Ladies and gentlemen, good day, and welcome to Q2 FY 2022 earnings conference call of Dr. Reddy's Laboratories Limited. As a reminder, all participants' 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 the 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 Mr. 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 Dr. Reddy's earnings conference call for the quarter ended 30 September , 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 read or pasted 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, 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 Q2 of FY 2022. We had yet another quarter of strong double-digit growth in terms of revenue, EBITDA, and profit, which were also our highest ever in a quarter. 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 US dollars at a convenient translation rate of INR 74.16, which is the rate as of 30 September , 2021. Consolidated revenue for the quarter stood at INR 4,763 crore, that is $777 million, and grew by 18% on a year-over-year basis and by 17% on a quarter-over-quarter basis.
The growth was driven by both base business and recent launches, supported by contribution from COVID products and out-licensing income in our proprietary products business. This was partly offset with continued price erosion, mainly in the US and Europe markets. Consolidated gross profit margin for this quarter has been 63.4%, a reduction of 50 basis points year-on-year, and an increase of 120 basis points quarter-on-quarter. While the gross margin in current quarter were impacted due to price erosion, product mix, and increase in input materials cost, primarily on KSM, solvent, and other fuels, it was supported by out-licensing income and leverage benefit from manufacturing overheads. Gross margins for Global Generics and PSAI businesses were at 66.9% and 25.9% respectively for the quarter.
The SG&A spend for the quarter is INR 1,595 crore, that is $215 million, an increase of 22% year-on-year and 6% quarter-on-quarter. The increase was to support sales growth and on account of continued investment in sales and marketing activities for brands in India and emerging markets and brand digital visibility building. As a percentage of sales, our SG&A has been at 27.7%, which is lower by 290 basis points over sequential quarter. The R&D spend for the quarter is INR 4.6 crore, that is $60 million, and is at 7.7% of sales. R&D spend increased by 2% year-on-year and declined by 2% quarter-on-quarter.
The R&D spend increase for biosimilars has been offset by a reduction in the proprietary product segment. The EBITDA for the quarter is INR 1,567 crore, that is $210 million, and the EBITDA margin is 27%. The EBITDA margin for the H1 FY 2022 is at 24.1%. Consequently, our profit before tax stood at INR 1,268 crore, that is $171 million, which is a growth of 47% year-on-year and 71% quarter-on-quarter. Effective tax rate for the quarter has been at 21.8%. We expect our normal ETR to be in the range of 25% to 26%.
Profit after tax for the quarter stood at INR 992 crores, that is $134 million. Reported EPS for the quarter is INR 59.65. Operating working capital increased by INR 950 crores, which is $128 million against that on 30 June , 2021. The increase was primarily driven by an increase in receivables of INR 752 crores due to increase in sales and planned continuance of the receivable discounting program for the year. Our capital investment during the quarter stood at INR 358 crores, which is $48 million. The free cash flows generated during this quarter was a net inflow of INR 83 crores, which is $11 million. Consequently, we now have a net debt of INR 268 crores, that is $36 million as on 30 September , 2021.
Foreign currency cash and hedges in the form of derivatives for the US dollar are approximately $450 million, largely hedged around the range of INR 75 to INR 78.4 to the dollar, EUR 67.5 million at the rate of INR 99.19 to the euro. AUD 5 million at the rate of INR 58.40 to the Australian dollar and ZAR 74 million at the rate of INR 4.97 to the South African rand, maturing in the next 12 months. With this, Amit Agarwal, I now request Erez Israeli to take through the key business highlights. Over to you, Erez Israeli.
Thank you, Parag. Good morning, and good evening to everyone. I hope you are all safe and healthy. I'm happy to note that we had a solid performance in this quarter on the back of overall performance and contribution from all of our key businesses. This was on the back of consistent base business delivery, ramp-up in key new products, coupled with contribution from sales of COVID portfolio in certain markets and out-licensing transaction announced during the quarter. It is encouraging that we are on track and deliver on our strategy while also delivering healthy EBITDA and ROE. We feel very optimistic about the future prospects of the overall business, and there are enough levers for us to continue this growth momentum in the coming quarters as well. Today, the US FDA audit of our formulation manufacturing facilities FTO-7 and FTO-9 was completed.
We have been issued the Form 483 with eight observations. I believe that these observations are addressable, and we will do so in their stipulated timeline. Let me take you through the key business highlights for the quarter. The references to these numbers and these sections are in respective local currencies. Our North America generic business recorded sales of $255 million for the quarter, with a decent year-over-year growth of 3% and a sequential quarter growth of 8%. The growth was led by market share improvement in our key base products and scale-up of the launches from Q1 through this quarter. The overall normalization of demand to levels also contributed to increased volumes across various categories of products impacted by COVID last year.
During this quarter, we launched one product in the United States and three products in Canada. Our momentum should improve during H2 with the multiple growth-based lineup for NDAs under review. Our EU business recorded sales of EUR 37 million, with a year-over-year growth of 10% and sequential quarters growth of 5%, driven largely by new product launches. During the quarter, we launched two products each in Germany and Italy, three products in the UK, and one product in Spain. We believe that EU will continue to be growth driver for us in next few years with our own strategy of portfolio and market expansion.
Our Emerging Market business recorded sales of INR 1,298 crore, with a strong year-on-year growth of 50% and sequential quarter growth of 42%, partially supported with sales of COVID drugs. Within the Emerging Market, the Russia business grew by 46% on a year-over-year basis and by 62% on a quarter-to-quarter basis in constant currency. The growth was primarily led by A, higher volumes due to seasonal demand, B, revival in market growth after a negative impact due to COVID in quarter one, and C, launch of biosimilar bevacizumab. During the quarter, we launched 24 new products across various emerging markets. Our India business recorded sales of INR 1,140 crore, with a strong year-on-year growth of 25% and sequential growth of 8%.
This strong growth was supported by both COVID portfolio as well as sustained performance of the base business. During the quarter, we launched two new products in India. As per the IQVIA report of September 2021, we had grown by 21.4% on MAT basis, much faster than the market growth of 13.4%. Our PSAI business recorded sales of $130 million with a year-over-year decline of 1%, but a sequential quarter growth of 11%, partially supported by contribution from COVID drugs. While there may be fluctuation in quarter-on-quarter sales, we believe that there are opportunities to grow this business. During the quarter, we filed 24 Drug Master Files globally, including two filings made in the US.
We have also filed 24 formulation products across global markets, including two NDAs in the United States. As of 30 September , 2021, we had 93 cumulatively filings pending for approval within the US. FDA, which include 90 ANDAs and A 505(b)(2) NDAs. In line with our strategy of commercialization of the proprietary products through out-licensing model, we have successfully out-licensed two of our products, E7777 and DFN-15 during this quarter. We have further strengthened our strategy with a focus of ensuring short-term growth and at the same time build strong foundations for a long-term growth. Our core business in North America, Europe, India, Russia, China and other emerging markets comprising of the unbranded and branded generics and global API business will continue to drive growth.
This growth will be led by an expansion of portfolio across markets, improvement in market shares and driving operational excellence with a focus on productivity. Over the last few quarters, we have built strong pipelines of COVID portfolio drugs, and this can be a meaningful additional growth opportunity for us in the short to medium term. As of now, we have commercialized Sputnik vaccine, Avigan that is favipiravir, remdesivir and 2-DG, and currently conducting clinical trials for molnupiravir and various other drugs. While this portfolio is no different than traditional healthcare products, we believe there are multiple opportunities even for the future. Specific to Sputnik, we are exploring several growth opportunities which include, A, Sputnik Light as a vaccine or as a booster dose, Sputnik Light for adolescents and a few export opportunities. We are also investing in various innovation business which will provide growth in the long term.
This includes building a global platform biosimilars, development of NC for immuno-oncology, building on PC and pharmaceutical portfolio, vaccines, CDMO and digital healthcare platforms. With the addition of business focus, we are significantly increasing the growth opportunities for us. While majority of our growth will be organically driven, we will supplement it with relevant inorganic opportunities. We will continue to grow our topics despite investment in the new businesses. The key to enablers which will drive the success will be our people and the digitalization initiatives being undertaken by us. As we are committed to our patients to bring in the innovative medicines at affordable cost, we are also committed to our investors to providing healthy and profitable growth on a sustainable basis. With this, I would like to open the floor for questions and answers. We can start the question and answer, please.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset while asking a question. Anyone who would like to ask a question, please press star and one. Ladies and gentlemen, we will wait for a moment for the question queue to load. The first question is from the line of Kunal Dhamesha from Emkay Global. Please go ahead.
Thank you for the opportunity. The first question is, what would be the COVID related sales in this quarter for us, including the domestic market as well as the exports?
The COVID sales, you know, we have recorded some sales in India in Sputnik. We have also sold some remdesivir in a few emerging markets. Overall, the contribution we have had a good contribution from COVID sales during the quarter. For example, in India, the reported growth year-on-year is 25%, but if we were to exclude Sputnik vaccine sales, the base business would have still grown in mid-teens. Overall, I would say that it has been a good contribution from COVID portfolio during the quarter.
Sure. The COVID vaccine sales, would you say it has been margin accretive for us?
The Sputnik is. It did not contribute to the COVID, but also it did not create a lot of rationale about the gap between the investment and what we gain. During the quarter, we could have sold much more if we had supply, but we had, especially June, July, shortage of supply. We fixed that and now we are self-sufficient out of India for the future on the opportunities that I mentioned, meaning adolescents, kids, export and Sputnik Light both for vaccine and boosters.
Are we able to crack any contract for the export with the RDIF?
We gave that contract to expertise.
Sure. Thank you.
Thank you. The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Yeah. Thanks for the opportunity. Can you give some clarity on what kind of contribution from the generic Revlimid that we have seen from the Canada side this quarter? What is our preparedness and timeline? If you can talk about the timeline for launching the generic Revlimid in the US.
I did. Sorry, I did not get the question from Surya line.
Just a second, sir. Is it fine, sir? I just wanted to have a sense, what contribution that we would have seen from generic Revlimid that we have launched in Canada this quarter.
It was a recent launch. Canada is naturally not a big market, so the overall contribution is not much, but it was a decent launch for Canada.
If you can give some clarity. Sir, is there any clarity now to launch the product, same Revlimid in the US, and what is our preparedness for that?
We got the approval, so we are very happy about it. We got it, basically the last obstacle to launch. We have secured both in terms of regulatory as well as legally. We will launch it in accordance to our agreement, and our settlement agreement.
Sure. Just last one question on the gross margin for the generic business. What we have seen that there is a kind of a steady declining trend that we are witnessing for the global generic gross margins. It has trended down from 61% to now 57% levels. Is it because of the pricing pressure what that is in there in the US or generally it is led by multiple factors, but can be recovered going ahead with the new launches coming up and some sense on that gross margin front, sir?
Yeah. There are multiple factors here. First I would like to point out two, three drivers that put downward pressure. One, as you know, the export incentive that was withdrawn has clearly put a downward pressure on the gross margin. Secondly, as you rightly pointed out, there is some pressure that is there because of North American price erosion. However, we have a number of levers to offset the impact. One is productivity. As we drive higher sales growth and we spread our assets, we can leverage the cost base. And the second is the product mix. Some of our significant high-margin launches are not repetitive. Overall, I don't believe that, you know, there is a downward trend in gross margin.
Gross margin fluctuates from one quarter to another, and we are fairly confident of the margin profile of the generic business.
Sure. Thank you. Wish you all the best.
Thank you. Anyone who would like to ask a question, you may press star and one. The next question is from the line of Damayanti Kerai from HSBC Securities and Capital Markets. Please go ahead.
Hi. Thank you for the opportunity. My question is again on gross margin. In view of input material cost inflation, how should we look at trends in next few quarters?
Indeed, there is an impact of the increase in the commodity prices, and we are offsetting it with productivity activities. This is one. Second, with better sourcing. In general, I believe that you are going to see similar margins, especially gross margin. As you see, we normally trend somewhere between 51% or 56%. In the last few years, more between like 51.5% to 54%. This will probably continue to be the case. I want to emphasize, and I normally say it in board meetings, some of it is, of course, product mix. If you get better percentages, talking of percent will not necessarily show much. It's more about the actual money than the percentage of it.
While of course we are very sensitive to the percentage of the profitability as well. Let's say lastly that it will be the same range, also, in the future.
Sure. Thank you for that. On Russia's business, you explained some reasons which has led to very strong sales during the quarter. Going ahead, how much of this is sustainable, and how should we look at growth patterns in Russia and CIS market in next few years?
It is sustainable, and we also planning on growing in Russia. It's sustainable with the projection of growth. At the same time, it's not necessarily sustainable quarter to quarter. Some of the products are seasonal and depends on cold and flu and stuff like that, especially. Some of them are seasonal because they are tender products for hospitals, and therefore it depends on the timing of the tender. On the year-to-year basis, we are planning to grow in Russia.
Sure. My last question is on US pricing scenario. What kind of erosion we are facing right now, and when do you expect it to normalize for the base portfolio?
We do see, like others, a relatively higher level of price erosion, which we were able to offset with both new products as well as productivity measures. I think price erosion will always be there because this is the business model, but it can fluctuate. It depends of course on the relevant products and how much competition we should get for our relevant products. It is likely that it would be moderated for us in the next few quarters if I can implement the type of products that we have in front of us. It's very much product mix dependent. I don't see any change in the United States in the policies or any structural changes.
Okay. Thank you, Erez. I'll get back in the queue. All the best.
Thank you.
Thank you. The next question is on the line of Anubhav Aggarwal from Credit Suisse. Please go ahead.
Yeah, hi. Thank you. Sir, I have some data questions. First in the ROW market, we were doing last year INR 300 crore kind of funded. Now we're doing INR 200 crore in quarter one and INR 500 crore now. The incremental large part of it, can we assume that INR 150 crore to INR 200 crore will be service sales there? Or can you help over there what will be core percentage over there?
I don't think I would quote any specific numbers for competitive reasons. You know, this quarter the growth in rest of world, rest of the market is about 90%. I would say, even if we exclude the COVID growth, the growth, base business growth is still very strong, in markets like South Africa and Latin America. I would say there is a good contribution from COVID portfolio, but the base business growth also continues to be very strong. I'm afraid I can't give you any specific numbers.
Sure. That's helpful. Second question is on SG&A. Quarterly increase that we've seen, which you talked about 6% increase quarter over. Are these some of the discretionary spends that we're doing now but may not do later on or is this very much a new base for us that we continue to spend on this base?
SG&A, as I think I have been saying for a couple of quarters, there are two, three drivers for the SG&A increase that you see compared to same time last year. One is we are seeing normalization of operations, and last year's first couple of quarters SG&A was confused. Now we are seeing normalization. We are seeing good growth in our markets, and therefore we are putting money behind our brand in the branded markets like India and Russia. We are also investing behind digitalization, both front-end and back-end. That's one part of it. One is normalization I would say has largely happened. Second is investment that we will continue to do.
The third point I would make is this quarter also has a royalty on Sputnik V sales, the COVID portfolio sales, which is the third reason. Broadly I would say that SG&A has normalized as a percentage of sales, which is a key measure that we track. We do believe that overall in aggregate for this year will be lower than last year.
Sure. Sure, that's helpful. Just last question on the Duvvada plant. Two parts to this question. One is how many pending ANDAs are from this plant? Secondly, in terms of eight observations, are more observations on the injectable side or on the oral side of the plant?
Can you repeat the second question?
Second question is one that out of the eight observations, are more observations on the injectable side of the plant or on the oral side of the plant?
Yes. We have quite a few ANDAs. We are not disclosing specific numbers that will come from the site. I went and read the observations that were being publicly mentioned. We believe they are addressable, and of course we need to address it within the relevant time, and we will do so. These are primarily related to products and not to the site itself. Primarily given the fact that it was a PAI type of an audit which has also had a GMP as well. It's a combination of GMP as well as PAI. Potentially most of the energy was about not oversight. It should be products.
Thank you, Erez Israeli. That's helpful.
Thank you. The next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Yeah, thanks for the opportunity. Good evening. My question is on lenalidomide. Just wanted to check where we have, you know, 2.5 mg and 20 mg. Do we have exclusivity? And if yes, are we at par with Natco to launch these two doses?
We believe that we are entitled to exclusivity on those two strengths, and we will launch them in accordance to the settlement agreement that we have with the university.
With respect to timeline, would you give just broad timelines, if that would be helpful?
We cannot give timelines, sorry, for that. It's part of the agreement that we have.
Okay. The rough cut, it would be in the range of $500 million to $700 million?
It will be decent amount of money, we believe.
Sorry, sir, I'm not able to hear you.
We believe that the number will be decent. We cannot specify or guide you any number as per our policy.
Okay. Got it. My question is on the sales that we have done ex-COVID. India, you called out that your India growth is mid-teens ex of Sputnik, which means about INR 90 or INR 100 crores. How would it look if I include the exports also, because you have seen a very strong growth across your ROW markets and emerging markets.
The Sputnik in the relevant quarter was not exported. We believe that licenses will be generated during this quarter itself. In the said quarter, we did not export the Sputnik.
Sir, your voice is not clear. Sorry.
What I said is that. Do you hear me properly now?
Yes, sir. Very much. Thank you.
Okay. Sorry about that. We did not export during Q2. Export license will be given by the government only during this quarter and when we will receive that, we will be able to export Sputnik. That's the problem.
Okay. The follow-up on ROW is, there is a exceptionally high growth, and what I heard last was that the growth momentum is strong, but any particular reason you want to call out? Is it COVID-related products or, is there any one-off to that?
There was a great contribution, especially from Avigan, from Favipiravir, especially in Asia. This was the part that related to COVID. As Parag said, even without COVID, there is a very robust growth, primarily led by growth in Russia and China and the rest of the emerging markets in both retail and hospital products. Even without COVID, which contributed in healthy manner, we have a healthy growth, and this will continue also in the future.
Very helpful. Last one on the PSAI, sir, if you could just give some highlight, when do we start seeing growth, and margin improvement? On the back of that we're already hearing a lot of raw material pressure. What exactly we are doing so that our growth comes back?
The main growth will come in the next. Overall, strategically, the main growth will come when the new portfolio of API, which will of course support launches by our customers, including our own internal use of the new API. If you wish, our API business, the biggest product is primarily driven by a group of products that are, let's say, veteran in the generic business and the new products that will be launched, primarily peptides, will replace that, if you wish, product in the next coming years.
Specifically, the API is doing well, given the fact that on one hand, you have increase in the commodity, and you have intensified competition of some of these key products, but we are doing well in penetrating with the new product, and I believe that within the next few quarters, we will see a sustainable growth. The fluctuation that we see now probably will continue the next two to three quarters.
Okay. Very helpful. Thank you, and all the best.
Thank you.
Thank you. The next question is from the line of Neha Manpuria from Bank of America. Neha.
Hi. Thank you. My first question is on generic Revlimid. What's the current API situation? Has it eased out? Can you scale up and take your target market share?
On the API supply line, we believe that we secured the API that we need for the next few quarters and beyond, and we feel very comfortable with our situation right now.
Your competitor had commented that this is possibly not a high-margin product as they would have normally imagined the new launch to be. Would that be the case for DRL as well?
We are not going to discuss the profitability of this product. I can say that I'm very happy and pleased with the performance of this product.
Thank you. My next question is on if you can give us an update on generic NuvaRing and generic COPAXONE, where you are in terms of the review cycle with the FDA, and if you're on track for an FY 2023 launch.
We are both on the same stage that we discussed last time. COPAXONE, kind of the ball is in our court. We still need to address FDA. I don't remember even how many cycles we have by now. The recent cycle. NuvaRing, we are waiting for the FDA response. We submitted, I think, back in June. This is the status that we have now. About launch prospect right now, I cannot give any timelines for the launch. Learning from the past experience, one will see it, I believe that one will get it.
Very nice, Erez. Just on NuvaRing. Given that NuvaRing and COPAXONE, given that it's gone through multiple cycles of you know, queries and then review by the FDA, should we still assume once you've submitted, it's still a six to eight months review cycle, or does it go longer because it's a multiple cycle now?
With the current practices, we review every time that we submit, we are getting a new go date, and that's the practice that probably will continue. I don't think it will be less than that for every submission.
Got it. Thank you so much.
Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.
Hi. Thank you so much, and good evening, everyone. Erez, on your Sputnik, you had contracted for 125 million doses, and the expectation was that you would achieve that within, say, 12 months. Given where India is today in vaccinations, do you think this is a realistic target, or do you think the volumes could be a lot lower?
On the wave of vaccination that was in India, especially during July and August, we clearly missed it, primarily because we were lack of supply on the second dose. Right now the level of vaccination in India is very healthy. At the same time, we believe that it's still a very viable opportunity, given the fact that, Sputnik can be a booster for any vaccine, not just in India, but elsewhere. The qualification of Sputnik like as a vaccine and as a booster, and the trial that we are doing for both kids, meaning two to 12, and adolescents, 12 to 18. As well as the ability to export. It's a new, if you wish, a newer opportunity or newer positioning. In terms of quantity, it's hard to speculate.
Potentially can be even more than that, but I would not say necessarily. As a number, it should be still a viable opportunity for us. Naturally, I wish we had more supply during July. We could make this quarter even better.
Okay, great. Thanks for this. For Vascepa very specifically, Erez, I know you've answered that you have secured supply for next few quarters, but has your new API supplier approved by FDA or that filing is still pending?
We got the approval of the suppliers that we seek for.
Oh, excellent. Okay, wonderful. Erez, I know you have very limited comments on Revlimid 2.5 and 20 mg, and I will not push you too much, but the question here is that for these two strengths, the contract is same as you have for other strength or, is it a different contract with the innovator?
The two strengths are included in the settlement agreement we have with the innovator.
Sorry, I missed that.
The two strengths are included in the settlement agreement we reached with Innovator.
Okay. I'll take this offline. Yeah. Thank you so much.
Thank you. The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.
Good evening, and thank you for taking my question. Just the first one on the molnupiravir clinical trials that you have been doing in India, what is the update? I thought that end of September is when trials conclude, but I could be wrong.
We are expecting the results within the next few weeks, and of course, we are expecting the approval of the product by the US FDA. If that will happen, then it's an interesting opportunity, especially for countries with a lower level of vaccination.
Sure, Erez. That's helpful. This could be, and given that Sputnik V seems to be the preferred candidate at this point of time, do you foresee this to be a large, both you have rights in India as well as low and middle-income countries, right?
Yes. We have high expectations, but with COVID, no one knows what will happen. We are preparing ourselves for a big opportunity, and let's see what will happen. Because it's, of course, it depends not just on the approval, but also how the pandemic will evolve in the next few months and quarters.
Sure.
I wish I knew, but we are preparing for the upside, yeah.
Yeah. No, sure. Erez, does our trial also cover prophylactic use? In which case the use case could be larger, right? Or do we have to do something different for that?
No, it's a prophylactic use.
Got it. Okay. Helpful. Second question is on Suboxone film. I know we've been in the market for quite some time, but the brand still seems to be retaining, like what, about 25% market share. We are at 13%. I'm just quoting IMS data, what I can see. You know, with the four to five generics, shouldn't generics be higher? Is there any further room on Suboxone film?
It very much depends on the patterns of the order or the way this product is being prescribed and reimbursed. The level of penetration of generics is going to be higher in the future. It's just lower than the other. Yeah, I do see higher market share than the number you showed now.
Erez, close to 20%, you think?
It's north of 20%, yeah.
Okay, great. That's very helpful. My last question is on China. Anything that you can help us update in terms of how we are doing, either what will be your annual run rates, what's the product portfolio there, how many are we launching? Anything in terms of the tender systems. Any update on China, very helpful.
Sure. First of all, we are on track with China. The performance in China is very, very positive on both the partnership that we have there with Rotam, as well as the products which are going to get from the VBP tenders. We are preparing to submit relatively larger numbers of products for the VBP that potentially can be among the first five and among the first to market. At this stage more than 15 products for next year. This year it will be probably less than 10 that eventually will be submitted. As you know, in the VBP, you normally have a cycle of two to three years, depends on the nature of the product.
We are targeting the approvals in accordance to the timelines of those tenders. At the same time, our partnership is focusing on branded generics and OTC, and this is going very well and continue to grow in double digits.
Thanks, Erez. All the best.
Thank you so much.
Thank you. The next question is from the line of Shrikant Akolkar from Asian Markets Securities. Please go ahead.
Yeah, thanks for taking my question. Now my first question is on Revlimid in Canada. Can you please talk about initial trends like price erosion or market share gain?
No, I cannot speak yet on these terms, primarily because post-launch in Canada there is a process in each one of the provinces and states to get approval. As you know, in Canada, you are getting approval from the Ministry of Health, and then you need to register it in each one of the provinces. This is the process that we are in. We did launch the product. It's a healthy launch, but it did not reach its potential, and it will be once it will be approved in all the relevant provinces.
We lost this line. We'll move to the next question. The next question from the line of Tushar Manudhane from Motilal Oswal Financial Services Ltd. Please go ahead. Tushar Manudhane, your line has been unmuted. Please go ahead with your question.
Two questions. One, in terms of the outlook in terms of biosimilars, when do you see it contributing meaningfully, and, I mean, by which year? Secondly, during the quarter, there has been some licensing income as well as some sale of rights income. So adjusted for that, how much would be the normalized EBITDA margin that Dr. Reddy's has on?
Yes. On the first question, the biosimilars, I believe that in the calendar year of 2024, we'll start to see more meaningful contributions, and as we are now reinvesting the sales that we have, especially in emerging markets, by building more capacity and building more R&D. This is our business model. Of course licensing in for the United States. This is right now the model, and this will continue to be the model probably until the calendar 2024 or fiscal 2025. As for the margins, I'm reiterating the 25, the famous 25 to 25 that we are sharing. We are very much in that direction, and it is coming faster than we anticipated, let's say three years ago.
We are very, very close to that.
Okay. About your partnership with Fresenius Kabi.
What about it?
For PegGRAfeel[crosstalk]
We are waiting for them to launch and to enjoy their profits.
Okay. They have got the approval right?
Not the time of year. They should get it, but I don't think they got it.
Okay. Yeah, regarding the EBITDA margin.
I said that we are very close to the 25% with the EBITDA, as well as the 25% ROCE. We are getting closer to that, and this is where I would like to see the company in the quarters and years to come.
Okay. Thank you.
Thank you. The next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Hi, thanks for taking the question. It is on Sputnik, you talked about the potential export opportunity opening up in the second-
Nitin Agarwal, may I request you to speak on the handset mode, sir? Your audio is not very clear.
Is it clear now?
Yes. Thank you.
Yeah, thanks. In theory, on the Sputnik opportunity, I think if I were to got it right, you mentioned that the export opportunity for Sputnik should potentially open up in the second half of the year. Now from a longevity of this opportunity, do you see this essentially being a FY 2022 opportunity or do you see it lasting much beyond 2022 or the next maybe more than a year or two years as you see it?
It depends on what kind of booster policy countries will adopt. At this stage, and as we all know, COVID is evolving faster than we can plan. At this stage when the export is either in countries with lower level of vaccination, and in the medium term, it's primarily about the booster. It of course depends on the booster protocol that each one of the countries will adopt, especially the countries in the emerging markets. It is yet to be seen, but this is the opportunity.
Okay, thanks. Secondly, on our R&D, now that we've significantly, you know, reduced our specialty work, where are we spending currently our R&D dollars on? Which areas are the focus areas for us going forward?
We are spending on our generic portfolio for the spaces in each one of the markets, namely the United States, China, Europe, emerging markets. We are trying to globalize the products so we are developing products for more than one market, and if possible, to all of the relevant markets. It was part of the productivity products. This is in line with our core business. In addition to that, we have spent money on biosimilars and recently also on COVID products as well as vaccines. Specifically for India, we do have in Russia certain clinical on some differentiated product, clinically differentiated products that the money is also going there.
Last but not least, we are developing APIs as well as intermediates as part of that. There is a small group under a branch of Dr. Reddy's called Aurigene Discovery Technologies that is developing products for immuno-oncology with a business model in which we are taking some of the assets and licensing out in early stage, and this is what is financing the products that we want one day to come to the marketplace. This is part of what I discussed before for Horizon two. The current business model of generic, branded generic and API will continue to be our main business for the time being. At the same time, we are building new businesses that will serve us in the next coming years.
A part of it is coming by investment and part of it is coming by self-financing of that specific group. We want to create the growth of our core business as well as building the new franchises and maintain the 25. This is the challenge that we took upon ourselves, and so far we are in that direction.
Thank you. If we can squeeze in one last one. You talked about inorganic growth. What are the areas that typically are our top priority for us from inorganic opportunity perspective?
These are primarily complementary product or assets that can help us grow in our spaces. Like we did with the acquisitions of the products that work out at the time. We are all the time evaluate primarily product assets. But in each one of our spaces, India, Russia, United States, Europe, we are evaluating deals and as well as emerging markets, which will be complementary in nature. We are trying to leverage, of course, our relatively comfortable financial situation that we have now.
Thank you, and best wishes.
Thank you. The next question is from the line of Kunal Dhamesha from Emkay Global. Please go ahead.
Thank you for the call. Again, coming back to the Sputnik export opportunity. From the economics, does export change anything? I mean, in terms of the whatever profit margin that we get for India versus the export, is it different or would it be same?
The prices outside of India are currently higher than India.
Sure. In terms of the quantities, it still remains the same, right? 135 million pieces or up to 250 million doses.
The current contract that we have with RDIF is still the same. We have now found just different outlets. It was meant primarily for India, and this did not materialize the way it was designed originally. Now we are trying to find opportunities in the other places that we have discussed.
We have a contract in place right now for export or no?
We do have contracts for export in terms of places agreed that we can export the product, yes.
Sure. Thank you, Erez Israeli.
Thank you so much.
Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.
Hi, thanks for the follow on. Are there any updated thoughts on outpatient health tech platform that we talked about? How is it progressing? What are the key milestones that you're looking out for?
Yes, we launched it in July. It is going very nicely. We are now at the stage of upgrading it to five more cities in India as well as upgrading the digital platforms that is supporting it. The recruitment of the physicians is going well, and it's a very, very interesting disruptive idea. Hopefully it will continue to be looked at, but let's say the launch is encouraging.
Okay. Is it only towards the doctor consulting or is it also towards e-pharmacy and diagnostics? Are you also expanding on that?
It's end-to-end solution, including all of the above.
Okay, great. One more. As far as biosimilars for regulated market is concerned, can you confirm how many do you have in phase III clinical? I thought there was one Rituxan. Over the next 12 to 24 months, how many more can enter into clinical trials, please?
phase III, we have one, which is Rituximab. In the next period of time that we discussed, we will have four more.
Four more. Excellent. Yeah. Thank you so much.
Sure.
Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over 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. On behalf of Dr. Reddy's Laboratories Limited, I thank you for this conference. Thank you for joining us, and you may now disconnect your line.