Dr. Reddy’s Laboratories Ltd.

8-2-337, Road No. 3, Banjara Hills,

Hyderabad - 500 034, Telangana,
India.

CIN : L85195TG1984PLC004507  

Tel      : +91 40 4900 2900

Fax     : +91 40 4900 2999

Email : mail@drreddys.com

www.drreddys.com

Ladies and gentlemen, good day, and welcome to Dr. Reddy's Laboratories Limited Q3 FY '23 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded.

I now hand the conference over to Ms. Richa Periwal. Thank you, and over to you, ma'am.

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 December 31, 2022. 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 discussion 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 outlets 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, Parag.

Thank you, Richa, and greetings to all, and wishing you all a very happy New Year. I'm pleased to take you through our financial performance for the quarter. For this section, all the amounts are translated into US dollars at a convenience translation rate of INR 82.72, which is the rate as of December 30, 2022. This is yet another quarter with a strong all round financial performance reflected in highest ever sales and profits and strong free cash flow. Consolidated revenue for the quarter stood at INR 6,770 crores that is US $818 million and grew by 27% year-on-year basis and by 7% on a sequential quarter basis. The performance was supported by healthy growth across our businesses with contributions from both base business and new product launches.

Consolidated gross profit margin for this quarter stood at 59.2%, an increase of 545 basis points over previous year and 15 basis points sequentially. On a year-on-year basis, the gross margins were mainly aided by an increase in contribution from new products and favorable product mix. Gross margin for the global generics and the PSAI business were at 64.6% and 18.2%, respectively for the quarter. In line with our expectations, PSAI gross margins have rebounded compared to the last quarter.

The SG&A spend for the quarter is INR 1,798 crores, that is US $217 million, an increase of 17% year-on-year and 9% quarter-on-quarter. The expense in the current quarter reflects an increase in investments, certain one-off expenses and an impact of the forex rate. As a percentage to sales, our SG&A has been at 26.6%, which is lower by 240 basis points year-on-year and marginally higher by 30 basis points sequentially. The R&D spend for the quarter is INR 482 crores, that is US $58 million and is at 7.1% of sales. We have been making good progress on our R&D pipeline in line with our business strategy. We continue to drive productivity across our businesses while also making investments to strengthen the product pipeline and capability development in marketing, digitalization and people, including for the Horizon 2 initiatives.

The net finance expense for the quarter is INR 14 crores that is US $2 million. The EBITDA for the quarter is INR 1,966 crores that is US $238 million, and the EBITDA margin is strong at 29%. Our profit before tax stood at INR 1,635 crores, that is US $198 million, which is a growth of 68% year-on-year and a growth of 1% quarter-on-quarter. Effective tax rate for the quarter has been at 23.7%. We expect our normal ETR to be in the range of 25% to 26%.

Profit after tax for the quarter stood at INR 1,247 crores that is US $151 million. Reported EPS for the quarter is INR 74.95. Operating working capital decreased by INR 490 crores, which is US $59 million, against that on September 30, 2022. The decrease is majorly due to higher collection of receivables and some increase in payables.

Our capital investment during the quarter stood at INR 292 crores, which is US $35 million. We generated healthy free cash flow during the quarter of INR 1,975 crores, which is US $239 million. Consequently, we had a net cash surplus of INR 3,401 crores that is US $411 million as at the end of the quarter.

As of 31st December 2022, foreign currency cash flow hedges in the form of derivatives for the US dollar are approximately US $351 million, largely hedged around the range of INR 80.3 to INR 83.3 to the dollar, Ruble 2,975 million at the rate of INR 0.9661 to the Ruble, AUD 1.8 million at the rate of INR 56.20 to Australian dollar, and South African Rand 34 million at the rate of INR 4.81 to South African Rand maturing in the next 12 months.

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

Thank you, Parag. Good morning, and good evening to everyone. I hope you and your loved ones are keeping well. I am glad to report that we continued with strong financial performance in the current quarter as well with record sales, profits and cash flow generation. We made good progress in our productivity journey which allows us to remain competitive and grow in our markets. We have been able to identify several new business opportunities, which we refer to as Horizon 2 businesses, and have started building these. We have also made good progress against most of our ESG goals.

Let me share with you some of the key highlights of the current quarter:

a.       Completion of Phase 3 clinical studies for Rituximab, and

b.       Completion of Phase 1 clinical studies for Tocilizumab

We are engaging in the multiple business opportunities and naturally we'll be able to share that when we'll sign the deals. Like we discussed in the past, we knew that this is coming, and we knew the type of capital that we are going to create. So for us, it's well within our plans and our strategic plans. The priorities will continue to be similar to what we have discussed in the past.

We want to engage in the business development, which is not a shopping spree or big deals, but rather complementary deals that will enable our strategy and create capability of brands that we don't have or areas in which we can create more meaningful contribution to our stakeholders, customers etc. The second is to continue to invest in both Horizon 1 and Horizon 2 in capex and R&D. That's the use of the money. We believe that we will have a good use for it.

The Wockhardt products sales are now serving us very well. I'm very happy with this acquisition.

It's already exceeded our expectations.

So as we discussed in the past, our priority is a productivity in the short term. So it needs to grow what we call Horizon 1, which is meaning the current business that we have including investment in those productivity investment in our portfolio, in the ability to get some of those complex generic faster to the market, some of those biosimilars faster to the market. As well in Horizon 2, building those new businesses that will give us the growth in the future.

As we shared in the past, we assumed that we will be able to generate enough cash and enough profit to finance for those activities. And so far, it is going well for us. The extra cash that we will have, we will use for business development and for investment in capabilities in the business, especially digitalization, automation and artificial intelligence.

And in line of what we have discussed, so I'd say the old guidance remain the same. We are comfortable on a long-term basis with the 25% EBITDA, 25% ROCE, double-digit growth and no debt. This continues to be the guidance that from time to time, we'll be above it like this year. From time to time, we'll be below it, like some couple of quarters ago. But overall, I think it will allow us to be both to be a very healthy company and to grow very, very well. And we have a potential upside even to exceed these numbers. But so far, we are very much into that. That makes up for quarter-to-quarter, but if you see our record for the last few years, we are very much where we said we are going to be.

Next, in FY '24, we are planning to launch at least 30 products, give or take. And we are planning to continue the growth that we saw in the last couple of years. So we indicated that we believe that a baseline of 6%, not 6%, single-digit growth, 6% was the past, single-digit growth will likely to happen and maybe more than that. And from time-to-time, we'll have a product or products that will create much better growth than that like happened to us in the last couple of months. And those products at a certain point time also will go down and others would have replaced it.

So overall, the trend is growth. In addition to that, we believe that once Horizon 2 will kick in, also the US will grow in double-digit, but this is in the later stage towards five, six, seven years from now. So now it may fluctuate because of price erosion, it comes to predict that market share it has to predict. So unfortunately, I cannot — I don't know what will be quarter-on-quarter, but absolutely, we are planning to grow in the United States.

If you recall, we decided at that time to skip the products that will be with the patent expiration until 2027, because we felt that we will be late to the market. And we have a pretty robust portfolio for the patent if that is after that, even larger number of what you just said. We kept rituximab as it was already there, we are already selling it in 27 countries. And by having the USFDA approval, this will allow us to sell it in many more countries, and we have also agreement with a third party in the US market.

Rituximab also will bring the USFDA, and we will be able to prove the relevant site from GMP point of view. So to your question, we are committed. We are committed to even larger number of molecules than that. And over time, we are going to see it. And in accordance to the relevant date that we need to launch the product, but we're absolutely going to play biosimilars to be a significant player, especially in emerging markets.

And what would be our current biologics capacity, reacted capacity in total in terms of kiloliters?

And the gross block related to it?

Yes, every year now, Saion, we have started filing more than double-digit — double-digit filings have started. As we speak, we have about 20 filings pending approval. And in the next few years, so going by this run rate obviously, there will be 40 - 50 over the next three, four years. So typically, after filing, it takes 18 to 24 months for a product to get approved. So last year, we got like approval for four products.

This year, we expect similar run rate and going forward, even it to become better and better. So all I think statistics are working as we have expected, and the sales also should start picking up faster. So we are already growing in double-digit, but that can start growing faster, maybe somewhere second half of '24, '25 onwards.

I'm asking, would there be a meaningful contribution in the overall sales Revlimid or US sales?

Or is it a small share?