Dr. Reddy’s Laboratories (DRREDDY) Q2 FY23 Earnings Concall Transcript

Dr. Reddy’s Laboratories (NSE: DRREDDY) Q2 FY23 Earnings Concall dated Oct. 28, 2022

Corporate Participants:

Amit Agarwal — Head of Investor Relations and Director of Finance

Parag Agarwal — Chief Financial Officer

Erez Israeli — Chief Executive Officer

Analysts:

Tarang Agarwal — Old Bridge Capital — Analyst

Prakash Agarwal — Axis Capital — Analyst

Kunal Dhamesha — Macquarie Capital — Analyst

Damayanti Kerai — HSBC — Analyst

Surya Patra — Phillip Capital — Analyst

Bino Pathiparampil — Incred Capital — Analyst

Sameer Baisiwala — Morgan Stanley — Analyst

Unidentified Participant — — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Q2 FY23 Earnings Conference Call of Dr. Reddy’s Laboratories Limited. [Operator Instructions]

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

Amit Agarwal — Head of Investor Relations and Director of Finance

Thank you. 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 September 30, 2022.

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 discussion and analysis of this call will be based on the IFRS consolidated financial statements.

To discuss the business performance and outlook, we have the leadership team of Dr. Reddy’s, comprising Mr. Erez Israeli, our CEO; Mr. Parag Agarwal, our CFO and the Investor Relations team.

Please note that today call is a copyrighted material of Dr. Reddy’s and cannot be rebroadcast or attributed in press or media outlet without the company’s expressed written consent.

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

Now, I hand over the call to Mr. Parag Agarwal. Over to you, sir.

Parag Agarwal — Chief Financial Officer

Thank you, Amit. We didn’t see everyone for the current festive season. This quarter we had strong financial performance [Technical Issues] highest ever sales PBT and EBITDA in a quarter. The performance has been supported by the launch of Lenalidomide capsules in the U.S. and rebound of Russia performance over last quarter.

Let me take you through the details for the quarter. For this section, all the amounts are translated into U.S. dollars at a convenience translation rate of INR81.37, which is the rate as of September 30, 2022. Consolidated revenue for the quarter stood at INR6,306 crores, that is USD775 million, and grew by 9% year-on-year basis, and by 21% on a sequential quarter basis. In the same quarter of last year, we had high COVID product sales, adjusted for which, we have grown in high-teens in this quarter.

Consolidated gross profit margin for the quarter stood at 69.1%, an increase of 565 basis points over previous year and 920 basis points sequentially. The gross margins were mainly aided by favorable product mix and production incentives recognition. However, it was partially provision made on COVID product inventory as the sales on these products has reduced significantly.

Gross margin for the Global Generics and PSAI business were at 65.4% and 3.6%, respectively for the quarter. PSAI gross margins were primarily impacted due to inventory provision on COVID product and adverse leverage on manufacturing overhead on a lower sales base. We expect it to improve in the coming quarters.

The SG&A spend for the quarter is INR1,656 crores, that is USD204 million, an increase of 4% year-on-year and 7% quarter-on-quarter. This is in line with business growth. As a percentage of sales, our SG&A has been at 26.3%. It is lower by 140 basis points year-on-year and 340 basis points sequentially. The R&D expense for the quarter is INR487 crores, that is USD60 million, and is at 7.7% of sales.

We have been making good progress on our R&D pipeline, in line with our business strategy. Further, while we continue to drive productivity, we have been investing it back to strengthen our development pipeline, building marketing capability and digitalization.

The net finance expense for the quarter is INR16 crores, that is USD2 million. We have been able to manage there the risk arising from the forex fluctuations in the current volatile environment. The EBITDA for the quarter is INR1,932 crores, that is USD237 million, and the EBITDA margin is strong at 30.6%.

Our profit before tax stood at INR1,611 crores, that is USD198 million, which is a growth of 27% year-on-year, and a growth of 10% quarter-on-quarter. Effective tax rate for the quarter has been at 30.9% due to the tax effects arising from jurisdictional mix. We expect our normal ETR to be in the range of 25% to 26%.

Profit after tax for the quarter stood at INR1,113 crores, that is USD137 million. Reported EPS for the quarter is INR66.89. Operating working capital increased by INR322 crores which is USD40 million, and [Indecipherable] on June 30, 2022. Our working capital base reduced by 15 days due to optimization of inventory across our businesses and factoring of receivables in Russia.

Our capital investment during the quarter INR251 crores, which is USD31 million. The free cash flow during this quarter was INR580 crores, which is USD71 million. Consequently, we now have a net cash surplus of INR1,370 crores, that is USD169 million as on September 30, 2022.

Foreign currency cash flow hedges in the form of derivatives for the U.S. dollar are approximately USD402 million, largely hedged around the range of INR78.8 to INR81.7 the dollar maturing in the next 12 months, giving 4,320 million at the rate of INR0.9119 to the [Indecipherable], AUD2.4 million at the rate of the INR56.04 to the Australian dollar, and ZAR67 million at the rate of INR4.82 to South African rand maturing in the next 6 months.

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

Erez Israeli — Chief Executive Officer

Thank you, Parag. Good morning and good evening to everyone. I hope you and your loved ones are keeping well. I am pleased to take you through the current quarter performance which was marked by record sales, EBITDA and ROC. In the last few years, we have built a well diversified business model which allows us to have multiple growth drivers and reduce the risk of being dependent on a single market or event.

We believe that the current environment with geopolitical and economic uncertainties, inflationary pressure and forex volatility, our strategy is allowing us to grow. While there may be some fluctuation quarter-on-quarter, we’re focused on building portfolio pipeline across market, driving productivity, investing for innovation and taking forward our ESG agenda. We believe that our strategy, along with the net cash surplus position will enable us to drive sustainable growth with our aspirations.

Let me share you and some key — some of the key highlights of the current quarter. One, successful commercialization of volume limited launch of Lenalidomide capsules in the U.S. market. Rebound of Russia sales after the [Indecipherable] channels normalization in last quarter. U.S. FDA approval [Indecipherable] stream received by our partner, improving visibility and commercialization of our products. Our largest manufacturing facility in Hyderabad, internally referred as FTF 3, a joined Global Lighthouse Network for the [Indecipherable]

Now, let me take you through the key business highlights for the third quarter. Please note that all the reference to the numbers in sections are in respective local currencies. Our North America Generics business recorded sales of $351 million for the quarter, with a strong growth of 38% year-over-year and 53% on a sequential basis. This was that a largely attributed to the new product launch contribution, including the volume limited launch of Lenalidomide capsules in the United — in the U.S. market.

While we wouldn’t be able to mention specifics to its volume or value arising from the Lenalidomide, we expect these products will continue to contribute meaningfully ahead in the next few quarters as well. The price erosion for the base business has been within the normal trends seen over the last few quarters. In this quarter, we learned [Technical Issues] expect that momentum to continue during the balance of the year.

Our Europe business recorded sales of EUR52 million this quarter with a year-to-year growth of 10% and sequential quarter growth of 4%. During the quarter, we launched 10 new products across various countries within Europe. We expect to continue with the gross momentum in the rest of FY’23.

Our emerging market business recorded sales of INR1,425 crores, with a year-on-year decline of 6%. However, a sequential growth — quarter growth of 36%. The year-to-year decline was due to a higher base effect as we had COVID product sales in Q2 FY’22. Adjusted for these pre-COVID, we have grown.

Within the Emerging Markets segment, the Russia business declined by 3% on annual basis and grew by 54% in the quarter-to-quarter basis in constant currency. The sales for Russia [Indecipherable] after the channel inventory stocking normalized in the last quarter.

During the quarter, we launched 31 new products across various countries of emerging markets. We expect this business to continue on the growth momentum year-on-year.

Our India business recorded INR1,150 crores with year-over-year growth of 1% and sequential decline of 14%. Adjusted for the COVID product sales during the Q2 FY’22 and the brand divestment income in Q1 FY’22, we have grown in mid-teens year-over-year and mid-single digit sequentially.

During the quarter, we launched two new products in Indian market. As per IQVIA report of June 2022, our MHC rank in the value terms is at Number 10. We will continue to reshape our portfolio in India business with focus of growing big brands, acquisitions, partnerships for focused therapy area while divesting [Technical Issues] non-programs.

Our PCI business recorded sales of $81 million with a year-over-year decline of 29% and sequential decline of 12%. Adjusted for the COVID product sales in Q2 of FY’22, the business has declined in single digits over the last year. The decline has been due to lower volume pickup by customers for some of the key products. We expect sales to improve over the next couple of quarters, and increasing volume pickup and launch of new products.

We have been progressing well in our journey of building a portfolio of complex and differentiated product, biosimilar and NCE pipeline. We have also made a good progress to identify mix of innovation moves for branded markets. We continue to actively look for investments in potential businesses in line with our strategy. We believe that even in the current uncertain environment, there are multiple opportunities to grow our business, and we are committed to pursue this in line with our strategy.

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

Questions and Answers:

 

Operator

Thank you very much. [Operator Instructions] We have our first question from the line of Tarang Agarwal from Old Bridge Capital. Please go ahead.

Tarang Agarwal — Old Bridge Capital — Analyst

Hi, good evening. Three questions from my side. The first question is on Lenalidomide. Just wanted to get a sense that were the volumes bunched up in the current quarter as per the agreement with innovator, or should we expect the volumes committed by Dr. Reddy’s in the current quarter to probably continue as we proceed? So that’s number one.

Number 2, if I look at the cash flow statement for the business, there’s roughly about INR600 crores that’s been spent on intangibles. So wanted to understand what is the nature of this? Is it purchase of ANDAs or something else?

And the third question is on the PSAI business. I believe the gross margins for this business have been declining continuously over the last one year. And they came to a low of about 3.5% this quarter. So if you could just explain what’s happening there. Is this supposed to move up going forward or how should we look at it, and what is driving this trend, not specifically for this quarter, but over the last three, four quarters? Thank you.

Erez Israeli — Chief Executive Officer

Thank you. I will take the first and the third and Parag will take the second question. On the cost, absolutely within the scope of the settlement, we had with the innovator.

Operator

Ladies and gentlemen, we have lost the connection of the Management team. We request you to stay connected, we’ll reconnect them.

Erez Israeli — Chief Executive Officer

Hi, can you hear me now?

Operator

Yes. Please go ahead.

Erez Israeli — Chief Executive Officer

Yes, did you hear the answer?

Parag Agarwal — Chief Financial Officer

Are you there?

Tarang Agarwal — Old Bridge Capital — Analyst

Yes, yes, I’m here. I couldn’t….

Erez Israeli — Chief Executive Officer

Sorry, our line broke, sorry. So, on the first question on the Lenalidomide, the quantity are within the scope of the agreement that we have with the innovator, and we will continue to sell the product also in the next coming quarters.

And the third questions, these volumes of the API — the volume of the APIs, especially on some of the old products went down, and this is the main reason of course the gross margin, but this is a very much fixed cost type of an industry. So what we see that likely it will go up, and naturally with that, also the margins will go up.

Now over time, strategically, we see growth in the CCL in general in all four levers. One [Indecipherable] is itself, primarily driven by certain launches of product in which we [Indecipherable] commercial quantities for launches that will help us this year, next year and the the year after for growth of profit and including [Indecipherable] The second is that CMO business — CDMO business, [Indecipherable] which is also recorded under this segment is going to grow and we do see a better traction in that direction.

Number 3, our CBT or what we call the indirect business-to-business sales, especially in the Middle East as well as seen in Japan, we also see likely that will increase [Indecipherable] deal with organizations like The Gates Organization that are supporting the mid and low-tiers, in terms of the economy, countries, and we’ve some interesting projects that have.

Overall, we can say that we believe that it’s a — so this segments will grow in the future.

Parag Agarwal — Chief Financial Officer

And on the second question, I will take. In the cash flow, the intangible amount that you see towards the acquisitions that we have announced publicly also in the last couple of quarters. This includes Cidmus from Novartis, also the Eton’s portfolio under development, and we also had another small acquisition Playback. So, it’s basically towards the acquisition.

Tarang Agarwal — Old Bridge Capital — Analyst

Okay, thank you.

Operator

Thank you. We have our next question from the line of Prakash Agarwal from Axis Capital. Please go ahead. Mr. Agarwal. Please go ahead with your question. We are not able to hear you. Your voice is breaking, sir.

Prakash Agarwal — Axis Capital — Analyst

Am I audible now?

Operator

Yes. Please go ahead.

Prakash Agarwal — Axis Capital — Analyst

Thanks. And thanks for the opportunity. Call quality is not great, so pardon if I’m asking this again, but two questions. One is how should we think about the base business performance given there is some competition in your key products? Would it be largely flattish or it would have come down?

And secondly on the volume restricted launch that you’ve done, most or all of it is already booked for the mentioned [Technical Issues] or there’s some more…

Operator

Mr. Agarwal, I’m sorry, your voice is breaking again.

Prakash Agarwal — Axis Capital — Analyst

I’ll repeat my question.

Parag Agarwal — Chief Financial Officer

Yeah, Prakash, I think we have heard the question.

Prakash Agarwal — Axis Capital — Analyst

Okay. Okay, So, one is the performance on the base business in the U.S. side. How it would have been done, is it flattish or it would have declined?

And second is on the volume restricted launch that you’ve done for generic Revlimid. Is — most of it is booked, or there is more to be booked in the financial year ’23?

Erez Israeli — Chief Executive Officer

So on the second one, we are going to book sales for this product in Q3 and Q4 and in the years to come. So until we — so it’s not that it’s a one time, we are planning to continue to sell this product in a meaningful also in the next coming quarters.

As for the first question, I would — the best way to describe it is we are very consistent, meaning that even if you — on the long-term basis, and that’s something we’re really — trying to be very consistent with our communication, our U.S. market — our U.S. activities will grow — is growing in the single digit on a monthly basis. While from time to time we’ve had leaps up and leaps down in accordance to the competition, this quarter, indeed, we had competitions over some key products like [Indecipherable], DOXO. And against that, we launch product — we want to launch 25 products.

Overall, our U.S. market will continue to grow in the same manner that we discussed in the past, and we will have from time to time, products that will contribute more meaningfully for certain period of time. So, the answer for that is we are consistent with what we have been discussing in the previous meetings.

Prakash Agarwal — Axis Capital — Analyst

And just to think that I understood the second part of your question correctly, you said there is more to come in Q3 and Q4 with respect to Revlimid.

Erez Israeli — Chief Executive Officer

Yes.

Prakash Agarwal — Axis Capital — Analyst

Okay, perfect. Thank you.

Operator

Thank you. We have our next question from the line of Kunal Dhamesha from Macquarie Capital. Please go ahead.

Kunal Dhamesha — Macquarie Capital — Analyst

Hi. Thank you for taking my question. First one on the gross margin. So we have kind of improved gross margin, that 550 bps. Can you just quantify various moving pieces here? I think we are product mix, PLI accrual, FX impact and then offsetting as the COVID product provision and the price erosion?

Parag Agarwal — Chief Financial Officer

Yeah Kunal, so our gross margin for the quarter, we have reported at 69%, and it has — as I stated, it is a strong record of favorable product mix, including the Impact of new product launches. So, that’s clearly something that’s pushing it upwards. We have also recognized the benefit of PLI and a few other normal accrued incentives like GVK et cetera there in the quarter. We’ve also taken a provision of around INR100 crores for COVID product inventory as sales have come down quite a bit as you would know.

So overall, and there is of course a little bit of cost inflation that fit in in these numbers. There is some softening we are seeing in [Indecipherable] which should have some favorable impact in the second half, but cost still remain at an elevated level. But overall I would say that this is what the gross margin is near about. I would just point out that even if you take out the impact of new product launches during the quarter, our gross margin is within the normal range that we have been consistently talking about, which is somewhere between 51% to 54%.

Operator

Mr. Dhamesha?

Kunal Dhamesha — Macquarie Capital — Analyst

Yeah, thank you for that. And would you be able to share some insight in terms of why our ANDA filing run rate remains low? I think in FY’20, we filed around 8 ANDAs, FY’21 was slightly better at 20, and then FY’22 was the [Indecipherable] If I look at this year’s run rate, first half is around 4 ANDAs filing, while our R&D continues to remain [Indecipherable] So, any insight into why our ANDA run rate filing is slow?

Erez Israeli — Chief Executive Officer

Yes, it’s more of a timing in the year of the submission. Normally, most of the submissions are done in the second half of the year. So you have one [Indecipherable] pick up of those numbers. As for the overall numbers, we are focusing our R&D as fast as possible on this initiative products on the biosimilars, on products that are essential. So it’s — so we are trying to target most essential products for year, but rather with a low number [Indecipherable] rounded into 25 products per year. But those products with their potential to be first to market, meaningful growth et cetera. So what we see here is also the combination of timing as well as focus of the R&D, across markets, not just for U.S. market. The products that we are developing in U.S. markets, we are also launching in other markets, especially injectables. So the absolutely value that can be derived from the R&D should be higher in the future. Those relevant products will be launching in the near future, being global, more complex, more injectable, more biological.

Kunal Dhamesha — Macquarie Capital — Analyst

Okay. Thank you.

Operator

Thank you. We have our next question from the line of Damayanti Kerai from HSBC. Please go ahead.

Damayanti Kerai — HSBC — Analyst

Hi, thank you for the opportunity. My question is on India piece. So even after adjusting for COVID base and sale of some non-core brands, for the quarter sequential growth rate is around mid-single digit, which is lower than market growth of double-digit. So how should we see growth moving ahead. And what will be the key drivers? So a few years back, you mentioned about growing your India sales by almost 50% on the base existing at that time. So are you broadly on track to achieve that?

Erez Israeli — Chief Executive Officer

Yes, we are on track. Once again, we are on track. What you see now is a combination of firstly, [Indecipherable] So as part of our strategy and as discussed in previous meetings, we identify a segment that we wants to focus on. And for those focus to [Indecipherable] behind meaningful brands that can grow and sustain for many years, as well as investing in what we call fertilizing tool, in which India is going to be a big outlet for that.

As part of this, we are divesting brands as well as focusing on brands. For example, the brands that we acquired recently, as well as factoring out, which is in area of the business [Indecipherable] and low quality in nature. We do have some brands that is moderate and we are fixing. And I’m very confident that this will help us well.

So bottom line, I’m very confident that we are going to see a very solid and we are reiterating that Dr. Reddy’s is going to be a top 5 player in India, and we are planning to achieve that.

Damayanti Kerai — HSBC — Analyst

Sure. My second question is on injectables. So this has been one of your focus segment. So can you talk a bit about the competition outlook for this segment, given we have seen competition driving in this segment. So how do you see competition scenario building up in injectables over next few years?

Erez Israeli — Chief Executive Officer

After the patent clears, we invite people to invest behind products with a — we have patent expiration in this time. Naturally, as part of the way portfolio was built by [Indecipherable] there are more and more injectables between now and patent expiration. So many — actually many companies have injectables pipelines exactly to increase in the future. So we do see, the injectables business is very competitive. We should see advantages and differences in the injectable business, that I guess or those if there is to be [Indecipherable] channel is different. It’s selling in hospitals, it’s selling globally with [Indecipherable] and around the world have gone with [Indecipherable] continues. So, the gross margins are higher in some of these products, the technological barrier is also higher. So given all of this, we believe that we will see more growth, we will see better margin on a global scale. At the same time, every product will have competition and where competition comes, it will be [Indecipherable] any under the segment — sales in any segments. This is likely to be also following us.

Damayanti Kerai — HSBC — Analyst

Sure. And my last question is a clarification on the PLI scheme benefit. Is it one-off or you are likely to book it every year, like in next quarters also yes?

Parag Agarwal — Chief Financial Officer

This is clearly not a one-off. This is, I think — as you know, it’s a multi-year scheme. And even within this year, it is not a one-off. Of course the quantum fluctuates from one quarter to another depending on the sales of the products that qualify for the scheme.

Damayanti Kerai — HSBC — Analyst

Okay, that’s helpful. Thank you.

Operator

Thank you. We have our next question from the line of Surya Patra from Phillip Capital. Please go ahead.

Surya Patra — Phillip Capital — Analyst

Yeah, thanks for this opportunity, sir. My first question is on the cash flow that we are likely to be generating from Revlimid. In fact, Dr. Reddy’s has been a kind of a consistent generator of free cash flow, over INR1,000 crore kind of annually, and this Revlimid is the way that contribution that we are witnessing. It is obviously over INR1,000 crore kind of per annum contribution that we are definitely likely to see. So, given that your qualitative growth outlook, if you can give some — utilizing this cash flow situation. So obviously, your growth can be qualitative and consistent over next few years. So can you give some clarity about what would be your key priorities here going ahead looking at the kind of strong cash flow generation situation?

Erez Israeli — Chief Executive Officer

Yes, thank you. Indeed. I agree with you, we are building a better cash flow position which is exactly to get stronger and stronger over there. So the capital is, as we mentioned [Indecipherable] basis, so to use it for capex, to use it for buying and building the use of technologies and to use it for our working capital. We will naturally have access of that. The second is business development. We are actively looking for [Indecipherable] across all of the geographies. The 3,000 square feet, both on the horizon one qualifies, we feel. And three also the geopolitical situation as well as the economy situation creates an opportunity for us. In this situation, we do see opportunities that may lead in faster and higher valuations. So likely, that we’re going to be very busy with the development in the next coming quarters. And if we we’ll see less, we will consider that of course, how to [Indecipherable] maybe for the shareholders. We will not take it — we will not take a decision about this kind of stuff like buyback or dividend, but what we can assure that we will have a use for the money, the money will be used for it.

Surya Patra — Phillip Capital — Analyst

Sure, sir. So in fact, whether that — even the R&D, although there is a kind of significant growth that we are witnessing from Revlimid, but accordingly, the R&D spend has also gone up. That was earlier indicated that way. So you think with the kind of a ramp up in the business the R&D spend and the investment on the specialty project, all that is likely to go up quite meaningfully?

Erez Israeli — Chief Executive Officer

That’s why, if you recall, in the past, we guided we are profitability with 25% EBITDA, which in one — in some quarters, we’ll do more, some quarters, we’ll do less. And maybe also in other quarters, we’ll do more. So absolutely this is the idea that this will help us to pay for the R&D for the Horizon 2 opex activities. Knowing our pipelines and knowing our cash position, that’s why we feel very comfortable to commit doing that we can finance well Horizon 2 while including the R&D associated with Horizon 1, while the overall the guidance of the EBITDA of 25% on a material basis. And [Indecipherable] we believe that we’re in a very comfortable position to do both organic and inorganic, not just because of the product but also the launches of other products and other activities that we will do in the next coming years.

Surya Patra — Phillip Capital — Analyst

Sure, sir. My second question is on the Pegfilgrastim. So the biosimilar, how should we see this as an opportunity for us because our partner Fresenius has already got the U.S. FDA approval for that. So how influencing this product opportunity before us? My only key query here is that what is the kind of association that we are having here, because it has been filed in the name of Fresenius, the manufacturing base is also used from Fresenius wait only, so then what is the kind of relationship that we are having for this opportunity?

Erez Israeli — Chief Executive Officer

This is an agreement that we had in the past with Mersk, the German Mersk, this was required by Fresenius, and they — so the project was developed by us initially and the second [Indecipherable] Fresenius. So we are entitled to royalty, meaningful royalties south of the launch.

Like you said — rightly said, we are not participating in the actual production, but we will share their success once they will sell the product.

Surya Patra — Phillip Capital — Analyst

Okay. Sure. Sir, just one clarification. You mentioned about the INR100 crores provision. Is it relating to the PSAI 1? And this INR193 crores of government grant that is what is the PLI amount? These two clarifications, please.

Parag Agarwal — Chief Financial Officer

Yeah, so the amount of government grant includes PLI and the other export incentives that we received. So it’s the total amount. Sorry, what was your first question?

Surya Patra — Phillip Capital — Analyst

INR100 crores provision, is it relating to the PSAI?

Parag Agarwal — Chief Financial Officer

Yeah, it is across all businesses. It is for India as well as PSAI and also in emerging markets. So it’s aggregate provision across all geographies.

Surya Patra — Phillip Capital — Analyst

But is it possible to share for PSAI, sir?

Parag Agarwal — Chief Financial Officer

We don’t share specific numbers…

Surya Patra — Phillip Capital — Analyst

Sir, because this is a quarter specific one…

Erez Israeli — Chief Executive Officer

Let’s say that it’s without the COVID — the gross margins of PSAI will absolutely grow…

Parag Agarwal — Chief Financial Officer

High single digits. I will put it as high single digits. So, without adjusted for COVID provision, the gross margin for PSAI would have been high single-digits.

Surya Patra — Phillip Capital — Analyst

Sure, sir. Thank you. Wish you all the best, sir.

Operator

Thank you. We have our next question from the line Rebecca San from Bloomberg. Please go ahead. Rebecca, can you please go ahead with your question.

Since there is no response, we move on to our next question from the line of Bino Pathiparampil from Incred Capital. Please go ahead.

Bino Pathiparampil — Incred Capital — Analyst

Hi, good evening. Good evening and good morning. Just couple of questions. Just a follow-up on this INR193 crores government grants, what do you think that it belong to? Is it just this quarter or is it related to sold over the last few quarters.

Parag Agarwal — Chief Financial Officer

So it is part of the of the production linked incentive scheme that the government of India has chosen. There are certain products that qualify under this scheme, and this incentive pertains to the sales that have been made in the first half of the year. The scheme started from this fiscal year.

Bino Pathiparampil — Incred Capital — Analyst

Understood. Second, your tax rate is a bit high for the quarter. So has it got something to the higher Revlimid profit in the U.S. Is it going to be a higher tax rate whenever there is higher contribution from Lenalidomide profits?

Parag Agarwal — Chief Financial Officer

As I said, because of the jurisdictional mix, as you know, we are a global company operating in multiple countries and the sales of various products are billed in various geographies depending on where the IP resides and where the value is created. So, it’s entirely driven by the jurisdictional mix and includes some impact of new product launches including Lenalidomide.

Bino Pathiparampil — Incred Capital — Analyst

Got it. And finally, you had guided to be the DLA for for E7777 in this year, in this current year. Are we on track for that?

Parag Agarwal — Chief Financial Officer

Your voice is not clear. I’m sorry, can you repeat the question. Sorry, the DLA for E7777, your new product, you had guidance for 2022. Is that on track?

Erez Israeli — Chief Executive Officer

Yes, Bino.

Amit Agarwal — Head of Investor Relations and Director of Finance

It has been filed by our partner.

Bino Pathiparampil — Incred Capital — Analyst

That’s already filed. Okay. Okay, great. Thank you.

Operator

Thank you. We have our next question from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.

Sameer Baisiwala — Morgan Stanley — Analyst

Hi, thanks. And a very good evening. Great quarter. Parag, can you just share what was the core EBITDA margins if you were to exclude those one-offs? I mean, versus the 25% ballpark target that you have?

Parag Agarwal — Chief Financial Officer

Sameer, first of all, I would not classify this as crores. I the entire business –the results we have reported are core because any new product launched is part of the core. I think there are a few moving parts, which I talked about. But let me just list them down again. We clearly have an upside because of new product launches, of which the generic version of Revlimid is obviously a significant component. It has been a successful high value launch. There is a COVID inventory provision that we have made, we have recognized the government grant of INR193 crores as we have disclosed. Overall, there is some impact of cost inflation, but I think we have had good cost control. So overall, I would say that our EBITDA margin of 30% is core. Having said that, I must clarify that what we have been speaking very consistently is that we are targeting — our aspiration is to deliver 25% EBITDA margin on a sustainable basis in the near to medium term. And we remain on track for that target. There will be quarters when you will see higher EBITDA, there will be quarters where you will see lower EBITDA. But we are on track to delivering our aspiration.

Sameer Baisiwala — Morgan Stanley — Analyst

Okay. Thanks for this, Parag. It’s just that when I did those adjustments based on whatever information that you guys have shared, it looked like it was more like 20%, 21%. So I get your point, you want to include everything in the business, but if you were to just see what it was pre-launch and now, it seems to be a little on the lower side, and hence the question. So — but that’s fine.

Erez Israeli — Chief Executive Officer

I believe it’s a major — the numbers are higher than that.

Sameer Baisiwala — Morgan Stanley — Analyst

Okay. Okay, that’s fine. Yeah, that’s great, thanks. And also on the working capital side, Parag, there seems to be INR700 crores negative working capital if I look at receivables and payables. So can you just talk about that? So INR400 crores and INR300 crores, I think, are the two movements.

Parag Agarwal — Chief Financial Officer

So to that movement would be because of the receivables, because of the higher sales. If you see, in this quarter, our sales have crossed INR6,000 crores and there is a certain period. So that’s the impact which is reflecting.

Sameer Baisiwala — Morgan Stanley — Analyst

Okay. Largely coming from the U.S., and that — you know, it’s a little higher.

Parag Agarwal — Chief Financial Officer

That’s right.

Sameer Baisiwala — Morgan Stanley — Analyst

And payables? INR300 crores, it has gone down.

Parag Agarwal — Chief Financial Officer

So there are certain payments that we have made to our partners. It’s not really something which is bringing the payments down permanently. It’s just a timing issue.

Sameer Baisiwala — Morgan Stanley — Analyst

Okay. Yeah. And just with your permission. My last question, if you look out next four to six quarters, anything that you want to highlight in terms of high value or complex launches for the U.S. market?

Erez Israeli — Chief Executive Officer

I believe that we will continue to do stock performance.

Sameer Baisiwala — Morgan Stanley — Analyst

Okay. And when you see that, you mean with the current basket ot you think there’ll be more new launches that’s going to add on top of this?

Erez Israeli — Chief Executive Officer

Yes, absolutely, we will launch more products in the U.S. in the second half, as well as in the [Indecipherable]

Sameer Baisiwala — Morgan Stanley — Analyst

Okay, thank you so much.

Operator

Thank you. We have our next question from the line of Prakash Agarwal from Axis Capital. Please go ahead.

Prakash Agarwal — Axis Capital — Analyst

Yeah, hi. [Technical Issues]

Operator

Mr. Agarwal, your voice is breaking again.

Prakash Agarwal — Axis Capital — Analyst

Yeah. Am I audible?

Operator

Yes, please go ahead.

Prakash Agarwal — Axis Capital — Analyst

Yeah, just a follow-up to my first question asked. So you mentioned there is more to come in Q3 and Q4. Question also was in terms of quantum, have we booked a large amount or expecting qualitatively, if you can comment, that it would be similar or lesser?

Erez Israeli — Chief Executive Officer

We cannot guide a number. But it is going to be meaningful numbers.

Prakash Agarwal — Axis Capital — Analyst

Okay. That is helpful. And to understand this further. I understand Natco is going to come back in March with double-digit volume share. So this calendar year or this works fiscal year, that is the volume restricted for everybody, or at least you can comment for yourself?

Erez Israeli — Chief Executive Officer

We cannot comment on our peers. Our [Indecipherable] is naturally until 2026. So there is certain [Indecipherable] we do not want to share. This is a settlement within [Indecipherable] But like I said before, we believe that the quantities and the value can be meaningful in the coming quarter including next year.

Prakash Agarwal — Axis Capital — Analyst

Fair enough. So just completing the loop here what I understand is you started in September. You have volume restrictions till March. And then there is another increment that happens post March, is that right understanding, or is it post-September?

Erez Israeli — Chief Executive Officer

As I mentioned, I cannot specify any details about the settlement. If it is in September, in October, in November, in December, I cannot say.

Prakash Agarwal — Axis Capital — Analyst

Okay, fair enough. Okay, that’s all from my side. Thank you.

Operator

Thank you. We have our next question from the line of Bino Pathiparampil from InCred Capital.

Bino Pathiparampil — Incred Capital — Analyst

Yes. Hi, just a couple of follow-on questions regarding products in the U.S., again. You have filings for Lexiscan, I believe there is some litigations going on. Could you give us your latest status update, do you expect to launch it anytime soon, say, maybe in the next 6, 12, 18 months?

Erez Israeli — Chief Executive Officer

I could not pick up the question, can you repeat?

Bino Pathiparampil — Incred Capital — Analyst

Generic version of Lexiscan, you have a filing in the U.S. for that, which is Regadenoson. Do you have an update or do you expect to launch it in the near future?

Amit Agarwal — Head of Investor Relations and Director of Finance

Yeah, Bino, I think it is — we have a settlement on that. So as per the settlement terms, we will have launched in the future. Obviously, the settlement terms are confidential, so we cannot discuss our launch timings currently.

Bino Pathiparampil — Incred Capital — Analyst

Understood. Second, there was a guidance regarding Rifaximin filing in 2023 in the U.S. Is the arrangement with Fresenius the same in case of [Indecipherable] — the same as [Indecipherable] or do you have a role in there?

Erez Israeli — Chief Executive Officer

The difference is that in this case, we will make the product and they will market our products. That will be made by them. And all the [Indecipherable] will be made by them. This is the main difference.

Bino Pathiparampil — Incred Capital — Analyst

Okay. And are you on track to file that in 2023?

Erez Israeli — Chief Executive Officer

We are on track.

Bino Pathiparampil — Incred Capital — Analyst

Okay, great, thank you very much.

Operator

Thank you. [Operator Instructions] We have our next question from the line of Kunal Dhamesha from Macquarie. Please go ahead.

Kunal Dhamesha — Macquarie Capital — Analyst

Thank you for the follow-up. So would you be able to quantify for your investment in terms of R&D, as well as capex for the first half of this year between Horizon 1 and Horizon 2 drivers for our business?

Parag Agarwal — Chief Financial Officer

So, Horizon 2 as I had clarified, I think when we had the Investor Day communication, we expect to invest about 5200 basis point of sale in Horizon 2 through our P&L, and we are within that range. At this stage, we’re not investing significantly in capex Horizon 2.

Kunal Dhamesha — Macquarie Capital — Analyst

And then what would be our capex for this quarter of around INR350 crores would be for?

Parag Agarwal — Chief Financial Officer

The capex in this quarter — let me step back. The capex for the full year is likely to be around INR1,500 crores, in that range. And a lot of this capex is towards building capacity for our biosimilars business and for our investors business.

Kunal Dhamesha — Macquarie Capital — Analyst

Okay. And typically, your biosimilar plant, what would be the typical cost, if you can share, or an injectable plant?

Parag Agarwal — Chief Financial Officer

I think it varies. It depends on the product, the complexity and the current utilization of our current plant. Sometimes it’s a top-up capex, sometimes it’s higher. So I think it’s not possible to give a general answer to that.

Amit Agarwal — Head of Investor Relations and Director of Finance

Yeah, Kunal and when we say capex, obviously, it is not all going into building new plants. So there will be several additions to the existing plant. There will be maintenance, there will be separation project, some R&D facility. So it is all put together. So — and over the plan, Parag already clarified, those are the two bigger areas.

Kunal Dhamesha — Macquarie Capital — Analyst

Okay, thank you.

Operator

Thank you. We have our next question is from the line of Surya Patra from Phillip Capital. Please go ahead.

Surya Patra — Phillip Capital — Analyst

Yeah, just two questions. On the Revlimid again, please, so do you think there is another wave of generic launches before 26 January — means, January 2026?

Erez Israeli — Chief Executive Officer

It is likely that more people will get approval. I do not know exactly when and what is the nature of settlement, but likely, before ’26, there will be additional companies that will build it.

Surya Patra — Phillip Capital — Analyst

Okay. My second question is on the, let’s say, basically India business. Two aspect that I would like to cover, one is the OTC and second is the — your initiative on the digital kind of effort. So particularly, on the OTC side, you have been one of the established player in the OTC space of the U.S. and Russia since long. And now, you have been trying to build a kind of a similar kind of presence in the domestic market in line with your enhanced focus for the domestic business. So what is your thought process there, and what you are trying to achieve there in the domestic OTC space? And in terms of profitability, how is it different from the existing ethical business in the domestic market. That is one aspect.

Second aspect is that spends that we have been making on the digital initiative front, in the domestic side since last few quarters, so how is that — what is the progress there and what is the benefit that we are accruing from that?

Erez Israeli — Chief Executive Officer

Yes, thank you. So, obviously, [Indecipherable] in the U.S. and especially in India in both [Indecipherable] as well as in hospital and both growing their, let’s call it, the traditional channel as well as the e-commerce. What we are trying to achieve. First, we believe that we have and identified either by ourselves or with partners, product with great data behind it. All the products that we’ve launched, we’re going to see us relevant and we will be backed by scientific data. And we believe that — our brand [Indecipherable] as well as the relationship that we have in the healthcare — operational healthcare gives meaningful value those brands. Over time, these products have also, let’s say, novel consumer eventually, with a recommendation of a professional. And therefore their business model is more sticky than the average generics in India.

And lastly, also, the profitability, [Indecipherable] is even higher to launching a brand in this part. We also see that because of our position in India, because of reputation being a credible, profitable company, many partners will be glad to work with us. And we believe that we can drive more value by bringing innovation in India as well as in other countries. And there is a lot of energy in that direction. So, to summarize this, we are building now meaningful portfolio, a meaningful R&D behind it, both internal as well as external, as well as a group of partners that will continue to support [Indecipherable] for many, many years.

As for the digital, we are continuing to build the business, we are moving for most cities with our partners, and we will move form — even working in the — actually various channels with [Indecipherable] insurance, working with companies without employees as well as direct, and the — it is — what we do now, it’s primarily scaling up both the region capabilities, the service associated with it, the physicians that are supporting it when we are in more cities with more patients, and it is picking up nicely. We do see a great unmet needs for outpatient services in India.

Surya Patra — Phillip Capital — Analyst

Okay. So, is it going to have a kind of a meaningful implication on the MR productivity also, if not now?

Erez Israeli — Chief Executive Officer

It’s not going to the MR, but — you’re asking about the M&HCV in the digital, right?

Surya Patra — Phillip Capital — Analyst

Yeah, yeah. Yes.

Erez Israeli — Chief Executive Officer

Yes. So the MRs are not relevant here because [Indecipherable] that we are using to patients, basically giving them about education about the issues. So, it’s a services — a health services, it’s not selling product.

Surya Patra — Phillip Capital — Analyst

Okay.

Erez Israeli — Chief Executive Officer

The MR productivity needs to go up because of the focus that I mentioned before. By focusing on more meaningful products, that will be bigger, and more focused with more data behind it, a wise is selling brands with relevant skills or quality will be lower and this will absolutely increase significantly the MR productivity.

Surya Patra — Phillip Capital — Analyst

Sure, sir. Thank you. Thanks for your response.

Operator

Thank you. We have our next question from the line of Rebecca San from Bloomberg. Please go ahead. Ms. Rebecca, please go ahead with your question. Since there is no response, we’ll take our last question from the line of Anubhav from Macro. Please go ahead.

Unidentified Participant — — Analyst

Hello. Yeah, thanks for taking my question. I have couple of questions on injectables. You see, first part, just wanted to understand are we seeing any industry-wide challenges in this space in terms of, as the supply chain challenges are concerned, because some of the peers have been highlighting for last few quarters in terms of getting the component or raw materials. So wanted to understand, are we also from the kind of a thing or are — and if that is the case, are we past that headwind?

Erez Israeli — Chief Executive Officer

So there are a — naturally, bidding with so many products in so many countries, warehouse challenges are there, but nothing significant to report on the above, nothing that [Indecipherable] to the business. We did not anticipate a major disruption. As a company, we are kind of, let’s say, put it in this way, are best in a way that we do not have a single product, or a single activity or a single supply or single country that we are dependent on. So, yes, there are challenges here and there, but nothing significant.

Unidentified Participant — — Analyst

Okay. Thanks for that. Secondly, on the long-term strategy for the injectables, I understand we are making — having disciplined in this space, I want to now stand this thing that do we have a goal that whatever injectables we want to get into, we should be manufacturing in-house, or is it also a possibility be that few of the products we can prefer to have a tie-up with contract manufacturers, because in the past also, I remember, there have been couple of products where we did so. Do you see merit in that or how Reddy’s will see the strategy as far injectables manufacturing is concerned?

Erez Israeli — Chief Executive Officer

Because our offering of injectable is global, we always prefer as much as possible to do it in-house, and for that, we qualified recently, relative capacities. And we do have not really relatively big facility. In [Indecipherable], it is 7 9 and 11, 11 was qualified recently by the [Indecipherable] That gives us a lot of capacity going forward. As we don’t have access to all the technology that are related to injectables, on best technologies we will supplement them by inorganic moves, especially those type of products, it does not make sense for governments to Make an India, sell in United States. So for that, we have a different solution. So if you wish, largely, it’s going to be organic, with some of inorganic.

Unidentified Participant — — Analyst

Okay. Okay. That’s quite helpful. Thanks a lot.

Operator

Thank you.

Erez Israeli — Chief Executive Officer

Thank you.

Operator

I would now like to hand the conference over to Mr. Amit Agarwal for closing comments.

Amit Agarwal — Head of Investor Relations and Director of Finance

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

Operator

[Operator Closing Remarks]