Dr. Reddy's Laboratories Limited (RDY) Q1 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, good day, and welcome to Dr. Reddy's Laboratories Limited Q1 FY '22 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.

Thank you. 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 June 30, 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. 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. Parag Agarwal. Over to you, sir.

Thank you, Amit, and greetings to everyone. I hope you and your families are keeping safe and well. I'm pleased to take you through our results for the quarter 1 of fiscal 2022. It is yet another quarter of double-digit growth in sales. However, profits were impacted due to higher price erosion in U.S. and increase in investments towards brand promotions, R&D and digitalization. We believe these investments are critical for the sustainable long-term growth of the company. Let me take you through the key financial highlights for the quarter in a bit more detail. For this section, all the amounts are translated into U.S. dollars at a convenience translation rate of INR 74.33 , which is the rate as of June 30, 2021. Consolidated revenue for the quarter stood at INR 4,919 crores, that is USD 662 million and grew by 11% on a year-on-year basis. and by 4% on a sequential quarter basis. The growth is mainly driven by new product launches, including COVID products, higher business volumes, full quarter impact of portfolio acquired from Wockhardt in Q1 FY '21 and was partly offset with price erosion in some of our products, mainly in U.S. and Europe. Consolidated gross profit margin for this quarter has been 52.2%, a reduction of 380 basis points year-on-year and 150 basis points quarter-on-quarter. Given FY '21 gross margins were high due to higher export benefit and favorable product mix. The gross margins in current quarter were impacted due to higher price erosion primarily in U.S. and increase in inventory provisions for a few products. Gross margin for the global generics and PSAI were at 53.7% and 21.6%, respectively, for the quarter. The SG&A spend for the quarter is INR 1,505 crores, that is USD 202 million an increase of 18% year-on-year and 5% quarter-on-quarter. The increase was on account of investments in brands in India and in emerging markets, investments in digitalization and annual increments. The year-on-year increase is also due to full quarter impact of the incremental expenses after the integration of Wockhardt acquired portfolio. The R&D spend for the quarter is INR 453 crores, that is USD 61 million and is at 9.2% of sales. R&D spend increased by 14% year-on-year and 11% quarter-on-quarter and is in line with the increase in development pipeline in our biosimilars and generics business, including development of COVID-related molecules. The EBITDA for the quarter is INR 1,019 crores, that is USD 137 million, and the EBITDA margin is 20.7%. The EBITDA margin was impacted due to lower gross margin and higher investments in sales and marketing and R&D. We are confident that EBITDA margin would improve in the coming quarters. Consequently, our profit before tax stood at INR 743 crores, that is USD 100 million, which is a decline of 16% year-on-year and an increase of 21% quarter-on-quarter. In June 2021, we received the final arbitration award pertaining to Xeglyze product in favor of Hatchtech for USD 46.25 million. which led to an incremental charge of USD 26.25 million for us, which was adjusted in our IFRS financial statements for Q4 and for the full year for FY '21 filed in Form 20-F as a subsequent adjusting event. Effective tax rate for the quarter has been at 23.1%. We expect our normal ETR to be in the range of 25% to 26%. Profit after tax for the quarter stood at INR 571 crores, that is USD 77 million. Reported EPS for the quarter is INR 34.34. Operating working capital increased by INR 1,189 crores, which is USD 160 million. Against that on March 31, 2021, mainly driven by increase in inventory and receivables. Increase in receivables was primarily on account of a planned discontinuance of receivable discounting program in the U.S. Our capital investment during the quarter stood at INR 320 crores, which is USD 43 million. The free cash flow generated during this quarter was a net outflow of INR 683 crores, which is USD 92 million, mainly due to increase in operating working capital. Consequently, we now have a net surplus cash of INR 45 crores, that is USD 6 million as on June 30, 2021. Foreign currency cash flow hedges in the form of derivatives for the U.S. dollar are approximately USD 555 million, largely hedged around the range of INR 74.7 to INR 77.9 to the dollar, RUB [ 7,725 ] million at the rate of INR 0.9921 to the ruble, AUD 7 million at the rate of INR 58.06 to Australian dollar, and South African ZAR 110 million at the rate of INR 4.96 to South African rand, maturing in the next 12 months. With this, I now request Erez to take through the key business highlights.

Good morning, and good evening to everyone. I hope you and your loved ones are keeping safe and healthy in these testing times. While many of our key markets and businesses including India were severely hit by the second wave of COVID during this quarter. I'm pleased that we have continued to deliver our purpose of good health. Cannot wait by ensuring the continuity of our operations and serving our patients with the relentless efforts of our employees and business partners. We continue to make good old base on our strategy execution by enhancing our development pipelines of both small molecules and biosimilars, continuing with our new products, launch momentum, gaining market share in key products, making inroad into new sets of markets in Europe, driving productivity and accelerating our innovation agenda. Today, we have successfully managed to expand our business model beyond the field innovation through digital innovation and through demonstration that is the launch of [ Svaas ] an app-based integrated OPD service delivery platform in India. This will provide simple and high-quality health care by addressing patient needs for doctors, pharmacies and [ Alta Life ] insurance, all under 1 roof. This is an unusual quarter for us as we face price erosion pressure in the U.S. as well as decline in [ Avigan ] sales, while the growth in both is expecting in the next coming quarters, supported by scale-up in the recent launches continued new product launch momentum and a gain of market share. Now let me take you towards the key business highlights of our business. 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 $235 million for the quarter with a year-over-year growth of 2% and a sequential quarter decline of 1%. We launch 4 products in the U.S., including our [ icosapent Ethyl ] capsules, ertapenem injections [indiscernible] 100 milligrams sachets and albendazole tablets and relaunch of OTC Famotidine tablets. We also launched 2 products in Canada in this period. This quarter witnessed normalized and progressive tender for retail [ Rx ] and OTC business due to low COVID [indiscernible] in the U.S. This end market share gain in our existing products and contribution from new products, which was offset by relatively high price erosion due to an increased intensity of competition in sales and base products and continued impact of lower number of elective procedures for health system business. Our Europe business recorded sales of EUR 45 million with a year-over-year growth of 6%, driven largely by new product launches. The sales were flat on a sequential quarter basis. During the quarter, we launched 4 new products in Germany and 2 products in the U.K. We have expanded our presence to 4 new countries in Europe, namely Netherlands, Portugal, Slovakia and Czech Republic with the launches of azacitidine for injection in this market. We believe that Europe will continue to be a good cost driver for us in the next few years with the dual strategy of portfolio and market expansion. Our emerging markets business recorded sales of [ INR 903 crores ] with the year-on-year growth of 14% in second quarter a growth of 3%. Within the emerging market, the Russia business grew by 14% on a year-over-year basis and declined by 13% on a quarter-to-quarter basis in constant currency. Our business in many other focused markets like Brazil and China performed well. During the quarter, we launched 13 new products across market. Our India business reported sales of INR 1,060 crores with a strong year-over-year growth of 69% and sequential growth of 26%. This strong growth was supported by both COVID portfolio as well as good performance of the base business. Year-to-year growth was also positively benefited to low base effect of Q1 and last fiscal. During the quarter, we launched 6 new product in the Indian markets, including Sputnik-V vaccine. COVID treatment drug of 2-deoxy-D and nutrition product [ Curahealth ] [indiscernible] report of June 2021. We have growth by 19.1% on semi-basis faster than the market [ 14.5% ]. On Sputnik deal, the commercial scale up is in progress. We are working with RDIF for ramping up supplies. We are also working closely with 6 CMOs in India for manufacturing readiness. We have been able to create a robust go-to-market infrastructure to supply the product in similar manner with patients and health system across 80 cities and towns and across India. We are also working on a single dose of Sputnik Light, a further recommendation from SEC. We would leverage Russia Phase III trial for approval in India. Our PCI (sic) [ PSAI ] business recorded sales of $102 million with a year-over-year decline of 10% and sequential quarter decline of 6%. This was largely due to higher sales base for business during same quarter in last year, owing to stocking activity by our customers as a response to mitigate the COVID -related potential disruptions. Considering the nature of this business, we expect some fluctuations in quarter-on-quarter sales due to lumping in order. On the R&D front, we continue to strengthen our pipeline of products with additional settled biosimilar introducing improve our development pipeline and why we continue to make progress in the Phase III clinical trials of Sputnik V vaccine. We have also strengthened in our molecule cycle for all of our markets and improving our execution with this proportion and focused approach for value and service devices. During the quarter, we filed 30 drug master files globally, including 2 files made in the U.S. We have also filed 70 formulation products across global markets, including ANDAs 2 NDAs in United States. As of June 30, 2021, we have 93 cumulative filing pending for approval with the USFDA, which includes 90 ANDAs and 3 type of 505(b) NDAs. In our proprietary product business, we continue to progress well with the pivotal registration trial for [indiscernible] for physical indication. During the quarter, we out-licensed the development commercialization rights of [ PFG 29 ] program that is monocyte-modified the [indiscernible] lease capsule at 40 milligram. Additional efforts are underway to globally monetize key approved on market and all market assets. While we are cautious of continuing uncertain business environment by owning to the global pandemic and increase in competitive intensity sales design. We remain committed to our strategy and believe that there are several levers ahead of us deliver healthy and profit on a sustainable basis over the coming quarters and in the future. With this, I would like to open the floor for questions and answers.

[Operator Instructions] The first question is from the line of [indiscernible] fleming from Choice Institutional Broking.

Am I audible?

Yes.

Yes. So just wanted to know on the outlook of the North America business with this intense price erosion, price competition. So how do you look at it? And second, I wanted to know like, going forward, what would be the drivers for EBITDA margin?

Yes. So this [ third ] quarter was a bit unusual for us as what we call the -- we got the downside of the U.S. as some products. We faced a price erosion, primarily defending our share. While the big launches are coming up times later, for example, icosapent, which is a very important launch, which we launched him in the last few days of the quarter. And naturally, our products like that, we will see realizations of this potential in the quarters to come as well as other products. So I think, first of all, timing-wise, it was a bit unusual for us. And so we are expecting the North America to grow this year and as well as to come to the famous numbers that we were saying, so we are very still committed to our [indiscernible] EBITDA of [indiscernible], as always, also in the quarters to come. And in this respect, it's a bit different. So the -- on the EBITDA, specifically, this quarter, it was a combination of the U.S. as well as less API that normally when you have less APIs impacting EBITDA. And this is also fluctuating from quarter-to-quarter because of the order book as well as COVID and other activities like that, I'm not concerned on that on a long-term basis.

Okay. And can you just throw some color on the North America side on the price erosion. How do you see it?

It's something very similar to what used to be in the years ago when you're launching a product, especially products that we launched recently means that in the last 12 months, then a competitor is coming and you need to defend your share and it lead to address erosion. So it's not unusual situation. And naturally, this will continue to be also in the future. So I don't -- I cannot say something that is unusual for us in North America. It's a normal business model in this country.

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

Sir, just on the aspects related to supplement issued by the U.S. I just would like to understand in terms of the number of health care professionals involved as per the complaint by the anonymous person.

So first of all, it's not a new thing. We reported on it in November of last year. And as we are traded in the U.S., we need to submit this information and to the relevant agencies, and that's what we did, and this is a start process. It is still under investigation, like it's done a dose investigation normally takes their time. So I don't issue an immediate action in this respect once the investigation will come. we will share it with the authorities and address the relevant processes.

Okay. And secondly, just on the PSAI gross margin, while the sales would have been impacted because of the inventory buildup for the previous quarters. But how to look at the gross margin for this business going forward?

So the gross dancing in API because of the nature of it, a relatively high level of fixed cost, when you have less sales, normally, you see it also in the margins themselves. So once the sales will go up also the margins will go up. I don't see any specific issue. We did have some price decrease in some molecules. So on those molecules, we will see less profitability, but on the other hand we are going to launch others. So overall, I believe very much in this business, while it will continue to fluctuate, we will have good quarter, less good quarter, it is relevant to very much depends on the procurement patterns of the customers.

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

I hope I'm audible.

Yes, Ma'am.

So my question is on Russia and CIS business. So if I understand correctly, fourth quarter is the lowest seasonal quarter for us. But despite that, we continue -- we saw, I'll say, notable sequential decline in both Russia and CIS. So can you talk a little bit more there? Like what are the regions due to which we are facing sales decline? And is it something specific to Dr. Reddy's or it's something market-wide phenomenon, which is impacting in Russia and CIS?

We are growing in this area, we will give you specifically in Russia, we -- there is a timing of the tenders and the bids on biosimilars. So those normally are coming in specific quarters and according to the buying patterns of the government in Russia. So that's why, for example, if we have most of those sales of these kind of products in certain quarters, we will see a sequential decline. But this is more of a timely, a timing issue of the tenders of these products, while actually, we are growing on both the retail as well as the government business, meaning in the whole business.

Okay. So how should we expect growth for this part of the business in a normalized way?

Should see growth in -- like it happened last year. In general, the emerging markets will continue to grow in the normal not necessarily every quarter, but we'll have trends also in the future.

Okay. That's helpful. And my second question is on Sputnik rollout in India. So depending on the clarification, which you might have got from CMOs. By end of FY '22, like how many doses you are confident about distributing in India? Or how do you see the rollout of COVID vaccines in the next, say, 12 to 15 months?

We will have somewhere between September and October, November, we will see the products coming out of India. We see it for Sputnik speed, and we hope also that we will be able to -- And if we but we would have sufficient quantities for the Indian market in that respect. Of course, this also depends on the what will happen in India's terms of vaccinations by other, et cetera. But we should have a sufficient line once this will be [indiscernible]

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

Sir, I mean, you mentioned about PSAI. I mean the voice was not clear, but trying to understand, we had stabilized this business and seen a 30% plus gross margins for at least last year. And then again, we saw this volatility coming for this quarter. So how do you see -- I mean I understand you mentioned about why this quarter was affected, a decrease in sales volume and pricing. But do you think it's a one-off? And how do you see the rest of the year and year after, given that there's a heavy investment in the DMF and you spoke about last quarter on the CRO that you are starting origin. So what is the update there? And what is the outlook, sir?

Yes. So the outlook is positive. We believe in this business, it's going to grow. There is indeed in the last few quarters, fluctuations, there were quarters in which people do more and people that -- in the quarters that people took less in the last 2 quarters, they are taking this. I agree with that. The -- overall, the product, especially -- the future portfolio looks very promising. The -- specifically, I think what happens to us in this quarter is that some key products. We missed a certain, let's say, pattern order because of sequence and part of it was pricing as well. So I see that more of a short-term issue rather than long term. . On the scale-up of the CDMO and stuff, we are very much on track, and I'm very much believe in this business. Right now, it's relatively small, growing but small in terms of impact on the entire company. So most activities of the API are rather for, let's say, generic API activity and impacted by the pattern of those procurements. Prakash, are you there? Is it okay?

Hello? Yes, sorry. I asked that -- do you think this is a onetime blip and you back to normalcy from Q2 onwards? Or you will take time to come to normalcy?

I don't think it's a onetime per se as some of these projects that the price went down, it will naturally continue. But if you -- but said this, we are going to see a growth in the API for sure for the year, but it will may fluctuate also during FY '22 from quarter-to-quarter. So I cannot say that it's a onetime, but the direction is positive. It is going to go.

Perfect. Great. And second question, sir, on the EBITDA bridge. So last year, we were at healthy EBITDA margin of 24%, 25%. And we started this quarter the soft U.S. business, soft PSAI business, which resulted in dropping gross margins and EBITDA margins. So how do you think, by when would you be able to come back to your 24%, 25% mark? I mean, would it take a couple of quarters? Or it will take next year too?

No, no, it will come fast. And we -- as you know, we cannot give guidance, but let's say, from next quarter, you are supposed to see something similar to what you used to see from Dr. Reddy's as before.

Yes. I'm not looking for guidance. I just wanted the drivers it will lead to that. So 1 is clearly the [indiscernible] launch, which will help. And one of the other big drivers?

More than fair. The drivers will be first realization of the full value of the products that will be launched in the U.S. This is missing in this quarter. The second is that a scale-up of some of our API activities. Third, you are going to see more growth and more impact of some of our -- if you wish, more top line in the company as the realizations of higher growth in general and as well as in India. And last but not least, we are -- this was a quarter in which we have some -- it was not significant, but some items that were impacted, whether it's COVID-related, it was a quarter in which 2 months out of the 3. We have -- we were under what we do in India, and has to deal with the logistics of it as well as certain copay. So all of these are supposed to help. And I am very confident that you'll see the margins that we have discussed. And my key KPIs that I'm always pressing in the meeting for long term, the [ 25, 25 ] is still valid for Dr. Reddy's.

The next question is from the line of Sriraam Rathi from ICICI Securities.

Sir, firstly, on -- I mean some issued by the SEC. So I mean just wanted to understand what this company stand on that in terms of what you are thinking? And secondly, I mean, what could be the worst outcome of that in terms of I mean what kind of impact it can have if something goes negatively against us?

Can you -- can you repeat the question? Because the line is not clear. Sorry about this.

I'll just repeat. So my question is regarding the [ supplement ] by SEC. So what is companies stand on that in terms of what are our [ faults ] and at the same time, I mean, what could be the worst outcome if something negative happens in terms of outcome?

So normally, when you have a complaint in the market, you need to submit this information as per the guidance to the agency in the U.S. as we have traded in the U.S., and this is what we did this time as well. The processes that we are going to our investigations, our self investigations by kind of outside the [ consulting ] firm that is investigating and give the outcome of this investigation. We are submitting it. And then we are discussing it with the relevant authorities. -- the potential outcome can be nothing or can be certain things that the company needs to do. At this stage, I think it's too early to assess. I don't envision any immediate action or any immediate activity that we need to do. The process is going to take probably for the for same time, maybe a year, maybe more, I don't know.

Okay. Okay. Got it. Got it. And secondly, 1 question on the gross margins. So I think in the initial comment, it was mentioned that there was some inventory adjustment also. Is it possible to share how much that impact would have been?

Inventory hit, Sriraam, I don't think we can share the numbers, but there is some inventory provision that typically happens every quarter. This quarter, we saw a little higher because of certain quality issues and slow-moving inventory, which is normal in our industry, we do expect it to normalize in the next couple of quarters.

Okay. Okay. So generally, like we used to be in the range of 53% to 55% gross margin. So that is the fair number to look at for the future quarters also on average?

I would not like to give any number. As you know very well, if you look at our data for the last several quarters, our gross margin fluctuates quite a bit. It is clear that in this quarter, our gross margin has been at the lower end of that range. And as you know, that's primarily because of the price erosion that we saw in North America and also because of a slightly higher inventory provision. Going forward, there are a number of levers that should improve the gross margin. Like it is said, the full impact of some of the recent launches in North America would push it up. as we grow sales, which we have been growing for a while in the branded market, that will give us better leverage. Also, as the PSAI business improves, that will impact gross margin positively. At the same time, there is a lever that will bring it down slightly, which is the increase in the commodity and solvent prices. So overall, we expect that the levers which are going to put an upside pressure to gross margin are more compared to where we are today. But I don't think I can give a range on gross margin.

It's fair to say that we will stay in the neighborhood of where we are. The -- if you recall in the previous meetings, if there will be a great business that will come, for example, [indiscernible] , but if a $1 billion business will come at 49% and a great EBITDA, we will not say no because of the margin. So what should guide us is naturally the EBITDA. And -- but in terms of expectations, yes, I think it's fair to say that we are working to improve it.

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

So a question on Sputnik V. So 1 of the challenges that we have been reading about recently is the scale-up in the second -- the challenges with the scale up in the second vector. And we understand that far fewer doses of the second dose has been imported as well. Is this likely to remain a challenge? Or do you have visibility on when this is likely to improve so that you are able to vaccinate more people?

First, this is correct. The main challenge is the supply of the second formula, what we call the formula [indiscernible]. And as well as the locations that comes from Russia as they have their own wave of pandemic, and they have their allocation considerations. In our discussions with them, it's supposed, we are supposed to get it in August. I cannot confirm it because there were delays in the past and they might continue in the future. I hope that the real solutions will come when there will be a ramp-up out of India as well as the potential approvals of Sputnik Light. This is the 2 mitigations that we can have in a case that the challenges of the formula [indiscernible]

Got it. So for Sputnik Light, is there any requirement from the DCGI for you to conduct any sort of study in India?

They will accept the trial results that will come out of Russia. And maybe once they will review these data, they may ask for more. But at this stage, we are planning to submit the data that will come out of Russia.

Got it. One last 1 on your -- you mentioned that your SG&A spend in India is now higher because you're pushing some marketing activities some digital solutions, et cetera. So is this level now likely to stay? Is this a new normal?

In India and emerging markets, yes, but it's also supported well the sales and the profit. So this is a very healthy business. It is growing and it's paying for its investment plus with rate return on investment and exact EBITDA. So this is likely to go. And more than that, this is the main mitigation on those businesses that are not giving us that level of more accurate like the U.S. business. So this is absolutely within the strategy will continue.

Got it. If I might squeeze 1 last 1 in. So if you look at Amarin's commentary, on their product, Vascepa, they've been talking about how the product has been able to retain market shares because the out-of-pocket expenses for the patient is actually lower with the brand compared to the generic -- Do you see this as a challenge for Dr. Reddy to gain market share in the market?

I cannot comment on those. On this stuff. I can tell you that so far, we did not see any challenge [indiscernible]

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

So first question on the U.S. business. If you can provide what proportion of our U.S. business in this quarter was from the new product launches -- And what would be our, let's say, target going forward on an annual basis where we are targeting a proportion of the revenue, this should come from the new product launches. That's my first question.

Yes. So first of all, we are not targeting a proportion. We are trying to explore the potential of a pipeline and some products will be very big, then they will add disproportions for them in this year, it will be more impacted by new products than others. So some of the products that we are launching are bigger than, let's say, what we had last year. and there will be years that it will be less. So we are not targeting specifically presented as such. The way we are looking at this business that we look at this business, whether it was the right choice for the shareholders in terms of return on investment, in terms of risk management, et cetera. And what we are doing with the U.S. portfolio is actually I mentioned in many discussions before is primarily to leverage it across market to launch with another remerging markets, et cetera, and reach the economies of scale. . So to make the -- sorry, to address directly your answer, this year, the proportion will be higher than other years, but it's not necessarily going to be year after, et cetera. It very much depends on the composition of the new products, the markets that we'll gain and the potential of those.

Sure. And the second question is what's the rationale behind discontinuation of the receivables factoring?

Yes. I can explain that. We had -- basically, the rationale is the narrowing of the interest differentials between U.S. and India. As you know, the interest base used to be much higher in India. And therefore, discounting of receivables in the U.S. and being able to take advantage of the arbitrage was a lever that we were using. -- with the narrowing of the interest rate differential that arbitrage was no longer making sense, and therefore, we have decided to reverse that.

The next question is from the line of Anubhav Agarwal from Credit Suisse.

Just 1 question from my side. I just want to understand the SG&A little better. So sequentially, from March quarter until now, we have seen almost an increase of INR 100 crores as the SG&A expense. So you guys mentioned 3 reasons. The personnel costs you guys report. So I can see only out of INR 100 crores, 25% to 30% came from personnel cost increase. Of the other 2 factors I just wanted to check in a quarter which was driven by COVID impact, which are so strong, starting from April, May, et cetera. I am not able to understand even in some of P-S market ratio, the impact of COVID was very much there. So -- In this quarter, when you talk about higher marketing activities resulting in higher SG&A. Can you just take me through this balance, 70% of the incremental, where exactly it came from?

Sure. So first of all, in this quarter, while we had COVID impact, it was in India, not a lockdown as severe as the last lot done. And we did have a combination from May and June, in particular, a combination of physical costs as well as digital cost. That's one. The second is that we are investing behind a number of new brands for example, Celavida in nutrition space, we have launched in June a brand called [ Curahealth ], which is -- which builds immunity, and we have got very encouraging response from the consumers initially. So we are investing behind our OTC business. We are also expanding into rural areas where we have seen strong growth. So there are a number of growth drivers which require investment, and we are not shying away from investing in India and Russia. And this is borne out by the growth profile of these businesses. If you see -- in this quarter, India has grown at a very strong rate, even if you discount for the low base in India, even sequentially, we have reported 26% growth. And similarly in emerging markets. So this is -- this investment, we firmly believe is good cholesterol, and we will continue to invest in good cholesterol.

Okay. Okay, that's helpful. And second question was on the Russian vaccine store. Effectively, the supplies will only ramp up for us in December onwards, et cetera. So for the export market, have you progressed further with our contract with RDIF. Any progress over there, which has happened?

So we got rights also for the other markets at this stage any quantity will come, will come to India. And right now, this is our priority. And I hope I do that we will get also in August, but we cannot, of course, we do not have the confirmation for that as of yet. And everything that is related to export will be after we will satisfy the middle of India. So yes, absolutely, the intent is that if this will ramp up, it will be used also by [indiscernible] But at this stage, the agreements and the activities that we have are [indiscernible]

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

My first question is on the India business. You just talked about investing in nutrition OTC coming into rural areas, digital. If you could just give some color on when we would start seeing the benefit of this? And a related question on that, how much do you think we will have to spend to scale up these businesses, particularly something like OTC and nutrition businesses?

So first, India is already financing its growth. So we are growing profit in India. I know that we are checking the SG&A line. But in terms of profit, India is financing its growth as well as the emerging markets. The specific investment in the brand when it's a new brand, you normally see it profitable in the second year. This is the experience in India, and this is going to be also the case in the new launches that we have. The activities that are related to more geographic spread as well as services, we, of course, will see the benefit immediately, as it is as we are taking current products and expanding into other areas. So that part of the investment is actually paying off nicely and the -- I see as well as the EBITDA in India is above our average even the average, we say mentioning in our previous discussions.

And I would also add that in many of these brands, the investment is in digital marketing, which compared to the earlier mass media model is much more efficient and effective, and that leads to a much earlier breakeven. Like it is said, typically, you would have it will start paying back from second year itself for new brands.

And in terms of new launches, do we -- I just wanted to understand how many brands that we have -- do we have in the pipeline of nutrition like you mentioned, new brands would require new investments. So in that context, what is the planned launch pipeline that we have for these 2 segments?

So the bigger brands are actually brands that we already. And there is an opportunity to scale them up and to create economies of scale. There are certain areas like Parag said, like in OTC, like [indiscernible] in which we are launching new brands in order to enhance our presence in that area. So prevention, wellness, OTC is another part of the -- of our strategy as well as our traditional TAs. And now we are -- we moved also in that respect to the digital therapy. So more and more, we will expand our footprint in India in that respect. And some of it will be new, and some of it will be leverage of things that we did in the past. Overall, the profit of India will go up from year to year. So it's even -- and it will pay for those investments that will take them 2 years to materialize.

Understood. And second, on the API supply for our generic Vascepa launch. I just wanted to get a sense on when do you think we will get to our fair market share for the product? And do -- is API anymore or concern in terms of our ability to ramp up this product, the supplies from partners?

At this stage, I don't see concerned.

Okay. And when do we think we can get to a fair market share in your assessment?

I don't know what is fair, fair incremental option. I think that the [indiscernible] Q2, you should see different results that in the contribution of this product as we launched the product in the last few days of the quarter and actually Q2 for example, we will be looking for third quarter.

The next question is from the line of Saion Mukherjee from Nomura.

As on the U.S. market, is it possible to quantify the extent of price erosion that you've seen in the base business is in single digit, double digit sequentially, how that has happened? And what's the concentration that we have in the U.S. today in terms of the top 2 products, 3 products, if you can throw some light. And also some color, I think you mentioned about OTC picking up. So if you can give some color on volumes, so I understand price is lower. But how has volume shaped up? Have you been able to defend volumes for all our products or there has been a loss of market share as well?

Yes. So in terms of -- Yes. In terms of -- let's start with market share. First of all, we are growing market share. So we are growing in general. And -- And our top product is about 35%, if I remember correctly in the United States and out of the -- of that. So it's a kind of -- this is the [indiscernible] in our case is about 35%. In terms of in terms of value of price erosion, we are not sharing these kind of numbers in these kind of meetings. For these products, we need to defend. Normally, it's double digits for these 2 products. But the overall impact on the basis contract rate depends on the -- of course, on the value of these projects and how deep it was. In this quarter, the main thing that happened to us, and that's what I said in the beginning is that we got what we call the stream, but not the honey. We did not -- we got the impact of the price erosion, but we did not get the impact in the market share stuff as most of the levers for us to grow will come primarily from starting in Q2. That's why I believe that [indiscernible] Q2 will resemble better, let's say, our activities in the United States and moving forward as well.

Okay. Just -- I mean, this number you said top 5 is 30%. Is that right? Can you just confirm that, please?

Yes. Around this number. Okay.

Okay. And secondly, if I can ask about Sputnik V, you mentioned, I mean, given that the vaccination pays in India has picked up, and we have a contract for 250 million dosage. Do you think -- and given the pricing environment, do you think financial -- from a financial perspective, it's a meaningful opportunity?

It can be meaningful. And if all the things will be rapid. And the reason that I think it can, not because I doubt the opportunity, the opportunities based. It's more the way it will pay out in terms of supply out of Russia, ramp-up vaccination programs. India. There are many, many the COVID ways that hopefully for India, were not coming underway to again and wish it's for India as a country. So there are many, many factors in that respect. Plus, we need to remember that the antibodies eventually for even for the people that do mean eventually are going down. And we do see the impact in countries that got vaccinations 6 months ago. Now there is a pickup of cases again. Even in certain areas. And so what we are doing is we are trying to move on multiple dimensions to address scenarios -- So for example, we are working on announcements with this foot net. We are working on Sputnik V. We are working on other product cases in our portfolio, there is pending, we have other products. We are working to qualify the Indian operations in the case that we can use them in India. We are working on them in a cash that we can do exports in the place that will be. So I don't know exactly how -- The future will fall, but we are arranging for [indiscernible], let's say, we are kind of ramping up our infrastructure, registrations of product, et cetera, to allow us to address it when there is a need for it. That's the way we work. So it can be important significant opportunity, but it can be also less than that. This is a kind of unpredictable situation. And especially when it's related to supply and [indiscernible]

Okay. And finally, if I can ask on R&D, you mentioned about biosimilars. I just wanted to check, like is there a very steep increase in R&D spend on biosimilars? And how should we think about are there any products which are going into a major clinical trial over the next 12 months? Should we expect this to move higher if you can guide on R&D spend? How should we think about it, particularly with respect to biosimilar. And your thought in general because there has been limited success in the space. So I mean, what are your thoughts on increasing spend on this high-risk area?

So we are increasing spread. I cannot call it steep, I can call it an so spend. And we are starting trials and it is part of our increase in R&D this year of biosimilars. I think overall in prices for this year will be 4 products, including rituximab. Really we are financing it by increasing of sales of biosimilars, especially in emerging markets and the main market for it is Asia. And the main difference is that this time, the other products will be aimed for first to [indiscernible] Unlike the products that we came behind. And there is, I believe, a significant opportunities in that, especially in our markets. So I continue to with the strategy of leveraging those countries in this area and which as part of our hospital strategy, those products are normally hospital product. And there will be sold on this infrastructure stand-alone as well as finding partners for markets like the United States as long as the United States is having its foreign business model. So I do believe in this opportunity, it's absolutely an investment in this stage, continue to be an investment in the stage, but limited in Asia.

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

Sir, the first question is on the digital health tech efforts that we are putting in and the app that you announced having launched today. So just thinking about it what is Dr. Reddy's competitive advantage in getting into this venture, you're right to win versus a few others who have launched their HealthTech app like hospital chain or online companies, pharmacy, et cetera. So just your thoughts on what's your end game over here?

Sure. Thank you for that. I see that as a very important development in first is not an app. It is a service that -- OTC service that we are giving to people. So -- and people that in this case, it's a collaboration we will get under an insured service their needs under 1 roof. And meaning that our -- we are going to provide them the just care that they deserve in much better service and much cheaper than they used to. -- to get to buy the current alternatives that they have. The beauty of that is an end-to-end platform. in which comprise the physicians, the insurer, the pharmacies, the delivery, the information and everything under 1 roof. And I think it's -- if you wish, it's outpatients, like, I used to get when I lived in America. And it's something that doesn't exist in that manner in India, and we are very happy to be -- to do that. So it's not a normal app. It is absolutely a service, an outpatient service like exist in other countries, we are not so much in India.

Fair enough. But I'm just wondering, what synergy does it have with the -- with your traditional core business? And what's your end game? I mean, would you keep it, develop it or just your thoughts on this?

We absolutely will continue to develop it. We just launched it. But the way I see the things are evolved in India, It will not be about necessarily going -- building on the those generics, but companies, we will have to go into a different ownership of the stakeholders and this is what we are aiming to do here as well.

So our aim is to create an ecosystem. And I think those companies that have are the first movers in creating an ecosystem, making all the players in the health care will definitely have a competitive advantage.

Okay. Excellent, sir. The second question is just Vascepa. I know you've answered. I'm looking at 4-week data that is available now in IQVIA, and your market share is under [ 3% ] for a drug, which were you a second player that's 90% still branded. So why is the market share ramp-up so slower here? And how should it pan out?

Normally, when you launch, people are taking the relevant stock and then we are trying to do it. So our sales is not in accordance to the acute brand.

Sorry, sir, I missed it. Speak of bit louder.

What I'm saying our sales are not working according to the ramp-up of a cube.

Oh, I see. Okay. Got it. And sir, just a clarification for Sputnik V. When did you say your supplies would be picking up a lot more from the Indian manufacturer was it September, October or December, if you can just clarify on that.

In September to November, because we have 6 of them, and each 1 of them has a different date. Some can be as early as August, but it will be [indiscernible] we were saying September to November. And we hope to get something from Russia, but it was delayed before, so it may be delayed again. But we are still in discussions, and it's still very much in the process.

Okay. Sir, just final, if I may, on Sputnik V. And by the time we come to this time period, a lot of India would have got at least 1 dose, which means they will take the second dose also of that vaccine. So will there be enough market left in that sense, if you back out the interior India, if you back out the anti-vaxers, et cetera. So the moment you get beyond September, October, then just the commercial rationale come down significantly.

It does in the places that was vaccinated first time, I agree with that. It looks like there's still many places, especially in the smaller cities and areas that did not have the same opportunity. Are we still there? And so in that respect, the opportunity is still there. And we need to take into account that is those antibodies longevity is also a question mark. So for example the people that brought vaccine in the months of February, March, we may have to get something again after a certain period of time. And when we are ramping up, especially as we're discussing also Sputnik like, et cetera, we are aiming also for the second wave of vaccination as well. So whether it was going to be within 6 months, 9 months, 1 year or whatever period of time. So yes, we may expect this delay that happens to Russia, May costed us a potential market share in the month of July with that. But I still believe that it's a very viable opportunity. And it's also very much needed in that respect. Let's say that if we could have the supply today, I don't see any challenge to sell it today.

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

Thank you all 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, and stay safe.

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