Dr. Reddy's Laboratories Ltd

Good day, everyone, and welcome to the quarter three FY26 earnings call of Dr. Reddy's Laboratories Limited. We appreciate your continued interest in our company. I'm Aishwarya Sitaram, Head of Investor Relations at Dr. Reddy's. Joining us today are members of the leadership team, Mr. Erez Israeli, our Chief Executive Officer, and Mr. M.V. Narasimham, MVN, our Chief Financial Officer. Our quarterly financial results have been published earlier today and are available on our website for your reference. We will start today's call with Emian providing an overview of our financial performance for the quarter. Following that, Erase will share his insights on key business highlights as well as the company's strategic outlook. We will then open the floor for questions. All commentary and analysis during this call are based on our IFRS consolidated financial statements Please note that certain non-GAAP financial measures may also be discussed. Reconciliations to the corresponding GAAP measures are included in our press release. I would like to remind everyone that the safe harbor provisions outlined in our press release today apply to all forward-looking statements made during this call. Before we proceed, I would like to call out a few housekeeping points. All participants will be in the listen-only mode during the opening remarks. Should you need any technical assistance during the call, please use the chat function on your Zoom application. The chat will not be monitored for any questions to the management. The session is being recorded and both the audio and transcript will be made available on our website. Please note that this call is the proprietary material of Dr. Reddy's Laboratories Limited and may not be rebroadcasted or quoted in any media or public forum without prior written permission from the company. With that, let me hand the call over to M.V.N. to present the financial highlights for the quarter. Over to you, M.V.N.

Thank you, Aishwarya. A warm welcome to all. Thank you for joining us on our Q3 FI26 earnings call. It is my pleasure to take you through our financial performance for the quarter. The business delivered a resilient performance in Q3 of I-26, reporting a 4.4% revenue growth and steady profitability despite product-specific headwinds. The performance reported this quarter was largely attributable to to the double-digit growth delivered by our underlying base businesses, excluding linoleumite traded by favorable forex. Reported EBITDA margin, which stood at 23.5%, included a one-time provision related to impact of changes in employee benefit obligations under the new labor law course in India. Adjusting for this one-time provision, the EBITDA margin was 24.8%. All financial figures in this section are translated into US dollars using convenience translation rate of Rs. 89.84, the exchange rate prevailing as of December 31, 2025. Consolidated revenues for the quarter stood at Rs. 8,727. which is US dollars 971 million, a growth of 4.4% year over year and a decline of 0.9% on sequential basis. Strong performance across our branded businesses, namely India, emerging markets and the acquired consumer healthcare business in nicotine replacement therapy. Further supported by favorable currency exchange rate movements was partially offset by lower linoleumide sales and continued price impression in the US and Europe generics. Consolidated gross profit margin for the quarter was at 53.6%, a decrease of 505 basis points on euro a year and 104 basis points sequentially. The decline in margins during the quarter was largely an account of lower linamide sales, price erosion in our unbranded generic businesses, adverse product mix in PSA, and the one-time promotion related to new labor law codes mentioned earlier. Adjusting for this one-off, the margin was at 54.1%. The reported gross margin fell was 57.4% for global generics and 17.3% for PSA. The SENA spend for the quarter was Rs. 2,692 crores, which is $300 million, an increase of 12% on year-over-year and 2% on QOQ. The year-over-year increase was primarily an account of ongoing targeted investment to support long-term growth of our branded franchises, namely the acquired NRT consumer healthcare business and branded generics, adverse forex impact, as well as the one-time provision related to the new labor law codes. H&A spends accounted for Around 31% of the revenue during the quarter was higher by 199 basis points year-over-year and 82 basis points on a sequential basis. Excluding the one-off production, H&A spends as a percentage to the revenue was around 30% in Q3 FY26. The R&D spend for the quarter was Rs. 615 crores, which is U.S. 68 million, a decline of 8% year-over-year and largely flat and sequentially. The decrease reflected lower development spends in biosimilars, given that large part of investment related to ABAT-SF have been completed. The spend this quarter also included one-time new labor law codes related to promotion. The R&D spend was 7% of revenues for Q3-FI26, lower by 92 basis points on year-over-year, and the same level as the previous quarter. Excluding the one of R&D spent was at 6.8% of Q3 revenues. Other operating income for the quarter was 77 crores, as against 44 crores in the corresponding quarter last year. EBITDA for the quarter, including other income, stood 2,049 crores, which is U.S. 228 million, a decline of 11% on year-over-year revenues, and 13% sequentially. The EBITDA margin stood at 23.5, lower by 401 basis points on EUR and 322 basis points on QQ. Adjusting for one-time new labour law codes related to provision, the underlying EBITDA margin was at 24.8%. The net finance income for the quarter was higher, at Rs. 117 crores as compared to net finance expenses of 2 crores during the same quarter last year. The increased net finance was primarily an account of higher foreign exchange gain this quarter in comparison to foreign exchange loss reported in the corresponding quarter last year. As a result, profit before tax for the quarter stood at 1,543 crores, that is US 172 million. PBT as a percentage of revenue was at 17.7%. Excluding the one-time new labour law code related provision, the PBT margin was at 19%. Effective tax rate for the quarter was at 22.9 compared to 25.1 in the corresponding period last year. The ETR for Q3 FY26 was lower primarily due to favorable durational mix for the quarter in comparison to the same period in the previous year. Profit after tax attributable to equity holders of the period for the quarter stood at 1210 crores which is 135 billion US dollars. A decline of 14% year over year and 16% on QOQ. This is a 13.9% of revenue before adjusting the one-off portion related to new labor law courts. Diluted EPS for the quarter is 14 rupees 52 paisa. Operating working capital as of 31st December 2025 was 14,142 crores which is 1.57 billion US dollars. An increase of 811 crores which is 19 million over 30th September 2025. CapEx cash outflow for the quarter stood at 669 crores which is 75 million Pre-cash flow generated during the quarter was 374 crores, which is 42 million. As of December 31, 2025, we have a net cash surplus of 3,069 crores, which is equivalent to 342 million U.S. dollars. Foreign currency cash flow hedges executed through derivative instruments during that period are as follows. U.S. dollars 481 million hedged using combination of forwards and forwards. Structured derivative contracts scheduled to mature through March 2027. The contracts are hedged at the rate of 89.1 to 90.3 per US dollar. Ruble 2.93 billion hedged at a fixed rate of 1.06 per Russian ruble with a maturity falling within next three months. With this, I now request Ares to take us through the key business highlights.

Thank you so much, MVM. Good day, everyone, and thank you for joining us today. We really appreciate your continued engagement and interest in our company. Thank you all for joining our meeting. Our overall performance in Q3 FY26 remained consistent with our strategy, and we continue to deliver on our strategic priorities during the quarter. the quarter, namely growing the base business, driving growth efficiencies across operations, advancing our key pipeline program, Simaglutide and Abatacept, as well as pursuing selective business development with the opportunities to augment our organic growth efforts. In line with our stated aspirations, our underlying base business delivered overall a double-digit growth this quarter. The company EBITDA margin was about 25%. This is adjusted for one-time provision related to the new labor codes in India. Let me now walk you through some of the key highlights of the quarter. Revenue grew by 4.4% year-on-year, despite lower contributions from Lina Dulemite. Our base business, excluding Lina Dulemite, delivered double-digit growth. The overall growth for the quarter was also aided by favorable forex. EBITDA margin stood at 23.5%, which included a one-time provision related to the new labor codes mentioned earlier. Excluding this one-time provision, EBITDA margin is at 24.8%, like I mentioned, about 25%. Annualized ROC was at 20.4%. Net cash surplus at the end of the quarter was $342 million. In alignment with our strategic focus to deliver first-in-class and innovative therapies in India and emerging markets, we entered into a strategic collaboration with Immunotep for commercialization of a novel immunotherapy oncology drug FT-Lagimod Alpha, a key global market outside of North America, Europe, and Japan, and greater China, with an upfront of $20 million, potential regulatory and commercial milestones of up to $350 million, as well as royalties. Further, we recently launched a vaccine, a novel recombinant vaccine, for the prevention of hepatitis E virus infection in India. We are pleased that the integration of the acquired nicotine replacement therapy business is progressing as per plan. 85% of the business by value is now under operational controls. The next phase of integration will include selected countries, Asia Pacific, Middle East, and Latin America. We expect integration largely to be completed by the end of this fiscal. We continue to make progress on our key pipeline products. During the quarter, we received a marketing authorization for semaglutide injection in India from DCGI, following the recommendation of subject expert committee in the SEC under Central Variable Standard Control Organization. Further, necessary local manufacturing licenses have been secured. We have also started filing in various emerging markets through the COPP lab. In October 2025, we received a notice of non-compliance from the Canadian Pharmaceutical Drug Directorate for our semaglutide injection, which outlined a request for additional information and clarification on the specific aspect of the submission. We promptly submitted our response by mid-November 2025, well within the stipulated time, and now we are awaiting a response from the regulatory agency in Canada. On the biologics front, we have completed the filing of the biologics license application, DBLA, for the IV presentation of Abatacept biosimilar candidate in December 2025, as per the schedule. Following the positive opinion For CHMP, we received a European Commission approval for the Nusroba Biosimilar and Q3F26. Likewise, we have received the approval from MHRA in the UK. Our in-house commercial team has launched the product in Germany in December, and launch preparations are underway for the UK and other European countries. We received a complete response later. From the USFDA for denosumab biosimilar BLA, which was developed by our partner, Alvotek, the CRL refers to the observation from a pre-licensed inspection of Alvotek Reykjavik manufacturing facility. On the regulatory front, in November 2025, the USFDA concluded its GMP inspection of our API facility, CTO-ACZ, in Shrikakulam, Andhra Pradesh, with zero observations. In December 2025, the U.S. FDA completed a GMP and a pre-approval inspection of our facility FTO-SZP1 in Shrikakulam, Andhra Pradesh, and issued a form for entries with five observations. We have responded already to the agencies within the stipulated types. Recently, the U.S. FDA issued a post-application action letter In relation to the response submitted to the observation received post the PAI conducted at our batch polybiologics facility in September 2025 for our Rituximab biosimilars, we are actively working to resolve the outstanding observations. Our CDMO business, Origin Pharmaceutical Services Limited, served as an exclusive API manufacturer for two of the 46 novel drugs approved by the US FDA in 2025. For further, APSL delivered three discovery programs to its in-house AI-assisted discovery platform called Origin.ai. We continue progress on our industry-leading sustainability practices. During the quarter, we announced a science-based net-zero climate target, making us the only Indian pharmaceutical company to commit to such a target by FY2045. We are in the leadership position in CTP water security and climate change categories for 2025. Let me take you to the key business highlights for the quarter. Please note that all financial figures mentioned are reported in the respective local currencies. Our North America generic business generated revenues of $338 million for the quarter, a decline of 16% even here, and 9% sequentially. was primarily on the account of level in Adule mine sales and price erosion in certain key products. During the quarter, we continued the launch momentum, adding six new products to our portfolio. Our European generic business reported revenue of $140 million for the quarter, gross of 4% on year-to-year basis, as well as sequentially. The acquired nicotine replacement therapy portfolio, which is now also in the base, has been performing well. Further, new product launches helped offset the impact of tricerogen in generics. During the quarter, we launched 10 new generics products across markets, further strengthening our product portfolio in Europe. Our emerging market business delivered revenue of... 1,896 gross rupees in Q3 FY26, reflecting a robust growth of 32% even year and 15% sequentially. Growth was primarily driven by new product launches across various markets and favorable forex. During the quarter, we introduced 30 new products across countries. in line with our commitment to improving access and further deepening our market presence. Within this segment, our Russia business delivered growth of 21% year-on-year and 16% sequentially in constant currency terms amid continued adverse macroeconomic conditions. Our India business reported revenue of 1,603 crores rupees in Q3 FY26, delivering a healthy double-digit year-on-year growth of 19% and 2% increase sequentially. This performance was attributable to revenues from our innovation franchise, new brand launches, price increases, and higher volumes, as well as contribution from recently acquired Stuggeron portfolio. According to Acuvia, we continue to outperform the Indian pharmaceutical market, IPM, with a moving quarterly total mass quarterly MQT growth of 12.3%, compared to the IPM growth of 11.8%, and moving annual total MAT growth of 9.7%, compared to IPM of 8.9% growth. Our IPM rank is 10 for the quarter and 9 for the month of December 2025. During the quarter, we launched two new brands as we continue to enhance our domestic market presence. Our PSAI business reported revenue of $92 million in Q3, FY26, resulting in decline of 5% year-on-year and 15% sequentially. During the quarter, we filed 31 drag master files globally. In line with our strategic priorities, we remain committed to investing in differentiated R&D programs, especially peptides and biosimilars, that offer meaningful commercial opportunities. In addition to our in-house development efforts, we will also continue to strategically collaborate to build our innovation portfolio for India and emerging markets. During the quarter, we completed 28 global generic filings. As we look forward, our focus remains on effective execution to deliver on our strategic priorities, improving base business growth, advancing differentiate partner products like Simaglot and Abadase, driving operational efficiencies, and pursuing value-accretive acquisition and partnership aimed at creating long-term value for our stakeholders. Before we move to the Q&A session, I would like to announce that Aishwarya Sidharan has recently taken over as the head of investor relationship from Richa Periwal. I wish both Aishwarya and Richa, which are staying with our organization, success in their respective new promoted roles. With that, I welcome your thoughts and questions as we move into the Q&A sessions.