Dr Reddy's Laboratories Ltd (RDY) 2021 Q2 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Q2 FY '21 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Amit Agarwal. 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 September 30, 2020. Earlier during the day, we have released our results, and the same are also posted on our website. This call is being recorded, and the playback and transcripts shall be made available on our website soon.

All the discussions and analysis of this call will be based on the IFRS consolidated financial statements. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's comprising: Mr. Erez Israeli, our CEO; Mr. Saumen Chakraborty, our CFO; and the Investor Relations team. Please note that today's call is a copyrighted material of Dr. Reddy's and cannot be rebroadcasted or attributed in press or media outlet without the company's expressed written consent.

Before we proceed with the call, I would like to remind everyone that the safe harbor contained in today's press release also pertains to this conference call.

Now I hand over the call to Mr. Saumen Chakraborty. Over to you, sir.

Thank you, Amit. Greetings to everyone. I hope all of you are keeping safe and healthy. I'm glad that we continued with our momentum of new product launches, productivity improvement and strengthening of COVID-19 portfolio while delivering the promise of serving our patients unabatedly even during these challenging times. The current quarter was witness to a strong sales growth across all our key markets, healthy gross margins, significant leverage benefit on SG&A, which resulted in a healthy EBITDA and profit margins.

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 convenience translation rate of INR 73.54, which is the rate as of 30 September 2020.

Consolidated revenues for the quarter stood at INR 4,897 crores, that is $666 million, and grew by 2% on a year-on-year basis. The year-on-year growth, adjusted for proprietary products out-licensing income of INR 723 crores recognized in the same quarter of previous year, stood at 20%. Growth is primarily on account of new product launches across market, volume traction in base business and integration of business acquired from Wockhardt. Our NAG business grew by 28%. Europe business grew by 36%. India business grew by 21%. Emerging markets business grew by 4%, and PSAI business grew by 20%.

Sequentially, our revenues grew by 11%, supported by gradual improvement in the volume pickup in India, Russia and other markets, new product launches and full quarter impact of the business acquired from Wockhardt. Sequentially, we saw 46% growth in India, 6% growth in both in Asia and Europe and 8% growth in emerging markets.

Consolidated gross profit margin for this quarter has been 53.9%. Although on a reported basis it declined by 360 basis points year-on-year, adjusted for out-licensing income during previous year, there has been an increase. This increase was driven by improved productivity, ForEx benefits and product mix, partially offset with price erosion. Sequentially, margin declined by 210 basis points due to lower export incentives, adverse ForEx rates and product mix. Gross margin for the Global Generics and PSAI were at 59.4% and 26.8% for the quarter.

The SG&A spend for the quarter is INR 1,311 crores, that is $178 million, a decrease by 1% year-on-year and an increase of 3% quarter-on-quarter. The sequential increase is primarily attributable to incremental costs arising with the integration of acquired business from Wockhardt and increased sales and marketing-related activities post unlock. Freight cost has shown a reducing trend post unlock with improvement in carrier availability. However, so far as productivity is concerned, SG&A as a percentage of sales at 26.8% reflects an improvement of 80 basis points year-on-year and 200 basis points quarter-on-quarter.

The R&D spend for the quarter is INR 436 crores, that is $59 million, with an increase of 19% year-on-year and 10% sequentially. This spend is in line with the increase in the number of R&D projects, including development of COVID-19 products. As a percentage of sales, however, R&D was at 8.9% of sales.

The EBITDA for the quarter is INR 1,267 crores, that is $172 million. EBITDA margin is at 25.9%, surpassing our aspirational target of more than 25%. Profit before tax for the quarter is INR 862 crores, that is $117 million, with a year-on-year growth of 12% and a sequential decline of 2% after absorbing an impairment charge of INR 78 crores on certain products, in line with the requirement of the accounting standards.

Effective tax rate for the quarter is at 11.6%. The ETR has been lower due to recognition of deferred tax assets for one of our subsidiaries. We expect the ETR to be around 25% for the full year, as alluded earlier. Profit after tax for the quarter stood at INR 762 crores, that is $104 million, which is 15.6% of the revenue. The reported earnings per share for the quarter is INR 45.83.

Operating working capital increased by INR 21 crores, which is $3 million. There has been an increase of INR 200 crores each in the receivables and the inventory, which are in line with the growth in business, which was partially offset by the increase in the trade payables. However, when we measure working capital in number of days, that has improved by 5 days. We invested INR 250 crores, which is $34 million, towards capital investment in this quarter.

The free cash generated during this quarter was INR 606 crores, which is $82 million. Our net debt as of September 30, 2020, was INR 136 crores. Our net debt-to-equity ratio is at 0.01 and continues to reflect our strong balance sheet position.

Foreign currency cash flow hedges for the next 11 months in the form of derivatives for U.S. dollars are approximately $305 million, largely hedged around the range of INR 74.4 to INR 76.7 to the dollar. In addition, we have cash flow hedges of RUB 2.1 billion at the rate of INR 1.031 to the ruble maturing over the next 9 months.

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

Thank you, Saumen. Good morning and good evening to everyone. I hope you and your families remain safe and healthy during these difficult times. I am pleased to see our employees and business partners have responded to the current challenging environment and came up with innovative solutions with speed and agility to ensure that we continue to serve patients across our markets. I want to thank them all.

We continue to progress well on our transformation journey with consistent improvement in performance across all financials and health parameters. We have yet again delivered strong financial performance this quarter and recorded the highest ever quarterly sales of INR 4,897 crores, healthy EBITDA margins of 25.9% annualized and annualized RoCE of 23.6% and consistent generation of free cash flows. The strong balance sheet position and low level of net debt give us reasonable headroom to invest for future growth.

Despite COVID-19 impacting fundamental demand, we saw healthy growth across all our businesses during the quarter. The market demand in India, Russia and other branded markets have witnessed sequential improvement. However, it is yet to fully recover to pre-COVID levels.

The quarter was supported by new products launch momentum across the markets, strong pickup in the sales of brands acquired from Wockhardt in India and overall cost leverage benefit. We continued to progress well in line our strategy and believe that we are moving in the right direction with diversified levers of future growth on the back of expansion in market share across key markets and further improvement in productivity.

We have also progressed in our effort toward this global fight against COVID-19. As you are aware, we entered into a deal with RDIF Russia for Sputnik V vaccines to conduct clinical trials and distribution in India. We are going to initiate combined Phase II and III clinical trials for the vaccines candidate very soon. In addition to that, we are working towards the development and launch of multiple products as treatment options for COVID-19 in our various markets.

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

Our North America Generics business recorded sales of $247 million for the quarter with a strong growth of 22% year-over-year and 8% on a sequential quarter basis. The growth was supported by new product launches, offsetting the lower volume uptake in select molecules segment, impacts by lower doctor visits and elective procedure in the hospital. We launched 9 products during the quarter, including some limited competition products such as first-to-market products Ciprofloxacin and Dexamethasone Otic Suspension, OTC Diclofenac gel, OTC Olopatadine eyedrops. With strong new launch momentum witnessed in H1, we are well on track to launch more than 30 products during this fiscal, exceeding our initial expectation of 25 launches. We believe that the H2 is likely to remain busy in terms of launches, and we would also include a few niche and limited competition products.

Our Europe business recorded sales of the EUR 43 million with strong year-to-year growth of 22% and sequential quarter growth of 2%. The growth was driven by new product launches seen across the markets. During the quarter, we launched 3 products in Germany and 1 product in each in the U.K., Italy, Spain and Austria, in line with our strategy to expand our presence across Europe. Leveraging our deep pipelines, we forayed into Austria market in the current quarter, beyond our EU5 countries.

Our emerging market business recorded sales of INR 864 crores with a year-on-year growth of 4% and sequential quarter of 8%. Within the emerging markets segment, the Russia business grew by 4% on a year-to-year basis and 26% on the quarter-to-quarter basis in constant currency. The market demand has been gradually improving after COVID-19-related decline witnessed in Q1. We also saw similar improving trends in our CIS markets. Our business in China has also continued to perform well in this quarter. During the quarter, we launched 28 new products across emerging markets.

Our India business recorded sales of INR 912 crores with a year-over-year growth of 21% and a sequential growth of 46%. The strong growth in this quarter was supported by sequential improvements in the market demand after a lighter Q1 due to COVID-19-related lockdowns. The sales was also supported with strong contribution made by the business acquired from Wockhardt, which has been performing quite well and ahead of internal expectations. We launched 7 new products in the India market, including the 2 COVID-19 treatment drugs, Avigan or Favipiravir drugs and Remdesivir injection.

Our PCAI (sic) [PSAI] business recorded sales of $115 million with a year-on-year growth of 14% and sequential quarter growth of 1%. We believe that this continue to -- we believe this continued strong demand was in part due to higher API inventory level being carried by our customers to prepare for any potential COVID-19-related disruption. This demand is likely to get normalized in the coming quarters and -- as inventory catches up with end consumption. However, we expect this business to be a key growth driver, supported by our focus on new product development, improvement in cost position and tailwind due to evolving market dynamics.

On the R&D front, we continued to strengthen our pipeline of products across the markets. During this quarter, we filed 27 formulation products across global markets, including 2 ANDAs in the United States. As of 30 September 2020, we have 94 cumulative filings pending for approval in the U.S. FDA, including 92 ANDAs and 2 505(b)(2) NDAs. We also filed 39 drug master files globally, including 1 filing made in the U.S. market. We have significantly strengthened our development pipeline across markets, including development for multiple products related to COVID-19. In the coming months, this will increase our investment in R&D and accelerate our submissions of new product filings.

On biologics front, the Phase III trial for rituximab is progressing well. In parallel, we are working on the next wave of biosimilar products, which are at different stages of development. On our proprietary business, we continue to actively progress toward building a sustainable globally relevant pipeline. Simultaneously, we are continuing our efforts to monetize select assets through partnership and licensing transactions that maximize their value.

We continue to progress on our growth agenda complemented by inorganic moves. After the successful integration of the business acquired from Wockhardt, we continue on our journey to evaluate more opportunities to help us achieve our strategic priorities. Having sailed through successfully over the last 2 quarters in the current volatile market environment, we remain committed to do our best and meet the expectation of all of our stakeholders.

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

(Operator Instructions) The first question is from the line of Prakash Agarwal from Axis Capital.

So my first question is, if you could help us understand the volume or the market opportunity for Remdesivir and Favipiravir?

Yes. Remdesivir, we built certain capacities for India. So currently, we are marketing it in India, and it is going very well. And we are expanding our capacity to -- ability to help both increasing demand from India as well as from other emerging markets. As for Favipiravir, we have a set of clinical trials on top of what the original topology of this product. So we have now trials conducted in the Kuwait as well as in the Emirates. And additional trials will be conducted in the U.S., Canada and India to allow us a variety of potential data as well as indication. And we will try to seek emergency use authorizations if the data, of course, will support it.

Fair enough. But just if some color could be given in terms of volumes that you are selling currently or some data, what is the market share you would have in Remdesivir, that would be helpful.

We are not disclosing that at the moment.

Okay. Fair enough. So sir, second question on the gross margin. Understanding -- so you clearly mentioned that export incentive is partly the reason, so -- and price erosion. So what our understanding is only the September month, it was not there. So have we accounted export incentive till August? And how do we account going forward since there's a statement by the ministry that there would not be any export incentive going forward? So how do we look that? And what is the outlook on the gross margin both for Global Generics and the PSAI business?

So you're right. In this quarter, it was a 1-month impact. That is September. And starting from next quarter or not, it will be a full quarter impact of the export incentives. So that has some impact in the gross margin going forward. And I clarify that if you were to look at year-on-year and quarter-on-quarter on a like-to-like basis, if you compare year-on-year, last year, definitely, gross margin was very high, beyond the normal range that earlier I alluded to. So there could be -- if you look at multiple quarters over the years, if you see our gross margin, there would have been all these fluctuations quarter-to-quarter. But there is a kind of a range which we will feel is a normal range, one odd quarter because our exception is -- goes higher than that. Maybe one odd quarter, it could be worse than that. I believe 53.9% is very much within the normal range.

Sequential decline, yes, some part is also for the ForEx. In the Q1, U.S. dollar was more than INR 75, and now it is INR 73.5. So that has an impact. That's 1 month of this export benefit withdrawal. It has an impact. And of course, beyond that, there are so many multiple factors, which is that we include product mix, business mix, business segment mix, everything. So fluctuations are bound to be there. It's very difficult for us to give any kind of specific outlook. But all that we can say is that we have continuous efforts to not only improve productivity, which is in the SG&A line or other overheads, but also improving the cost of revenue. That effort has contributed.

Okay. So what I understood was the normal range would largely be maintained despite the export incentive for the full quarter being not there going forward. Would that be correct understanding?

No. I said 53.9% is also in the normal range. I say so far as export incentive is concerned, in this quarter, this was a 1-month impact. And this is not only for us. It is -- this is withdrawn by the government earlier than what -- earlier one thought. That was supposed to be in December end. This has started in September. And going forward, this will become a normal phenomenon. That means there will be -- export incentive will not be there. So our effort will be to what extent you can neutralize by improving in terms of cost of revenue, how do you improve costs, so many other things to neutralize that.

(Operator Instructions) The next question is from the line of Damayanti Kerai from HSBC.

Hello. Am I audible?

Yes. You are.

Okay. Yes. My first question is regarding SG&A cost trend going ahead. So I understand the second quarter reflects impact of, I'll say, full integration of Wockhardt portfolio. And now with things opening up in Indian market, we assume there will be incremental cost coming up on the marketing and promotional side. So how do you see SG&A costs moving in coming quarters?

So first, we have been able to contain a lot of cost because on the manpower costs front, I think the containment is quite good. And in terms of SG&A as a percentage of sales, you get a leverage if you are getting more and more sales. And this quarter has been very good on sales front. And like-to-like, as I already told, it is around 20% growth. If that happens, then yes, productivity improves definitely. Yes, you are right. On an absolute basis, the more we start spending on marketing and sales, on an absolute term, SG&A may increase. But our effort would be always how do we keep on improving the SG&A productivity.

Sure. And my second question is regarding the update on recent cyberattack. So after this incident, do you believe you need to invest more in resources to secure up your system? What kind of investments you are looking at there?

So we have been building up both in terms of digital initiatives, increasing our digital footprint as well as all the information security measures. So there has been always attacks which would have been happening. And to a great extent, we have been able to ward off most of them. But in this particular case, the cyberattack happened. And so we have already given to the stock exchange our notification. We took, as I believe, the right kind of steps in terms of isolating the impacted IT service part and then taking help of international experts in cybersecurity to really contain and restore from our backup very systematically, in a very controlled manner and very cautiously. And by this time, our -- most of the critical applications have been enabled and are being enabled also. So -- but at any point of time, nobody can take things in a complacent manner so far as cyberattack is concerned. It's an ongoing effort by whoever wants to do anyway.

But yes, we have been doing it in the past. We are doing more heightened surveillance at this point of time, and we will continue to do. But it's not always a matter of the investment. Whereas always, you can reduce the chance but you cannot eliminate the possibility, so -- no matter what you invest. It is almost like 0 defects can be your target, but that's an ideal. The more you improve your Sigma levels, the possibility of defects per million comes down. Same way we can get some comfort of whatever the security that we can build, but you can only minimize, but you cannot possibly eliminate because there are so many things which are happening on in terms of other creating newer and newer [spins] and other way of attacking.

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

Just to delve a little bit more on the SG&A spend. I understand your outlook. But if I look at the spend in this quarter versus the last quarter, given we have the Wockhardt integration and normalization in our branded businesses to some extent, could you explain the reason for such a moderate increase on an absolute level? I understand the operating level -- operating leverage. But what helped offset the increase that we saw because of the other 2 factors?

The broad -- as I told that we have been able to contain various components of the SG&A cost, and specifically, when you do things more digitally and virtually, then the sales and marketing expense will be a little bit lower. But there has been already a sustained effort on improving, containing cost. This has been going on, and we can only disclose as much as we can. So I don't know.

The freight, which went up sharply in the previous quarter, there has been a little bit reduction, which I have already said in my script.

Understood. And so this digital marketing, which helps control cost, that should be sustainable, right? Or do you see this more as the markets are opening up, probably we go back to physical marketing?

Yes. So we are going to be more productive, and we're going to use more digital marketing absolutely going forward. So we are actually even at the beginning of the journey. And I do see ourselves even increasing the level of digital marketing. And some of which will be on the expense of the, let's call it, better marketing process. So more and more, we are going to be more and more digital and more productive on the SG&A.

Understood. My second question is on the ROW market. If I exclude Russia CIS, there seems to be a moderation quarter-on-quarter. Was there any specific reason for that?

There have been some countries like Vietnam, Jamaica, where the sales has been lower in this quarter.

But a 20% decline quarter-on-quarter?

Yes. It has happened.

Some of the smaller markets are dependent on specific products that -- and sometimes (inaudible) stuff like this. Some of those markets were affected also by COVID. So I think, overall, I think we have a very healthy performance in the emerging markets. I'm actually very pleased given the challenges that we are in this quarter in some of these markets.

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

My question was on the Sputnik V vaccine and the trials you're now conducting in India. If you can help us understand what's the size of the patient pool of your clinical trial? And any visibility you can give us on time lines as to when the clinical trial results would be available and then you could launch the product?

So everything is tentative because we need to be also successful with the trials. We are talking about Phase II, which is about 100 patients, which will start very soon. And about 1,500 that will be on top of the trials that are conducted in Russia or the global trial for India, which will be conducted right after with the consent of the authorities. If everything will go well, and of course, it's a big if, because many things needs to go right, it can be as soon as end of March. But of course, it can also be after that, depends, of course, on the relevant results as well as the requirements of the authorities.

Got it. So the 40,000 patient clinical trial that RDIF is conducting, what is the visibility on the trial readout for that Phase III trial? How is it...

What we have is the relevant part of the India arm of test. They have -- it's on top of what they do in the global trials.

I understand. But I thought you mentioned that this data will be kind of a bridging study over and above the data that you will have from the large-scale clinical trial. Would you need both for an approval in India?

Yes, we will have to have both.

Hence, the question is, is there any visibility on when there might be some data coming out of the larger Phase III clinical trials?

I don't have a specific date on that, but what I gave you as a best case scenario is the (inaudible)

Got it. Just 1 more related question. On the 100 million doses that we saw in the press release that you will be able to supply of this vaccine, have capacity actually been identified?

Yes, we are working on it. And I hope that it will be ready by the time that we can commercialize the product.

So assuming everything goes well and you have the right data and you have the approval by March, you will have capacity scaled up to 100 million doses? Or would that happen over a period of time?

We will have a capacity that we will build over time. At that point of time, we will not have 100 million available. It will come in a certain space over the time.

The next question is from the line of Kunal Dhamesha from [MK Global].

So first question is on the Wockhardt business. Now that you have integrated it for full 1 quarter, so any synergy potential that you've identified because there is a lot of portfolio overlap that we have in terms of therapy?

I'm very pleased with this integration as well as from the product as well as from the people that joined us from Wockhardt. So I think we discussed in previous meetings, the Wockhardt deal gives us both synergies on both top line and bottom line, and we are actually now executing on both. So we can sell more in less cost.

Okay. And what would be your current sales force in India?

Excuse me, sorry, can you repeat?

What would be our current sales force in India?

We are not discussing numbers of people. Sorry?

It will be around 6,500 plus.

The overall?

Yes.

6,500 people.

Okay. And the second question is on Europe. We have seen significant growth in Europe in this year and that's driven by new product launches and new geographies. But if you can provide some color in terms of how much runway do we have in terms of new product launches? So I suppose we have x product right now in the EU5 market. Can we go to 2x or 3x in next 3, 4 years? Or maybe it goes 5x, and will all those products be from our U.S. portfolio or whatever we are developing globally? If you can give some color on that on Europe?

Yes. The color is that we just started to expand in Europe. I believe that we will grow much, much more. And we're we just in the beginning of country products. We are not giving guidance for the future, that -- naturally, our bases are now very low, and there is a lot of room for us to grow in Europe.

Okay. And any qualitative commentary on margins on Europe business, whether they will be in line with company margins or?

No, we don't disclose that.

The next question is from the line of Tushar from Motilal Oswal.

Yes. Just extending the Europe question, now there's another wave of COVID, so do you see any near-term impact on the business?

Another wave of COVID in Europe.

Yes. I hope not. And so far, I do not see any impact on the business.

Got it. Sir, just on the balance sheet side, the other intangible assets compared to FY '20, there's a sharp increase. So if you could just explain that?

Sharp increase in what, sorry?

Other intangible assets related on the balance sheet.

This is the Wockhardt deal.

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

First of all, Saumen, congrats on your long innings and best wishes for the future. My question first is...

Thank you.

My first question is on generic Vascepa. If you could just tell us -- share with us your commercialization plans, when do you expect to launch? Perhaps share around what's holding you back would be great?

We are gearing up for the launch. And when we are ready, we will launch it.

What's the key bottleneck for the launch? Because you've got the approval, you've got the court decision. It's been a few months. It's still not in the market.

We are not ready to launch, that what is keeping us for months.

Okay, cool. No worries. Sir, the second question is on your REVLIMID settlement. I don't know how much you can share. But the other 2 settlements, which was Natco and Alvogen, they had given some sort of a flavor around the entry and the exit market share between 2022 and '26. Is there some color that you can share even qualitatively would be great because it's a big product?

No, we cannot share specific numbers because it's a part of what we discussed in the past. But let's say that I am very pleased with the settlement.

Okay. And with your permission, one more question, and that's around Sputnik V vaccine. Sir, will the vaccine require any specialized distribution in terms of refrigeration? And second is, some states have made announcement of giving free vaccines. So will that have any commercial implications for you?

These products will require cold chain -- supply chain as this product needs to be kept in a very low temperature. So yes, absolutely, it's a consideration for this product. As for any commercial arrangement, we did not discuss, and we're not discussing any of this at this stage. What we are focusing on is to prove that the product is with the right efficacy and safe. Once it will be -- we can prove that, we will worry about prices in commercial terms. Right now, we are not discussing it.

The next question is from the line of Vishal Baraia from Aviva Insurance.

Just to continue on the Sputnik V, what would be the spend on trials that we plan to conduct for the vaccine in India?

We are not sharing specific numbers. What I can say is that we -- our R&D is going to increase in the next 6 months as not just because of Sputnik but also on other COVID-19 products that we are bringing. At the same time, I think we will be able to contain this cost by improving on the other parts of the business. So it's something that we'll be, I think, can contain it easily.

Okay. And one question on the United States. So if we exclude these 9 large products that we launched in, say, the second quarter, what -- how would -- how the base business behaved? Some perspectives on this could be helpful.

In general, it behaved well. Overall, if you look at prescriptions, and you can see (inaudible) IQVIA, you see that in certain molecule demand were down overall, primarily because of the way the market is behaving at the time of COVID ability of patients and doctors to meet, et cetera. So we do see in some molecules less demand, we've seen some molecules more demand. And overall, we -- in accordance to at least the last report I see and also what we feel as well, that we increased market share. So it is going well for us.

But the price erosion for the base business would be mid-to-high single digits, somewhere there or better than that?

We -- there is no -- let's say, we are not discussing specific prices for products or subsegments of products. But overall, the price pressure is more moderate this year than it used to be in the years before, but it will always be there. And this is also the case for this year.

Okay. And just last question on PSAI, on the API business. What would be the contribution for the COVID-related products in the API business?

Not much. It's -- we are producing the API for some of them, but it's not a big contribution. Most of the growth comes from, let's call it, the normal products that we have. And the growth is attributed to the efforts that we did in the last 2 years.

And how has been the pricing for APIs, some perspectives?

(inaudible)

Pricing.

You asked about pricing of the API?

Yes, sir. I mean, when we had the pandemic, there was a tight market. So does that continue? Is there a policy in currently as well? Some views over there.

I think that at the beginning of the pandemic, there was a bit more orders of this product test for companies that prepared themselves for potential scenarios. This got normalized by now, and that's how we see it also going forward.

So do you think the 30% run rate, year-on-year growth run rates continuing for the second half as well?

I believe that in the second half, we will not see the impact of accumulation of inventories. We will see the normal growth that comes. So we will not see maybe the full effect. We see some of this effect.

The next question is from the line of Surya Patra from PhilipCapital.

Sir, is it possible to have a sense what is the kind of contribution that we would have seen from the COVID portfolio sequentially? Because the sequential domestic growth looks really strong, almost like 46%. Even if we add this for the Wockhardt this thing, it is near about 27 odd percentage kind of. Obviously, there would be a recovery, but -- in the domestic market. But if you go by the [ALCV] data, that suggests that you could focus (inaudible). So is it fair to say a kind of meaningful contribution from the COVID portfolio for the domestic growth this quarter?

So COVID helped, but I would not say that it's the most significant growth. I think all of the businesses performed as well together. So it was a combination of the fact that there is a recovery in the market. As you know, the type of portfolio that we had suffered more during the lockdown, so now the lockdown was open, it's absolutely helped us as well as Wockhardt, as well as the COVID product. So it's the combination of the 3 of them.

Okay. If I just take that same question regards U.S., so then I think, obviously, the growth number for the quarter is really -- look really strong and great. Some extent of this, the base effect is also there. But curious if you can give us some understanding that, okay, you have a kind of growth -- or what would be your oncology portfolio revenue sale in the U.S.? And since there are studies that says that there is a -- because of the COVID, the oncology products witnessed a kind of 30%, 40% kind of decline over the last 4, 5 month period. So what would the kind of impact that you have witnessed, despite which you have delivered this kind of growth?

Indeed, some of the injectables that we have hedges demand, not just by the oncology, it can be other hospital-related products that we did see some less of demand due to COVID. Overall, for us, we were able to, between the market share and new products, we were able to overcome or compensate for some of those declining in certain demand of products as well as for the relevant price decrease. So more volume share, more new products compensate price as well as less demand in certain products, including some of these injectables.

Okay. Just last one question, sir, on the vaccine side. Sir, if you can provide some idea that, see, so far as the commercial launch of the product is concerned. I think government is indicating about distributing the vaccine -- or vaccinating -- or running a vaccination program only through government agencies and the procurement to be through government agencies only. In that case, do you expect, having seen or knowing the fact, that there are multiple domestic leading players are there who are manufacturing and almost hoping to launch.

So in that scenario, if they're in thinking about introducing the product in the domestic market, there is any kind of business scope for domestic market?

So you asked about the vaccines, correct?

Yes, yes, yes.

Vaccine is only for the domestic market. We don't have it for other markets. So yes, I believe that there is a great need for this. And I do hope that we will prove that the product is safe and with the right efficacy. I'm not sure that -- I don't see any competition on that, so I'm not sure what kind of competition you're relating to.

The next question is from the line of Surajit Pal from Prabhudas Lillhader.

Could you please tell me is this API manufacturing is the main issue for Vascepa as well as some litigation issues where some liability could come into picture, given that what has happened in other cases in the -- in U.S. verdict?

Surajit, you're referring for which product?

Vascepa.

Vascepa.

Yes, we're not commenting on the -- I'm not commenting on the activities around this product. What I said before, we are prepared for the launch, and we will launch when we are ready.

Any actual -- so could you throw some light on when could be that possibility? 3 months, 6 months?

Not really. I'm not planning not because -- because you can understand that it's a sensitive information.

Okay. Another question is about your Favipiravir in U.S. So currently, I believe, going -- ongoing trials. So any development on that?

Yes, we are accumulating the data, and we will try to seek emergency use authorization in the United States. And if not, we will try to go to in the normal patterns of registering the product. I hope that we will be able to do so.

And what could be...

Yes. Sorry. Yes, please.

Any time line on that? Could you throw some possible time line?

I don't have yet the time lines. There are ongoing discussions with the authorities about the type of data they want to see in order to allow emergency use authorization. And we are trying to send this data. Everything that we are discussing is will happen within the next few months anyway. But I don't have a specific date within that.

All right. With your permission, just last question. Is that -- your $100 million budget for Sputnik V trial, is it budgeted for FY '21 only?

I never said...

Or is it across FY '21 and '22 together?

We never put numbers for the R&D expenses, $100 million refers to the number of injections that we are getting as a quota from the Russians. That are the numbers we got licensed to market in India. And we never discuss the R&D budget.

The next question is from the line of Nimish Mehta from Research Delta Advisors.

Sir, I'm just trying to understand the gross margin of Global Generics business. We have seen a sequential decline of 200 basis points on Global Generics, whereas we have very large 2 activity, which has actually got added. So one is the sharp increase in the domestic business. And second is the launch of products in the U.S. and the (inaudible) exclusivity. So both should have meant that the dropped margin, at least on the Global Generics, should have been far higher sequentially, but versus that, we are looking at a 200 basis point decline. So what is that I'm missing here? If you can explain, that will be great.

So I have already said the 3 distinct reasons. One is the lower export incentive because 1 month impact is there. Secondly, that was ForEx rate. Last quarter, it was 75 or so. This quarter, it is 73.5. So ForEx rate is at first impacting. And third is product mix.

Sir, I'm sorry to disrupt. But does the ForEx really reflect the gross margin or is it below gross margin that is captured?

So some impact is there in terms of margins.

Yes. So the ForEx impacts the gross margin in the sense the sales basically comes down. Most of our sales happens in USD. So as it comes down, then the impact goes to gross margin also. And ruble has further been impacted this quarter. So that impact is also there.

Okay. So from an impact perspective, is ForEx the largest reason by this has happened? I mean, I'm seeing 2 very strong wins. One is the domestic business, which is sharply up, and taking (inaudible) just trying to still understand, like can the 3 elements that you mentioned, the factors you mentioned, are they sufficient to compensate for the (inaudible)

Yes. We need -- so other than this also, there are other products, which has impacted. So these 2 have contributed possibly, but there are factors which have contributed negatively. So there is an overall product mix where we see.

Understood. Okay. And second, I just want to know, there is a product where I think we already have an approval. And I don't think we have been integrated. So what is that stopping us from launching the product? I understand it would be an important product for Dr. Reddy's, given that it's low competition?

Yes. So there are certain activities which are pending. So maybe once we complete those, then we will launch the product.

I see. Any time line, if you can give, that will be great.

As of today, we don't have any specific time line, but once we have a little bit more clarity, we will (inaudible)

The next question is from the line of Shyam Srinivasan from Goldman Sachs.

The first one is on the regulatory inspection outlook. Have you started seeing the FDA starting to inspect at least some of your global plants like the plants in the U.S.? And from a calendar year 2021 perspective, what do you think are some of these changes that companies need to adopt while having to do these regulatory inspections?

So as for the U.S. FDA, we did not have inspections outside of India. And as for other agencies, some of them are performing remote audits and that's what -- and that's the preparation people needs to do to be able to either obtain data or having audit remotely, meaning use cameras or using other means to present to the auditors and give the information that they need. This is a certain adjustment that we are doing for some agencies.

Do you think -- for next year, do you think this audit -- virtual audits could remain in terms of proportion or in terms of criticality of plants, you -- that we need physical inspections versus others could just keep doing virtual audits, is there some qualitative sense ready?

It is up to the agency. Some agencies already doing, and we even experienced some virtual audits and some don't. So it's up to them. I believe that COVID-19, unfortunately, is here to stay for the foreseen short term. So people will have to take those decisions. And right now, I believe that the inspections, if will happen, will be virtual, by and large.

All right. And my last question is on the China business pick up. I think these 20 products in all emerging markets. What have we done in terms of the China market this fiscal so far? And the experience of selling clopidogrel, if you can actually walk us through that as part of the GPO?

Yes. So we are continuing with the strategy and actually executing well against it, including the products that you've mentioned. We are not giving number specifically for a product. But the strategy, the way we articulated, is working for us. And our China business is growing, and including the products that we get to the GPO, like olanzapine. So in that respect, it is going well for us. So we continue to do both submissions as well as to focus on those products that are not commercial for us.

We'll take that as the last question. I would now like to hand the conference back to Mr. Amit Agarwal for closing comments.

So just before Amit will finish, I want to this audience to thank Saumen that is not leaving Dr. Reddy's, but he is going to -- in next month and -- going to retire and -- after 19-plus years in Dr. Reddy's and will continue to be with Dr. Reddy's after that. And I want to, to this audience, to thank you all for collaboration with Saumen and to thank him in front of you for an excellent service with Dr. Reddy's. And thank you so much for your collaboration all these years with us, and I hope you'll continue to do that.

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

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