Q1 21/22

Jul 27, 2021

Good day and welcome to Doctor. Reginald Ward Limited Q1 FY 'fifty two Earnings Conference Call. As a reminder, all participant lines will be in listen only mode, And there will be an opportunity for you to ask questions after the presentation concludes. To begin the call, Please note that this conference is being recorded. I now hand the conference over to Amit Agarwal. Thank you and over to you, sir. Thank you. Very good morning and good evening to all of you and thank you for joining us today for the Doctor. Reddy's earnings conference call for the quarter ended June 30, 2021. Earlier during the day, we have received 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. All the discussions and analysis of this call will be based on the IFRS consolidated financial statement. To discuss the business performance and outlook, we have the leadership team of Doctor. Eddie from phasing Mr. Ire Israeli, our CEO Mr. Farad Agarwal, our CFO and the Investor Relations team. Please note that today's call is a copyrighted material of operator ID and cannot be rebroadcasted 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. Saragar Bebirtwal. Thank you, Amit, and greetings to everyone. I hope you and your families are keeping safe and well. I am pleased to take you through our results for the quarter 1 of fiscal 2022. This is yet another quarter of double digit growth in sales. However, profits were impacted due to higher price erosion in U. S. And increased investment towards brand promotion, R and D and Digitalization. We believe this investment is 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. Dollar at a continuous cancellation rate of $57.63 which is the rate as of 30 June 2021. Consolidated revenue for the quarter stood at INR 4,919 crores that is $650,000,000 and grew by 11% on year on year basis and by 4% on a sequential quarter basis. Our growth is mainly driven by new product launches including COVID products, high spec business volume, 3 quarter impact of portfolio acquired from And consolidated gross profit margin for this quarter has been 52.2%, a reduction of 3 80 basis points year on year and 150 basis points quarter on quarter. Q1 FY 'twenty one gross margins were high due to higher export benefits and favorable product mix. The gross margins in current quarter were impacted due to higher price provisions primarily in the U. S. And increasing inventory provisions for purchase orders. Gross margin for the global generics and CACI were at 67.7% and 21.6% respectively for the quarter. Of the incremental expenses after the initiation of Warkhar's acquired portfolio. The R and D spend for the quarter has received INR 4.63 crores that is 1,000,000 and is at 9.2 percent of sales. R and D spend increased by 13% year on year and 11% quarter on quarter The EBITDA for the quarter is between INR10.19 crores that is $137,000,000 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 and D. We are confident that EBITDA margin will improve in the coming quarters. Consequently, our profit of US56.25 million dollars which is adjusted in our IFRS financial statements for full force and for the full year for FY21 while in Form 20F as a subsequent adjusted EBITDA. Effective tax rate for the quarter has been at 23.1%. We expect our normal APR to be in the range of 25% to 26%. This year, we have covered RMB160 1,000,000 against that on March 31, 2021, mainly driven by increased inventory and receivables. Increase in receivables was primarily on account of a planned discounting money 2020, we now have a net surplus cash of $6.25 per day that is $6,000,000 as on June 30, 2021. Largely held around the range of RMB74.7 billion to RMB77.9 billion, ruble 77.25000000 at the rate of rupees 0.9921 to the ruble AUS10 million dollars at the rate of AUS68.062 and AUS410 million dollars at the rate of RMB 4.962,000 2nd maturing in the next 12 months. With this, I now request Elias Good morning, and good evening to everyone. I hope you and your loved ones are keeping safe in MT and D starting time. We continue to make some progress on our targeted execution by enhancing our development pipeline of pro form molecules and biosimilars, Driving productivity and accelerating our innovation agenda. Today, we have successfully managed to extend our business model Beyond the team innovate from digital innovation and good demonstration that is the launch of SOVAST and Abtay's integrated OPD service delivery platform in India. This was for by system and high quality healthcare, laboratory, safety, Quite the positive pressure in the U. S. As well as decline in NPI sales, while the growth in growth is expected in the next coming quarters, supported by Kera In the recent launches, continued new product launch momentum and the gain of market share. Now let me take you to the key business highlights of our business. Please note that all of the investments in the numbers and these actions are in the respective local currencies. Our Europe business recorded sales of €45,000,000,000 with a year over year growth of 6%, driven largely by new product launches. The strength was set on its technology and services. During the quarter, we launched 4 new products in Germany and 2 products in UK. We have expanded our presence to 4 new 100 in Europe, namely Netherlands, or Dubai, for the rest of the public with the launch of the capacity team for injection in this market. Our net earmarked business recorded sales of INR903 with the year over year growth of 40% in the quarter quarter, It was 3%. Within the EU market, the Russia business grew by 14% on the year to date basis and declined by 30% on the quarter to quarter basis in constant currency. Our business in many other office markets like Brazil and China for the Congo. We have been able to create a robust go to market infrastructure of the Kaiser products in field, many applications and network And what we're doing is to stop the activity of our customers as a response to mitigate the COVID related potential disruptions. Considering the nature of this business, we expect some fluctuations in quarter to quarter as due to ramping in order. On the R and D front, we continue to strengthen the fact that positive decisional efforts are similar to During the quarter, we signed 35 market sites globally, including 25 made in In our proprietary quarter visit, we continue to hold as well as the pivotal registration trial for April 7 for CPCA indication. During the quarter, we have licensed the development and hospitalization rights of the FT29 program that is modified in modified relapsedrefractory milligram. With this, I would like to open the floor for questions and answers. Thank you very much. We will now begin the question and answer session. The first question is from the line of Forum Parekh from Choice Institutional Broking. Yes. So just wanted to know on the outlook of the North America business with this intense price erosion, So how do you look at it? And second, I wanted to know this going forward, What would be the drivers for ADESA Monthly? Yes. So this quarter was a bit unusual for us as what we call We got the downside of the U. S. Upstream from that We faced a price erosion primarily descending our share, while the big launches are coming up annual And later, from Dental, across the front, which is a very important launch. The launch came in the last A few days of the quarter and probably for products like this, we will see realizations of its potential in the quarters to come And we are expecting the North America to grow this year and as well as As always also in the quarter to come, and in this respect, It's a bit different. So the specifically this quarter, it was a combination of the U. S. As well as the less API, normally when you have less API, it's impacting EBITDA. And this is also fluctuating from the quarter As well as COVID and other activities like that, I'm not concerned on that on the long term basis. Okay. And can you just throw some color on the North America side on the soy side ocean, how do you see it? Something very similar to what used to be in the years ago when you're launching your product, Especially for the books we launched recently, recently in the last 12 months, German Confectica was And naturally, this could continue to be also in the future. So I don't I cannot say something that is Next question is from the line of Prashant Manuthane from Motorola Sloan Financial Services. Please go ahead. So first of all, it's not a new change. We reported And those investigations normally takes your time. I don't think there's an immediate action in this respect. Once the investigation will come, Okay. And secondly, just on this PSCI gross margin, why the sales would have been impacted because of the immense buildup for the previous quarters? The next question is from the line of Damian Tekerai from HSBC Securities and Capital Markets. Please go ahead. So my question is on Russia and CIS Business. So if I understand correctly, 4th quarter is the lowest seasonal quarter for us. But despite that, we continue we saw I'd 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 declines. And is it something specific to Doctor. Regis or It's something market wide phenomena which is impacting sales in Russia and CIS. In Russia, there is a timing of the tenders and the bid on both cereals. Those normally are coming in 60 quarters according to the buying patterns of the government in Russia. That's why, to say, believe we have most of those sales, but there's 2 kind of products in certain quarters we will be sequentially behind. This is more of a timely issue of the tender's product, while So how should we expect growth for this part of the business in a normalized And my second question is on the rollout in India. So depending on the clarification which you might have got from the CMOs, by end of Slide 22, Like how many doses you are concerned about distribution in India? Or how do you see the rollout of COVID vaccines in next, say, 20 to 3 months? We will have somewhere between September and Of course, this is also depends on what will happen in terms of vaccinations by The next question is from the line of Prakash from Axis Capital. Please go ahead. Yes. Hi. Good evening and thanks for the opportunity. Sir, I mean, you mentioned about CSAI. 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 and I understand you mentioned about why this quarter was affected, The 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 GMF and you spoke about last quarter on the CRO that you are starting auditing. So what is the update there and what is the outlook So the outlook is positive. We believe in this business since 2 months ago. There is indeed in the last or third quarter fluctuations. There were quarters in which people took more and Overall, the product, especially in the future, of course, looks very promising. The On the scale up of the CPMO and stuff, we are very much on track and I very much believe in this business, I found relatively small, growing but small in terms of impact on the entire company. Hello? Yes, sorry. I was on mute. I asked that do you think this is a one time glitch and you back Some of these products that the price went down will naturally continue. But We are going to see a growth in the API for sure for the year, but it may fluctuate also during the And second question is around the EBITDA bridge. So last year, we were at healthy EBITDA margin of 22.25 percent. And we started this quarter with soft U. S. Business, soft retail business, resulted in drop in Gross margins and EBITDA margins. So, how do you think by when will you be able to come back to your 24%, 25% mark? I mean, will it take a couple of quarters or it will take next year to No, no, it will come Yes, more than fair. The drivers will be, first, the realizations of the full value of the product that will be launched in the U. S. It is missing in the quarter. The second is that a scale up of some of our API activities. 3rd, we are going to see more growth and more impact of some of If you wish, more top line in the company after the revisions of higher growth in general We are this was a quarter in which we had some, not it was not significant, but some I think that the impact, whether it's COVID limited, it was a quarter in which 2 months out of the 3, We have we were under what wave pool in India and has to deal with the logistics As well as certain concierge. So all of this are supposed to help, and I am very confident that we'll see The margin that we have discussed and my key KPIs that I'm already describing in the meeting for long term, the 25, 25 Thank you. The next question is from the line of Sriram Rathi from RTC Securities. Please go ahead. Yes. Thank you, Gautam. Firstly, on the I mean, just So normally, when you have a complaint in the market, You need to submit this information after the guidance to the agents in the U. S. As we have heard in the U. S, and this is largely this time. The processes that we are going through are investigations, have The process we want to take probably The 14 times a year, maybe more, I don't know. Okay, got it. And secondly, one question on the gross margins. So, I think the Infant Management has mentioned that there was some inventory adjustment also. Inventories, Shriram, I don't think we can share the numbers, but There is some inventory collision that typically happens every quarter. This quarter we saw a little higher Because of certain quality issues and still moving inventory, which is normal in our industry, we do expect it to normalize in the next couple of quarters. 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 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, let's push it up. As we grow The sales which we have been doing for a while in the branded market, that will give us better leverage. Also, as the PSI business improved, that will impact Gross Margins, obviously. 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 with an upside pressure to gross margin Our mood compared to where we are today. But I don't think I can give a raise on gross margin. If you recall in the previous meetings, digital will be a great business that will sum. So, in terms of the NOI, it's hypothetical. So what to guide us is naturally the EBITDA. But in terms of expectation, the effect is fair to say The next question is from the line of Nitya Malasubramanian from Bernstein. Please go ahead. Thank you. So, question on SPOT-three. And you understand that far fewer doses of the second dose has been reported as well. Is this is this likely to remain a challenge? Do you Have the stability on Ben, this is likely to improve so that you are able to vaccinate more people? So first, this is correct. The main challenge is the supply of the second formula, what we call the formula 5 And as well as the allocation that are from Russia, as they have their own wave of pandemic and The FDA allocation consideration. In our discussions with them, it's, of course, I hope that the risk solutions will come and there will be a ramp up out of India as well as the potential approval of supply. So for satellite, is there any requirement from the DCGI for you to conduct any sort of study in India? They will accept the trials that resulted to come out of Russian. And maybe once Got it. One last one on your you mentioned that your SG and A spend in India is now higher because you're pushing for marketing activity On digital solutions, etcetera. So is this level now likely to stay? Is this only normal? In India and emerging markets, yes. But it's also supported well the sales and the profit. So this is a very effective business, which is growing And it's paying for its investment plus with late return on investment and net EBITDA. So this is likely to grow. And more than that, this is the main implication on the on those businesses that are not giving us the level of Got it. If I could squeeze one last one in. So if you look at Aladdin's commentary on The next question is from the line of 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 fixed target going forward on an annual basis And what we are doing with the U. S. Colleagues, like I mentioned in many discussions before, So to address directly your answer, this year, the proportion will be higher than other years. But it's not Sure. Thank you. And the second question is what's the rationale behind the continuation of the receivable funding. 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 rates used to be much higher in India. And therefore, the downstream of receivables in the U. S. And being able to take advantage of the arbitrage was a lever that you were using. It is narrowing of the interest rate differential That RB card was no longer making sense and therefore we have decided to reverse that. Next question is from the line of Anubhav Agarwal from Credit Suisse. Please go ahead. Hi, guys. This is Vinik. Just one question from my side. I just want to understand the agreement is better. Sure. So, first of all, in this quarter, while we had COVID impact, So in India, not a lockdown as severe as the last lockdown. And we did have a combination of For India and June in particular, a combination of physical calls as well as digital calls, that's one. The second is that we are investing behind a number of New brand. For example, Celavida in Nutrition space, we have launched in June a brand called Poor Health, which is We have got very encouraging response from the consumers initially. So, we are investing behind our OTC business. We are also spending in 2 rural areas where we have seen strong growth. So, there are a number of growth drivers which require investment and we have not shined away from investing in India and Russia. And this is borne out by the growth profile of these businesses. In this quarter, India has grown at a very strong rate. We need to account for the growth rate in India. Sequentially, we have recorded 20% growth and similarly in the emerging markets. So, this investment we found is good cholesterol and we will continue to invest in good cholesterol. And right now, this is our priority. And I hope I will that we will get to work in August, but we cannot of course, we do not have the confirmation for that as of today. And everything that is related to export It will be after we will satisfy the need of treatment. So yes, absolutely, the intent is that this will help us. It will be also fresh But at this stage, the agreement and the activities that we have The next question is from the line of Neha Manpuria from JPMorgan. Please go ahead. Yes. Thanks for taking my question. My first question is on the India business. And a related question on that, how much do you think you will have to spend to scale up these businesses, particularly something like OCC and Nutrition Businesses. So first, India is already financing it. So we are going in office in India. I know that we are shifting the DNA line, but in terms of office, India is trying to be This is the this is external in India, and this is going to be also the case So That part of the investment is actually being worked nicely and the obviously as well as EBITDA in India with the overall average even the average 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 in terms of new launch, do we just want to understand how many brands that And some will be leveraged to $30,000,000 in the past. Overall, the profit of India will grow from year to year. So it's a investment and it will pay for those investments that we'll take as in 2 years. At this stage, I don't think we can get to I think that the competitors also, you should see a different Thank you. The next question is from the line of sir Mukherjee from Nomura. Please go ahead. On the U. S. Market, is it possible to quantify the extent of price erosion that you've seen in the base business? 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 speaking up. And give some color on volumes. I understand price is lower, but how has volume shifted? Have you been able to In terms of mid market share, first of all, we are growing market share. So we are going in general. And our corporate product is about the 25% if I remember correctly For this product, we need to defend normally it's double digit for this product. This quarter, the main thing that happened was that's what I said in the beginning We got what we call the streams of not the honey. We did not we got to be the impact Okay. And secondly, you can ask about specifically you mentioned, I mean, given that the vaccination phase in India has picked up and we have a contract for 250,000,000 dosage. Do you think and given the pricing environment, do you think financial If all the things will be right there. And the reason that the thing is can because I'm down the There are many, many The COVID wave that hopefully for India will not come another wave to again, and we should for India So there are many, many factors in that respect. Plus, we need to remember that The antibodies potentially or even for the people, the doctors, they eventually are going down and reducing the impact in countries that were vaccination 6 months ago now, there is a couple of cases. Again, even in the Western area. And So what we are doing is we are trying to move on a good different dimensions to address scenario. So for example, we are working on adult foods. We are working on smoking slides. So I don't know exactly how the switch will fall, but we are arranging for Okay. And finally, if I can ask on R and D, as you mentioned about biosimilars, I just wanted to check like is there a very steep increase in R and D spend on biosimilars? And how should we think about, are there any products which are going into major clinical trial over the next 12 months? Should we expect this to Move higher if you can guide on R and D spend, how should we think about it, particularly with respect to biosimilars and your thoughts in general because There has been limited success in the space. So I mean what are your thoughts on increasing spend on other areas? We are unanticipated debt. I cannot call it steep. I can call it an increase of spend. And we are starting trials and it is part of our increase in our individual We are financing by increasing our sales of the biosimilars, especially in emerging markets and the main And the main difference is that this time, the Other products will be aimed for first to market, unlike the product that will change behind. And there is, I believe, a Significant opportunities in that, especially in our market. So I continue to with the strategy of And there will be a sort of this infrastructure spend alone as Thank you. Next question is from the line of Sameer Desiwala from Morgan Stanley. Please go ahead. Thank you very much and good evening everyone. So my first question is on the digital health tech effort that you're putting in And the app that you announced having launched Kale. So just thinking about it, what is Doctor. Reddy's competitive advantage In getting into this venture, you are right to win versus a few of those who have launched their, if it's a half like This is the service that we are giving to people, so people that In this case, it's a collaboration. We'll get under an insured We take on time with the physicians, the insurers, the pharmacies, The delivery, the information and everything underlined. And I think We are very happy to be and to do this. So it's not a normal act. It is absolutely a service, Fair enough and thanks for this. But I'm just wondering what revenue does it have with your And what's your end game? I mean, will you keep it developing or just thoughts on this? We absolutely will continue to develop it. We just launched it. But the way I see the increase in the world in India, It will not be about necessarily going drilling on the doors of the tremendous amount. What's happening is we will have to go So, I aim to create an ecosystem and I think those companies that have are the 1st movers in creating an ecosystem, All the players in the healthcare will definitely have a competitive advantage. Okay. Excellent. The second question is just on multiple. I know you've asked that. I'm looking at 4 weeks data that is available now in IQVIA and your market share is under 3% For drug, we could use the 2nd clearance maintenance instead granted. Why is the market share ramp up so slow here and how should we pay the panel? Normally, when you launch, people are checking the relevant stuff and then they're trying to do it. Sorry, sir, let's say. Speak away from that. I'm saying our sales are not working in according to the ramp up of And sir, just a clarification, specifically, when did you say your supplies would be I'm picking up a lot more from the Indian manufacturer. Was it September, October or December between this price and that? September to November because we have 6 of them, and each one of them has different dates. Something we have early as August, but it will be positive. We are saying September to November. And we hope to get something from Russia, but And by the time we come to this time period, A lot of India would have got at least one dose, which means they will take the particular dose of that vaccine. So, will there be enough market to rest in that sense if you back out the India to back out the anti vaxxers, etcetera. So, the moment you get beyond 2nd October, there is a commercial rationale So for example, the people that brought the vaccine in the month of So whether it was going to be with the 6 months, 9 months, 1 year or whatever period of time. So yes, we may expect this delay, the sentence to Russia made You'll have feedback 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 refer to the Investor Relations team. Thank you and stay safe. Thank you very much. On behalf of Doctor. Raji Diwali's Midrand Conference Call. Thank you for joining us, ladies and gentlemen. Please now disconnect the lines.