Ladies and gentlemen, good day, and welcome to the Q4 and FY '21 Earnings conference call of Dr. Reddy's Laboratories Limited. [Operator Instructions]. I now hand the conference over to Mr. Amit Agarwal, Head of Investor Relations at Dr. Reddy's Laboratories Limited. Thank you, and over to you, Mr. Agarwal.

Thank you. 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 and full year ended March 31, 2021. 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. G.V. Prasad, our Co-Chairman and Managing Director; 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 written 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. G.V. Prasad. Over to you, sir.

Thank you, Amit. Good evening, good afternoon and good morning to all the participants. I do hope that you and your families will remain safe and healthy during these challenging times. I would like to start this call by thanking all our teams from the bottom of my heart for the work they are doing for COVID patients in India and the rest of the world. I also want to thank all our teams who are ensuring the safety of our frontline workers and teams by ensuring all the precautions for COVID. All of us at Doris are driven by our purpose and belief that good health can't wait. We are motivated to serve patients in every possible way and with utmost urgency. This is reflected in the multiple collaborations we have entered to develop and commercialize a wide range of preventive and curative options for COVID treatment. As you already know, we launched Sputnik V vaccine today. And we have also, over the past few weeks, ramped up our supply of multiple medicines, including Remdesivir to meet the surge in demand. We are also working on the launch of newer treatment options, which we'll bring to the market in the next few months. We have also ensured that supplies of our existing medicines are continue uninterrupted and we continue to meet the market demand for all our markets. Being sensitive to the current realities, we are extending help in all possible manner to our employees, including additional insurance coverage, converting our -- some of our residential training facilities into dedicated in-house treatment facilities, supporting people with the virtual doctor consultations, arrangement of medicines, oxygen and any other required support. We also -- while we do all this, we remain committed to our strategy of attaining market leadership in our chosen spaces, driving operational excellence with continuous improvement and focus on patient-centric product innovation. Each of our current business will continue to drive growth for the next few years. But we are also investing in building for the future through advancing science, digitalization and innovation. These are extraordinary times and call for finding solutions rapidly and making them available to as many people as possible in the shortest possible time. This is what is driving us, and we are all committed to playing our part in helping people to get back to health at the soonest. With these opening remarks, I hand over the call to Parag for taking you through the financial performance of the company for the quarter and for the year. Over to you, Parag.

Thank you, Prasad. Greetings to everyone, and thanks for joining this call. Giving the prolonged COVID times, I hope you and your families are keeping safe and healthy. I'm pleased to take you through our results for the quarter 4 and full year of fiscal 2021. It is yet another year of good financial performance with highest ever sales in EBITDA and a strong cash flow generation from operations.

I'm so sorry to interrupt you. Sir, may I request you to come a bit closer to the phone, sir.

Yes. Is that better?

Slightly better.

Okay. It is yet another year of good financial performance with highest ever sales and EBITDA and a strong cash flow generation from operations. The PBT adjusted for impairment in both the year and for out-licensing and settlement income in FY '20 grew by 45% for the year despite COVID-related challenges. Let me take you through the 3 financial highlights for the quarter and financial year as companywide in a bit more detail. For this section, all the amounts are translated into U.S. dollar at a convenient translation rate of INR73.14, which is the rate as of 31st March 2021. Consolidated revenues for the quarter stood at INR4,728 crores, that is USD 646 million and grew by 7% on a year-on-year basis and declined by 4% on a sequential quarter basis. Year-on-year growth has been supported by a growth in most of our businesses. Sequential decline was primarily due to lower sales in branded markets, and recognition of milestone income in quarter 3. The revenues for the financial year 2021 stood at INR18,972 crore that is USD 3.59 billion and grew by 9%. A business for out-licensing income during FY '20, the growth stood at 13.5%. The growth is supported by new product launches, contribution of portfolio acquired from BOCAD, improvement in the base disease volume, scale up in new markets and favorable. Consolidated gross profit margin for this quarter has been 53.7%, an increase of 220 basis points year-on-year, a decline of 10 basis points on quarter-on-quarter basis. The year-on-year increase is primarily attributable to improved product mix and productivity, partly offset with lower export incentives and price erosion in the generic markets. Gross margin for the global generics and PSAI were at 57.9% and 31.7% for the quarter. Gross margin for financial year '21 has been 54.3%, which…

Thank you, Parag. Good morning, and good evening to everyone. I hope that you and your loved ones are staying safe and well to this surge of pandemic in India. I'm quite happy with the way we have been able to manage our business operation during these unprecedented times. While we have made significant efforts to bring to market a range of COVID-related drugs as part in the size for global pandemics we remain committed to our long-term strategy and continue to push our agenda forward towards accelerating growth in each of the areas. The full year '21 has indeed been a milestone year for us, which is reflected in the following key highlights: successful completions of clinical trials for Sputnik V vaccine in India, leading to an eventual launch today. development and launch of several COVID-related drugs, successful integration of business acquired from BOCAD in India, healthy sales growth supported by all our major markets; attaining EBITDA margin of 25%, consistent with our aspiration. ROC adjusted for impairment charges also move on towards our aspirational targets; healthy cash flow generation leading to a much stronger balance sheet, scaling up of product development pipeline for all of our businesses and productivity improvement across manufacturing, R&D and commercial section of the business. Now let me take you to the key business highlights of our business. Please note that all the reference to the numbers in these sections in respective local currencies. Our North America Generics business recorded sales of $237 million for the quarter, with a decline of 5% year-over-year and a growth of 1% on the sequential quarterly basis. On the back of much higher base of March 2020, which was driven by pantry loading by patients and significant inventory buildup by customers due to the COVID-19 lockdowns at the…

Ladies and gentlemen, we lost the line of the current speaker. We would request you to please hold the line, while we will be joining back on the call. Ladies and gentlemen, we have Mr. Israeli reconnected. Over to you, sir.

Yes. I saw about this disturbance. Apologies for the inconvenience. We are progressing with Phase III trials. So I took on the next wave of biosimilar products, which are a different stage of development. In our proprietary products business, we are progressing with Phase III trials for CTCL indication. Additionally, efforts are underway to globally monetize key approval and 1 market assets. During the current quarter, we out-licensed to development, registration, commercialization of rights of Elixir, which is the sale of a oral solution for the EU 5 markets. While the current business environment confers uncertain going to global pandemic, we believe that the foundation is solid and the multiple growth levers available for us to sustain this growth trends in FY '22 and beyond. Our growth would be primarily driven by the organic moves, focusing around pipeline amortization, productivity enhancement, diversifications and capability ramp-up in marketing and digitalization. Further, our strong balance sheet allow us to continue to invest in the right set of inorganic works to enable long-term growth. 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 first question is on the Sputnik V. Just wanted to understand the opportunity better. So it's about 100 million plus doses. And how should we think about since we have the marketing and how should we think about in terms of monetizing this opportunity? I mean?

Yes. So first, just to put the database together, we have the rights for the first 250 million of dose of India, which translates to 125 million patients. And the initial confidence will come from the important right that will come out of Russia. And in the meantime, we have 6 contractors in which we are qualifying to make the product locally in India. This is for the country of India. In addition, there are discussions with the RDIF of Light, as well as additional engagement for the future for India. And we are also in discussions with them about quantities and rights assets permitted for other countries. So the -- this is the overall view that we have at this stage of scope.

Yes. But I mean, just trying to understand the -- for modeling purpose, even if we assume that we make INR100, 10% on the current price. So I mean, the sales opportunity could be as high as INR2,500 crores.

You know that we are not giving guidance, and we cannot give the -- today, we announced that the price for the important route will be a INR945 before tax. And the global pricing of Sputnik Escota as decided by the Russians is about $10. That's what we can share.

Okay. Got it. And my second question is on the margin trajectory. So clearly, we have seen some improvement versus last quarter, which had some one-offs. But we are still that below the quarter 1, quarter 2, which had obviously lower cost due to lockdowns. And we are a little behind then our 25% aspirational guidance. So I mean, how do we see this achieving in '22?

We are very much on the radar. And we are not giving again guidance. But in terms of aspiration, we are very much there. We also put certain efforts in order to make our activities more robust. So we invested a little bit more than the average in terms of building capabilities for the future. Including digital activities. So in that respect, we are very much committed to the to the numbers that we shared in the past on both the EBITDA as well as the ROC.

[Operator Instructions]. The next question is from the line of Damayanti Kerai from HSBC Securities and Capital Markets.

Please go ahead. My question is on U.S. business. So we are seeing a consistent launch of around 20, 25 products per year. But our quarterly sales rate is generally staying within $240 million to $250 million level. So can you please provide some color on how should -- or what can drive U.S. sales meaningfully from current quarterly run rate? And what is the price erosion level currently for your portfolio?

The U.S. market the some -- I'm sorry.

I'm sorry to interrupt. May I request the participant to please mute yourself while you're not speaking, there's some disturbance from your line. Thank you. You may go ahead, sir.

Thank you. So the U.S. models will continue to be that way. So specifically, now the price erosion is not as to do, but the model is the same. If certain numbers of our products will face competitions, especially with the big customers, those, of course, will face price pressure. And this trend will continue also into FY '22, if it's going to be single digit or double digit, I don't know. But it is going to be -- the model will continue accordingly. What will continue to grow is the type of products that we are developing. As you know, we have some more and more and you are seeing and you see products that have higher value. At the same time, it's not just about sales, it's about profit. And we are doing -- attacking multiple activities to reduce the cost to change the cost structure of our molecules or both of the API and the pharma. And thus this will continue the improvement in the profitability of the U.S. will grow higher. So it's a combination of focusing on the relevant products, which I believe that our portfolio is very promising, productivity and increase market share. The same things that this market had 9 years ago, I think we are implementing it every quarter better and better.

And my second question is India part. So fourth quarter definitely has some impact of seasonality. But barring seasonally and uncertainties around current COVID situation, how do you see India business progressing in next few quarters?

India, first of all, I'm very -- even though people are losing confidence in India, I personally as well as the company, very much believe in India. And India is a very, very important, not just market for us, but we are part of the effort to high pandemic in India. So I do see growth in India. We have -- we launched several COVID products. We launched also, so product and probably per over as well as an Sputnik today. And more products will come. So our portfolio is getting more and more robust as time goes by. In addition to that, we improved our capabilities, and there is a better focus on the big brands in India, which I believe will grow as well. So overall, I'm very bullish about India as well as new activities that we will do in the future that we will announce when we'll do that.

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

So first is on EBITDA margin as we continue our journey towards our aspirational goal of 25% EBITDA margin, but from here, what are the 3 key drivers of the EBITDA have been expansion in your view in order of importance? Obviously, there would be product mix, et cetera. But in the order of magnitude, which you believe could have a greatest impact on our journey? If you could share that, that would be great.

Yes, sure. The EBITDA -- the main drivers are common, although it will sound comment, but it has, of course, different -- different magnitude as even in FY '21 and moving forward. One is focus on the relevant portfolio. So we build future portfolio, which I believe very attractive, and we will very much focus on that. On this portfolio will be bigger as well as more profitable. The second piece is that we are going to increase our productivity level of the existing portfolio. And the -- we have various initiatives that are related to this for quite some time, and they are very and retired operations, which is included to labels one is overall productivity initiative in the way we conduct our operation. And the second is digital initiatives. We invest heavily into digital. We very much believe in digitalization as well as in automation. And this is yielding very promising results. The third is we are increasing market share in those products on both the branded market as well as be unbranded. The -- then on top of it, we are bringing the relevant products, that is COVID activities, which it's also meeting the need of the our as well as helping ourselves in those relevant markets to facilitate additional capabilities. And on top of it, we are going to grow and try to explore our financial capacity for more activities. I hope these are believers that all of them should increase our EBITDA in the future.

Sure. And the follow-up would be -- we have been speaking a lot about digital stand we are investing heavily. Would you like to quantify what is our investment of non-term of investment till now and is it likely to go down drastically in near term or maybe medium term, and it will also come up with its own cost savings, which would realize over a period of time. So any color you would like to provide here?

So the other, I can say that if you -- in FY '21, we put CapEx so on the operating expenses, most of the goal is this investment. So whether it's in R&D or in digital or activities that are related to digital. So the goal that we have in this is either related to inflation of the debt. And the growth in CapEx is also related to that, in addition to scaling up our injectable operations. That in order to facilitate robust launches of products that will come in FY '23 and FY '24. So if I call correctly, we had about, give or take a little bit less than INR1,000 crores of CapEx in FY '21, which is more than the years before, it's primarily to prepare for that.

Sure. And the investment in digital will come down. Do you foresee that it would come down once we are through the cycle and can come down drastically in coming quarters?

The investment in digital will be -- we will invest in more in the future, and it will replace manual activities. So overall, the expense base will go down.

Next question is from the line of Neha Manpuria from Jpmorgan.

My first question, just a continuation of the operating costs. If I look at the SG&A spend, up in the last two quarters, we've been inching up about INR1,540 crores. How should I look at this going forward? Do you think the pace of the increase would be higher as we invest in digital try to launch more products because -- or do you think this is the level which is enough to sustain the growth that we have planned for the next two years?

We have done it? Do you want to take it?

Yes, I think take it a risk. So yes.

Yes. So the SG&A expense as a percentage of sales for the full year, as you know, is flattish compared to last year. It has gone up in the last few quarters, primarily driven by 2 factors. One is we are prioritizing the supply and availability of our products across all markets. And because of COVID impact, the freight costs are higher, and the ratio is slightly a worse because we are prioritizing the supplies. And the second reason is to increase investment that we are making behind digitalization and also higher product filing costs. The levers which impact of G&A are clearly the investment that we make on 1 hand and the productivity that we're driving on the other hand. From one quarter to another, you can expect fluctuations. As you know, we are actually giving in very uncertain times right now. And the impact of COVID also impacts this line. So I would say that going forward, we can expect to see higher investments in digitalization, as it has mentioned. We can also see some of this will get offset by productivity. This is, I think, is going to be the shape of as we enter going forward.

Okay. Understood. And Erez, in your opening comment, you mentioned about the Russia market seeing some disruption in the quarter, which led to the quarter-on-quarter growth if you could give some color on that? And was this something one-off like destocking? What led to this disruption?

Can you repeat, I could not hear it fully, sorry, you mentioned quarter-on-quarter market share? That was the question.

Yes, for the Russia, I think in your opening comments, you mentioned some impact in the fourth quarter because of slowdown or disruption in the market. So if you could give some color on that?

Yes, the demand from the customers in this quarter was less than usual and less than anticipated. It's probably financial situation of those customers as well as relatively low season. As you know, our products are very seasonal, and this was for I do not see that as a quality issue. I see that as something that is primarily related to this period of time.

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

Erez, the first question on Sputnik. What's the time frame within which you think you can supply to 50 million doses that you're contracted for India? And when do you think that the local manufacturers will start giving the supplies?

Yes. Thank you. So the -- I anticipate that between now and July, maybe August, the primary supply will be from Russia. And only the first quantities will come from the Indian manufacturers, hopefully, by August and September. If it depends, of course, on the qualifications of those sites and the ability to meet the bridging studies, et cetera. But this is at least the anticipation. If this plan is in close, we can deal with these quantities within 12 months.

Excellent. And the second question, Erez, is on the U.S. 2 products. One is 500-milligram powder. I think you launched the other 2 forms, but this 1 is pending FDA approval. So is holding it back? And when do you see this getting approved? And second is on. What's the outlook for the launch? And when do you think you can have sort of a smooth supply of API?

Yes. So Amit, if you can take the first one, because I don't recall the status of it. Bear with me, that will give you the details of it in a second the second, indeed, we faced a shortage of supply. I believe that we ever can it, and we are going to launch within the next.

Yes. And on the first one, 500 mg sachet, we expect it sometime in this year.

Okay. That's right, broad, Amit.

No, it is not expected in next 1 or 2 quarters, but maybe during H2 of the year, we expect.

Okay. And if I missed your point on as you said, you launch it in the next couple of months, but you said something about the API supply, would it be with a smooth supply? Or would it be with a limited supply?

It's good supply.

Excellent. So sir, with your formation, 1 last question, if I may. And that's about your 95 pending filings with the FDA. So 3 of them are NDAs. Are these generic kind of product? Or are these specialty branded kind of products?

These are generic, more of a generate products, not the specialty products, which we were having like in proprietary product segment. You are basically generic product to cycle 505(b)(2) out.

The next question is from the line of Nikhil Mathur from AMBIT Capital.

Sir, my question is around the recent products that you have launched in collaboration with Pharma with. I wanted to understand now the company having invested so much on investable capacity past injectables, why does Dr. Reddy's still have to work with the contract manager business injectable products?

I can answer that. So I think the PMS require dedicated facilities, which we don't have. And gland has dedicated a line to. So we're using that capacity. Our capacity is between oncology and multipurpose. Insulins,, all of these require specialized dedicated facilities.

Okay. And will it be possible, I think 1 year or 2 years' time frame in such products, Dr. Reddy's, and hence, we won't need to profit share on such products.

I didn't understand the question. What was the question? Can you repeat that?

My question is that years' time thing. Is the company looking to establish capabilities in this space. So that in future, whatever positives are there, the company doesn't have to profit share before contract manufacturing.

I don't think we will ever say that we will do everything in-house. There will always be opportunities to create value through partnerships. And Dr. Reddy's has gained a lot through many partnerships. So I will not say that we will do everything in-house. Of course, where there is a business case there were in volume, the capability will do that, but we will not say that we do everything in-house.

Okay. Okay. And just one more question. Those subsidies have any ambitions of plans to enter the U.S. facilities generic business because a couple of last are quite heavily invested in that business space. Do you see that as an opportunity for Dr. Reddy's as well sometime down the line?

You talked about respiratory products.

The inhaltion products, respiratory products?

Yes. It's not a big space for us, but it's something we don't know what we'll do in the future at this time. But right now, we are not investing a lot in inhalation.

And sir, any reason why you would not see investing in the…

…limitations of time we'll clear in many areas. And also, we find the areas becoming very crowded.

The next question is from the line of Ranvir Singh from Sunidhi Securities.

My question again relates to that Sputnik. So just wanted to understand the price which has been freshed right now is for imported consignment or even if you can start manufacturing ourselves or get it manufactured in India, the price will remain the same? Or would the price will be redetermined?

This is a price that is related to the approved imported product. And it's -- if and when, we will have an approval for the contract manufacturers, I hope you will be able to offer a cheaper price to the market.

Okay. And second question, again on Sputnik. Further RIDF has got a manufacturing agreement with all 5 players. And these manufactured products will be distributed through you or they will have a separate distribution agreement with them.

For the first 250 million vaccines, we have the rights from all of these counties. What will happen after that, we will have to discuss and agree with RIDF and of course, those contractors. At this stage, they are all working for our distribution.

Okay. And the last one, if I can. You saw news yesterday that your entail licensing deal for therapy product called So just we wanted to understand the more details on it. So what is the outlook? What kind of market actually it will cater to and what prospect we can expect from this?

I will take it as. So this is the cell therapy. It is in early stages of development with our licensing partner. It's not going to be a big product. It's a niche therapy, but it is an area we want to explore because we have a strong presence in oncology in small molecules as well as biologics. We are getting into this to offer an affordable automotive to Indian patients. And in the process, pick up the skills of cell therapy. We will have a facility which will take the cells convert them into CAR-Ts and then administer them to patients. It's an entry into a new space, but in a therapeutic area, which is very key to Dr. Reddy's. At this time, it is too early to predict what will be the margin and all that because we have to go through the clinical development and all of that. And -- but our objective in this is to make cell therapies available to Indian patients at affordable prices.

But how is cell therapy market in India currently? How many products?

There is no market today. Whereas today, it is not available to Indians. We have to go about overseas to get this done.

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

Just a clarification on the supplies again. When it is locally manufactured. And I think as you said that largely supplies will ramp up then the local manufacturers start. I thought there was a role which says that 50% of the locally manufactured vaccines should be given to the central government and 50% is state and private. Would that rule apply to you as well?

I think to the domestic manufacturer, it could be applicable as they stand, but these rules are evolving every day, as you can see. So it's hard for us to predict when we then supply ease in the next few months, what exactly will happen. But you're right about that rule for Indian developed and manufactured medicines. But there are contracts also that Russia and RDIF has signed with the local companies. So we'll have to see how the situation evolves. But we will do whatever the government mandates us to do.

Got it. And just a linking question on the export opportunity for Sputnik V. Given the constraints around local, what -- and the different payers that we're going to be dealing with. We think the export opportunity could be a much larger opportunity, given our presence in emerging markets.

I think, I'll take it. I'll take it. It was a the export, we have 2 routes for engagement with other product, it is made in Russia in those to other countries and that we have several discussion and we do see an opportunity for those markets out of that route. As for a potential additional capacity in Russia. And this the intent is that India will be a big hub for Sputnik also in the future. And therefore, a portion of that quantity was fulfill what is needed for India will be also for export, but this is not concluded at this stage, it's in discussions.

Got it. And the last question is on the PSAI business. We've seen good growth. And looking at the press release, it seems to suggest it's largely volume-led growth, and we are seeing price erosion. So which makes so how -- what is the sustainability of this in the fiscal '22? and from a capacity for API and PSPI, are we good? And is the inventory-led demand that we actually saw in the first half of last year do you think it's continuing? Or what's driving this volume development?

Yes. So I think what the main drivers of the business is a good execution on our end in order to provide products in the right service in the right course, especially giving the time with the relevant cost. So it's primarily driven by focusing on those products in which we can have a global market share, and this is the main drivers. In terms of geography, it's primarily driven by Asia, China and Japan, Korea as well as some products in the United States. As for the future, the API will grow, but it will fluctuate. There will be quarters that it will be -- look soft, and there will be quarters that it will look up because it's primarily the timing of the pickup of those inventory by the customers. So it's not going to be a kind of a linear quarter-on-quarter necessarily. But absolutely, our API business will grow and become more profitable.

The next question is from the line of Alok Dalal from CLSA.

Any updates on Copaxone and filing?

We got the recent CRL, and we are still working on its solution.

This is for both products, Erez?

You asked about Copaxone, the next season. What was the question? Sorry. We are still waiting for the feedback. Yes, go ahead.

So I was asking about an update on Copaxone and?

Yes, yes. So Copaxone I gave you. This is -- we are still working on the CRL that we have said in January. And in the case of, we submitted the CRL response in the December, and we are waiting for the feedback, which is likely to come milestone submission. So we will get it by October.

Okay. Will these be FY '22 launches?

Unlikely for both of them.

Okay. And second and last question, how should we think about the capital allocation strategy next 2, 3 years? And how important will acquisitions be a part of this?

Sorry, and how the last part of the sentence?

How important will acquisitions or inorganic growth, be a part of this approach?

Yes. So we do have a very, very good balance sheet and a relatively big financial capacity. So we are looking for opportunities all the time. And we will be keen to take a deal that we find the suitable for our strategy. Having said that, we are not -- I said this in the past, this is still the philosophy of the company. We are not in a shopping story. We are going to go after assets that fit us well. Primarily, the focus will be products, brands, for certain capabilities that we want. It's globally, but the main focus will be India in markets.

Okay. And CapEx will be higher than FY '21?

The CapEx will be around the same numbers, maybe a bit higher if everything will go through. Depends, of course, on the COVID-related activities and restrictions that we will be able to do. I'm assuming that will be give or take around the same neighborhood that we are -- that we had in FY '21.

Thank you. Ladies and gentlemen, due to time constraints, that was 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. Stay safe and healthy. Thank you.

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