Dr. Reddy's Laboratories Limited (500124) Earnings Call Transcript & Summary

Good day, everyone, and welcome to quarter 2 FY '27 Earnings Call of Dr. Reddy's Laboratories. We appreciate your confident interest in our company. I'm Aishwarya Sitharam, Head of Investor Relations at Dr. Reddy's. Joining us today are members of the leadership team. Mr. Erez Israeli, our Chief Executive Officer; and Mr. MV Narasimham, we call MV, our Chief Financial Officer. Our quarterly financial results have been published earlier today and are available on our website for your reference. We will start today's call with [indiscernible] providing an overview of our financial performance for the quarter. Following that [indiscernible] will share his insights on key business highlights as well as the company's strategic outlook. We will then open the floor for questions. All commentary and analysis during this call are based on our IFRS consolidated financial statements. Please note that certain non-GAAP financial measures may also be discussed. Reconciliations to the corresponding GAAP measures are included in our press release. I would like to remind everyone that the safe harbor provisions outlined in today's press release apply to all forward-looking statements made during this call. Before we proceed, I would like to call out a few housekeeping points. All participants will be in the listen-only mode during the opening remarks. Should you need any technical assistance during the call, please use the chat function on your Zoom application. The chat will not be monitored for any questions to the management. This session is being recorded, and both the audio and the transcript will be made available on our website. Please note that this call is a proprietary material of Dr. Reddy Laboratiries Limited and may not be rebroadcasted or quoted in any the acholic forum without prior consent from the company. With that, let me hand the call over to MVN to present the financial highlights for the quarter. Over to you, MV.

Thank you, Aishwarya. Greetings, everyone, and thank you for being with us today. It is my pleasure to take you through our financial performance for the second quarter of FY '27. The business reported a 1.5% year-over-year decline in revenue, while EBITDA margin was at 20.6% for the quarter. Excluding lineman in North America, the underlying base business maintained its growth momentum, delivering double-digit growth. All financial figures in this section are translated into U.S. dollars using a convenience translation rate of 95.83 the exchange rate prevailing as of September 30, 2026. Consolidated revenues stood at INR 8,671 crores, which is USD 95 million, a decline of 1.5% year-over-year and a growth of 7.4% on a sequential basis, strong underlying base business performance across Key businesses, except Europe and API driven by new product launches and favorable ForEx movements helped mitigate the impact of lower lined sales. Consolidated gross profit margin was 52.1%, an increase of 62 basis points sequentially and a decrease of 254 basis points year-over-year. The year-over-year decline in margins during the quarter was largely on account of lower met sales. As a reminder, margins in the preceding quarter were adversely impacted by a provision for inventory and other costs associated with the [indiscernible] related challenges. The reported gross margin for Q2 FY '27 was 56.2% for global generics and 11.8% for PSA. The SG&A spend was at INR 288 crores an increase of 6% year-over-year and a decline of 3% sequentially, according for 32% of revenue. The year-over-year increase was primarily driven by higher personnel costs following annual increments adverse ForEx movement as well as elevated freight costs due to supply chain disruptions arising from the Middle East crisis. The R&D spend was at INR 54 crores down by 16% year-over-year and 9% sequentially, accounting for 6% of revenues and primarily reflecting lower development expenditure in the generics as compared to the previous year. The EBITDA, including other income stood at INR 173 crores, which is USD 186 million, a decrease of 14 basis points year-over-year, an increase of 8 basis points sequentially, reflecting a margin of 20.6% of the revenues for the quarter. The profit before tax was at INR 1,228 crores, that is USD 128 million, representing a margin of 14.2%. Effective tax rate for the quarter was at 25.6% compared to 22.2% in the responding period last year. The year for the quarter was higher, primarily due to an adverse durational mix for the quarter in comparison to the same period in the previous year. Profit after tax attributable to equity holders of the parent for the quarter stood at INR 925 crores, which is USD 197 million, a margin of 10.7% in revenues. Diluted EPS for the quarter is at INR 11.1%. Operating working capital as of 30th September 2026 was INR 14,650 crores, which is USD 1.53 billion, an increase of INR 297 crores for 30 June 2026. Cash CapEx, cash outflow for the quarter stood at INR 186 crores, which is USD 19 million. Cash flow during the quarter was INR 171 crores, which is $18 million. As of 30th September, we have a net cash surplus of INR 72,500 crores. Which is USD 61 million. Foreign currency cash flow had just executed through derivative instruments during the period of USD 229 million hedge using a combination of forwards and risk reversal option. -- due to mature by March 2027, these contracts are hedged at a rate of EUR 95.32, USD 95.44. With this, I now request Erez to take us through the key business highlights.

Thank you, MVN. Good day. Thank you for your continued interest in our company. I apologize for my voice. I hope it will stay consistent. We remain consistent with -- in our strategic priorities of delivering double-digit growth across geographies and sustainable profitability and to strong execution in our core businesses, focus on key assets, continued productivity improvement and disciplined investment in future growth drivers, both organic as well as inorganic. During the quarter, the underlying business that is excluding [indiscernible] in North America continued to perform well, delivering a double-digit growth overall as well as across North America emerging markets and India. We achieved an EBITDA margin of 20.6%, supported by the strength of our base business and our continued effort to drive productivity. Subject to successful validation, we expect to relaunch semaglutide [indiscernible] directly as well as to our partners in November 2026 and consistent with the time lines communicated earlier. We also remain focused on advancing Abatacept and other content generics as they move through the regulatory review process in the coming quarters. Let me now walk you through some of the key highlights of the quarter. We partnered with Takeda to bring India first approved dengue vaccine. We call it fuel diner to the private markets in India in the first half of 2027. We expand our collaboration with Gilead science to enable access to investigational once early lenacapavir for HIV prevention in 120 countries. In collaboration with the GARP Foundation, we secured approval for oliphodocin and antibiotic use gonorrhea treatment in Thailand within 6 months of USFDA approval. We received USD appeal for rituximab biosimilar, which will be commercialized in the U.S. through our partners, [ Fresenius Kabi ]. We launched nivolumab in India, marking our entry to biosimilar immuno-oncology in India, both rituximab and nivolumab are developed and manufactured in-house. Generic semaglutide is now prove in 10 countries across Latin America, Africa, the Middle East as well, of course, as Canada and India. Our CDMO business under Origin Pharmaceutical Services generated revenues over $100 million in the last 12 months. We continue to receive global recognition for commitment to sustainability, Finance Asia Awards, a silver medal in the best large cap company in India category as Asia best companies 2026, reflecting strong endorsement by the Asian investor and analyst community. We improved our CRISIL [indiscernible] to 73 out of 166, becoming the only pharmaceutical company in the leadership category. Let me take you through the key business highlights for the quarter. Please note that all financial figures mentioned are reported in the respective local policies. Our North America generic business reported revenue of $64 million for the quarter, accounting for 29% of our overall revenues and reflecting a decline of 29% year-on-year and a growth of 12% sequentially. The decline is attributed to [indiscernible] sales versus last year. The underlying base business, excluding lenadulemide, continued to deliver strong double-digit growth, driven by new product launches -- during the quarter, we launched 6 new products, including first-to-market launch of sugammadex injection. We remain on track to launch additional products, including complex injectable during the year. Our branded traces comprising India emerging markets and consumer health business in nicotine replacement therapy or NRT together accounted for 53% of our overall revenue and continue to provide a strong foundation for stable margin for the company. Our emerging market business recorded revenue of at INR 2,059 crores, accounting for 25% of our overall revenue and flagging a robust growth of 24% year-over-year and 12% Q-on-Q. New product launches across markets, including acquisition, coupled with favorable currency movement drove growth during the quarter. We introduced 27 new products across countries in Q2 FY '27. Our India business revenues were INR 1,851 accounted for 21% of overall revenues and consistently delivering a robust double-digit even-year growth of 17% and an sequentially. Cost was driven by recent launches, including acquired brands, along with price increases and higher volumes. According to IQVIA, September 2026 data, our IPM rank improved to 8% for the quarter and for the year. We continue to outperform the Indian pharmaceutical market IPM with moving quarterly total growth of 21% versus 14.7% for IP and moving annual total MAT growth of 19.4% versus 13.2% for the market. Four of our brands feature in IBM top 50 new launches and we launched four new brands during the quarter. Our European business which include NRT posted revenue of PHN127 million for the quarter, accounting for 16% of our overall revenues. Revenues declined 6% year-over-year and 3% sequentially on account of price erosion in generic, partially offset by revenues from new product launches. Growth was further affected by the continued impact of the operating model changes post NRT integration, as highlighted last quarter. During the quarter, we launched 6 new generic products across markets. Our PSAI business reported revenue of $88 million, accounting for 10% of the overall revenues. Revenue decline of 19% year-over-year and sequentially. Primarily on account of lower API volume uptick, our CDMO business delivered double-digit growth this quarter during the quarter. We filed 28 drug master files globally. We remain committed to improving the health of our business and to deliver consistent growth and sustainable margins as we continue to strengthen our core business, we are also investing in a future growth driver across peptides, biosimilar, consumer health and innovation. Our focus remains on progressing key products such as semaglutide and abate driving operational efficiency and pursuing targeted inorganic opportunities to support long-term growth and shareholder value. With that, I invite your questions as we move into the Q&A sessions.

Thank you very much, Erez. We will now begin the question-and-answer session. [Operator Instructions]. The first question is from the line of Neha Manpuria from Bank of America.

My first question is on semi. I think you mentioned that we are on track to resume summer in early November. It is -- I think you had given us a volume guidance last time when we announced the disruption in supplies. Two questions on sema first. Is the resumption happening with our own API? Is it the same partner that we're using? And second, given what has happened in Canada, with one player which is already there, how confident are we of meeting the guidance that we'd given for [indiscernible].

So I'm very confident. The confidence is based on orders that we already have. We just obviously to supply. The main issue was with our ability to scale up the this probably be sold, and we shipped all the necessary API to our partner to do. We still need to have the result of the validation. So this is still pending, but I'm confident that it will be successful. And then we are ready to launch. Most of the quantities will go to Canada and some of the quantities will go to Latin America, primarily to Latin America and it's a bit area.

Understood. And my second question is on the gross margin improvement that we have seen in the quarter. MBM, if you could give us some color in terms of what's driving this gross margin improvement. And is it fair to assume that as Hema comes through, this is the bottom in terms of gross margin and gross margin should only improve from here?

Yes. They had just as we guided earlier, we want to be gross margin in the 50% to 55%. That's why this quarter, what we see [indiscernible] this improvement from last quarter to even this quarter is a combination of the new products and the business mix. That's where I think we will be in this one, certainly in the coming quarters as well.

And your assumption is correct. Yes. It will only go better from here.

Thanks, Neha. The next question is from the line of of Dr. Kunal Dhamesha from Macquarie.

First one on the one cash flow line item. On other assets and liabilities, there is a large change that has happened around INR 1,370 crores. So MVN, could you please help us what is driving that?

So this is not one where this SSA claim what we had. I think there was the payments have happened this quarter. That is one change and then other balances due to various operations. But that is the biggest one. That's -- if I remember about $50 million, what we have provided in the Q4. During the H1.

Okay. So the cash flow has [indiscernible] Great. And just continuing on the gross margin front. Or the other way to look at is there is a sequential improvement in U.S. revenue, a meaningful improvement, right? So would you be able to split between the new product launches driving that and the volume improvement in existing product or pricing improvement, how should we think of the delta in U.S. business? And the similar driver and approximate split for the gross margin improvement on a Q-o-Q basis?

So certainly, like in new products, what we have launched in [indiscernible], I think in the U.S., contest products. as compared to the -- our company average gross margins, I think, certainly is like on the higher side as well as what we have launched the nivolumab. And we see the business mix also has contributed to this margin. So Kunal, the main driver in driver is actually the business mix because.

Now the businesses that are relatively with high profitability, meaning India, EM and the NRT, all of them are much more profitable than our average went to 53%. So this is one contribution. The second is what MVN said that the U.S. is more profitable because of the contribution of the new products. The combination of both that and the last we did not increase the expenses. Expenses are essentially flat this quarter. And so if you grow the sales double digit and you don't increase their cost is obviously lead to this margin improvement.

Sure. And lastly, from my side, would we have also seen some drag from the raw material price increase and given the -- I think the oil prices are high and the chemical prices are also high. And then how should we look at that cost line item from the, let's say, second half perspective, do you think that quarter 2 is when we have seen most of the increase or quarter 3, quarter 4, we can see [indiscernible]?

So here, just I think is because of the war. I can say, increases of what we have seen in the KSMs and then the second one is solvent. And the third is like logistics, quite outwards what we are exporting metal from India to all countries. So we have seen the increase in the -- on the 3 fronts. And then overall, it has an impact close to 100 basis points on -- so we believe that's already part of the gross margins. And then we believe, I think this trend will continue for Q3 and Q4 as well.

I don't anticipate traditional growth unless, of course, there will be as much as we can predict additional geopolitical issues. But with our limited understanding if it will stay the way it is now, we are in the same place.

The next question is from the line of Damayanti Kerai from HSBC.

It is a clarification on semaglutide resumption. So you mentioned you have already started supply of API to your partner bill and finish partner. However, what is remaining is the validation. So I actually am not clear I thought like validation will be done and then you will supply to your fill and finish partners. So can you just help us understand this?

Sure. So you do validation as we had to come back and basically tweak the process on the AP. Then you do validation of the API. And then when you ship it to our partner, then you know and you need now to do validation on the drug product using the API. This is a process that takes about 3 weeks. And so far, give or take the all the activities are on time. And that's why it took us to November from the first place. So, so far, it is a right direction, but you have basically validation in each stage of the scale-up of the process.

Sure. That's helpful. And other point on semaglutide, you mentioned so far, it's approved in around 10 countries. So didn't you secure for more approvals in other markets while you are trying to resolve the API issue? Or you want to go after you resume the supplies in the existing or approved market. So how do you plan -- because you mentioned you'll be targeting to launch in more than 70 countries across the world, right?

The right number is now 89 markets. But it just that all the markets that the process started, we did not stop. The scale-up issue has nothing to do with the regulatory process, and we don't require any amendment to the file or anything like that. So I wish continued. And all the approval we got was in according to the process in each one of those respective countries, and this will continue. Some of the approval in some other markets, good delays because of the scale up as we needed to ship them samples of the products, and those samples will be now sent to these places. So we will continue with the process for all the other markets as well.

Sure. And my second question is on your -- the nicotine business. So flat performance for last 2 quarters. And you mentioned it was due to change in the business model. So when we should see recovery in NRT business?

So last year or last quarter, if you recall, we had to carve out form Helion. So it means that [ Alion ] used to do it, and we gave them certain margins for handling the business. The new business model, it means that now we are selling it either by ourselves or through distributors and -- but the payment to Alion is not there anymore. It means normally in this respect less sales, and -- but more of it. So what I can say about it is the comparison year-over-year will be until we will finish the year, see we have two more quarters like that. In general, the business is doing well. It will grow in the same way that you saw until now, some of between high single digit to maybe even double digits. And the profitability is way above the expectations that we put in the business model. So we're very, very pleased with this one.

The next question is from the line of Tausif Shaikh from BNP Paribas.

First question on [indiscernible] while the goal date is set for December. Is there any incremental update that you would like to share with us, especially from the [indiscernible]?

Yes. So the plant went for the inspection. We are still waiting for the IR to come. And the gold eat is indeed December 22, and we and we are hoping for an approval. It's obviously in the end of the U.S. FDA.

Okay. That's helpful. On the R&D expense, which seems lower compared to Y-o-Y and Q-on-Q, well, you have mentioned is on account of lower spend on global generics. How do you see this trend going ahead? Shall we assume this is a new base now?

So this quarter's R&D is low, absolutely, you're right. And then coming quarters, what we believe our R&D is going to be in the range of 7% to 8%.

the next question is from the line of Madhav Marda from Millennium.

Just one question. If I understood right, during the initial remarks, you mentioned about like one or a few complex injectable launches in the second half of the year. Could you just clarify like if you could share some more views on that product? Do I hear that right that we have some complex injectable line?

Well, we'll talk about it more when we get closer towards the end of the year. But yes, we do have a few interesting products in our pipeline. We've always spoken about that. We've done a bunch of launches. We want to continue over that momentum.

Yes. But I'm kind of careful to promise because I got burned in the past when dealing with the ruble of complex generics and some of you have been with us for many, many years, and you remember that. But let's say, we have some exciting products ahead.

And [indiscernible], we've done the analyst meet in Bombay, I think that we had shared names of a few products -- is it from that list itself? Like do you like to disclose 45 products in the pipeline?

You will know by the end of the year.

Okay. Okay, fine. But it's a meaningful product for the U.S. market. Is that right?

These are meaningful products, yes.

The next question is from the line of Foram Parekh from Bank of Baroda Capital.

Thank you for the opportunity. My first question is on Europe business, of NRT the growth seems to be declining there, probably because of Germany. So how should we look at it? I mean NRT is also now flattish because of the change in business model and exofNRT also, it's declining, which is taking a toll on the Europe business. So can we expect it to go back to double digit.

Yes, it will. First of all, the NRT will grow. The NRT is growing and obviously, that part will positively impact also the relevant part of Europe. Absolutely, you are correct about the performance of this quarter. the next quarter should be better. Let's say, the NRT I'm expecting, again, either high single-digit growth or even double depends on certain scenarios. As for Europe, I'm expecting growth, but it will not be significant growth this year.

Sure. And on XOF NRT, how should we look at growth ramping up?

X Europe, you mean?

Yes.

It should grow probably single digit.

Okay. That's helpful. My second question is on SG&A cost. Here also, the contribution has come lower to 26% versus earlier trend of 29%. So would this be the new sustainable number to look at?

Yes. So overall, I just want to clarify, our S&A percentage [indiscernible], we've also spoken the cost productivity, what we are doing is now that is becoming visible. So even coming quarters also at least in this year coming -- you may not see like significant changes to this number. It's going to be at this level around year and there, I think small changes.

I just want to reiterate to take the opportunity. We believe that the level that we agreed and we discuss it all the time, actually, with all of you, is sustainable. We think that the 20 plus, we actually mean for the famous 25%, but we are always discussing EBITDA, EBITDA. And this will continue and we are planning to consistently continue to deliver on this number.

Sure. And last question is on the India business. So we have done good and IPM growth also is inching up in double digit and is likely to sustain at current levels for the remaining year. So can we expect a current run rate of 17% to be the growth rate for the year?

It's going, obviously, to stay high level of double digit. It's maybe a little bit lease or a little bit more, but we are in the right neighborhood. Also, we want to be -- our growth want to be like higher than the market growth at 2 basis points.

Participants are requested to restrict the number of questions to ensure that everyone on the -- in the queue gets an opportunity to interact with management. The next question is from the line of Prakhar Nema who is from BNY Mellon.

Firstly, thanks for the question. So what is the company's strategy for expanding the biosimilar business through within research and development and partnership. So could you please share some light on this?

Sure. We are going after both. So we're naturally leveraging our back facilities as well as additional facilities that will build in the future. And [indiscernible] is going to be the first meaningful product to be launched out of our own facilities. Rituximab is obviously one of them. But I said we're going to be obviously meaningful and more products to follow. In parallel to that, we are we are talking to partners around the world, and we are trying to license products in which we don't have in our own pipeline and our own internal pipelines. And we have it whether globally or for specific regions. So both will continue.

Perfect. And one more question. So what the revenue we can expect for the next 3 to 4 years?

It depends on the success of test obviously, in the next coming years because this is going to be a significant product for that. And Abatacept should be in the 100. So you should expect hundreds of millions of dollars. So followed by [indiscernible], then we have a pembro and daratumumab also will come in the next within 5 years.

The next question is from the line of Abdulkader Puranwala from ICICI Securities. Please go ahead. Abdul new will come back to you. The next question is from the line of Vishal Manchanda from Systematix.

On rituximab, would it be possible for you to share? Where are we in terms of market share in Europe?

We have a single digit of market share in Europe. Low single digit or high single digit.

Any time lines and any guidance as to where we can be maybe a year or 2 years down the line? And do we have the capacities there?

So indeed, we were constrained by capacity. We should be better we will be able to add more qualified capacity for that. And at the same time, we are talking about the product with a high level of competition. So I would not expect a significant change because of this.

Okay. And second, your JV entity in China got a first generic approval for a drug called [indiscernible] July. Is that contribution part of your numbers in the current quarter? Or will this come in subsequent quarters?

So we are recording our share of the -- so we are not recording the sales. We are recording our share of the profit of that it's the profit and our share in that, which is 51%.

So this would be part of the JV -- share of profits from JV?

[indiscernible].

So have we kind of started selling this? And is this now -- have you ramped up to our full potential? And are we the only generic here or there are other generics that have entered.

To the best of my knowledge we started, I don't recall about the competition.

Okay. And just one final one on Abatacept, once we get the approval, how long can we take to get listed on the formularies? Will it be like 6 months? Or we can start getting market share quickly post approval?

So the ramp-up, like you said correctly, will be after 6 months after we'll get all the codes and all the registration. The -- but we can initially sell smaller quantities from day 1. So expect that the launch will be upon approval, but the ramp-up will be correctly after 6 months.

if I can ask one more on semi, if you can guide on where generics are in terms of market share in Canada as on date?