trend up from the, you know, current spend that we are seeing, you know, for FY24? I understand, you know, this will obviously continue to increase, but Is this level of investment that we have seen in the quarter enough to sort of sustain the growth that we have envisaged or should I expect an increase from the current levels?

Yeah, we are continuing to invest behind multiple levers as we have been talking in digitalization, behind our brands in sales and marketing. I would expect a slightly higher trend in absolute terms. As a percentage to sales, of course, it will remain very positive because of our top line growth. We'll see the benefits of operating leverage. But in absolute terms, you will see a marginally upward trend.

Understood. That's helpful. Thank you so much, sir.

Thank you. The next question is from the line of Cinderella Carvalho from GM Financial. Please go ahead.

Thank you so much for taking my question and congratulations on a great set of numbers. Bringing the question back to India, You mentioned about the innovative products, two products that you have signed for India. You mentioned about mother and child. You spoke about gummies and the generic division. So what kind of investment are we envisaging in all these three different categories that we are talking about, consumer health, generic, generic business, and getting the enlightened products? And in what range should we see this overcoming two to three years?

So we are not going to see more investment than what you see already. And I'll just leave it maybe a slide up. Some of it is what we call balance sheet money, meaning that we will sign a deal or acquire a product and... It will be a balance sheet move rather than a P&L move. So it's relatively not expensive or not going to require much, and I'll try to explain why. Most of the stuff that we are bringing to India is a late-stage innovation. The product is already there. The product also proved itself in other markets. In most of the cases... It's got approval already either by the US FDA or by European authorities. So the activity that requires are either a licensing fee, some trials, local trials, registrations, and we are mostly going to leverage our teams in India for doing that. So if you wish, it's a marginal investment that give or take We are already spending the last couple of quarters. And maybe it's marginally up, the more deals that we will do. But I don't anticipate a major use of cash or costs in that element. It's actually pretty straightforward in that respect.

So the returns will be fairly high is what you're trying to tell with the minimal investments. But in terms of revenue, how should we see these, like, you know, if we divide into three segments, how sizable each segment could be for us, agent-generic, innovative, enlightened? So how big these could be? From a brand perspective, I understand you have something like 150 crore per brand size in your mind over three to four years. But what could be, what it could mean to the entire India business?

The intent is to bring a significant number of products to the Indian market in the next coming years. If everything will be successful, we are talking about tens of agreements like that, which we believe will be the main lever to bring us to top five. So it's top five names that we need to battle ourselves, give or take, in the next coming years. That's the expectation that the innovation will bring most of that value come into play, and the rest will come from the normal growth of the brands that we will have, as well as the trade degenerates. So the innovation will be the key focus and the main growth drivers. In terms of timing, as we sign the deal, then, of course, we need to allow some time for a clinical trial, registration time, and then, of course, the pickup of the brain as we are introducing it to the healthcare community. So it will be kind of a pickup of the brain. So every one of these brains will take a few years before it will come to its peak cells. But the beauty about it, these are true innovation. They are not switchable. And they are bringing a real solution for places that we believe that there is no such a solution or the solution we are bringing is much better.

Okay, thank you. And just one last question. We've seen a lot of doctorate deepening in terms of shortages of products in the U.S., Are you seeing some opportunities meaningfully for us overcoming pure quarters, or are you planning to participate in some of them which could be potentially large for us?

We do from time to time, but to be honest, I don't enjoy when we are going on the expense of others. I actually want the supply to be there for the patients. So whenever it comes, we are taking it. But I don't see it as a strategic growth leader. I'm happy to supply if it helps patients. But I actually wish that all the companies would be able to sell normally and not to see it as a leader growth. But it is coming to us as well from time to time.

Thank you so much and all the best.

Thank you. We have the next question from the line of Dushar Manudane from Motilal Oswal Financial Services. Please go ahead.

Yes, thanks for the opportunity. Particularly on the trade receivables, as I see, there has been a good jump of almost 400-450 crores, both year over year or even quarter over quarter. Is this more or less linked to North America business? And is this more to fill up the channel and so the sales could moderate to some extent in the coming quarters? The increase in deficit levels is broadly in line with the growth in business and the normal fluctuations that we see depending on the timing of supply and the credit term. So there is nothing unusual and it's in line with the business growth. Okay. And secondly, on the overall gross margin, we used to guide for at least in the past before regulating the range of 52 to 55% for the base business. And since launch of Resolume, we've seen good, at least 250 to 300 bits improvement in the gross margin. So, if you could just indicate the gross margin guidance for SAFE24. So, yeah, see, first of all, we can't describe a certain portion of the gross margin to a specific product. As you know, We manage the business on a portfolio basis. And we are launching new products all the time. This quarter, again, we have launched eight new products. And in the next two or three quarters in this year, we are going to launch more products. So we have to look at the gross margin as a composite. Overall, the drivers of gross margin, as we know, are the price version obviously brings it down, but we are seeing softening of solvent prices, we are seeing softening of fresh waste and so on. And we are also seeing favorable product mix. So overall, I expect our growth margin to range between 56 to 59% in the next few quarters. Interesting. Interesting. And just on extending to your launch aspects, are there two products if you would like to call out which could be interesting launches over the next 12 to 15 months in North America?

I don't want to call out specific. We're trying to avoid it because after that we have a lot of discussion on these products. But What we can say is that we believe that we can sustain also the level of activities in North America, even post-linodulamide, because we have quite a few very high-value products that we can bring to the market.

Great. Thanks, Anand.

Thank you. We have the next question from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.

Good evening, and thank you for taking my question. Just looking at the sales mix for the quarter, when I look at it, 57% of revenue is coming from the U.S. currently, 17% from India. I remember we had some kind of an aspirational goal to narrow this over time, but we seem to have gone the other way. I know there is a little bit of Biden there, which is probably skewing things. But it is just your broad guidelines of a more diversified geographic mix. And, you know, I'm a little also confused with India strategy because we keep divesting things, right? Like the life sciences of the J.B. Pharma. So how do we get to top five if we keep divesting? And you mentioned innovation to kind of help you double. But I'm just wondering, what are these opportunities? Shouldn't it be more like a transformative M&A? where we acquire assets like our WCAG deal, perhaps U.S. back, right? So that are small. So just want to understand your thought process on this.

Sure. Thank you so much for the question. Indeed, in a dilemma, they make the U.S. obviously in proportion more than before. I reiterate our commitment to the near market actually being a very important market for us, and also reiterate the aspiration to Bitro 5. Now, how should we go to Bitro 5? It's not because we are going to buy number 6. I wish I could, but first it's not available, and second, it's too expensive. And I don't think our shareholder wants us to do that. The way to do that for us is by launching innovations. So we saw that in India there are two trends that are coming up. One, some of the Brenner generics will have a headwind in the future, either because of the trader generic, either because of the digital challenge. There will be certain level of potential switches also. And when we looked at our portfolio and we saw what brands we believe are long-term for us, we decided to focus on them and to divest those that we decided not to focus on. At the same time, we have a major effort to bring a lot of innovative solutions to Asia. And once this will pick up, This will bring us to the desired level even without acquisitions. Acquisition, I'm happy to go with a reasonable price, with a reasonable risk, but we are not building on it. We can be top five even without.

Got it. Helpful. My second question is on the cash pile, about $50 billion of net cash sitting now on the balance sheet. So, Parag, what are your top priorities in terms of capital allocation at this point of time? What is the rank order of things that you would be using that cash file for? So, obviously, we want to use it for driving business development. I think in terms of priority, I would say, first of all, it has to be a strategic fit. We have a clear strategy for every segment in our business, for every geography. And secondly, it must come at the right price. So we are not going to chase acquisitions just because we have cash on the balance sheet. Within these boundaries, I would say that acquisitions in India and emerging markets would probably rank higher. Having said that, if there are good opportunities that come up in Europe also, we will grab them, just like the main acquisition that we did recently. I think it's a great fit. So, yes, we are taking acquisitions. I believe that instead of seeing a large acquisition, we will probably see a series of smaller acquisitions. So, a strategy. But it depends on what kind of opportunities are available at the right time. Got it. Thank you and all the best.

Thank you. The next question is from the line of Saiyan Mukherjee from Nomura. Please go ahead.

Yeah, hi, thanks. So if you can, you know, talk about, you know, what's the revenue base in China currently? And you mentioned about, you know, the significant growth from FY25 onwards. So I understand you're getting like 10 to 15 approvals per year now. So from a three-year perspective with 30, 40 products, you know, added to your basket in China, How should we think about revenue in China in three years' time? And how does per-product revenue potential you see in China versus, let's say, in the U.S.? So I'm wondering, can it be $200 million, $300 million more in revenue in China? If you can give some color on how should we think about the growth trajectory in that market?

So I see any number of around 2x in the next three years. So this is the time. The baseline that we are talking, what I'm talking about in market sales, not necessarily the way we report, is around $180 million a year.

Okay. So it means like additional $180 million is what you would book, let's say, three years down the line is a fair number to look at in China. It's in this range, could be even more. Understood. Okay. And my second question would be around R&D. I think you mentioned a run rate of around 500 crores a quarter, right? Is it possible for you to sort of indicate, you know, how is this, like how much of this is going into, say, biosimilar development at this point? And secondly, you know, at the time of Analyst Day, you talked about New Horizon Initiative, Horizon 2 Initiatives, having an impact of 1500 basis point on your EBITDA margin. That's the kind of investment you're doing. So what's the number at this point in time if you have anything to share on that? Yeah, so on the second question, right now we are in this range. So 5200 basis points on an annual basis is what we're investing on Horizon 2. And of course, going forward, Depending on how many of these succeed, it might start inching up. But we'll obviously discuss that subsequently in the subsequent call. Your first question was regarding? Right now, our R&D behind biosimilars would be approximately 20% of the total. And we expect it to progressively grow up, because we are Investing behind biosimilar, some of the products that we've discussed in the past, you know, TOSI and TOSI-DMAP, Avatacept and so on. So we expect it to progressively go up.

Okay.

And this 5,200 basis points that you mentioned does not include or does it include the biosimilar investment? Do you consider it as part of Horizon 2 or is this like separate? No, so this 5,200 basis points does not include the R&D investment in biosimilar. Okay. Thank you.

Thank you. Thank you. The next question is from the line of Vinopati Parampil from Ilala Capital. Please go ahead.

Hi, good evening and congrats on a great set of numbers. Just a couple of questions. One on Rega Denison. Could you please help us understand the competitive landscape there? I know a couple of you guys have launched, but there are more approvals. How many competitors are there in the market right now?

So for regular and so on, it's a multiplayer product, right? We've launched it in April, and we've seen good progression in terms of our market share. We are happy with the way things are progressing for us.

Okay. And any update on your products which you have outlicensed? That is Pegfil, Grashim, and the novel product E7777. Any updates regarding timelines?

So on the first one, it was already launched. And so whatever is the consideration will come, of course, with the progression of the schedule of this product. And up for Equal 7, likely that in the next quarter or the third quarter, it will be December, January, we should expect to see whether it will get approval or not.

Okay, and any milestones or any royalties included in the current quarter from the first product?

No.

Sorry? It's a low number in absolute terms. Okay. It's not material. Okay. Okay. And finally on gentric rituximab, you know, now that FDA has accepted your filing, what sort of timeline can we look forward to if everything goes fine? You know, would you be looking forward to launching it in 12 months, 18 months, or something like that?

Yes, this is a timeline. So somewhere between 12 months to 18 months depends, of course, on the approval by the US FDA. Once it is getting approved, we will launch it. Now it depends if, you know, a response letter will come or anything like that. But likely in that time frame. Thank you.

Thank you. We have the next question from the line of Ankush Mahajan from Access Securities. Please go ahead.

Thank you, sir, for... for providing me the opportunity and congrats for a good set of numbers. Sir, this is an extension of the question that our base business is improving and it seems from the number that the base business in the U.S. market, that has improved a lot. Can we face a high single-digit growth K1Q in the base business? And I would like to really appreciate if you tell us that what are the factors behind that the base business is improving? What is happening in the U.S. market at this time in the pandemic?

So I mentioned the timing of RFPs, agreement with customers, shortage of some products, and relatively lower than normal price erosion on the day. So it's a combination of all of it.

And can we expect this trend will continue? So this quarter, sir, there is a high single digit growth, Q1Q, on base business? I would just say that it is healthy growth, even after excluding Visa as well as Maine, it is healthy growth. Thank you, sir. Thank you very much.

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

Hi, thank you for the opportunity again. So just coming back to the licensing opportunities for the India market or the innovation that we have talked about, how does those opportunities fit into our 25% framework for EBITDA margin and ROC? Are they accurate, neutral, or would you say diluted? That's absolutely correct.

So we should reach those margins With the investment, it means it's including. That's why right now we have debt and we have even higher margins than debt. And I use the 25 always as a kind of benchmark of where is our comfort zone. It doesn't mean that we necessarily get this quarter in quarter. Likely that in the next couple of quarters it will be higher than that, including that investment. And likely that the 25 anyway needs to include all of that as well. So it will not be below the system.

Sure. Yeah. Just to clarify, 25% EBITDA, obviously, for the entire portfolio and across all geographies. So there are business segments which will be higher, and there are business segments that will be lower than that. So 25% is our overall expiration. And that modeling model includes a certain part of portfolio, which will be enlightened. Sure, sure. Okay. And secondly, on the trade-generating business, can you provide some, you know, details as to, you know, we have launched this division, how many people have we kind of, you know, hired for this, how many products that we are expected to launch, let's say, over the next two to three years? and which are the geographies that we are targeting or any particular therapy areas that we are targeting for this business?

So, we are not participating in about 50% of the Indian markets. So, when you look at our portfolio today, there are certain therapies and segments that we are not participating, which is about half of the market. So, we are targeting, obviously, a place in which we believe There is a meaningful play in those areas that we are not participating. We will launch it all over India. So geography-wise, it will be in all the states of India. In terms of number of products, it will be, I don't have the exact number, but it's a few tens of products that will be launched in that direction. As for the pickup and staff, we probably need to see the response of the customers that at the moment we cannot tell, we probably need to wait a quarter.

Sure. Thank you and all the best.

Thank you. That was our last question, ladies and gentlemen. I now hand the conference over to Ms. Richa Periwal for closing comments. Over to you, ma'am.

Thank you all for joining us for today's evening talk. In case of any further queries, please get in touch with the investor relations team. Thank you so much.

Thank you. On behalf of Dr. Reddy's Laboratories Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.