Dr Reddy's Laboratories Ltd (RDY) 2021 Q3 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Laboratories Limited Q3 FY '21 Earnings Conference Call. (Operator Instructions). Please note that this conference is being recorded.

I hand the conference over to Mr. Amit Agarwal from Dr. Reddy's Laboratories Limited. Thank you, and over to you, sir.

A very good morning, and good evening to all of you, and thank you for joining us today for the Dr. Reddy's earnings conference call for the quarter ended December 31, 2020. Earlier, during the day, we have released our results and the same are also posted on our website. This call is being recorded, and the playback and transcript 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. 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 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 phone to Mr. Parag Agarwal. Over to you, sir.

Thank you, Amit, and greetings to everyone. I hope all of you and your families are keeping safe and healthy. I'm pleased to take you through our financial results for the quarter 3 of fiscal 2021.

We had yet another quarter of good performance in terms of revenue growth and EBITDA margin, though the profits were impacted by impairment charge taken during the quarter.

Let me take you through these in a bit more detail. For this section, all the amounts are translated into U.S. dollars at a convenient translation rate of INR 73.01, which is a rate as of December 31, 2020.

Consolidated revenues for the quarter stood at INR 4,930 crores, that is USD 675 million and grew by 12% on a year-on-year basis. Growth is primarily on account of new product launches across markets. Our North American generics business grew by 9%, Europe business by 34%; India by 26%, emerging markets by 5% and PSAI by 1%.

Sequentially, our revenues grew by 1%, supported by volume pickup in India, emerging markets and Europe. However, impacted by price erosion in North American business and lower volumes in the PSAI payments.

During the quarter, we recognized milestone receipt towards AUR102, one of the programs of our Origin Discovery business.

Consolidated gross margin for this quarter has been 53.8%, a decline of 30 basis points year-on-year and 10 basis points on quarter-on-quarter basis. The decline is primarily on account of price erosion and lower export benefits. However, supported by milestone income received towards AUR102 compound and productivity improvement.

Gross margin for the global generics and PSAI businesses were at 57.6% and 25.3%, respectively, for the quarter. The SG&A expense for the quarter is INR 1,439 crores, that is USD 197 million, an increase of 14% year-on-year and an increase of 10% quarter-on-quarter. The increase in expenses is due to investments made in sales and marketing and branded markets, digital capability building, higher sales costs and certain onetime expenses pertaining to this quarter. SG&A as a percentage of sales was 29.2%, which is within our normal range.

The R&D spend for the quarter is INR 411 crores, that is USD 56 million, and is at 8.3% of sales. The product development activities continued normally during the quarter, including development of COVID-19-related products.

The EBITDA for the quarter is INR 1,185 crores, that is USD 162 million. EBITDA margin is at 24% and is slowly tracking our aspirational target of 25%. In this quarter, we have taken an impairment charge of INR 597 crores, that is USD 82 million. The impairment has been taken primarily on 3 products-related intangibles acquired from Teva in the year 2016. These are for: (inaudible) and Metformin.

We do a quarterly impairment [costing] analysis. And as part of it, we concluded that the carrying value of certain of our intangible assets are not reflective of their current market reality. And hence, in line with the requirements of the accounting standards [within] discharged. Consequently, our profit before tax for the quarter stood at INR 284 crores, that is USD 39 million.

Effective tax rates for the quarter has been 93%, higher due to nonrecognition of deferred tax assets and losses arising out of impairment. We expect our normal ETR to be around 25% before the impact of impairment charges. Profit after tax for the quarter stood at INR 20 crores, that is $3 million. Reported EPS for the quarter is INR 1.19.

Operating working capital increased by approximately [INR 600] crores, which is USD 82 million. There has been an increase of approximately [INR 200] crores each in the receivables and inventory. Increase in receivables was partially due to reduction in discounting of receivables and the balance is in line with the normal business trend. Increase in inventory was due to a planned increase in inventory for certain products to deal with any potential supply disruptions.

We invested INR 287 crores, which is USD 39 million towards capital investment in this quarter. The free cash flow was a net outflow of INR 58 crores, which is USD 8 million after payout for the brands acquired from [Denmark] for the Russia and CIS markets. We had a net cash surplus as on 31st December 2020, of INR 84 crores, that is USD 11 million.

Foreign currency cash flow hedges for the next 15 months in the form of derivatives for U.S. dollars are approximately [USD 535 million]. Largely it hedge around the range of INR 74.5 to INR 77.6 to the dollar. In addition, we have cash flow hedges of [RMB 55 million] at the rate of INR 1.0021 to the [renminbi], maturing over the next 15 months.

With this, I now request Erez to take through the key business highlights. Over to you, Erez.

Thank you, Parag. Good morning, and good evening to everyone. Hope you are having a happy safe and healthy beginning of the new year. The year of 2021 has started with a hope and visibility around life returning to normal after significant health care crisis and socioeconomic disruption caused by COVID-19 in 2020. The vaccinations program has started in several world countries, and we are continuing to contribute [our base] in this fight against the global pandemic.

Recently, after the approval from [DPGI], we have initiated the Phase III clinical trial of Sputnik V vaccine in India. The vaccine's efficacy is confirmed at 91.4% based on the data analysis of the final control points of clinical trials in Russia. We have also strengthened our partnership with RBIS and have been confirmed as the preferred marketing partner to enable the safe and expedius distribution of the vaccine in India.

During this quarter, we continued in our growth journey and achieved higher ever quarterly sales, healthy EBITDA margins and once [a turn] once again, net cash positive as of December 2020. We saw healthy growth across our branded markets, in Europe. While the market demand in India, Russia and other branded market has witnessed sequential improvement over the last couple of quarters, which is yet to recover to pre-COVID levels.

We continue to progress well on our strategy of diversified business model and creating the right levels of growth from each one of our businesses. This includes building a healthy product pipeline, focus on productivity, improvement in marketing capability and strengthening of processes led by digitalization initiatives. The strong balance sheet position allow us to continue to invest in the right set of opportunities for future growth.

Now let me take you through the key business highlights for each one of our businesses. Please note that all references to the numbers in this section are in respective local currencies.

Our North America Generics business recorded sales of $235 million for the quarter, with a growth of 4% (sic) [9%] year-over-year and a decline of 5% on a sequential quarterly basis. While the new product tranches momentum continued through the quarter, we faced incremental competition led by (inaudible) enrollment in certain base portfolio products. Throughout the end of the quarter, we also witnessed signs of COVID-driven slowdown in demand levels, especially at the retail and hospital level impacting resources.

We launched 5 new products during the quarter: (inaudible), [Cinacalcet], Succinylcholine Chloride injection and relaunched OTC Famotidine tablets in the U.S., and (inaudible) injection in Canada market. Overall, during the 9 months in (inaudible), we have already launched 22 products, including 1 e-launch.

As we continue to maintain the large momentum for the rest of the year, resulting in around 30 launches for the fiscal. We remain focused on ramping up of the market share across key recent launches.

Our Europe business recorded sales of EUR 47 million, with strong year-to-year growth of [20%] and sequential quarter growth of 9%. The growth is driven by new product launches seen across the markets. During the quarter, we launched 3 new products in Germany and one product each in U.K., Italy, France and Spain.

Our emerging markets business recorded sales of INR 962 crores with a year-on-year growth of 5% and sequential quarter growth of 11%. The year-on-year growth adjusted for the forex impact has been also in double digit. Within the emerging market segment, the Russia business grew by 4% on year-on-year basis and [17%] on a quarter-to-quarter basis in constant currency. The market demand has been gradually improving after COVID-related decline. We also saw similar improvement trends in our CIS markets.

Our business in China also continued to perform well in the quarter. During the quarter, we launched 27 new products at the (inaudible) emerging markets. We also completed the acquisition of select anti-allergy brands from Denmark to Russia and CIS markets.

Our India business recorded a sale of INR 959 crores, with the year-over-year growth of 26% and a growth -- and a growth of 5%. The strong growth in the quarter was [recorded] by gradual improvement in the marketing months. The brand acquired for workout are also performing well. We are progressively adapting the region (inaudible) to improve connect with the (inaudible), physician community, patient and channel partners to expand access and leverage demand platforms.

During the quarter, we launched [7] new products in the India market. As we (inaudible) result of December 2020, we have been [ranked #9] for the month of December and 11 on -- in (inaudible) and (inaudible) basis.

Our PSAI business recorded sales of $95 million with a year-on-year decline of [2%] and sequential quarter decline of 17% . As alluded to in the last quarter, part of the high-growth in the first half of the financial year was driven by higher API procurement inventory level being carried by our customers in response to the COVID-related disruptions. This part of demand has largely been normalized. At strategic level, we continue to believe that our PSAI business is well positioned to benefit from evolving structural shifts in the industry as we continue to invest into new product development and cost reduction initiatives.

On the R&D front, we continue to strengthen our pipeline of products across the market with focused R&D investments through our value-accretive assets. During this quarter, we filed 57 formulation products across global markets, including 2 ANDAs in the United States. As of December 31, 2020, we had 89 cumulative filings pending for approval in the U.S. FDA that includes 87 ANDAs and 2 505(b)(2) NDAs.

We also filed 45 drug master file globally, including filings made in U.S. We are also progressing with Phase III trials for rituximab and working on the next level of biosimilar products, which are in different stage of development. We remain committed to strengthen our product (inaudible) markets as one of the key leaders for driving our future goals.

As the uncertainties surrounding COVID progressively recedes, we remain focused on our key strategic priorities of building sustainable gross (inaudible) value businesses, including inorganic (inaudible) and strengthening the cycle (inaudible) long-term goals.

With this, I would like to open the floor for questions and answers.

(Operator Instructions) The first question is from the line of [Shanti Patel from Shanti Patel Investment Advisors].

(inaudible) light on capacity utilizes, I mean in respect of various verticals? And question #2, is impairment loss, how it is determined? And will it be reversed in future, if situation changes? Please throw some light on that.

Yes. So we had a (inaudible) event of the launch of (inaudible), and we are in accordance to the good accounting (inaudible). We are still planning to launch these products. And I don't -- there is no plans to reverse, but I hope and believe that we will launch these products and make money from them.

Mr. Patel, does that answer your question?

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

The capacity realization?

Yes, that is correct.

We have enough capacity for the (inaudible). I'm not sure I understand the question.

No, no, capacity utilization we suppose we can produce 1,000 units. Today, we are producing only 900, so 90%. So that way, what is the installed capacity and how much we are producing? The ratio?

(inaudible). And I'm saying again, we have enough capacity for all (inaudible). The only places in which we need a bit more capacity is injectable arena and primarily for the years of 2022 -- FY '23 and FY '24 as well as the biologics. We have enough for the growth in the other sales.

The next question is from the line of [Rashmi Sancheti] from (inaudible) Research.

If you can highlight what kind of growth we are seeing in India business ex (inaudible) integration?

We are not submitting the goals. Amit, you want to answer it?

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

Okay. And sir, for the 9 months?

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

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

Yes. So we have now successfully integrated the Wockhardt portfolio into our business. And what we are now -- what our P&L reflects are the normal ongoing expenses. So there are no one-off expenses pertaining to the Wockhardt business in our P&L this quarter.

Okay. But that integration expenses, will it continue in the subsequent quarter? Or it is already over -- by third quarter?

So Rashmi, this integration expense, so there is nothing integration expense. It is a sale for like we have got from this business. So that is now part and parcel of our business. So that will continue. So it is on account of incremental manpower cost, S&N costs, the plant, which came from Wockhardt, so those expenses -- so on a year-on-year basis, that's the reason we had mentioned. On a sequential quarter basis, that is not relevant. It was therein Q2 also, it is there in Q3 also.

Okay, sir. Got it. And sir, finally, on the U.S. business, are we going to maintain our 30 product launches guidance in U.S. for this entire year? We have already launched around 22 products.

Yes, (inaudible).

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

So it's not [huge]. And of course, it differs from product to product. But it's more than it used to be in the other [process] for us. And I believe that the business will continue to do well also in the future.

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

Continuing on the U.S. business, while we are seeing healthy number of launches. But on the filing side, I believe it's been bit muted for last few quarters, and we are also having around 87 pending ANDAs and in the past, you early expressed your goal about increasing your U.S. sales by 50% in next 3 years. So how do you see a pickup happening on the ANDA filing front? And second question on the U.S. business is, any update on (inaudible) and (inaudible) generic launches?

So on the filing, I think you are going to see much more filings next quarter. It's in line with what we discussed in previous (inaudible) so we are in the same place, just in terms of disposition between the quarters (inaudible) in Q4. As for the (inaudible), we are preparing for the launch of the product.

Sorry, there was another one?

(inaudible)

(inaudible) there will be some time. It will take some time for us.

Okay. Okay. And my second question is on the impairment part. So for acquiring 8 ANDAs from Teva, we paid around $350 million. And if I'm correct, we have already taken impairment of around $250 million to $260 million due to change in market conditions. So do you see like the remaining asset value can also like be impaired if we see further deterioration in the market conditions?

(inaudible) additional impairments.

Sorry, I didn't get that.

We are not expecting additional impairments.

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

We are going to grow this business on both the external sales as well as (inaudible) important for us is the best integration. So we are working on both. And we are going to see growth in the API in the future.

The next question is from the line of Kunal Dhamesha from Emkay Global. .

So the first question is on the other expenses. So I think in the opening remarks, our CFO said that there was some onetime expense that was included. So can you throw some light on what was the nature of the expense and can you quantify it?

Yes. Thank you for the question, Kunal. One-off expenses that I referred to are primary 2: One is, COVID-related freight expenses have been at the higher end, as we know, for the last 3 quarters since COVID started. And we are not seeing any moderation in the rate there. It's a very marginal reduction. And we do think as situation normalizes and COVID comes under control, over the next few quarters this is going to reverse. So that's one reason I mentioned as one-off.

And secondly, we also have some one-off litigation expenses that we have recognized during the quarter, which are not recurring in nature.

Okay. So if I see the quarter-on-quarter, last quarter, our SG&A expense, excluding D&A was around INR 982 crores, and this quarter, it is somewhere around INR 1,120 crores. So can we attribute the entire increase to that? Because you have said that Wockhardt integration costs were already during quarter 2, so the entire thing is related to and that the freight cost would also be there in quarter 2, right? So when the entire difference is coming from the onetime litigation cost?

No, that's not right, Kunal. Let me give you the shape of the increase. So as I said in my remarks earlier, the largest increase is driven by investment behind sales and marketing in those branded markets. In markets like India and Russia, we are seeing the market (inaudible) signs of pick-up. And we want to make sure that we invest ahead of the curve. So we have started in a cautious manner investing behind our brands in these markets.

The second thing that we are investing behind is our digital capabilities. We have a very ambitious program in place where we want to digitize our core, our quality systems, our manufacturing plant the way we manage our -- the entire process of product selection to launch and also we are digitalizing our front end, the way we go to market, the way we engage with the doctors.

So I would say that investments behind brands and capabilities is a large part of this increase. And the rest, as I said, is some bit of freight. In this quarter, we have seen higher freight costs compared to the previous one. To some extent, it was also because of a higher OTC shipment, partly COVID-related, but also partly the mix between [air and sea] shipments.

Okay. Okay. So do you think that this investment in the brands and sales and marketing will continue for, like, next 3, 4 quarters before it kind of normalize? Or how should we look at it? Like is this the new normal of SG&A like INR 1,100 crores?

See, we -- as you know, Kunal, we don't give any forward-looking guidance. So at the same time, I would like to say that the investment increase in marketing we do expect it will continue. But I must also point out that we evaluate return on investment on a continuous basis. And if you are finding this growth to be driven by the investments then we continue, otherwise, we also try to pare it down. So that's one point I would make. And obviously, the COVID-related expenses will gradually normalize. .

Okay. Okay. And the second question is more of a housekeeping question. So I think we took $156.5 million of investment charge for (inaudible) in quarter 3 FY '20 and we took another $40 million, $45 million this quarter. So that adds to around $200 million. But the purchase price allocation that we did for this product was around $185 million. So I'm not able to -- what am I missing here? Like did we capitalize some of the R&D expense that we did on the product?

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

The next question is from the line of Nithya Balasubramanian from Bernstein.

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

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

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

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

Okay. Understood. The second question was on some of the materials products that you have filed in the U.S. or likely to file. So if you can give us an update on where you are on (inaudible) Copaxone. I think you mentioned you refiled, do you have a TAD date if you can update us on those 2 products?

Yes, I'll do this. So (inaudible) we submitted the response to the (inaudible) in December. And now the ball is back in the court of the U.S.FDA. So we will wait for the response on the FDA and accordingly, prepare for the launch. As for Copaxone, we received the CRL, and we are now addressing it. So this is the status of these 2 assets.

Sorry, I hope I got that, right? You have -- you've got received another CRL on Copaxone and you are preparing a response? Did I hear that right?

Yes. Yes.

Any timelines on when you're likely to resubmit?

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

The next question is from the line of Vishal Manchanda from Nirmal Bang Institutional Equities.

On the domestic side, is there a seasonal element to the Wockhardt portfolio kind of -- so -- is Q3 a large quarter for the Wockhardt portfolio or are these like normal across all quarters?

It is -- there is no significant seasonal element, I would say. As I said earlier, Wockhardt portfolio is performing well. It is exceeding internal expectations. And we believe that we'll maintain growth at similar levels for this portfolio.

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

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

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

Yes. So we are discussing our various options to increase the collaboration also to other markets.

The next question is from the line of Neha Manpuria from JPMorgan.

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

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

And what will drive that growth? It is since most of the low-hanging fruit is already there in the numbers?

I think that it was primarily our ability to invest behind these products and to full stop the activities that these products demanded. I think this is -- both the sale synergies as well as the cost of the (inaudible) anticipated to have. And it's working well so far.

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

Yes, we have. So on receivables, approximately the increase [INR 200 crores] . I would say roughly around 1/3 or slightly higher than that is because of lower discounting of distributors in the U.S. and that's because we are no longer finding it economical because of the drop in interest rates in India. So that's the fundamental reason.

The second reason is an increase because of normal sales growth that we see. And finally, the milestone payment that we had received from origin is another driver. But overall, I would say the receivables increase is due to the underlying business drivers.

On inventory, again, part of it is because of sales growth, and the rest of it is a planned increase. We want to make sure that our safety cost levels are adequate, and there is absolutely no disruption as we enter Q4. So these are the reasons for the increase in working capital. I hope I've answered the question.

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

It starts in more than 1 quarter. So it's not specific. It's like normal course of business. But it's not the entire portfolio. So like always in United States, when competition is coming, we need to react to it, if we want to defend the (inaudible) what happened in this case also.

The next question is from the line of Kunal Mehta from Vallum Capital.

Sir, my first question was in (inaudible). So just want to understand the rationale behind the write-down of the entire product because I think it's still a viable product. And of course, of course, from -- from an earnings perspective, it is -- when you consider the 5-year period is practically neutral before it just accelerates the amortization. But I wanted to understand the rationale behind writing down this whole product?

Well, the rationale is we have a triggering event with the launch of the (inaudible), of course, the model around this product. And as we address (inaudible) now and depends of course on the time the approval -- obtain approval, in accordance to both accounting standards, we have to depreciate these assets. So but you are right, we are still committed to this product. Hopefully, the (inaudible) will approve the (inaudible).

Understood, sir. Sir, the second question I had, I wanted to understand regarding the emerging markets. So how -- so I'm sure in the opening remarks, you mentioned that all of the filings which you have done this year. And especially in this quarter also, most of these are dedicated to the emerging markets, ex U.S., I would say, ex U.S. markets, including Europe and Russia, CIS and the other emerging markets all to smaller ones.

So just wanted to understand why the -- of course, there is a lot of understanding of (inaudible) to understand the U.S. portfolio [sense]. But on the emerging market side, could you please give us understanding of the new product launches, which we have down, which we have targeted over the next 2, 3 years? I mean, any sense, could you give us on let's say, if we are targeting these markets to grow by, let's say, maybe 15% over the longer 2, 3 years perspective? Then any target, whereby, what would be the contribution of the new product launches for these markets?

So we are not giving targets. But I'm expecting, especially on the institutional and hospital, that this product will significantly contribute to the growth in this area. As you recall, when we discuss our strategy, we are taking our global product portfolio and try to find a (inaudible) in order to get much more dollars -- much more dollar sales for investment in R&D. And that's what we are doing.

So you are going to see more and more filings in the rest of the market -- in the rest of the market. Some of them -- and most of the development that we are doing now, we are doing globally, not necessarily for a specific market. So if you're in line with the strategy that you have discussed and what you say in the course of the -- or the starting (inaudible) . We are going to find more and more.

Understood. Understood. Just a last final question from my answer. I just wanted to understand the strategy which we have on the injectable side, could you just give us a number of regarding from the outstanding portfolio of outstanding filings in the U.S. ANDAs. How many are on the injectables? And if you could break it down between complex and, I would say, rather simple ones on the injectable side.

And of course, I was looking at -- you have mentioned in your 20-F that from the U.S. business, roughly 1/4 comes from the injectable portfolio. I'm again talking about FY financial '20. So any, I would say, any perspective on how do we would want to take this business ahead because I think considering the fact that I think majority of the -- I mean, a good portion of the off-brand products are now in this portion of the market -- for the next 5 years. So any perspective on how we want to take this business ahead in the U.S.?

Yes, of course. Our injectables are global products. And we want to develop and most of our investments is in that area for global products, including the U.S. The impact on the U.S. is that more and more injectable products will be filed in the U.S. So proportionally, the injectables will be higher than they used to be in the past.

So if you will see a complete in the U.S. (inaudible) to grow on the simple (inaudible).

Okay. So if I have to have to at least say that from the 25% current contribution is over the next 3, 4 years, this contribution will only move upwards in terms of the overall portfolio, assuming that's a thing you want to?

Yes, the weight of the injectables will be bigger in the future.

The next question is from the line of [G Vivek from GS Investment] .

Yes. Is my understanding correct at the tailwind, our pharma sector was in Q2 COVID is now weakening? And are we back to the time of price erosion letting on very severely instead of the single-digit price erosion due to consolidation we faced?

You are talking about the United States?

Yes, U.S. and rest of the entire world market. Basically, the tailwind of -- due to COVID for pharma sector to India, were responsible for very good performance in Q1, Q2, and that is now weakening.

Yes. So we are letting -- so we are (inaudible) costs on the market but we are not yet in the pre-COVID level or the pre-COVID behavior, and there are still impacts of COVID in certain areas. For example, in the U.S., we do see still that certain products are affected by the ability of people to meet the change and stuff like that. We do see that these products are softer than they used to be.

In terms of price erosion in the U.S., it's primarily related to competition. So when competition is coming, this is what is causing price erosion so much COVID impact. In the case of India, we absolutely see a pickup as the Q3 was a quarter in which by and large, the activities of India and it's almost to full -- to normality. We are not there yet, but we are almost there.

And is the similar situation prevailing for injectables also? Or is it mostly for oral solids? Injectable also the price erosion is serious.

No, the price is affected by both injectable and also it's not probably related to competition that is coming in both (inaudible).

And the good part for our company was all our [flight] plants were FDA-approved and maybe after some gap also. And now FDA inspection have again begun in India and any FDA inspection due for any of our plants in India?

We did not get any requirements from the U.S. FDA (inaudible) inspection.

The next question is from the line of (inaudible).

On the U.S. business, during the launch, as you mentioned for (inaudible) , but there's not been much pickup on the sales run rate number. So (inaudible) take to meaningfully move this number from around for the last couple of (inaudible) quarters.

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

My question was we've had 24 new launches during the year in the U.S., but our run rate still is sort of -- continues to be (inaudible) up to around 2 (inaudible) per quarter. In your assessment, what will it take for us to really break through to meaningfully scale up from these levels, given the fact that I mean number of launches clearly, it's not been a hindred so far, is there any large number of launches even this year?

So the number of the launches, the type of products that we are launching, it's a combination of -- first of all, I believe that the portfolio moving forward is [proactive] and [manages] a growth as the products that (inaudible) we are launching and should give us the growth we are looking for.

So it's not just the quantity, but it's also what you call the quality, the size of the product that going to be launched. And some of the products coming up are interesting.

Okay. And secondly, on the gross margin, we've had a fairly sharp drop in the gross margin, the generic business this quarter, if you adjust for the licensing income. Now how should we read this? I mean, is this the new normal to COVID, given the fact that -- the export incentives are no longer there? Or how should we look -- how should we sort of model in the generic gross margins going forward, generic business gross margins?

Yes. Like we said in the past, we are not managing the gross margin per se. We're actually managing the EBITDA, and we are maintaining (inaudible) sticking to the 25, 25 that we shared in the past. And we are already in this neighborhood and planning to stay in this neighborhood maybe even lower for a while.

Gross margin is a matter of mix of activities. So and for example, if we have a great product, it will give us 50% gross margin, and it will be profitable, with the right EBITDA, we will take it. So we are not managing the percentage. We are managing the nominal in gross margins. And in general, like we said, that we are still there, but we will stay around the neighborhood of being -- of the gross margin that we were in the past. But we are not managing this so we will continue to take businesses (inaudible) it will be below this number that we have now.

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

Sir this is an important (inaudible). So I can ask a question on this, I'm not sure how much you can talk. But would it be like your regular high-value launch? Or would it be volume constraint like the first entrant with the lower margins? And it would improve as we go along. So any thoughts would be very helpful.

Yes, Sameer, I cannot tell you that. It's absolutely going to (inaudible). That's what I can say, but I'm not going to discuss any quantity, (inaudible) outlook. For more these reasons.

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

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

Okay, great. Second question on the Sputnik V. Just, if you can tell us, what's your sourcing plan for the vaccine? And second is, is there any change to your earlier launch timelines and $100 million volume target, that would be great?

So the $100 million is now $125 million, (inaudible) and we are discussing more countries. We are now rolling -- actually, we initiated already (inaudible) with [1,600]and by March, we hope we can submit to the (inaudible), the most (inaudible). And if we will get, we can launch in March.

Okay. And what about the sourcing plan? I mean, would you be taking it from your partner (inaudible)? Or would you also be doing some manufacturing?

So a little bit from Russia, and most of it from India, with 2 partners.

Okay. Got it. Very helpful. The other question is on the origin outsourcing of AUR102. This is pre-phase I sort of outlie I think to (inaudible) so it's a very early stage of licensing. So what's the thought process behind this? You would have taken it to Phase II or even early Phase III and then whatever to make sense?

Yes. So we and [origin] developed other (inaudible) interesting pipelines. Some of them, we are planning to continue to develop to a later stage. Some of them we're planning to monetizing (inaudible) to allow origin to be subsystem in terms of risk/reward management. So I think that Origin has a very, very interesting path going forward. So those that we want to keep and continue to invest a new (inaudible) we'll do later.

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

Yes. So as I said, our aspiration indeed is to deliver 25% EBITDA on a sustainable basis. And while we are in neighborhood of 25%, not yet able to consistently deliver 25%, and we have a number of levers to get there. I think the biggest lever, obviously, is top line growth. And second is productivity that we are driving very hard across the value chain. I mean, I can talk about it in detail. (inaudible) product reformulation, the chemistry, how we can run our machines more efficiently, how to improve the yield, finding alternate vendor for our materials and so on, and also increase in marketing and so on.

So productivity is a big driver, and we want to make it a habit. But I must point out that as we drive productivity, we also need to invest some of it back into the business behind our brands and behind capabilities, digital capabilities I spoke earlier. So it's very important that we drive the levers for that can potentially improve the margin but we also invest brand a business so that we can believe a sustainable growth in the future.

So I would say that we are in the neighborhood of 25% EBITDA aspiration. And I think you can expect that in the next few quarters, we should be in that range.

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

Just a follow-up on this. Clearly mentioned 25% over few quarters on a sustainable basis. But if I get my math right, particularly this quarter, if you strip the licensing income, then you are around 21%. And you mentioned that there are some structural cost upgradation which would happen or will continue over a few quarters.

So I'm just trying to get these 2 together that currently, we are at 21%. Last 2 quarters, we were 25%. How -- I mean, there's a 400 basis gap here. Actually, we are not near 25%. So if you could explain that. Earlier, you want to say that the cost is truly one-off here. So that would be helpful.

No, that's not right. The cost isn't (inaudible). Let me clarify that, first of all, the impact of the origin milestone payment is around 1%. We have delivered EBITDA margin of 24% during the quarter. And even if our EBITDA margin is around 23%, excluding the milestone payment, it is within normal range.

I must also say that we do drive out-licensing in a number of our businesses like proprietary products and origin and biologics business fairly regularly. So I'm not sure it is fair to exclude or include milestone payment. As I said earlier, we are driving productivity, and we are also investing behind the business. We are right now in the neighborhood of 25% margin, and we will continue to drive that as our long-term aspiration.

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

I don't feel I can quantify the one-offs. In terms of the increased cost, as I said, it is an investment behind our brands. We do expect it to continue, but it is also a little bit growth. So we have a profit internal investment and therefore, there is room for growth.

So in summary, I think this level of investment, we expect to continue, but this is directly linked to the serious growth that we can deliver.

Perfect. That helps, very helpful. Secondly, sir, on China. So I think with COVID, everything is muted, but what is the ground level action in terms of the filing momentum, how it has been in the last 9 months? And has it started to pick up? And when do we see the next round of approvals for us?

So China is doing very well for us. We are also growing in China despite COVID and we already filed 16 products and out of a list of about 100 products in the pipeline that we shared before. So we are very much on track with the developments for China.

Sir, you mentioned 16 products filed and growing double digit. Did I hear that right, sir?

What I said is 15, and I did not say anything about the digit.

Okay. Okay. But we are growing in China despite COVID?

We are growing in China despite COVID and (inaudible) . And we already submitted (inaudible) on top of the products that we already have in the market.

Perfect. That is very helpful. And sir, on the API (inaudible) business that we have, so clearly, the first 2 quarters, very heavy, you mentioned stocking supply disruption. So how do we see the outlook going forward, given that in the last call, you mentioned that it's strategically important to us, and we want to invest in this business?

We will grow our API business. It will grow, maybe not quarter-on-quarter, but it will grow. It will grow and it's very important for us, and we want to increase also the level of the integration of (inaudible).

And it has 2 parts, if I'm not wrong, the API and the pharma services. So -- and then you carved out origin out of it. So I just wanted to understand the growth trajectory for each of the business.

Both will grow. We are not giving guidance, but both will grow.

Okay. Understood. And lastly, sir, on Pegfilgrastim, is there any update in terms of where we are in the overall approval scheme?

Which one, sorry?

Pegfilgrastim.

Yes. (inaudible).

Yes. Yes, Prakash. So we are -- so that the program is run by revenue, the [size of the] product. We haven't heard anything about approval, but we expect in FY '22, but we do not have any confirmed date.

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

Thanks, everyone, for joining us today for the earnings forum. In case of any further queries, please reach out to the Investor Relations team. Thank you.

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