U.S. Markets closed

Edited Transcript of DRREDDY.NSE earnings conference call or presentation 27-Jan-20 1:00pm GMT

Q3 2020 Dr.Reddy's Laboratories Ltd Earnings Call

Andhra Pradesh Jan 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Dr.Reddy's Laboratories Ltd earnings conference call or presentation Monday, January 27, 2020 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Amit Agarwal

Dr. Reddy's Laboratories Limited - Director of Finance, FP&A and IR

* Erez Israeli

Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council

* Saumen Chakraborty

Dr. Reddy's Laboratories Limited - President, CFO, Global Head of IT & Business Process Excellence and Member of the Mgmt Council

================================================================================

Conference Call Participants

================================================================================

* Aditya Khemka

DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare

* Anubhav Aggarwal

Crédit Suisse AG, Research Division - Associate

* Kunal Mehta

Vallum Capital Advisors - Research Analyst

* Neha Manpuria

JP Morgan Chase & Co, Research Division - Analyst

* Nikhil Mathur

AMBIT Capital Private Limited, Research Division - Associate of Small Caps

* Nitin Agarwal

IDFC Securities Limited, Research Division - Analyst

* Prakash Agarwal

Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals

* Sameer Baisiwala

Morgan Stanley, Research Division - Executive Director

* Shyam Srinivasan

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Surajit Pal

Prabhudas Lilladher Pvt Ltd., Research Division - Assistant VP & Senior Research Analyst

* Surya Narayan Patra

PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Q3 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Amit Agarwal. Thank you, and over to you, sir.

--------------------------------------------------------------------------------

Amit Agarwal, Dr. Reddy's Laboratories Limited - Director of Finance, FP&A and IR [2]

--------------------------------------------------------------------------------

A very good morning and good evening to all of you, and thank you for joining us today for the Dr. Reddy's earnings conference call for the quarter ended 31st December 2019. 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. Saumen Chakraborty, our CFO; and the Investor Relations team. Please note that today's call is a copyrighted material of Dr. Reddy's and cannot be rebroadcasted or attributed in press or media outlets without the company's expressed written consent.

Before I proceed with the call, I would like to remind everyone that the safe harbor contained in today's press release also pertains to this conference call.

Now I hand over the call to Mr. Saumen Chakraborty. Over to you, sir.

--------------------------------------------------------------------------------

Saumen Chakraborty, Dr. Reddy's Laboratories Limited - President, CFO, Global Head of IT & Business Process Excellence and Member of the Mgmt Council [3]

--------------------------------------------------------------------------------

Thank you, Amit. Greetings to everyone.

The current quarter financial performance has been quite good with the highest ever quarterly sales without any one-off item, an improvement in both the gross margin and EBITDA margin and healthy cash generation. However, the profit is impacted by significant amount of impairments taken due to specific triggers acquired during the quarter. Let me take you through these and other major items in some more detail. Nearly all the amounts are translated into U.S. dollars at a convenient translation rate of INR 71.36, which is the rate as of 31st December 2019.

Consolidated revenues for the quarter are at INR 4,384 crores, which is $614 million, registering a growth of 14% on a year-on-year basis. The growth has been supported by a good performance across all our businesses. On a sequential quarter basis, our reported revenues declined by 9%. In Q2 FY '20, we had an amount of INR 723 crores recognized as revenue towards the sale of 2 neurology brands of our propriety products business. And adjusted for this, the sequential quarter growth would have been 7%.

Consolidated gross profit margin for this quarter is 54.1% with an improvement of 20 bps on a year-on-year basis. On a quarter-on-quarter basis, while there is a decline of 340 bps in the reported gross margin, however, after adjusting for the one-offs in Q2 FY '20, the normalized gross profit margin has improved by about 260 basis points. Gross margin for the Global Generics business is 58.2% with a quarter-on-quarter improvement of 270 basis points. Gross margin for the PSAI business is 30% with a quarter-on-quarter improvement of 540 basis points.

The SG&A spend for the quarter is INR 1,267 crores, that is $178 million, which is 28.9% of sales, with the leverage benefit being visible on improvement in sales. In this quarter, we have taken an impairment charge of INR 1,320 crores led by specific triggers: In December 2019, there has been a generic launch and an authorized generic launch for the product NuvaRing, which has led to a considerable erosion in the valuation of this product for us. And accordingly, we have taken an impairment charge of INR 1,114 crores, equivalent to $156.5 million. The balance carrying value of the asset after impairment is INR 308 crore, equivalent to $43.2 million. In addition to this, considering the current market reality, we have taken an impairment charge of INR 206 crores on other intangible assets.

R&D spend for this quarter is INR 395 crores, that is $55 million and is at 9% of the sales for the quarter. The R&D spend has increased by 8% both on year-on-year and sequential quarter basis. The EBITDA for the quarter is INR 1,074 crores, that is $150 million, which is around 24.5% of revenues. The net tax for this quarter is INR 42 crores. EPS for the quarter is negative INR 34.37.

Operating working capital increased by around INR 428 crores, which is $60 million. This increase is attributable to an increase in receivables and inventory partially offset by an increase in sales. The net working capital has increased by 3 days against the last quarter. We invested INR 121 crores, which is $17 million, towards capital investment in this quarter. The free cash flow generated during the quarter was INR 582 crores, which is $82 million. Consequently, we now have a net surplus cash of INR 414 crores as on 31st December 2019.

Foreign currency cash flow hedges for the next 9 months, in the form of derivatives for U.S. dollars, are approximately $210 million largely hedged around the range of INR 70.43 to INR 74.24 to the dollar. In addition, we have cash flow hedges of RUB 900 million at the rate of INR 1.0789 to the ruble maturing over the next 3 months.

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

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [4]

--------------------------------------------------------------------------------

Thank you, Saumen. Greeting to all. I'm very pleased with the continued improvement in all of our business spaces and our ability to improve our performance and health metrics this quarter. We have seen strong growth in revenues across our key businesses, coupled with improvement in gross margins, operating expense leverage and achievement of healthy EBITDA margin. During the quarter, we also turned to net cash surplus and further improved the health of our balance sheet as an outcome of sustained and focused efforts around our businesses. We are progressing well in implementing our strategy across the markets under the guiding principles of creating more opportunity with less risk.

Now let me take you through the key business highlights. Please note that all references to the numbers in this section are in respective local currencies.

Our North America Generics recorded sales of $225 million for the quarter with a growth of 8% year-on-year and 11% (sic) [12%] on a sequential quarter basis. We launched 5 new products in this quarter. On a year-up-to-date basis, we launched 22 products, including 4 relaunch of the earlier discontinued products. We expect the new launches' momentum to continue to deliver with about 30 product launches during this year. We are gradually improving our market share in gSuboxone sublingual film product and several other recent launches like Carboprost injectable and OTC (inaudible) finished in Pseudo products. During the quarter, the market for the gNuvaring was formed, leading to potential reduction in the size of the opportunity for us. Based on these changing market dynamics, we have taken an impairment charge in the intangible carrying value depending upon the various scenarios expected upon our market input. We continue to work on responding to the CRL, which is expected to go out in the next few months.

Our Europe business recorded sales of EUR 39 million with a year-on-year growth of 59% (sic) [52%] and sequential growth of 11% (sic) 12% . This strong performance was driven by new product launches and improvement in base business performance owing to stabilization in supplies. The growth was further aided by the increase in contribution from the 3 newer markets, which included France, Italy and Spain. During the quarter, we launched 2 products in Germany, 3 products each in U.K. and Italy and 1 product in Spain. We expect this steady growth momentum to continue as we are building our sales in these places.

Our emerging markets business recorded sales of INR 920 crores with a year-on-year growth of 19% and sequential growth of 11%. Within the EM segment, the Russia business grew at 17% (sic) [20%] in constant currency both year-on-year and sequentially on the back of sustained base business performance and partially supported with the Reditux standard supplies. The overall growth in the rest of the emerging market was led by higher volume and new product launches, which was impacted partially due to price erosion in a few markets. During the quarter, we launched 17 products across these markets.

Our India business recorded sales of INR 764 crores with a strong year-on-year growth of 13% and sequential growth of 2%. During the quarter, we launched 8 new brands, including the launch of our first brand, Celevida, in the growing nutraceutical space. As per the secondary sales reported by IQVIA, we registered healthy growth of 10.6% ahead of total margin growth of 9.6% for the quarter ended December 2019. India is a priority market for us, and we continue to focus and strengthen our presence in this market.

Our PCAI (sic) [PSAI] business recorded sales of $97 million with a year-on-year growth of 17% (sic) [16%] and a slight sequential decline of 3%. While there has been good growth in API product sales, we witnessed a bit of softness in the services components of the business, which is expected to improve upon the future.

During this quarter, we filed 20 formulation products across global markets, including 3 ANDAs in the U.S. market. As of 31st December 2018/'19, we have 101 cumulative filing pending for approval with the USFDA, including 99 ANDAs and 2 505(b)(2) NDAs. We also filed 20 drug master files globally, including 3 filings made in the U.S. We'll continue to strengthen our pipelines of products across the markets.

On the quality and compliance front, let me provide you a quick update on some of the key manufacturing site. Last week, the USFDA has initiated the inspection of our API Srikakulam Plant referred as CTO-VI, which has been under warning letter since 2015. Since the audit still ongoing as we speak, we will not be able to offer any comments on the status until the conclusions of the audit. On the other side, pending compliance closure, and of course, this is obviously in all the last few months for FTO 7 and CTO is that we have submitted our response to the USFDA and await to hear back from the agency.

On Proprietary Products business, we have received a goal date of May 2020 for our NDA filing related to DFN-15, which is oral celecoxib. The progress on the ongoing R&D program is on track, and we continue to pursue out-licensing opportunities to unlock the value of our product portfolio.

Overall, we continue to make steady progress around transformation journey, as we continue to reduce our dependency on fewer products or market for growth. We have created multiple growth drivers by expanding and leveraging our pipelines and assets to market across the global markets with limited incremental investment, which provides us a good visibility for a long-term, sustainable growth for the company. In the meanwhile, we continue to focus on productivity improvement across the organization and committed to make it a way of life. Our healthy balance sheet and sustainable cash flow generation will help us to grow faster through efficient capital deployment for both organic, strategic initiatives and for inorganic opportunities.

And with this, I would like to open the floor for questions and answers.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from the line of Aditya Khemka from DSP Mutual Fund.

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [2]

--------------------------------------------------------------------------------

So Erez, firstly, on the cost management. So for the past 4, 5 years now, we have been seeing low single-digit growth in most of our cost components, which includes R&D expense and SG&A expenses. And I understand this has come from a lot of efficiency and hard work from your end, from the (inaudible) end. Could you sort of give us some flavor on -- if there was, let's say, 100 is the scale of which cost optimization could have been done when you joined Dr. Reddy's, where are you in that journey to 100? Are you at 50? Are you at 80? Are you at 99? How close are we to sort of achieving the optimal cost structure that you would have desired?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [3]

--------------------------------------------------------------------------------

I cannot quantify these numbers, but there is still a lot of room to be better. The goal is to be the most efficient company on health, in our space, and we are very far from there. So I -- we will continue to see these efforts also going forward.

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [4]

--------------------------------------------------------------------------------

Okay. And just in terms of your commentary in some of your calls where you said that the ideal metrics that you want to target is a 25% EBITDA with a 25% ROCE. Do you think that's something which is achievable over the next 2, 3 years? Or you would target that for the next year itself? How would you think about that goal?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [5]

--------------------------------------------------------------------------------

We achieved already for this quarter 24.5% on the EBITDA overall, so we are very close. And I believe that -- and also on the -- I will say we are not that far. So I believe that it's achievable. And I believe that it's achievable basically not just as an overall, but it's relevant actually for every activity that we want to do. Which means that the average can be even higher in the future. I don't have time frame or guidance of that because we don't give guidance, but this is the indication.

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [6]

--------------------------------------------------------------------------------

Fair enough. On the revenue side, if you could just guide us on what the domestic business -- we have seen a decent turnaround in terms of the growth that we have been doing now. What has changed for the domestic business? What has it changed to achieve this superior growth toward -- versus the broader market? And how do you see that effort sustaining in the future?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [7]

--------------------------------------------------------------------------------

We decided that we want to win in this market. I think this is the main change, and we substantiate it by putting relevant R&D for those products, by opening new [PAs], by changing the team leadership, by putting commercial excellence. So it's a multiple effort-in-multiple way activities. But I attribute the main success, if you wish, for what we do, it's the fact that we, as a management team, decided that India is a priority for us. And we decided that we want to be in the future to fight in India, and we are planning to achieve it.

--------------------------------------------------------------------------------

Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [8]

--------------------------------------------------------------------------------

Sure. Just 1 last question. So now that your balance sheet is a net cash balance sheet, the outlook on any inorganic opportunities and your priorities on that side.

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [9]

--------------------------------------------------------------------------------

We are always looking for opportunities, and we are very active on this front. The priority is on emerging markets and India, in particular, so -- because this is where the area of focus. Having said that, we said it in the past, I'm -- I want to use the opportunity to say it now, we see it as a complementary move. And we don't want to merge both financial risk and businesses, meaning that we will not grow more than 2x in EBITDA for acquisitions. And we -- the primary growth of Dr. Reddy’s will be organic.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

The next question is from the line of [Vishal Gada] from Aviva Insurance.

--------------------------------------------------------------------------------

Unidentified Analyst, [11]

--------------------------------------------------------------------------------

Sir, could you guide us how has the China business performed in third quarter?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [12]

--------------------------------------------------------------------------------

China did well and it is growing, and on top of which we discussed that we won, I think, the first winner, at least outside of China, in the product of olanzapine. We are not giving specific numbers for the market. But overall, I'm very pleased with the performance. China grew this quarter as well.

--------------------------------------------------------------------------------

Unidentified Analyst, [13]

--------------------------------------------------------------------------------

Okay. Could you help us with the kind of launches that you're planning for Europe and EM in the coming few quarters?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [14]

--------------------------------------------------------------------------------

We have -- what we're doing in Europe is primarily taking and leveraging the U.S. portfolio in Europe. So most of the launches in Europe in the future will be primarily injectables. And in the case of Germany, it will be also a solid growth. So the overall expectation and our strategy in Europe is to build an healthy organization with better critical mass based on debt leverage. And give or take, whatever we are launching or will launch in the U.S., we want also, at least a portion of it, to submit and launch in Europe.

--------------------------------------------------------------------------------

Unidentified Analyst, [15]

--------------------------------------------------------------------------------

Okay. And could you -- and the last question is, could you help us to understand what helped in containing the SG&A costs?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [16]

--------------------------------------------------------------------------------

It's primarily the commercial excellence. We are selling more, but we were able to do it with the same or even less resources to sell in other places. Just pure management of -- a much more stringent focus on KPIs, nothing special. Nothing we do especially, it's just more discipline.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [18]

--------------------------------------------------------------------------------

Just one question on the INR 11 billion write-off that you've taken for the NuvaRing product and you kept INR 3 billion pending. So I just wanted to understand, has the value with 1 or 2 players come off that significantly or we are going ultra conservative? Some thoughts?

--------------------------------------------------------------------------------

Saumen Chakraborty, Dr. Reddy's Laboratories Limited - President, CFO, Global Head of IT & Business Process Excellence and Member of the Mgmt Council [19]

--------------------------------------------------------------------------------

These are all the trigger-based impairment testing that we do. And given the dimensions, the nature of this gain, we will take an independent evaluator, beyond what team management we consider and our statutory rate is. So of course, there will be various scenarios, various possible eventualities, so with probabilities attached on tax indicator in terms of the impairment outcome. So pure accounting treatment, we have taken this.

--------------------------------------------------------------------------------

Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [20]

--------------------------------------------------------------------------------

Okay. And what is our current understanding of the product in terms of -- we've got a CRL in the past. So when do we plan to get this resolved and get an approval?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [21]

--------------------------------------------------------------------------------

We are planning to submit this in the next few months.

--------------------------------------------------------------------------------

Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [22]

--------------------------------------------------------------------------------

Okay. And any color on the expectation on approval, sir?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [23]

--------------------------------------------------------------------------------

Then it will go through the review. It's 6 months before the -- without inspection and 10 months out, so -- if no additional queries. So from that submission, we need to count that time. But of course, it can go to another cycle. We already have 2 cycles in this one.

--------------------------------------------------------------------------------

Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [24]

--------------------------------------------------------------------------------

Understood. Fair enough. And secondly on, sir, your cost, I think a couple of guys already asked. But just one thought here that since we are focusing more on the emerging market, which is India, Russia, CIS, where the cost is a push model, where you need to use your MRs, and we have been rightly growing mid-teens now. So I just wanted to understand, I mean, going forward, high single-digit or early teens should be the right metrics in terms of cost. Or we can still maintain our low single-digit kind of cost escalations. What are the thoughts?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [25]

--------------------------------------------------------------------------------

Firstly, in the emerging markets, part of our model is B2C, that's using direction. Part of it is B2B. And overall, going forward, B2B, it means selling directly to account management in hospitals around the world. Footprint rate will grow. So part of it is a mix of business model that we have to take into account as well. Overall, there is a room to grow efficiency also in what we have now. So we did not finish the efficiency activities. And in general, the way you should look at it is that bottom line will always grow faster than the top line.

--------------------------------------------------------------------------------

Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [26]

--------------------------------------------------------------------------------

Bottom line would be always faster than the top line?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [27]

--------------------------------------------------------------------------------

Will grow faster than the topline.

--------------------------------------------------------------------------------

Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [28]

--------------------------------------------------------------------------------

And secondly, just 2 more updates, if you could help us with Copaxone expectation now as well as REVLIMID?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [29]

--------------------------------------------------------------------------------

We will submit those the next few months with CRL.

--------------------------------------------------------------------------------

Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [30]

--------------------------------------------------------------------------------

For Copaxone?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [31]

--------------------------------------------------------------------------------

Yes. For Copaxone.

--------------------------------------------------------------------------------

Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [32]

--------------------------------------------------------------------------------

Okay. And sir, any updates on REVLIMID expectations?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [33]

--------------------------------------------------------------------------------

We expect it to be an amazing product. I cannot say more than that, as you can understand.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

The next question is from the line of Anubhav Aggarwal from Crédit Suisse.

--------------------------------------------------------------------------------

Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [35]

--------------------------------------------------------------------------------

My question is on the Russian market. It was quite a strong quarter in this geography despite a mild winter. So -- and in your release, you mentioned about the volumes and realization both were better in this quarter. So some more explanation will help, just in a quarter, what led to such a strong result?

--------------------------------------------------------------------------------

Saumen Chakraborty, Dr. Reddy's Laboratories Limited - President, CFO, Global Head of IT & Business Process Excellence and Member of the Mgmt Council [36]

--------------------------------------------------------------------------------

This also has been helped by the tender of Reditux that [hopefully] got in this quarter.

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [37]

--------------------------------------------------------------------------------

So it's a combination of both. We do better on the retail, and we won the tenders together. And I attribute it primarily to the commercial excellence program that we put in place, and we are achieving better results with less people.

--------------------------------------------------------------------------------

Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [38]

--------------------------------------------------------------------------------

So your comment that the volumes and realizations were better, largely that was for Reditux, is it?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [39]

--------------------------------------------------------------------------------

It's a combination of both, retail and the rituximab that we won in Russia.

--------------------------------------------------------------------------------

Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [40]

--------------------------------------------------------------------------------

So just to help us guys so that we have a better idea, so retail performance, was that out of line with what we've been doing for last 2, 3 quarters? Or was it much stronger this quarter?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [41]

--------------------------------------------------------------------------------

I believe that we just -- the team performed better. We did not do anything special, and there was no single act or single activity that led to that and -- because it was across the both. The only one that we singled out was rituximub, which we mentioned already.

--------------------------------------------------------------------------------

Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [42]

--------------------------------------------------------------------------------

Okay. Second question was on the PSAI business. Our top line was largely similar sequentially, September to December quarter, but margins were significantly better. Some color will be helpful. Was it like more API, more custom products or, within API, a significantly better mix? What was the reason for that?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [43]

--------------------------------------------------------------------------------

The main reason for this is a combination of product mix. So the mix of the product was more profitable. And second, I think we're doing better on costs also.

--------------------------------------------------------------------------------

Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [44]

--------------------------------------------------------------------------------

Sorry, what was the second reason?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [45]

--------------------------------------------------------------------------------

That we are doing better on costs. We are more and more cost-conscious. And from quarter-to-quarter, we see the benefit of that.

--------------------------------------------------------------------------------

Saumen Chakraborty, Dr. Reddy's Laboratories Limited - President, CFO, Global Head of IT & Business Process Excellence and Member of the Mgmt Council [46]

--------------------------------------------------------------------------------

Manufacturing overhead is in place.

--------------------------------------------------------------------------------

Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [47]

--------------------------------------------------------------------------------

Okay. And just want clarity on the earlier question on NuvaRing when you responded that you've made several cases and to probability-adjust it.

So when you do this kind of current accounting, do you typically do all probability-adjusted scenarios? Or is it just you would tend to be more conservative and select the most conservative one?

--------------------------------------------------------------------------------

Saumen Chakraborty, Dr. Reddy's Laboratories Limited - President, CFO, Global Head of IT & Business Process Excellence and Member of the Mgmt Council [48]

--------------------------------------------------------------------------------

The accounting standard doesn't allow you to be extra conservative, and it doesn't allow you to be aggressive. So we have to have a very nice balance. And that's why you -- when it is very significant, you actually go out and get a third-party also to do the same thing to validate the rationales.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [50]

--------------------------------------------------------------------------------

On the U.S. business, if I remember correctly, there was -- other than Ranitidine, there were some logistical issues which impacted the revenue, which should have been resolved in this quarter. Given you've had 20-plus launches in the last 9-month, our revenue does not seem to be reflecting both resolution of logistical issue or the launches. Am I missing something in the U.S. performance for the quarter?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [51]

--------------------------------------------------------------------------------

I don't know if you are missing. You normally don't miss, Neha. So I'll do my best to explain. Firstly, logistics issues are behind us. The Ranitidine event was only last quarter. This quarter, we did not sell Ranitidine. We are still out to the market. And then it's a combination of new products and price erosion. So it's just a mix between the 2 of them.

--------------------------------------------------------------------------------

Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [52]

--------------------------------------------------------------------------------

Sir, is it fair to assume that we're still seeing probably high single-digit price erosion in our portfolio, despite our concentration being much lower? Because with the work in market share increase and launches, should there not have been an improvement in the U.S. business versus, let's say, the first quarter in FY '20?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [53]

--------------------------------------------------------------------------------

Our portfolio is indeed in the -- has a price erosion. If you do your (inaudible) field, max price erosion is absolutely inhabited. What -- I do agree with you also that the product mix is much more healthy than it used to be. Naturally, when we launch new product, those product which we launched in the earlier part of the year has also a higher price erosion because it's still within the first year. And that's always the case. But for new products, the percentage of price erosion is normally higher than mature products.

--------------------------------------------------------------------------------

Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [54]

--------------------------------------------------------------------------------

Understood. And second question, on the India business, sir, if you could give us some color on what does the India MR that we have on ground? And are we seeing an improvement in productivity? Because as per the last reported number of March '19, there's been a reduction in the number of MRs that we had in India. So have we added, deducted, how the productivity has improved? Just trying to understand the profitability of the India business.

--------------------------------------------------------------------------------

Saumen Chakraborty, Dr. Reddy's Laboratories Limited - President, CFO, Global Head of IT & Business Process Excellence and Member of the Mgmt Council [55]

--------------------------------------------------------------------------------

Yes. Primarily, the sales force productivity has improved considerably. And what you see -- what we report is the top line growth. Our profitability in India has grown much better than the top line.

--------------------------------------------------------------------------------

Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [56]

--------------------------------------------------------------------------------

And do you see more scope for improvement, sir, there?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [57]

--------------------------------------------------------------------------------

Yes. Yes. There is scope for more improvement even in the future. We just started to have one in India.

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

The next question is from the line of Kunal Mehta from Vallum Capital.

--------------------------------------------------------------------------------

Kunal Mehta, Vallum Capital Advisors - Research Analyst [59]

--------------------------------------------------------------------------------

Sir, when you look at your present manufacturing infrastructure, are there any sites where the utilization is below what we would like to have, I mean, below 50% or so?

--------------------------------------------------------------------------------

Saumen Chakraborty, Dr. Reddy's Laboratories Limited - President, CFO, Global Head of IT & Business Process Excellence and Member of the Mgmt Council [60]

--------------------------------------------------------------------------------

Yes. There are sites where utilization is still low. Multiple reasons. So there is -- again, there's scope to improve our CapEx, capital turnover.

--------------------------------------------------------------------------------

Kunal Mehta, Vallum Capital Advisors - Research Analyst [61]

--------------------------------------------------------------------------------

Sure. And sir, second question is, sir, over these set of actions which you have taken to improve the business, has been very commendable. But sir, I would -- just wanted to understand your view on what sort of precautions that we're taking to make sure that the inspections we go through in the next -- in the future would give us satisfactory outcomes? Because any company we see is just probably one [barren] inspection away from affecting their product mix and their growth trajectory. So how would we -- dealing with that?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [62]

--------------------------------------------------------------------------------

Since 2015, until to date and increasing every year, we took measurements to be compliant not just with the United States, all over the world. And it's in the forms of a very, very different quality organization than we used to have where you factor the growth, very different digital event -- most activities are digitized. All the activities that are related to part 11 are in very, very different level and so is the resources and the awareness of compliance. And I personally believe -- and so far, the track record for the last few shows is that it's working. And one should never be -- to show off himself and we -- it's something that we always need to insist on, and we are planning to do so. But so far, so good. And luckily for us until now, knock on wood, we're not out of that compliance work. And hopefully, it will continue in the future.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [64]

--------------------------------------------------------------------------------

Congrats on a very good set of numbers. Sir, just on the U.S. market, you have mentioned in your commentary that you saw price erosion in some of your key molecules. Can you just let us know what is driving this price erosion? I mean were there new entrants or was there some other reason?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [65]

--------------------------------------------------------------------------------

They're primarily new entrants and that's -- that were launched after us. And some of you know well these markets. So when there's a new entrant -- come especially to 1 of the key customers, then you either defend your share or move your share. And that is the mechanism, and that's what happened to us.

--------------------------------------------------------------------------------

Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [66]

--------------------------------------------------------------------------------

Okay. And that -- and I'm sure what you're saying is these are mostly new products. They were not the mature products.

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [67]

--------------------------------------------------------------------------------

Also mature products, but let's say, the -- as we started to launch new products, after the growth that we had since October last year, those products that we launched in the late last year, in the beginning of this year, naturally got higher erosion percentage than the mature products.

--------------------------------------------------------------------------------

Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [68]

--------------------------------------------------------------------------------

Okay. Got it. Sir, just belaboring a bit more on this point. Going forward, our understanding is that the North American market pricing environment has got a lot better from mid-teens to high teens. It's gotten down to single-digit price erosion. Is this something that you would also confirm? And how do you see as we roll forward to fiscal '21 on price erosion?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [69]

--------------------------------------------------------------------------------

So we're not giving specific numbers. For us, there is no overall trend. It's more of what portion of our portfolio is seeing this competition because per product, per customer, it's always double digits. So it now depends on how many of your products are under this kind of regime. In our case, we do see a price erosion also this year, but we are not giving specific numbers.

--------------------------------------------------------------------------------

Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [70]

--------------------------------------------------------------------------------

And just one more from my side. And sir, most companies in the Indian generic space have margins mid-20s and that sort of top -- topping it out at EBITDA level. You're already there, and your commentary suggests that you had just started. You're a long way to go. So quite naturally, you expect this EBITDA margin to expand substantially over the next 2-year period.

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [71]

--------------------------------------------------------------------------------

I believe that we can do much better on the EBITDA. Yes, absolutely.

--------------------------------------------------------------------------------

Operator [72]

--------------------------------------------------------------------------------

The next question is from the line of Nitin Agarwal from IDFC Securities.

--------------------------------------------------------------------------------

Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [73]

--------------------------------------------------------------------------------

Sir, on this pure Rituximab launch in Russia, is it -- I mean, if this is a 1-quarter number? Is it going to be sporadic? Or this is something that's going to continue through the quarters.

--------------------------------------------------------------------------------

Saumen Chakraborty, Dr. Reddy's Laboratories Limited - President, CFO, Global Head of IT & Business Process Excellence and Member of the Mgmt Council [74]

--------------------------------------------------------------------------------

No. Reditux here launched long back in Russia. The way it gets sold is through tendering, and the tender happens in a particular sequencing. So this quarter, there was tender awarded consequently sales on Reditux (inaudible). But it is not a new one, but it doesn't happen consistently every quarter.

--------------------------------------------------------------------------------

Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [75]

--------------------------------------------------------------------------------

Okay. There's going to be a limit or lumpiness to these earnings, depending upon the tenders there?

--------------------------------------------------------------------------------

Saumen Chakraborty, Dr. Reddy's Laboratories Limited - President, CFO, Global Head of IT & Business Process Excellence and Member of the Mgmt Council [76]

--------------------------------------------------------------------------------

The lumpiness is always there on account of this particular molecule.

--------------------------------------------------------------------------------

Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [77]

--------------------------------------------------------------------------------

And another on your -- just on Reditux per se, how are we -- if this were biosimilar in emerging markets, beyond Russia, how should we look at this portfolio now?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [78]

--------------------------------------------------------------------------------

We have rituximab in many markets. I don't recall exactly how many how many.

--------------------------------------------------------------------------------

Unidentified Company Representative, [79]

--------------------------------------------------------------------------------

14, 15 markets.

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [80]

--------------------------------------------------------------------------------

14, 15 markets. And normally, it's like Russia, there is a tender -- a tendering of either by a hospital per se or by some government body that buys for the rest of the country. We are now in the middle of the [price] for the U.S. market. And the way we look at it, those markets that we like to get the data of the USFDA approval, once approved, it will open a new opportunity for us. In a place that will have a good go-to-market, we will do it ourselves. And in the place that we don't, we will like to speak to others.

--------------------------------------------------------------------------------

Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [81]

--------------------------------------------------------------------------------

And sir, are there any other products in the biosimilar pipeline beyond rituximab?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [82]

--------------------------------------------------------------------------------

We have 11 more in the pipeline.

--------------------------------------------------------------------------------

Operator [83]

--------------------------------------------------------------------------------

The next question is from the line of Surya Patra from PhillipCapital.

--------------------------------------------------------------------------------

Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [84]

--------------------------------------------------------------------------------

Congratulations for the great set of numbers. Sir, just a simple clarification on the gross margin front. Is there -- is it fair to believe that there was an element of currency that also played meaningfully for the expansion of the gross margin sequentially this quarter?

--------------------------------------------------------------------------------

Saumen Chakraborty, Dr. Reddy's Laboratories Limited - President, CFO, Global Head of IT & Business Process Excellence and Member of the Mgmt Council [85]

--------------------------------------------------------------------------------

Constant currency, there has been no impact either on sales or profit year-on-year basis. In specific currency, it could have happened, but it has neutralized. Overall for the company and on a constant currency, it would have been very, very similar to what is the reported growth.

--------------------------------------------------------------------------------

Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [86]

--------------------------------------------------------------------------------

Okay. And on the kind of a CapEx trend and the R&D expenses trend, along with the kind of a cost containment pieces that we are seeing the kind of flattish R&D spend, and alongside the CapEx, also meaningfully has corrected from the last couple of years. So any thought process on the kind of money, use of free cash flow that we are generating about, the usage of those?

--------------------------------------------------------------------------------

Saumen Chakraborty, Dr. Reddy's Laboratories Limited - President, CFO, Global Head of IT & Business Process Excellence and Member of the Mgmt Council [87]

--------------------------------------------------------------------------------

As far as CapEx, we have spent considerable amount of CapEx over FY '13, '14, '15, '16. All these years, we have spent considerable amounts. Today -- or as we told that there are some affecting our network, which is quite underutilized. But overall, utilization level is also something that we can do much more with the current level up in the upper end of the economy that we have created.

Having said that, maybe some specific business, for example, service business, if we have to scale up, then we need to move accordingly in the spend area to scale up. And also for biologics, if we sell more in different markets, we need to increase the capacity. But the level of CapEx that we need to do, and we actually alluded right at the beginning of the year, that we will not be spending as much as we would have been spending in the past. R&D on an absolute amount, again, is something which will be further slightly less than -- maybe than what we have spent last year. But of course, as a percentage of sales, as our sales goes up, then R&D as a percentage of sales has come down to single digits. Right now, it is around 9%. And if we can contain it on an absolute level and improve the R&D productivity because I always want to emphasize that our focus on R&D is always very high. We have been focusing on developing our pipeline, expanding our pipeline, and we want to continue to focus on that. But just -- we want to improve the productivity so that we -- same level of this productivity can deliver more.

In terms of the cash flow, obviously, if our margin is better and if we can improve on an EBITDA level, then consequently, the generation -- cash generation can improve. On, secondarily, working capital, beginning this quarter, we said that our working capital -- net working capital has increased by 3 days. Suppose that instead of increasing by 3 days, it would have been, through by 3 days, reduced, then we would have generated more cash flows. So there are always opportunities to what extent we do based on how do we execute on multiple fronts. The good thing happened with this quarter: In all the businesses, we have grown. Sometimes we have different -- we don't -- we haven't put all eggs in one basket. There are multiple baskets. In this quarter, all businesses have grown. So that way, it is good. But in the working capital front, this quarter was not that fit.

--------------------------------------------------------------------------------

Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [88]

--------------------------------------------------------------------------------

Okay. Just on the U.S. business front, sir, in the opening remarks, you have mentioned that we have relaunched a couple of the discontinued or a few of discontinued products, and also the kind of filing effort that is also picking up that is what you were mentioning. And simultaneously, there is a pricing pressure also that you are witnessing. And also, you're saying that the focus on the anchor product for the dependency is -- that is also, to some extent, is going away. So that way, what would be the ultimate statuses that you are thinking about U.S.? Well, are you thinking that, okay, whether it is the anchor product or it is a common product, everything that you should be launching and, hence, the quality of earnings, sir, in the U.S., sir, that is going to deteriorate? And it means you're trying to chase growth at the cost of quality. Is that the meaning that you were trying to convey?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [89]

--------------------------------------------------------------------------------

Well, first of all, to the last comment, absolutely, we'll not grow cost on the expense of quality. It is not in the equation of -- we will meet the quality standards for so called U.S. market. And absolutely, we will not compromise the quality of this. So this is one. It's unrelated to [performance] sales. So this is a license to build the business accordingly.

In the case of the products, well, no, we will not be dependent on any single products to grow, including United States. There's a notion of the past that the company focused on a relatively small number of assets, either complex generics or biologics or proprietary products, for the growth of the company. This is a strategy that was indeed in the company until 2 years ago. Since then, we've announced a new strategy, in which we have multiple spaces that have synergy among them, much more opportunistic. So we moved from high-risk, high-reward to a low-risk, very high reward. That's what we moved. And we are not dependent not Nuvaring and not Copaxone and not on any other big names to grow there. In the United States, we will grow because we want to have 350 products. Now we have commercially 120, and this is including the 4 that we have in the pipeline plus the products that are in the pipeline on the R&D, plus additional efforts that will help to (inaudible) number of products. What we want is to give the customer in the United States the products that they need, not necessarily focused on specific assets. Naturally, when you will have a broad portfolio, some of your products will give you upside. What is important to us is that the products will have a low cost in order to allow the right EBITDA and the right ROCE.

--------------------------------------------------------------------------------

Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [90]

--------------------------------------------------------------------------------

Okay. But is it fair to -- or when -- any time line that you are targeting to achieve double-digit kind of a growth again in the U.S.?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [91]

--------------------------------------------------------------------------------

I'm not targeting a double-digit growth. I'm targeting EBITDA and ROCE.

--------------------------------------------------------------------------------

Operator [92]

--------------------------------------------------------------------------------

The next question is from the line of Nikhil Mathur from AMBIT Capital.

--------------------------------------------------------------------------------

Nikhil Mathur, AMBIT Capital Private Limited, Research Division - Associate of Small Caps [93]

--------------------------------------------------------------------------------

My first question is on SG&A expense. So in fourth quarter FY '19 and first quarter FY '20, the proprietary products are out-licensed. So my understanding is that there would have been some cost savings in SG&A from that out-licensing. So has that -- has it materialized in third quarter or for that matter even in second quarter as well?

--------------------------------------------------------------------------------

Operator [94]

--------------------------------------------------------------------------------

(technical difficulty)

We have a line from management reconnected. Over to you.

--------------------------------------------------------------------------------

Nikhil Mathur, AMBIT Capital Private Limited, Research Division - Associate of Small Caps [95]

--------------------------------------------------------------------------------

Should I repeat my question, Nikhil here from AMBIT?

--------------------------------------------------------------------------------

Amit Agarwal, Dr. Reddy's Laboratories Limited - Director of Finance, FP&A and IR [96]

--------------------------------------------------------------------------------

Yes, please repeat.

--------------------------------------------------------------------------------

Nikhil Mathur, AMBIT Capital Private Limited, Research Division - Associate of Small Caps [97]

--------------------------------------------------------------------------------

Okay. So in fourth quarter and first quarter, we would have out-licensed your proprietary products. Now my understanding is that there would have been some cost savings arising from that out-licensing. So has those costs come off in third quarter this year for you? For that matter, with the second quarter as well?

--------------------------------------------------------------------------------

Saumen Chakraborty, Dr. Reddy's Laboratories Limited - President, CFO, Global Head of IT & Business Process Excellence and Member of the Mgmt Council [98]

--------------------------------------------------------------------------------

There will be -- suppose we will divest the commercial wing, there are also costs associated in terms of separating people, so that it's -- sometimes to really get the complete benefit out of that. So when we went on next financial year or not, we can see a full benefit of that kind of a cost saving. But yes, it has contributed to the overall cost savings, to some extent, that can take place.

--------------------------------------------------------------------------------

Nikhil Mathur, AMBIT Capital Private Limited, Research Division - Associate of Small Caps [99]

--------------------------------------------------------------------------------

Okay. Sir, FY '21, even if a bit of expense increases because of growth in India and Russian markets, you still have -- do have a lever of this proprietary product cost that kind of benefit you?

--------------------------------------------------------------------------------

Saumen Chakraborty, Dr. Reddy's Laboratories Limited - President, CFO, Global Head of IT & Business Process Excellence and Member of the Mgmt Council [100]

--------------------------------------------------------------------------------

On the proprietary product, earlier, what we used to have is the commercial cost that is going to be a benefit. Because we are going to continue to focus on the Proprietary Products family.

--------------------------------------------------------------------------------

Nikhil Mathur, AMBIT Capital Private Limited, Research Division - Associate of Small Caps [101]

--------------------------------------------------------------------------------

Okay. And second question is on your product launches in FY '21. Can you give some kind of an indication as to what kind of proportion would those be injectables, so some kind of complex launches in FY '21? And a question associated with that would be, I believe that there will be a fair share of launches from your partner sites. So are most of your partner sites compliant with the USFDA currently?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [102]

--------------------------------------------------------------------------------

I don't have, in front of us, the sort of the segmentation of the product launches. Also, without that, I don't know. In general, we are not dependent on a specific supplier or a specific vendor or third-party to launch the products. Most of the products will be launched out of the (inaudible) facility.

--------------------------------------------------------------------------------

Operator [103]

--------------------------------------------------------------------------------

The next question is from the line of Surajit Pal from Prabhudas Lilladher.

--------------------------------------------------------------------------------

Surajit Pal, Prabhudas Lilladher Pvt Ltd., Research Division - Assistant VP & Senior Research Analyst [104]

--------------------------------------------------------------------------------

Just 2 to 3 questions. So one thing is that -- is there any update on Suboxone loss of sales, which you were supposed to receive from the originator for blocking of launch? That is one. Second thing is that, is there any regulatory update on Duvvada observations? Had it crossed 90 days? And what is the status of the plant currently? And third is that the 30 products which you have guided, out of which 22 already you have launched. Any key products can we expect?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [105]

--------------------------------------------------------------------------------

So on the first question, Suboxone, and the bonds that we have, we are still in the legal process. And it will be resolved when the legal process will take its place. So far, we won all the relevant related litigations that were on this. And so it's still work in progress in that respect. I do not expect that the legal process will end in the next few months. It will probably take more than that. But I don't have exactly the indication of how long it will take.

As for Duvvada, it was a PI inspection. That was in August. We did not receive yet the EIR. And what we call EIR, we don't have any additional information on that. We're just awaiting the EIR.

And as for specific big products in the rest of the year, again, I'm repeating, none of the product per se will be that important. So some of them can bring nice money, some of them not, but nothing special that we can share.

--------------------------------------------------------------------------------

Operator [106]

--------------------------------------------------------------------------------

We'll be able to take one last question. The last question is from the line of Shyam Srinivasan from Goldman Sachs.

--------------------------------------------------------------------------------

Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [107]

--------------------------------------------------------------------------------

Just the first one on China and the second GPO for 32 drugs. I know we didn't win anything here. But just wanted to understand any of the learnings of -- that you got from olanzapine in the round 1. How did they play out this time? We see that the price cuts are very high, 60%, 70%, again, in GPO 2. So how does this kind of shape your China strategy? So that's my first question.

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [108]

--------------------------------------------------------------------------------

It's part of the strategy. Just to remind us all, we have 4 different spaces in China. One is branded generic, one is selling generics directly to the hospital. One is this tender, if you wish, and one that we are selling services like the API and other activities to Chinese (inaudible). So on this front of the -- this GOP (sic) [GPO] model, it's still work in progress also for the Chinese authorities. So the next tenders have already different rules. For example, there will be 10 minus 1 winners for the next tender. So there is a high likelihood or higher likelihood to be a player in that. But of course, there will be also more winners. And this is the main learning that I can share. What we do in China is a clear leverage strategy. We are taking U.S. products or products that we submitted for the U.S. that can meet the Chinese criteria. We are submitting them. We're obtaining approval and then participating and do our best to win as much as we can. Even in the case that we will not win, it's a leverage product. So it's not a risky move in our case. That's how we plan to build. But it's very hard to tell which product will win and which products will not and what will be the price. Naturally, on this product, on one hand, there is a relatively high price reduction. But on the other hand, you don't tell me to pay SG&A because you're not promoting those products. It goes to this standard.

--------------------------------------------------------------------------------

Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [109]

--------------------------------------------------------------------------------

Yes. Just following up on this. So are you saying even after these price cuts, this is reasonable money to be made? Or you think there is a period of 2 to 3 years where we have to invest before we start seeing profits come through in China?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [110]

--------------------------------------------------------------------------------

No, every product that we are launching is money. So it's not that period of investment and period of profit, we are making profit as we speak.

--------------------------------------------------------------------------------

Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [111]

--------------------------------------------------------------------------------

Got it. Just a follow-up again on China. Any -- the coronavirus is making the news. Does it impact our Chinese operations? Or on the contrary, does it also benefit us in some form or way? Is there any impact of the virus?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [112]

--------------------------------------------------------------------------------

Naturally, it did not impact the quarter because it's recent. No, I don't have anything that happens to us in the last few days as of the corona issue, and I hope and wish for everybody that nothing will happen.

--------------------------------------------------------------------------------

Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [113]

--------------------------------------------------------------------------------

And my last question is on REVLIMID. I know you said it's a great product. We get that. But the point is on trial dates, is there -- our understanding was that the trial has been pushed to second half of calendar year 2020. Could you confirm or just give us details on when are the upcoming dates so that we can look out for this product?

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [114]

--------------------------------------------------------------------------------

I'm not aware of a specific date that was scheduled. That's what I know. But from my point of view, versus what we wanted, the product and the legal process is continuing in accordance to our plans.

--------------------------------------------------------------------------------

Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [115]

--------------------------------------------------------------------------------

Got it. So it is -- just belaboring here. So is it -- still, it is not a near-term opportunity and we still think it's probably sometime out.

--------------------------------------------------------------------------------

Erez Israeli, Dr. Reddy's Laboratories Limited - CEO & Member of the Management Council [116]

--------------------------------------------------------------------------------

It's -- yes, I don't see it in the next few months. It's -- probably, it will be after that.

--------------------------------------------------------------------------------

Operator [117]

--------------------------------------------------------------------------------

We'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.

--------------------------------------------------------------------------------

Amit Agarwal, Dr. Reddy's Laboratories Limited - Director of Finance, FP&A and IR [118]

--------------------------------------------------------------------------------

Thank you, everyone, for joining us today for the earnings call. In case of any further queries, please reach out to the Investor Relations team. Thank you.

--------------------------------------------------------------------------------

Operator [119]

--------------------------------------------------------------------------------

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