Dr Reddys Laboratories Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Record quarter, broad-based strength: Sales, profits and cash flow all hit records, with North America generics surging +51% YoY on base business traction and recent launches.
• Lenalidomide remains a meaningful, lumpy contributor: The product will stay material for the next few quarters, but quarter-to-quarter fluctuations are expected and management will not quantify the outlook.
• Horizon 2 investment is disciplined, not a margin reset: SG&A and R&D will rise to support the pipeline, but management insists this stays within past profitability rate commitments and is financed by growth and cash.
• Russia strength is real but lumpy: The 29% constant-currency growth was consumption-driven, though the quarter got a one-time boost from government biosimilar tender timing that will not repeat.
• What to watch next quarter: Whether the PSAI recovery sustains its QoQ momentum, the pace of ANDA/DMF filings promised to "significantly improve," and any early signal on how Amazon's RxPass reshapes US generic channel dynamics.

North America: The Growth Engine

• Generics delivered a standout quarter: Sales grew 51% YoY and 7% QoQ, driven by both base business traction and recent launches including Sorafenib, Sapropterin hydrochloride and Lenalidomide capsules.
• Base business growth is self-generated: Volume growth comes primarily from company-initiated activities and better customer service, not from industry-wide FDA issues at competitors. Pricing erosion remains marginal with no special phenomenon on price or quality.
• Lenalidomide is material but unforecastable: Contribution may fluctuate quarter-to-quarter based on customer order timing, but is expected to remain meaningful over the next few quarters. Management declined to share any volume share numbers or revenue outlook, citing agreement restrictions.
• Smaller-strength exclusivity is finite: The 180-day exclusivity on smaller Revlimid strengths means competition is expected to enter after day 181. Management would not disclose whether this exclusivity period is a meaningful contributor to the overall run rate.
• Launch momentum to continue: Five new products launched in North America this quarter, with at least 30 planned for FY24. Excluding lenalidomide, the quality of future launches will be better, with a pipeline of complex and very big products growing for the next three years.
• Amitiza launched into a crowded field: Launched in Q1 with roughly 8-10 players; price erosion has been fairly decent, sales are decent but not very large, and market share is good.
• Regadenoson approval secured: Launch timing is linked to IP and settlement terms with the innovator.

Israeli: "I believe that growth is coming because we are giving better service to our customers and they appreciate it."

Emerging Markets & Russia

• Emerging markets grew 14% YoY and 7% QoQ, with momentum expected to continue through the balance of the year.
• Russia delivered 29% constant-currency growth, supported by higher sales of biosimilar products. The quarter benefited from timing of government biosimilar tenders, a lumpy factor unlikely to repeat in other quarters.
• Russian demand is real, not competitor-exit driven: Growth is consumption-led across OTC, Rx and biologics. OTC products carry seasonality, biologics have procurement-timing seasonality, and Rx demand is steady year-over-year. Management sees nothing special related to company or country dynamics, with everyone waiting to see how events unfold.
• Quarterly fluctuations expected, but local-currency growth intact: Russia will continue to be strong overall, though quarter-wise results will fluctuate.

Israeli: "Russia will continue to do -- to be strong for us. Quarter-wise, it will fluctuate. This quarter, it's a timing of the bids with the government on biosimilars, for example. So unlikely that we will see that in the other quarter."

India & Europe

• India grew 10% YoY but declined 2% sequentially. Management does not analyze the business excluding acquisitions and divestments, viewing it as an integrated portfolio.
• India strategy centers on differentiation: Future growth will come from investment in differentiated products, specialty products and collaborations, with plans to introduce significant innovation. Brand divestitures will continue where returns from selling exceed returns from continued marketing.
• India market position confidence: Management remains very confident about reaching a top-five market position, consistent with earlier targets.
• Europe grew 8% YoY but declined 2% sequentially. Growth momentum is expected to continue for the rest of FY23. Eleven new products were launched in Europe during the quarter.

PSAI: Recovery Taking Hold

• PSAI sales declined 2% YoY but grew 18% QoQ, contributed by an improvement in volume pickup. The business is starting to show signs of recovery after 18 months of disruption.
• Recovery has room to run: Management sees very good signs but believes there is still room for improvement. The stated ambition is to return to mid-20% gross margins.
• Momentum expected to continue in coming quarters.

Pipeline, Biosimilars & Horizon 2

• Biosimilars are a long-term, scaled commitment: Phase 3 clinical studies completed for Rituximab and Phase 1 for Tocilizumab. The portfolio is committed to an even larger number of molecules than the 5-10 previously discussed, focused on products with patent expiry after 2027.
• Rituximab USFDA approval is a gateway: Approval will enable sales in many more countries and serve as validation of the GMP manufacturing site. The aim is to be a significant player, especially in emerging markets.
• Biologics capacity and cost competitiveness: The company has been investing for five years and continues to invest, with enough capacity to capture market share globally and the ability to produce many hundreds of kilos. Management believes they are very competitive versus Korean and Chinese players on technology, product accretion and India economy leverage.
• Complex generics pipeline is on track and growing: Planning to launch complex products not previously disclosed. Products like octreotide, liraglutide and teriparatide are filed or under development, with launches linked to IP and approval, some possibly reaching market from FY25-FY26 onwards.
• No return to 505(b)(2): Horizon 2 focuses on differentiated activities across 11 spaces in India, a couple outside India, NCE via Aurigene (oncology), cell-gene therapy, therapeutic management, OTC, nutraceuticals and go-to-market innovation.
• China growth expected: FY24 should see growth, with FY25 even stronger. The typical approval timeline is 18-24 months post-filing.

Israeli: "We are not planning to come back to the 505(b)(2). We worked hard to get out."

Capital Allocation, Costs & Amazon RxPass

• Operating working capital decreased majorly due to higher collection of receivables and some increase in payables.
• SG&A contained a one-off of less than 100 bps of sales, in the normal course of business and not likely to recur. Management declined to disclose the nature.
• Horizon 2 spending is disciplined: SG&A will grow to support both Horizon 1 and Horizon 2, with more growth coming from sales to support it. Management remains committed to the same margin rates as committed in the past, financing investment with growth and cash rather than extra spend.
• Inorganic opportunities under evaluation: Several are being assessed across businesses in line with strategy, expected to lead to growth opportunities in the short and long term. Capital allocation priorities remain similar to what was discussed in the past.
• Amazon RxPass launched: Amazon introduced a \$5/month subscription offering for roughly 60 common generic medicines across the entire US, launched the day before the call. Management's initial view is that it is a channel that was not there before and will be impactful, with whatever is not covered likely to be covered over time.
• Government grant income fluctuates quarter-to-quarter based on product mix, sales levels of eligible products and timing of grant recognition.

Israeli: "We don't like to ramp up spend. We are planning to spend in a very disciplined manner in accordance to our growth."

Guidance & Commitments

Key Metrics