Ladies and gentlemen good day and welcome to the Dr. Reddy’s Laboratories Limited Q3 FY’21 Earnings Conference Call. Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Agarwal from Dr. Reddy’s Laboratories Limited. Thank you and over to you sir..

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 call 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 am pleased to take you through our financial results for the quarter three 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 convenience translation rate of INR73.01, which is the rate as of December 31, 2020. Consolidated revenues for the quarter stood at INR4,930 crores, that is $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 business.

During the quarter, we recognized milestone received towards AUR102, one of the programs of our Aurigene 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 improvements. Gross margin for the Global Generics and PSAI businesses were at 57.6% and 25.3%, respectively, for the quarter..

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 the hope and visibility around life returning to normal after a significant healthcare crisis and socioeconomic disruption caused by COVID-19 in 2020.

The vaccinations program has started in several countries and we are continuing to contribute our bit in this fight against the global pandemic. Recently, after the approval from DCGI, we have initiated the Phase III clinical trials of Sputnik V vaccine in India.

The vaccine’s efficacy is confirmed at 91.4% based on the data analysis of the final control point of clinical trials arm in Russia. We have also strengthened our partnership with RDIF and have been confirmed as the preferred marketing partner for and expeditious 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 turn -- once again turn 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 markets has witnessed sequential improvement over the last couple of quarters, it is yet to recover to pre-COVID levels.

We continue to progress well on our strategy of diversified business model and creating the right leverage of growth from each one of our businesses. This includes building a healthy product pipeline, focus on productivity, improvement in marketing capability and strengthening our processes led by digitalization initiatives.

The strong balance sheet position allowed us to continue to invest in the right set of opportunities for future growth. Now, let me take you through the key business highlights in 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% year-over-year and a decline of 5% on a sequential quarterly basis. While the new product launches momentum continued through the quarter, we faced incremental competition and less pricing erosion 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 resourcing..

Thank you very much. The first question is from the line of Shanti Patel from Shanti Patel Investment Advisors. Please go ahead..

The light on capacity utilization in respect of various verticals.

And question number two, is impairment loss, how it is determined? And will it be reversed in future? It situates on changes, please throw some light on that?.

Yes. So the -- we had the triggering event of the launch of Nobel and Vascepa and the -- and we have worked in accordance to the good accounting practices, as we see the attributed base events for that.

We are still planning to launch these products and I don’t -- there is no plans to reverse that, I hope and believe that we will launch these products and make money from them..

Mr.

Patel, is that answer your question?.

Capacity utilization, what is the capacity utilization in respect of the various verticals?.

Yes.

The capacity utilization?.

Yes. That is correct..

We have enough capacity for the visibility trial, so I’m not sure I understand the question..

No, no. Capacity utilization means 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?.

I got that and then saying again, we had enough capacity for all the verticals. The only place to say in which we need additional capacity is in the injectable arena and primarily for the years of 2022 -- FY’23 and FY’24, as well as the biologics. We have enough or the growth in the oral solid..

Okay. Thank you. Thank you..

Thank you. The next question is from the line of Rashmi Sancheti from InCred Research. Please go ahead..

Yes. Thanks for the opportunity.

If you can highlight what kind of growth we are seeing in India business ex Wockhardt integration?.

Yes. We are not listing the growth.

Amit, you want to answer it? Amit?.

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

Thank you.

And, sir, for the nine months?.

For the nine 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 of 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 expenses, so there is nothing in integration expenses. It is the field force like we have got from this business. So that is now part and parcel of our business, so that will continue. So the -- it is on account of incremental manpower cost, S&M cost, the plant which came from Wockhardt, so those expenses.

On an year-on-year basis, that’s the reason we have mentioned. On a sequential quarter basis, that is not the reason. It was there in 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. Well, that is the -- in this --.

Okay. And, finally, last on the pricing on the base portfolio.

Are we 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 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 quarters for us. And I believe that the business will continue to do well also in the future..

Okay, sir. Thank you and all the best..

Thank you. The next question is from the line of Damayanti Kerai from HSBC Securities and Capital Markets. Please go ahead..

Hi. Thank you for the opportunity. Continue 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 only expressed your goal about increasing your U.S. sales by 50% in next three years.

So how do you see pickup happening on the ANDA filings front? And second question on the U.S.

businesses, any update on Vascepa and Remodulin generic launches?.

So, on the filing, I think you’re going to see a much more filings next quarter. It’s in line with what we discussed in previous meetings. So we are in the same place, just in terms of the collision between the quarters, what would happen in Q4. The -- as for Vascepa, we are preparing for the launch of the product.

Sorry, there was another one?.

Remodulin?.

Remodulin, there will be some time away in the main peak. It will take some time for us..

Okay. Okay. And my second question is on the impairment part. So, for acquiring eight ANDAs from Teva, we paid around $350 million. And if I’m correct, we have already taken impairment of around $250 million, $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 condition?.

We are not expecting any 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 has 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 much more important for us is the big integration. So we are working on both and we are going to see growth in the API in the future..

Okay. Sure. Thank you..

Thank you. The next question is from the line of Kunal Dhamesha from Emkay Global. Please go ahead..

Hi. Thanks for taking my question. So the first question is on the other expenses. So, I think in the opening remarks, our CFO said that there was some one-time 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. The one-off expenses that I referred to are primarily two, one is COVID-related freight expenses have been at the higher end, as you know, for the last few quarters, since COVID started. And we are not seeing any moderation in the rates yet. 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 non-recurring in nature..

Okay. So, if I see the quarter-on-quarter, last quarter our SG&A expense excluding D&A was around INR983 crores and this quarter it is somewhere around INR1,120 crores.

So, can you attribute the entire increase to that because we have said that Wockhardt integration costs were already there in quarter two, so the entire thing is related to and the freight cost would also be there in quarter two, right? So then the entire difference is coming from the one-time litigation costs?.

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 the branded markets.

In markets like India and Russia, we have seen the market growth is showing some gradual signs of pickup 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 plants, 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 doctor.

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 is also because of the higher air to sea 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 three, four quarters before it kind of normalize or how should we look at it? Like, is this the new normal of SG&A, like INR1,100 crore?.

See, we do -- 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 in sales and 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 we are finding sales growth is being driven by the investments, then we continue, otherwise, we also try to tear it down. So that’s one point I would make. And, obviously, the COVID-related expenses will gradually normalize..

Okay. Okay. Thank you for that. And the second question is a more of a housekeeping question. So, I think we took $156.5 million of impairment charge for NuvaRing in quarter three 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 capitalized 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..

Okay. Okay. Okay. Yes. Thank you. Thank you for taking the question..

Thank you. The next question is from the line of Nithya Balasubramanian from Bernstein. Please go ahead..

Yes. Thank you. Sir, my question is a follow-up on the SG&A expenses. Sir, in the last quarter, at least in branded markets like India, China, Russia, assuming that all the clinics are open, but that’s the back on the ground. So the kind of savings you probably realize in Q1 and Q2, most of the costs are likely to 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..

Sir can I take that, you 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 investments and we link it to sales growth. So, it is linked to -- ultimately, these investments are linked to the growth that we can deliver. But yes, you can expect that gradually will go back to pre-COVID levels..

Okay. Understood. Thank you. The second question was on some of the material products that we have filed in the U.S. or are likely to file.

Sir, if you can give us an update on where you are on NuvaRing, Copaxone, I think you mentioned you refiled? Do you have a CAT date? If you can update us on those two products?.

Yes. I’ll do that. So, on NuvaRing, we continue -- we submitted the response to the CRL in December. And now the ball is in the court of the FDA and they also will -- we will wait for the response from 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 two assets..

Sorry, Erez, I hope I got that right, you have got received another CRL on Copaxone and you are preparing a response.

Did I hear that right?.

Yes. Yes, correct..

Any timelines on when you likely to resubmit?.

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

Got it. Thank you..

Thank you. The next question is from the line of Vishal Manchanda from Nirmal Bang Institutional Equities. Please go ahead..

Thanks for the opportunity.

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

Yes. 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 will maintain growth at similar levels for this portfolio..

Okay. And second one on the Sputnik vaccine.

So, just wanted to understand whether this could involve marketing and you would need to distribute it in the private market or will this be a 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 market. Of course, in accordance with the guidance that will come from the Indian government about 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 we also be allowed to sell it outside India, maybe Emerging Markets?.

Yes. So, we are discussing regarding the AF auctions to increase the collaboration also to branded markets..

Okay. Thank you. That’s all from my side..

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

Thank you for taking my question.

If I heard the numbers 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 the peak sales level? Is that correct and is that in the case, how should we look at momentum from Wockhardt from here? What will drive incremental growth or what you’re indicating in line growth for the Wockhardt from here?.

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

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

I think that in fact it was primarily our ability to invest behind this product and to full stop the activity that this product has demanded. So, this is the -- both the sales synergies, as well as the cost synergies that we anticipated to have and it is working well so far..

Okay. Understood. Okay. I’m not sure if I caught this in your opening remarks, but our working capital seems 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, Neha. So, on receivables, approximately the increase is INR300 crores. I would say roughly around one-third or slightly higher than that is because of lower discounting of receivables 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 the normal sales growth that we see. And finally, the milestone payment that we had received from Aurigene 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 stock 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 to more than the one product and so it’s not specific. It’s like the normal course of business, but it’s not the entire portfolio. So, like always United States when competition is coming we need to react to it if we want to defend the service what happens in these cases..

Understood. Thank you..

Thank you. The next question is from the line of Kunal Mehta from Vallum Capital. Please go ahead..

Sir, thank you very much for the opportunity. Sir, my first question was on NuvaRing.

So, just wanted to understand the rationale behind the write-down of the entire product because I think it’s still a viable product and, of course, it was, from an earnings perspective, it is for -- when you consider the five-year period, it’s practically neutral because it just accelerates the amortization.

But wanted to understand the rationale behind the writing down this whole product..

Well, the rationale is we have the triggering event with the launch of Teva, so change of course the model around this product. And as we address the CRL only now and depends, of course, on the time that we will obtain approval in accordance both the accounting standards we had to depreciate this asset.

So -- but yes, you are right, we are still committed to this product. Hopefully, the FDA will approve the product and then we can launch it and make money out of it..

Understood, sir. Sir, the second question I had -- I wanted to understand regarding the Emerging Markets. So, I’m sure in the opening remarks you mentioned a lot of the filings which you have done this year, 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, also smaller ones. So, just wanted to understand, while the -- of course, there is a lot of understanding available to understand the U.S.

portfolio in the sense, but on the Emerging Markets side, could you please give us an understanding of the new product launches which we have jotted down -- which we have targeted over the next two, three 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 two, three years’ perspective, then any target whereby what would be the contribution of the new product launches for these markets?.

So, yes, so we are not giving targets. But I am expecting, especially on the institutional and hospital that this product will significantly contribute to the growth in these area.

As you recall, when we discussed that strategy, we are taking our global products portfolio and try to find as many markets as possible in order to get much more dollars for -- much more dollar sales for investment in R&D, and that’s what we are doing.

So, you’re going to see more and more filings in the rest of the market -- in rest of -- in the rest of the markets and some of them and most of the development that we are doing now, we are doing globally and not necessarily for a specific market. So, it’s in line with the strategy that we have discussed.

And I want to say it’s in the court of the -- or the starting of the court of this execution. We are going to file more and more..

Understood, sir. Understood. Just a last final question from my end, sir. I just wanted to understand the strategy which we have on the injectable side, sir, could you please give us a number of regarding the -- 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 in the -- on the injectable side? And, of course, I was looking at -- you’ve mentioned in your 20 AF that from the U.S. business, roughly one-fourth comes from the injectable portfolio.

I was -- I’m again talking about FY -- financial year ’20. So, any -- I would say, any perspective on how we 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-patent products are now in this portion of the market. So -- for the next five years.

So, any perspective on how we want to take this business ahead in the U.S.?.

Yes. Our inject -- yes, of course, our injectables are global products. And we want to develop -- and most of our investments with -- in that area is 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 wish U.S. complex -- in the U.S. complex and injectables will grow and the -- and simple ..

Okay, sir. So, if I have to -- do you say that the 25% current contribution this -- over the next three, four years this contribution will move -- will only move upwards in terms of the overall portfolio assuming that’s the way we want to….

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

Got it, sir. Thank you. Thank you very much. All the best for the future..

Thank you. The next question is from the line of G Vivek from GS Investment. Please go ahead..

Yes.

Is my understanding correct that the tailwind our pharma sector was having Q2 COVID is now weakening and are we back to the time of price erosion getting on weight 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 tailwinds of -- due to COVID for pharma sector in India were responsible for very good performance in Q1, Q2 and that is now weakening..

Yes. So, we are -- I think -- so we are in the -- it depends cost on the market. But we are not yet in the pre-COVID level or the pre-COVID behavior and are still impacts of COVID in certain areas. For example, in the U.S. we do see still the certain products are affected by the ability of people to meet physicians 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 called price erosion, it’s not so much the COVID impact.

In the case of India, we absolutely see a pickup but the Q3 was a quarter in which by and large the activities of India came almost to a normality. We are not there yet, but we are almost there..

And the similar situation prevailing for injectables also or is it mostly for oral solid? Injectable also the price erosion is severe?.

Yes. The price erosion is affected by both injectable and oral solid. It’s not related to COVID. It is related to competition that is coming. It’s in both segments in the case of the United States..

And the good part for our Company was all our five plants were FDA approved and after -- maybe after some gap also.

And now FDA inspection has again began in India and any FDA inspection due for any of our plants in India?.

We did not get any requirements from the USFDA yet. And in general, it’s a good news that the USFDA is starting inspection soon. It’s a great news, actually..

Okay..

Thank you. The next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead..

Hi, all. Thanks for taking my question. It is on the U.S. business. During the year, we’ve launched, as you mentioned, 24 products so far, but there’s not been much pickup in our quarterly sales run rate number.

So, what is in your assessment? Does it take to meaningfully move this number from 40 to 45 that being kind of stuck around the last couple of quarters?.

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

Sir, 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 below sub to around $240 million per quarter run rate.

So, in your assessment what’s it take for us to really breakthrough to meaningfully scale up from these levels given the fact that -- I mean, number of launches clearly is not been -- it’s not been a hindrance so far. We’ve done fairly large number of launches even this year..

So, as you know, it’s the number of the launches and also the type of products that we are launching. It’s a combination of -- first of all, I believe that the portfolio moving forward is attracting. And it should create a growth and actually, this -- the product that -- hopefully, we are launching 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 are going to the 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 with 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 go with given the fact that the export incentives are no longer there? But how should we look -- and how should we sort of model the generic gross margins now going forward, generic business gross margins?.

Yes. Like we shared in the past, we are not managing the gross margin per se. We are actually managing the EBITDA and we are maintaining that we are staying and sticking to the 25% that we shared in the past and we are already in this neighborhood and planning to stay in this neighborhood or may be even lower for a while.

Gross margin, it’s a matter of mix of activities. So, in the -- and the -- for example, if we have a growth product that will give us 50% gross margin, then it will be profitable with a like EBITDA, we will take it. So, we are not managing the percentage. We are managing the nominal gross margins.

And in general, what we’ve said and we are still there, that we will stay around the neighborhood of the gross margin that we were in the past. So -- but we are not managing per se. We will continue with that businesses, it’s therefore -- it’s a solid and they will be below this number that we had now..

Okay. Sir, thank you very much. Best of luck..

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

Yes. Thank you and good evening, everyone. Sir, this is an important launch, which is Vascepa. So let me ask a question on this. I’m not sure how much you can talk.

But what is the -- like your regular high-value launch, or what is the volume constraint like the first entrant with the lower margins and it should improve as we go along? So, any thoughts would be very helpful..

Yes. Sameer, I cannot tell you this. It’s absolutely going to be an important launch for us. I can -- so that I can say. But I am not going to discuss quantities or anything like that for more these reasons..

Okay.

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

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

Okay, great. Thank you. Sir, second question was Sputnik V.

Just if you can tell us, what’s your sourcing plan for the vaccine? And second, 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. This is one update. And we are discussing more countries. We are now rolling out of -- actually, we see initiatives already face train , the 16,100. And by and large we hope that we can submit to DCGI the most received application. 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 RDIF or would you also be doing some manufacturing?.

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

Okay. Got it. Very helpful. Sir, the other question is on the Aurigene outsourcing of AUR102. This is pre-Phase I sort of out-licensing to Exelixis. So, it’s a very early stage out-licensing.

So, what’s the thought process behind this? You would have taken it to Phase II or even early Phase III and then could have out-licensed?.

Yes. So, we and Aurigene developed or delivered very interesting pipelines. Some of them, we are planning to continue to develop to later stage. Some of them, we are planning to monetizing early stage in order to allow Aurigene to be self-sustained in terms of risk reward management.

So, I think that Aurigene has a very, very interesting pipeline going forward. So, those if you want to keep and continue to invest, that will -- beyond that we will not monetize an early stage, we will do later..

Okay. One final one, if I can. Parag, if I’m not wrong, you’ve mentioned that in the EBITDA margins sort of internal aspiration as 25%. And if so, if you did fill it and you are very close to that already. So, what’s in your outlook for margins and what are the levers for that? Thank you..

Yes. So, as I said, our aspiration indeed is to deliver 25% EBITDA on a sustainable basis. And while we are in the lever of the 25%, we are not yet able to consistently deliver 25% and we have a number of levers to deliver it.

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 that we drive products re-formulation, the chemistry, how we can run our machines more efficiently, how to include the yields, finding alternate vendors for our materials and so on. And also in sales and 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 behind the business so that we can give you a sustainable growth in the future. So I would say that we are in the neighborhood of 25% EBITDA escalations.

And I think you can expect that in the next few quarters we should be in that range..

Okay, great. Thank you very much and very helpful..

Thank you. The next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead..

Yes. Thanks for the opportunity.

Just a follow-up on this, clearly, mentioned 25% over few quarters on a sustainable basis, but if I get my maths 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 few quarters.

So I’m just trying to get these two together that currently we are at 21%, last two quarters we’re at 25%. How -- I mean, there is a 400 basis gap here. Actually, we are not near 25%. So, if you could explain that? Or you want to say that the cost is truly a one-off here? So that would be helpful. Thank you..

That’s not right that the cost is entirely one-off. Let me clarify that, first of all, the impact of the Aurigene 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 in the normal range.

I must also say that we do drive out-licensing in a number of our businesses, like Proprietary Products and Aurigene and Biologics business fairly regularly. So I’m not sure it is fair to exclude or include the 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 think I can quantify the one-offs. In terms of the increase in cost, as I said, it is an investment behind our brands. We do expect it to continue, but it is also due to growth. So we have a process to manage return on investment and therefore, this went to growth.

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

Perfect. Thanks 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 nine months? And is 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 15 products and out of a list of about 100 products in the pipeline that we shared before. So we are very much on break with our plans for China..

Sorry, 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 double-digit..

Okay. Okay.

But we are growing in China despite COVID?.

We are growing in China and -- despite COVID and even nicely. And we already submitted 15 products and top of the products that we already have in the market..

Perfect. That is very helpful. Thank you. And, sir, on the API, PSAI business that we have. So, clearly, the first two quarters very heavy, you mentioned stocking supply disruption.

So how do we see the outlook going forward given that in the last call we mentioned that digitally important to us and you want to invest in this business?.

We would 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 I want to increase also the level of big integration over time ..

And it has two parts, if I’m not wrong, the API in the pharma services. So -- and then you carved out Aurigene out of it.

So, I just wanted to understand the growth trajectory for each of the business?.

Both will grow. We are giving guidance, but both will grow..

Okay. Understood.

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

Which one, sorry?.

..

Yes..

The go ahead..

Yes. Yes, Prakash. So, we are -- so that -- the program is run by , they filed the product. We haven’t heard anything about approval, but we expect in FY’22, but we do not have any confirmed date..

Okay. Thank you and all the best..

Thank you. 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 call. 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..