Aishwarya Sitharam: Good day everyone, and welcome to Q2 FY2027 Earnings Call of Dr. Reddy's Laboratories Limited. We appreciate your constant interest in our company. I am 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. M.V. Narasimham, we call MVN, 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 MVN providing an overview of our financial performance for the quarter. Following that, Erez 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.
Aishwarya Sitharam: 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's, and may not be rebroadcasted or quoted in any media or public forum without prior written consent from the company.
Aishwarya Sitharam: With that, let me hand the call over to MVN to present the financial highlights for the quarter. Over to you, MVN.
M.V. Narasimham: 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 FY27. The business reported a 1.5% year-over-year decline in revenue while EBITDA margin was at 20.6% for the quarter. Excluding lenalidomide in North America, the underlying base business maintained its growth momentum, delivering double-digit growth. All financial figures in this section are translated into US dollars using a convenient translation rate of INR 95.83, the exchange rate prevailing as of 30 September 2026. Consolidated revenues stood at INR 8,671 crores, which is $905 million, a decline of 1.5% year-over-year, and a growth of 7.4% on sequential basis.
M.V. Narasimham: 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 lenalidomide sales. Consolidated gross profit margin was at 52.1%, an increase of 562 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 lenalidomide sales. As a reminder, margins in the preceding quarter were adversely impacted by a provision for inventory and other costs associated with the semaglutide API-related challenges. The reported gross margin for Q2 FY2027 was 56.2% for Global Generics and 11.8% for PSAI. The SG&A spend was at INR 2,808 crores, an increase of 6% year-over-year and a decline of 3% sequentially, accounting for 32% of revenue.
M.V. Narasimham: The year-over-year increase was primarily driven by higher personal 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 524 crores, down by 16% year-over-year and 9% sequentially, accounting for 6% of revenues and primarily reflecting lower development expenditures in the generics as compared to the previous year. The EBITDA, including other income, stood at INR 1,783 crores, which is $186 million, a decrease of 614 basis points year-over-year and an increase of 806 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 $128 million, representing a margin of 14.2%. Effective tax rate for the quarter was at 25.6% compared to 22.2% in the corresponding period last year.
M.V. Narasimham: The ETR for the quarter was higher, primarily due to an adverse jurisdictional 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 $97 million, a margin of 10.7% on revenues. Diluted EPS for the quarter is at INR 11.1. Operating working capital as of 30 September 2026 was INR 14,650 crores, which is $1.53 billion, an increase of INR 297 crores over 30 June 2026. Capex cash outflow for the quarter stood at INR 186 crores, which is $19 million. Cash flow during the quarter was INR 171 crores, which is $18 million. As of 30 September, we have a net cash surplus of INR 2,502 crores, which is $261 million.
M.V. Narasimham: Foreign currency cash flow hedges executed through derivative instruments during the period are $229 million, hedged using combination of forwards and risk reversal option scheduled to mature by March 2027. These contracts are hedged at a rate of 93.03 to 95.54 per US dollar. With this, I now request Erez to take us through the key business highlights.
Erez Israeli: Thank you, MVN. Good day, and thank you for your continued interest in our company. Apologize for my voice. I hope it will stay consistent. We remain consistent in our strategical priorities of delivering double-digit growth across geographies and sustainable profitability through strong execution in our core businesses, progress 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 lenalidomide 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 both directly as well as to our partners in November 2026, consistent with the timelines communicated earlier.
Erez Israeli: We also remain focused on advancing abatacept and other complex 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 Qdenga, to the private markets in India in H1 2027. We expand our collaboration with Gilead Sciences to enable access to investigational once yearly lenacapavir for HIV prevention in 120 countries. In collaboration with the GARDP Foundation, we secured approval for zoliflodacin, an antibiotic used in gonorrhea treatment in Thailand within six months of US FDA approval. We received US FDA approval for rituximab biosimilar, which will be commercialized in the US through our partners, Fresenius Kabi. We launched nivolumab in India, marking our entry to biosimilar immuno-oncology in India.
Erez Israeli: Both rituximab and nivolumab are developed and manufactured in-house. Generic semaglutide is now approved in 10 countries across Latin America, Africa, the Middle East as well, of course, as Canada and India. Our CDMO business under Aurigene Pharmaceutical Services generated revenues over $100 million in the last 12 months. We continue to receive global recognition for our commitment to sustainability. FinanceAsia 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 improve our CRISIL ESG score to 73 out of 100 from 66, 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 currencies.
Erez Israeli: Our North America Global Generics business reported revenue of $264 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 lenalidomide sales versus last year. The underlying base business, excluding lenalidomide, continued to deliver strong double-digit growth, driven by new product launches. During the quarter, we launched six 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 franchise 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.
Erez Israeli: Our emerging market business recorded revenue of INR 2,059 crore, accounting for 25% of our overall revenue and reflecting 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 FY27. Our India business revenues were INR 1,951 crore, accounting for 21% of overall revenues and consistently delivering a robust double-digit year-on-year growth of 17% and 8% sequentially. Growth 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 9 for the year.
Erez Israeli: We continue to outperform the Indian pharmaceutical market, IPM, with moving quarterly total growth of 21% versus 14.7% for IPM and moving annual total MAT growth of 19.4% versus 13.2% for the market. Four of our brands feature in IPM top 50 new launches and we launched four new brands during the quarter. Our European business, which include NRT, posted revenue of EUR 127 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 six new generic products across markets. Our PSAI business reported revenue of $88 million, accounting for 10% of the overall revenues.
Erez Israeli: Revenue decline of 19% year-over-year and 3% 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 delivering 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 abatacept, driving operational efficiency and pursuing targeted inorganic opportunities to support long-term growth and shareholder value. With that, I invite your question as we move into the Q&A sessions.
Aishwarya Sitharam: Thank you very much, Erez. We will now begin the question and answer session. To join the question queue, please use the raise hand option available by the bottom of your Zoom application. If you wish to exit the question queue, you may click on the lower hand option. Participants are requested to ask one to two questions at a time and to rejoin the queue in case of any incremental queries. I would like to reiterate that the chat will not be monitored for any questions to the management. However, in case of any technical concerns, please do feel free to use the chat option to reach out to us. The first question is from the line of Neha Manpuria from Bank of America. Neha, please go ahead.
Neha Manpuria: Yeah, hi. Thanks for taking my question. My first question is on SEMA. I think you mentioned that we are on track to resume SEMA in early November. Erez, I think you had given us a volume guidance last time when we had 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 are using? Second, given what has happened in Canada, with the one player which is already there, how confident are we of meeting the guidance that we had given for SEMA?
Erez Israeli: I am very confident. The confidence is based on orders that we already have, and we just obviously need to supply. The main issue was with our ability to scale up the API. This problem is solved, and we shipped all the necessary API to our partner to do. We still need to have the results of the validation. This is still pending, but I am confident that it will be successful. 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 a little bit to Africa.
Neha Manpuria: Understood. My second question is on the gross margin improvement that we have seen in the quarter. MVN, if you could give us some color in terms of what is driving this gross margin improvement. Is it fair to assume that, as SEMA comes through, this is the bottom in terms of gross margin, and gross margin should only improve from here?
M.V. Narasimham: Yeah. Neha Manpuria, just as we guided earlier, we want to be gross margin in the range 50% to 55%. That is why this quarter what we see 52.1%. This improvement from last quarter to even this quarter is a combination of the new products and the business mix. That is where I think we will be in this zone, certainly in the coming quarters as well.
Erez Israeli: Your assumption is correct.
M.V. Narasimham: Yes.
Erez Israeli: It will only go better from here.
M.V. Narasimham: Yeah.
Neha Manpuria: Understood. Thank you so much.
Aishwarya Sitharam: Thanks, Neha. The next question is from the line of Dr. Kunal Dhamesha from Macquarie. Kunal, please go ahead.
Kunal Dhamesha: Hey. Hi, thank you for taking my question. 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 crore. MVN, could you please help us, what is driving that?
M.V. Narasimham: This is the one where this SSA claim, what we had, I think the payments have happened this quarter. That is one change. Then other balances due to various operation. That is the biggest one.
Kunal Dhamesha: Yeah.
M.V. Narasimham: If you remember, $50 million what we have provided in the Q4-
Kunal Dhamesha: Okay
M.V. Narasimham: during this H1.
Kunal Dhamesha: Okay, so the cash flow has happened now. Okay.
M.V. Narasimham: Yeah.
Kunal Dhamesha: Great, thank you. Just continuing on the gross margin front, or the other way to look at it, there is a sequential improvement in US revenue, a meaningful improvement, right? 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 that delta in US business and the similar driver and approximate split for the gross margin improvement on a Q over Q basis?
M.V. Narasimham: So certainly, like in new products, what we have launched in Bosentan, Apes, Sugammadex, I think in the US, I think these products, as compared to our company average gross margins, certainly is on the higher side, as well as what we have launched, the nivolumab. Chevy, the business mix also has contributed to this margin. Kunal, the main driver
Erez Israeli: the driver is actually the business mix.
Erez Israeli: 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%. This is one contribution. The second is what MVN said, that the US is more profitable because of the contribution of the new products. The combination of both gave that. The last, we did not increase the expenses. The expenses are essentially flat this quarter. If you grow the sales double digit and you don't increase the cost, it obviously lead to this margin improvements.
Kunal Dhamesha: Sure. Lastly, from my side, would we have also seen some drag from the raw material price increase? Given the, I think the oil prices are high and the chemical prices are also high. How should we look at that cost line item from the, let's say H2 perspective? Do you think that Q2 is when we have seen most of the increase or Q3, Q4 we can see some drag?
M.V. Narasimham: Here, just I think this because of the OR. I can say increases what we have seen in the KSMs. The second one is solvents. The third is logistics, right outwards what we are exporting material from India to all countries. We have seen the increase on the three fronts. Overall, it has an impact close to 100 basis points on the EBITDA. We believe that is already part of the gross margins. We believe, I think, this trend will continue for Q3 and Q4 as well.
Kunal Dhamesha: Sure.
Erez Israeli: I don't anticipate additional growth unless, of course, there will be.
Kunal Dhamesha: Yeah.
Erez Israeli: 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.
Kunal Dhamesha: Sure. I have more question. I'll join back the queue. Thank you, and all the best.
M.V. Narasimham: Thank you.
Aishwarya Sitharam: Thanks, Pal. The next question is from the line of Damayanti Kerai from HDFC. Damayanti, please go ahead.
Damayanti Kerai: Yeah, hi. Good evening, everyone. It is a clarification on semaglutide resumption. You mentioned you have already started supply of API to your fill-and-finish partner. However, what is remaining is the validation. I actually am not clear. I thought validation will be done, and then you will supply to your fill-and-finish partner. Can you just help us understand this?
Erez Israeli: Sure. You do validation as we had to come back and basically tweak the process on the API. Then you do validation of the API. Then when you ship it to our partner, you need now to do validation on the drug products using that API. This is a process that takes about 3 weeks, and so far, give or take, all the activities are on time. That's why it took us to November from the first place. So, so far it is in vibration, but you have basically validation in each stage of the scale-up of the process.
Damayanti Kerai: Sure. That's helpful. Other point on semaglutide, as you mentioned, so far it's approved in around 10 countries. 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 supply 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?
Erez Israeli: The right number is now 89 markets. It is 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 do not require any amendment to the file or anything like that. Everything 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 got delayed 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. We will continue with the process for all the other markets as well.
Damayanti Kerai: Sure. My second question is on your NRT, the nicotine business. A flat performance for last two quarters. You mentioned it was due to change in the business model. When should we see recovery in NRT business?
Erez Israeli: Last year, or last quarter, if you recall, we had to carve out from Haleon. It means that Haleon 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 ourself or through distributors. The payment to Haleon is not there anymore. It means normally, in this respect, less sales, but more profit. What I can say about it, the comparison year-over-year will be until we will finish the year. I think 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, somewhere between high single digit to maybe even double digit. The profitability is way above the expectations that we put in the business model.
Erez Israeli: We are very, very pleased with this one.
Damayanti Kerai: Sure. Thank you. I will get back in the queue for more questions.
Aishwarya Sitharam: Thanks, Damayanti. The next question is from the line of Tausif Shaikh from BNP Paribas. Tausif, please go ahead.
Tausif Shaikh: Good evening, and thanks for the opportunity. First question on Vatasaft. While the goal date is set for December, is there any incremental update that you would like to share with us, especially from the Bachupally plant?
Erez Israeli: Yeah. The plant went for the inspection. We are still waiting for the EIR to come. The goal date is indeed 22 December, and we are hoping for an approval. It is obviously in the end of the US FDA.
Tausif Shaikh: Okay, that is helpful. On the R&D spend, which seems lower compared to year-over-year and quarter-over-quarter, where you have mentioned it is on account of lower spend on Global Generics, how do you see this trend going ahead? Shall we assume this is of new base now?
M.V. Narasimham: This quarter is R&D is low, absolutely you are right. Coming quarters, what we believe our R&D is going to be in the range of 7% to 8%.
Tausif Shaikh: Okay. That is helpful. I will get back in the queue.
Aishwarya Sitharam: Thanks, Tausif. The next question is from the line of Madhav Marda from Millennium. Madhav, please go ahead.
Madhav Marda: Hi, good evening. Just one question. If I understood right, during the initial remarks, you mentioned about one or few complex injectable launches in the H2 of the year. Could you just clarify, if you could share some more views on that product? Did I hear that right, that we have some complex injectable lineup items?
Aishwarya Sitharam: Well, we will talk about it more when we get closer towards the end of the year. But yeah, we do have a few interesting products in our pipeline. We have always spoken about that. We have done a bunch of launches. We want to continue with that momentum.
Erez Israeli: Yeah, but I am kind of careful to promise because I got burned in the past when dealing with the approval of complex generics, and some of you have been with us for many, many years, and you remember that. But let us say we have some exciting products ahead.
Madhav Marda: I remember in 2022, we done the analyst meet in Bombay. I think that time we had shared names of a few products. Is it from that list itself, like you will disclose four or five products in the pipeline?
Aishwarya Sitharam: You will know by the end of the year.
Madhav Marda: Okay. Okay, fine. But it is a meaningful product for the US market, is that right?
Erez Israeli: These are meaningful products, yes.
Madhav Marda: Okay. Got it. All right, cool. Thank you.
Aishwarya Sitharam: Thanks, Madhav. The next question is from the line of Foram Parekh from Bank of Baroda Capital. Please go ahead.
Foram Parekh: Thank you for the opportunity. My first question is on Europe business, ex of NRT. The growth seems to be declining there, probably because of Germany. How should we look at it? I mean, NRT is also now flattish because of the change in business model, and ex of NRT also, it is declining, which is taking a toll on the Europe business. Can we expect it to go back to double digit?
Erez Israeli: 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 us say the NRT, I am expecting, again, either a high single-digit growth or even double, it depends on certain scenarios. As for Europe, I am expecting growth, but it will not be significant growth this year.
Foram Parekh: Sure. On ex of NRT, how should we look at growth ramping up?
Erez Israeli: Ex NRT Europe, you mean?
Foram Parekh: Yes.
Erez Israeli: It should grow, probably single digit this year.
Foram Parekh: Okay, that is helpful. My second question is on SG&A cost. Here also the contribution has come lower to 26% versus earlier trend of 29%. Would this be the new sustainable number to look at?
M.V. Narasimham: Well, overall, just want to clarify, our SG&A percentage is 32%. Just as you know, here, we have also spoken of the cost productivity, what we are doing is now that is coming visible. Even coming quarters also, at least in this year coming, you may not see significant changes to this number. It is going to be at this level around here and there, I think small changes.
Erez Israeli: I just want to reiterate, to take the opportunity. We believe that the level that we agree and we discuss it all the time, actually with all of you, is sustainable. We think that the 20% plus, we are actually aiming for the famous 25% that we are always discussing.
M.V. Narasimham: EBITDA
Erez Israeli: EBITDA.
Erez Israeli: This will continue, and we are planning to consistently continue to deliver of this number.
Foram Parekh: Sure. Thank you. Last question is on the India business. 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. Can we expect current run rate of 17% to be the growth rate for the year?
Erez Israeli: It is going obviously to stay a high level of double digit. It is maybe a little bit less or a little bit more, but we are in the right neighborhood.
M.V. Narasimham: Also, our growth will be higher than the market growth at a few basis points.
Foram Parekh: Sure. That is helpful. Thank you.
Aishwarya Sitharam: Thanks, Foram. Participants are requested to restrict the number of questions to 2 to ensure that everyone 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. Prakhar, please go ahead.
Prakhar Nema: Firstly, thanks for the question. Thanks for taking these questions. What is the company's strategy for expanding the biosimilar business within research and development and partnership? Could you please shed some light on this?
Erez Israeli: Sure. We are going after both. We naturally are leveraging our Bachupally facilities as well as additional facilities that we will build in the future. abatacept is going to be the first meaningful product to be launched out of our own facilities. Rituximab is obviously one of them. abatacept is going to be obviously meaningful, and more products to follow. In parallel to that, we are talking to partners around the world, and we are trying to license products in which we do not have in our own pipeline, in our own internal pipelines. We have it whether globally or for specific regions. Both will continue.
Prakhar Nema: Perfect. Thanks for that. One more question. What revenue can we expect for the next 3 to 4 years?
Erez Israeli: It depends on the success of abatacept, obviously, in the next coming years, because this is going to be a significant product for that. abatacept should be in the hundreds, so you should expect hundreds of millions of dollars.
M.V. Narasimham: Followed by abatacept, then we have pembro and durvalumab also will come within 5 years.
Prakhar Nema: Okay. Thank you so much. Thanks for taking my questions.
Aishwarya Sitharam: Thanks, Prakhar. The next question is from the line of Abdul Puranwala from ICICI Securities. Abdul, please go ahead. Abdul, you have been unmuted.
Erez Israeli: Just move on, then he will come back.
Aishwarya Sitharam: Abdul, we will come back to you. The next question is from the line of Vishal Manchanda from Systematix. Vishal, please go ahead.
Vishal Manchanda: Hi. Good evening, and thanks for the opportunity. On rituximab, would it be possible for you to share where are we in terms of market share in Europe?
Erez Israeli: We have single digits of market share in Europe.
Vishal Manchanda: Low single digit or high single digit?
Erez Israeli: Low single digits.
Vishal Manchanda: Any timelines and any guidance as to where we can be maybe a year or 2 year down the line? Do we have the capacities there?
Erez Israeli: Indeed, we were constrained by capacity. We should be better once we will be able to add more qualified capacity for that. At the same time, we are talking about a product with a high level of competition, so I would not expect a significant change because of that.
Vishal Manchanda: Okay. Second, your JV entity in China got a first generic approval for a drug called Icotinib in July.
Erez Israeli: Correct.
Vishal Manchanda: Is that contribution part of your numbers in the current quarter, or will this come in subsequent quarters?
Erez Israeli: We are recording our share. We are not recording the sales, we are recording our share of the profit of that. It is part of-
Vishal Manchanda: Profit
Erez Israeli: the profit and our share in that, which is 51%.
Vishal Manchanda: This would be part of the JV, share of profits from JV?
Erez Israeli: Of course.
Vishal Manchanda: Have we started selling this, and have we ramped up to our full potential? Are we the only generic here or there are other generics that have entered?
Erez Israeli: To the best of my knowledge, we started. I don't recall about the competition.
Vishal Manchanda: Okay. 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 six months, or we can start getting market share quickly post-approval?
Erez Israeli: The ramp-up, like you said correctly, will be after six months, after we'll get all the codes and all the registration. But we can initially sell smaller quantities from day one. Expect that the launch will be upon approval, but the ramp-up will be correctly after six months.
Vishal Manchanda: Got it. If I can ask one more. On SEMA, if you can guide on where generics are in terms of market share in Canada as on date.
Erez Israeli: As of date, there is only one generics in Canada.
Vishal Manchanda: Right.
Erez Israeli: I do not remember their market share. But let us say that the Canadian market will have to get us quick.
Vishal Manchanda: Got it. Thank you.
Aishwarya Sitharam: Thanks, Vishal. The next question is from the line of Surya Patra from PhillipCapital. Surya, please go ahead. Surya, you have been unmuted. While Surya joins back in, the next question came in from the line of Dr. Bino Pathiparampil from Elara Capital. Bino, please go ahead.
Bino Pathiparampil: Hi. Good evening to all of you, and congratulations on a great set of numbers. A couple of clarifications. I see from the footnotes this bendamustine deal and some milestones in Russia, which is part of revenue. Where is it included in the revenue breakup? Is it part of US revenue and Russia revenue respectively?
M.V. Narasimham: It is in the sales line.
Bino Pathiparampil: Bendamustine is in the US revenue and milestones are in Russia revenue. Am I right?
M.V. Narasimham: That milestone of Russia is part of the EM.
Bino Pathiparampil: Okay. Second, what is this bendamustine deal about? What was the logic behind selling the product rights?
M.V. Narasimham: Which one?
Aishwarya Sitharam: Bendamustine out-licensing.
M.V. Narasimham: Yeah. That way, I think here we thought a partner will get overall as a deal, as in we get a better economics. That is why we have given these rights to the partner.
Bino Pathiparampil: Got it. In the quarter, I see that the finance income is significantly lower versus INR 290 crore last quarter and kind of similar numbers in previous quarters. This quarter is only about INR 90 crore. Is there any reason why the finance income is so much lower?
M.V. Narasimham: Here, what the exposure we have on the balance sheet is now the Forex, especially the movements as from June to September of the Ruble spot rate is, I think, significant variance. I think that has given this P&L debit, I think, in this quarter as compared to the Q1.
Bino Pathiparampil: Sorry, in this quarter it is lower compared to Q1?
M.V. Narasimham: Yes.
Bino Pathiparampil: Okay. Got it. One last question. What will be the CapEx for the full year? The first half I have seen is much lower than your typical numbers.
M.V. Narasimham: Earlier we have guided around INR 1,800 crore. My view, it could be little lower, but definitely I expect around INR 1,600 to 1,700 crore.
Bino Pathiparampil: Got it. Thank you. I will join back with you.
M.V. Narasimham: Yeah.
Aishwarya Sitharam: Thanks, Vinod. The next question is from the line of Amlan Das from J.P. Morgan. Amlan, please go ahead.
Amlan Jyoti Das: Sorry. Just wanted one clarification on the abatacept scenario. Apart from the IV indication, we also heard from the previous calls that for abatacept indication, you expect an approval in the US in Q4 FY28, and in the non-US markets for both indications in Q1 FY28. Do the timelines remain consistent or has there been a change in this?
Erez Israeli: Consistent. We stay consistent with it, yeah.
Amlan Jyoti Das: Okay. Thanks for that. The non-US market is also roughly $1 billion for the reference drug. How do you expect the ramp-up in the non-US markets for abatacept?
Erez Israeli: We believe that the European market is a very important market for this. It is going to be launched a little bit after the United States, but Europe is, we believe, a significant market.
Amlan Jyoti Das: Okay. Lastly, for these markets, the manufacturing would be done in Bachupally itself, right?
Erez Israeli: Correct.
Amlan Jyoti Das: Okay. Thank you. Thanks for the opportunity.
Aishwarya Sitharam: Thanks, Amlan. The next question is from the line of Dhara Ganatra from UTI Pension Funds. Dhara, please go ahead.
Dhara Ganatra: Yes, go ahead.
Dhara Ganatra: Am I audible?
Aishwarya Sitharam: Yes, we can hear you.
Dhara Ganatra: Thank you so much for taking my question. I had one question largely from the India market perspective. What we have seen in the last 2 years is that IPM growth has been in high single digits, and in the last 6 odd months or last 3 odd months, what we are seeing is that the growth has accelerated versus the last 2 years. The growth was more driven by pricing. This time around, there is a lot more volume growth. So both for Dr. Reddy's and for the industry, what do you think is changing and what is the outlook for the H2 of the year and going forward?
Erez Israeli: One thing that changed significantly is obviously the launch of semaglutide and the GLP-1 product. This is a significant addition, both for volumes. The second one is that you have more new products like us, innovative products that are coming to the market. In general, this is the main contribution. I believe that if you take the GLP-1, you will get either close to the single digit or to higher. I did not do the math, but this is the main contribution, I believe.
Dhara Ganatra: Okay. You don't see any smaller players vacating the market or slowdown in trade generics or that sort of, that would be driving the IPM growth?
Erez Israeli: The way I see also, the main, at least growth for us is in the places in which you have those utmost demands. For us, it's primarily the innovation. The branded generic, those that we are investing behind are doing well. The rest are doing like in the market, like normally, mostly driven by prices.
Dhara Ganatra: Sure. Thank you.
Aishwarya Sitharam: No, Dhara. We're going to try and see if Abdul can join us now. Abdul, can you please unmute yourself? Abdul, you've been unmuted. Okay. Looks like his continued technical issues at his end.
Erez Israeli: Yes.
Aishwarya Sitharam: The next question will be from the line of Vivek Agrawal from Citi. Vivek, please go ahead.
Vivek Agrawal: Thanks, Aishwarya. My question is on abatacept. Just trying to understand, what can be the fair market share of your biosimilar in the US, let us say, once the product is there across the formularies, even one year down the line. Because we have seen in a lot of biosimilars that sometime the market share remain around 10%, 15%, and some of the products get market share as high as around 50%, 60% kind of stuff. So what is your assessment based on the opportunity itself, competitive dynamics, as well as your capacity and capability, like what kind of the market share is a fair market share for this product for you?
Erez Israeli: No, thank you. At least at the moment, assuming that we will get approval, we are alone. So in terms of competitiveness, it is us and the innovator. It is a medical benefit product in the United States, so the sensitivity to the price and to market share is not as big as in pharmacy benefit. I know you know that well. I believe that a fair market share can be any number from 15% to 25%. It depends, of course, on the success of the launch. We need also to add that once the subcu will come to the market, it is obviously going to add to the market share, which will come later. We are talking about 28 February. So this is Gilead tech, so it is primarily about the sweet spot between market share and prices.
Vivek Agrawal: Just a clarification. This 15%, 25% is the entire abatacept market you are talking about, or only the IV version?
Erez Israeli: Initially, it will be on the IV. It could be that there will be some movement on that, but we will start with the IV, and the subcu will come in 28 February.
Vivek Agrawal: Understood. In terms of confidence on approval based on your discussion with the FDA, would you like to assign any kind of probability, how comfortable you are based on your discussion with the agency, type of queries, et cetera? What kind of the chances that you have in terms of approval, or is there any possibility of getting CRL in December and approval may get delayed by 2 months, et cetera?
Erez Israeli: You know, I am 33 years in this business. I had my share of scars from these predictions. We feel good about the product. We feel good about the inspection. We feel good about the correspondence with the US FDA. We want and we are preparing to launch in December. If you ask me, "Is there a chance that we will get a CRL?" There is a chance. Obviously, none of us want it, but there is a chance.
Vivek Agrawal: Understood. The second question is on the US generic business trajectory. On a quarter-on-quarter, we have seen improvement. A part of the improvement is also being driven by some of the products which may face competition in the incremental quarters Q2 and Q3. Just want to get your understanding how we should look at the US numbers with the North American numbers on quarter-on-quarter. Is there any possibility of dip in Q3, Q4, or you can maintain the current trajectory even going forward in the H2?
Erez Israeli: So for the US, we have, one we discussed is abatacept. The other is obviously semaglutide. It is not the US, but it will going to be including in the North America sales, and also those complex generics that are on paper. So if we will have that or the combination of that, we will actually grow versus the current state and for sure sustain it. I believe that the numbers are sustainable. Naturally, we have botox in it. Botox in it, obviously after the 6 months, that SKU, we have one SKU that has 180, that will obviously go down. I do not think it will impact significantly, so that we will be able to absorb without a problem. So overall, I am optimistic, but it obviously depends on our ability to be successful with those products that I mentioned.
Vivek Agrawal: Understood. Just last question on margins, because the reason I also asked the question on the US business sustainability is that in the coming quarter. You are also indicating, Erez, that the R&D spend is also expected to go up, right? So I am just wondering, if R&D spend goes up, some of these products like botulinum comes down, and in this quarter you also had some impact of milestone incomes, et cetera. So just trying to understand from where you are getting confidence that you will be able to maintain close to around 20% kind of margins in the H2.
Erez Israeli: First, we know our numbers. So I am sharing that confidence again. We will reach that, and it will even go higher. The reason that we feel it, first of all, is the growth that we see in EM, in India with the consumer health, as well as the United States. Second, is the way we control the expenses. Indeed, R&D, we will have more, but we will have on the other expenses less, and we are planning to continue to do that. It is primarily the mix, the growth, and obviously, the continued launch of new products. For me, by the way, 20% or 21% is not impressive. We always say that we want 25%. We are recovering from lenacapavir, and that is what we are going to be. But I said it also before, now I think people believe me.
Erez Israeli: We will have 20% plus and if we will launch successfully the way I believe lenacapavir, it will be 21% plus.
Vivek Agrawal: Thanks, Erez. Congratulations for the 6-12 numbers and best of luck. Thanks.
Erez Israeli: Thank you so much.
Aishwarya Sitharam: Thanks, Vivek. The next question is from the line of Prashant Manudhane from Motilal Oswal. Prashant, please go ahead.
Prashant Manudhane: Yes, thanks for the opportunity. Just one question from my side. What kind of price erosion we are seeing in case of Sugammadex post-launch?
Erez Israeli: I don't recall the price erosion.
M.V. Narasimham: There's no price, I think. Whatever we have initial contract signed, I think it's getting continued. I think the product launch.
Erez Israeli: That's probably versus the innovator, I don't remember.
M.V. Narasimham: mm-hmm.
Aishwarya Sitharam: Maybe I can get back to you on this later, Prashant.
Prashant Manudhane: Sure. That's it from me. Thanks for the opportunity.
Aishwarya Sitharam: The next question is the follow-on question from Kunal. The next question is from the line of Dr. Kunal Ramesh.
Kunal Dhamesha: Hey, hi. Thanks for the follow-up. Just one on the abatacept subcu filing. Where are we in that process?
Erez Israeli: We are supposed to submit it, if I remember correctly, in February.
Kunal Dhamesha: February of 2027?
Erez Israeli: 2027, if I remember correctly.
Kunal Dhamesha: Yeah.
Erez Israeli: Aishwarya will see if will keep me honest.
M.V. Narasimham: Yes, February or March, they say. I think around that period.
Aishwarya Sitharam: Yeah, Q1.
M.V. Narasimham: Yeah, in Q1, we are going to submit.
Kunal Dhamesha: Sure. Another one on the complex ZEMDEX launch that we are basically looking forward in H2. That product particularly, we are dependent on the IP outcome on those launches, or is it more just the approvals?
Erez Israeli: Approvals. Every approval.
Kunal Dhamesha: Sure. Are these Para IV filings?
Erez Israeli: Launch and approval situation for now.
Kunal Dhamesha: Sure. Lastly, on abatacept, you suggested that the ramp-up will happen couple of quarters later as we get included in the formulary. Just one, when we launch, what kind of commercial infra do we require, especially for the US market, and when do we start the build-out of that?
Erez Israeli: We started to do it already three years ago. The main framework
Erez Israeli: of the sales and marketing in North America is already there. We will hire a couple of more sales team. The team that will cover certain geographies, this is still pending, but the lion's share of the team is there.
Kunal Dhamesha: Sure. There is not much incremental cost related to that?
Erez Israeli: No, not much.
Kunal Dhamesha: Perfect. Thank you and all the best.
Aishwarya Sitharam: Thanks, Kunal. The next question is from the line of Aman Vij from Astute Investment Management. Aman, please go ahead.
Aman Vij: Yeah. Good afternoon, team. Am I audible?
Erez Israeli: Yes.
Aman Vij: Yes. My questions are on the semaglutide side. First, given we expect the validation to be completed by November, where are we in terms of launches in other big markets like Brazil and Turkey, in terms of approval timeline and launch timelines? Any rough estimate?
Erez Israeli: Brazil, likely in the beginning of Q4. The rest of the markets, we are going to launch in all the smaller markets, either in the end of Q3 or at the beginning of Q4. This is primarily the timelines as from the time that we finish validation and we start to sell batch by batch. Some of it may come to the markets in Q3, some will come in January. All of it will be in that timeframe. Some in December, some in January.
Aman Vij: Sure. That helps. Second question is, you have talked about we are still adhering to our guidance of 6 to 7 million devices this year. What are the latest estimates, say, for next 1 to 2 years, say, 2028 and 2029? Where do you see this number?
Erez Israeli: It obviously depends on the success of this at 6 to 7. But like I mentioned in the past, the run rate of 12 to 15 million pens that we discussed in the past is still my estimate. But obviously, it can fluctuate as we understand better the markets, once we will get all the approvals, and we will understand the competition in each one of the markets. So right now, take it as a very tentative number. But this is what we are preparing for the, let us say, the 12 months from April.
Aman Vij: You had mentioned those numbers last time also. I just want to understand, are you more positive on the numbers or slightly negative that point?
Erez Israeli: I did not change my attitude. It is because we need to see the success of the market share that we will take, as well as the success and the market share of our partners. So I do not have any additional information. Right now, it is the same, consistent with what we discussed in the past.
Aman Vij: Thank you for answering the question.
Aishwarya Sitharam: Thanks, Aman. In the interest of time, we will take one last question from the line of Saion Mukherjee from Nomura. Saion, please go ahead.
Saion Mukherjee: Yeah, thanks for taking my question. Just one question on the PSAI segment. The growth has been muted for a while, so how you see that growth playing out? You also mentioned the CDMO revenue is at 100 million plus. If you can give some color on the nature of this revenue, is it generics or innovation-related? Also, the new contract that you signed, when you expect that to kick in, is that meaningful? And any other CDMO contracts that can be added over the next year or so? Thank you.
Erez Israeli: No, thank you, Saion. On the CDMO, I believe that the growth trajectory will come. It is a combination of growth in discovery, what you call innovation. So this is growing in double digits. We have also certain contracts with big companies in which they want to transfer their production into our line. So we have several of these projects. As well as a normal CDMO, meaning that we are doing projects for phase III, phase II for innovative companies. I believe that this business should grow and should reach two to three times of these numbers in the next three to four years. This is still our plan. I believe that we should get there. On the API side, part of it is that our older products have less demand.
Erez Israeli: Part of it is because most of our launches and most of our activities are done more of a, as a B2B of a finished product. This is actually going well. Part of it, we are recognizing as part of PSAI, and part of it we are recognizing as part of the relevant EM or North America. So overall, the B2B is actually growing. The API merchants part of it is declining, because most of the product, the peptides and this kind of stuff, people prefer to buy the finished good rather than to buy the API.
Saion Mukherjee: Understood. Thanks, Erez. Thank you.
Aishwarya Sitharam: Thanks, Saion. That was the last question. Thank you all for joining us today. We value your time and participation on this call. If you have any further questions or need any additional information, please do feel free to reach out to me. With that, we conclude today's earnings call. Thanks, everyone.
Erez Israeli: Thank you.
Aishwarya Sitharam: Thank you. Goodbye.
