Dr Reddy's Laboratories Ltd (RDY) 2014 Q2 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Laboratories Q2 FY14 Earnings Conference Call. As a reminder all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. Kedar Upadhye. Thank you, and over to you, sir.

Good morning and good evening to all of you. Thank you for joining us today for Dr. Reddy's Earnings Call for Q2 FY14. Earlier during the day, we have released our results, and the same are also posted on our website. We are conducting a live webcast of this call, and a transcript shall be available on our website soon. The discussion and analysis in this call will be based on IFRS consolidated financials.

To discuss the business performance and outlook, we have today Satish Reddy, our Vice Chairman and Managing Director; Saumen Chakraborty, President and Chief Financial Officer; Abhijit Mukherjee, President and Head of Global Generics and Investor Relations team.

Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcasted or distributed in press or media outlets without the company's expressed written consent. Before we proceed with the call, I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call and the webcast. After the end of the call, in case any additional clarifications are required, please feel free to get in touch with the Investor Relations team.

Now I would like to turn the call over to Saumen Chakraborty, our CFO.

Thank you, Kedar. Good morning and good evening to everyone. Let me begin with the key financial highlights. For this section, all the figures are translated to U.S. dollars at a convenience translation rate of INR62.58, which is the rate as of 30 September, 2013.

I am happy to report our highest ever quarterly revenue at a healthy margin profile for Q2 FY14. Revenue for the quarter is $537 million and grew by 17% year-on-year.

Revenues from our Global Generics segment is $434 million and grew by 32% year-on-year, driven largely by new product launches in US, continued momentum in the emerging market territories, and the effect of rupee depreciation against marketable currencies. Revenue from our Pharmaceutical Services and Active Ingredients segment is $102 million. While it declined by 19% year-on-year, it grew on a sequential basis vis-a-vis Q1.

Consolidated gross profit margin for the quarter is quite healthy at 58% versus 52.4% for the same quarter of the previous year. Corresponding value for Global Generics and PSAI segment for this quarter are at 66.1% and 24.6% respectively. Global Genetics gross profit margin has seen significant improvements due to limited competition, new product launches coupled with improved contributions from the emerging markets. PSAI gross margin declined primarily on account of an unfavorable product mix, nevertheless on a sequential quarter basis there has been an improvement by almost 600 bps.

SG&A expenses, including amortization for the quarter, are at $156 million and has grown 21% year-on-year. As a percentage to sales this is higher by approximately 100 bps over last year. There has been the impact of normal year-on-year salary increments, along with select brand building activities in the emerging market territories. In addition, a major part of our SG&A is denominated in foreign currencies, which had the effect of rupee depreciation. Approximately, 30% of the increase in cost is due to currency movement. R&D costs for the quarter are at $48 million, representing 9% to revenues versus 6.1% in the previous year. The increase in R&D expense during the year is in line with our planned development activities.

EBITDA stands at $152 million and it's 28.3% to revenues, and registered strong year-on-year growth of 27%. Current quarter EBITDA represents 800 bps to revenue's improvement on a sequential basis. Profit before tax for the quarter at $123 million is 23% of revenues. While the current quarter's effective tax rate is lower at approximately 10%, the annual effective tax rate for FY14 is likely to be around 20%.

Key balance sheet highlights are as follows. Our working capital balance increased by $75 million over June 2013. Capital expenditure for the quarter is at $50 million. Foreign currency cash flow hedges for the next 18 months in the form of derivatives and loans are approximately at $460 million, largely hedged around INR56.00 to INR60.00 to $1. In addition, we have balance sheet hedges of $561 million. Net debt at $352 million represents a net debt-to-equity ratio of 0.28.

With this, I now request Satish to take us through key business highlights.

Thank you, Saumen. Good morning and good evening to everybody, and I extend a warm welcome to you on this earnings call. Also I'd like to take opportunity to wish you a very happy Diwali.

I am pleased to announce the highest ever quarterly performance of Dr. Reddy's, backed by strong growth across the key geographies of the Global Genetics segment. The recent generic launches of azacitidine, decitabine, divalproex ER and donepezil 23mg in the US demonstrates our ability to build a sustainable, limited competition portfolio. These launches have contributed to an increasing customer franchise in the US and has resulted in the enhancement of our gross margins and operating margins as well.

On the domestic front, as you'd be aware, the Indian pharmaceutical market is witnessing one of its most challenging times due to the transition towards the new (technical difficulty) regime.

The first half of this fiscal was characterized by market disruptions in various forms. Industry bodies have been in active dialog with the government authorities and trade representatives to resolve the matter and we hope to see an amicable resolution on most of the issues very soon.

Now let me take you through some of the business highlights for each of our key markets. Please note that in this section, all references to numbers are in respective local currencies at average exchange rates. Revenues in North America Generics business for the quarter are at $220 million and grew by 18% year-on-year. This growth is largely attributable to new product launches over the past 12 months and market share gains in select key molecules.

During the quarter, we launched four new products, namely azacitidine, decitabine, donepezil 23mg, and divalproex ER. As mentioned earlier, these products were in the limited competition space and enjoyed the pricings premium for the quarter. These launches have helped enhance the mix of limited competition products in our portfolio compared to previous quarters. We also increased the market shares for some of our top molecules, such as fondaparinux, tacrolimus, and omeprazole DR. Further, our anti-allergy OTC and antibiotics portfolio are in a gradual improvement on a sequential quarter basis, considering the seasonal demand patterns.

For our India business, despite the issues of market disruptions like I mentioned earlier, and also lowered pricing due to the new pricing policies for our top molecules, the business has been resilient enough to post INR421 crore of sales, with year-on-year growth of 8%. The recent IMS numbers also record our above-market growth rate on a consistent basis.

Our MQT September growth was 13% as compared to the market growth of 6.3%. On the MQT growth percentage scale, we are the fourth highest growth company. We have launched several initiatives to sustain this momentum, wherein we will be selectively exploiting our current portfolio in the non-prescription channels such as OTC and institutional segments.

On the emerging markets front, Russia revenues at $74 million for the quarter, grew by 31% in ruble terms because of the higher offtake in the current quarter, as well as due to the low base effect of last year. For the first six months of the fiscal, we have grown at a healthy 16% on year-on-year basis. The market sales data for Russia of the recent months indicate a reduction in the market growth rate, and in some cases, negative volume growth due to a variety of reasons. In this scenario, our secondary revenue growth indicates a healthy trajectory. As you're aware, the mix of OTC products in our portfolio is increasing and we've also improved our ranks.

CIS markets grew by 24% on a year-on-year basis, on the back of new product introductions in Ukraine and growing base in other regions. European operations are in line with our expectations. As you're aware, we have transitioned our Germany business model to a much leaner and simplified structure with a conscious exit from the tender-based revenue model.

Our PSAI business registered a de-growth of 19% on a year-on-year basis. However, sequentially the business has registered marginal growth on the back of improving market dynamics. We hope this trend to normalize over the coming quarters, and as you'd have noticed, the gross margin of this business improved by 600 basis points over the first quarter, indicating a slight improvement in the product mix.

As we look forward to second half of this fiscal, the opportunity in serving patients in various global markets is quite significant, and we feel quite excited to deal with the growth challenges in these markets. Outcomes from our global R&D activities in the coming years will help us build a sustainable and growing portfolio. We are seeing the needle moving significantly in our development pipeline in terms of greater mix of non-oral solid dosage forms and high value complex molecules. While we're required to spend higher R&D costs to invest in the associated development, we're also cautiously calibrating the resources and prioritizing wherever required.

Our biosimilars portfolio is a case in point, where we continue to focus on the progress of the pipeline. All our regulated and emerging market development programs are on track. Preparation for some of the multi-region clinical trial programs are in advanced stage as well and we feel good about the progress of the ongoing collaboration on developmental and manufacturing aspects with our alliance partner, Merck Serono.

With this I'd now like to open the session for Q&A.

(Operator Instructions) Anant Padmanabhan, Cowen & Company.

Yes, hi, thanks for taking my questions. I have a couple of questions. First, on generic Dacogen and Vidaza. Could you give us a sense of the sustainability through the rest of the year? I mean what is your internal thinking in terms of competition, number of players and just how are you seeing pricing in these markets?

Your question is on Dacogen, and which is the other molecule?

As a side-heading, Vidaza?

Vidaza, yes. So, in Vidaza, there is an authorized generic, Sandoz is three and we're there. Market shares are satisfactory. In Dacogen, we're the only generic, shared market share with [Innovative]. So it's a two-player market in decitabine and three player in azacitidine. And the prices are in line with the expectations of similar participation amongst competitors. Going ahead, it's a difficult guess. We hear there are people coming in, but we have not got signaling from the market as yet.

Okay, thank you. And then one more question. Europe continues to do poorly, and so, one of your larger global competitors recently discussed divesting some of the Western European assets. So, just a couple of questions related to that. Is this business EBITDA positive, and could you talk about any strategic options you have here?

It is EBITDA positive, and as we have moved out from [NATO] commodity play, especially the tender play in Germany. Currently, as we speak, although the business has not grown, our gross margins have improved because of certain steps taken. We're consciously moving into certain sectors of business. Having said that is there any -- at least there is intention? The answer is no at the moment.

Okay, great. Thank you.

Sonal Gupta, UBS Securities.

Hi, thanks. Good evening everyone, congrats on a great set of numbers. I guess partly a continuation of the last question. But I just want to understand, I mean on a quarter-on-quarter basis, is this sort of represent a sort of -- I mean this quarter in the US represent some sort of a bolus, because you had these big launches coming through, so I just want to understand the sustainability of this $220 million number on a normalized basis, assuming that there are no competitors coming through in these all, the current situation prevails in these products. So any thoughts on that front and anything in terms of how do you see your pipeline for the rest of the year and if you could give any outlook on FY15 in terms of the US pipeline, are there more differentiated products that you're expecting in the second half or in sometime next year?

So, on Vidaza and Dacogen, as I mentioned, there would certainly be some figures coming in. When is the big question. We haven't heard specifically anything in the market, but doesn't take too much time for someone to show up. I am sure it's in development with others and they would come in, and then there would be erosion, steeper erosion.

There are other products which are also -- we've launched Divalproex Extended Release, which is I think much more sticky in terms of revenue. There are few others products which are sustainable.

So, all in all, I think great quarter, there would be erosion, but I think we are fairly optimistic on things. There is also I think -- our supply position has improved substantially, and it has helped in taking some case-specific market share increase, which has helped, hopefully should sustain for a while. But given the nature of the business there will be always erosion. With good products there will always be erosion.

You've had sort of like -- I think beginning of the year you talked about 10 to 15 new launches in the US, and we've seen very significant number of those coming through right now. So do you see any more meaningful products in the second half?

So, in public domain we have tacrolimus coming up in January. There are a few more coming in, but may not be in the big league.

Okay. I just wanted to understand, is there like, in Q4 last year you had, because of Propecia, you had a big number and then in Q4 -- in Q1 this year we saw a decline on that base. So is there a similar sort of cycle here as well that -- because you've just got these approvals and you've pushed in a huge amount into this system and next quarter when it normalizes you'll see a little bit of a step-down?

Not in our view, not a great deal. There are launches, but as I said, none of them in the big league.

Okay, great. Thanks. I will join back the queue.

Anubhav Aggarwal, Credit Suisse.

Yes. Good evening. Satish, just one question on PSAI business. If you look at the order book now that you have for rest of the year, for basically for next six months, how does that compare versus what you had six months back?

I think like we indicated in the last quarter, there's been changes in terms of the customer inventory holdings and things like that. That's again played out in the second quarter, but there has been an improvement. So the outlook is -- still remains the same, which is whatever is lost we can't get it back, but certainly in the Q3 and Q4, we will see a ramp-up in sales, and then we're hoping to normalize things.

Right, so -- I mean the issues are quite a few, like I said. There's this customer inventory corrections, we do not have significant launches, and we're waiting for the sales to ramp up from now onwards.

So you're saying, on the current base, what you reported in the September quarter, do you expect a ramp-up in the second half?

Of course, yes.

Okay. And just one clarity on the fondaparinux approval in Europe, how close are we, or how far are we? Is it still quarters away, or is it like near-term, because you filed last year and European cycle approval is -- depending on that what do you think is the status of the application?

It will take a little while more, maybe a couple of quarters more.

Okay, and last question on the gross margin improvement, you're average currency was about 60 this quarter. How much of the Global Generics margin, about 66% what you reported this quarter benefitted from the currency, because it has moved from -- let's say, if you look at June quarter it was about 61.5%, and it moved to 66% this quarter. Can you just roughly indicate how much would have been the benefit of just currency movement there?

There has been some benefit, we will not be able to exactly share how much is the benefit. But all that we can say that we cannot expect the kind of gross margin level that we have in Q2 for Global Generics segment to continue. The PSAI, the gross margin can improve, but Global Generics it may decline.

But, Saumen, probably I didn't put the question correctly. So there's no translation benefits in this quarter in the gross margin, right? These are all transaction gross margins.

Yes.

Got it. Okay thank you.

Surya Patra, Phillip Capital.

Yeah. Congrats for the good set of numbers. Sir, just wanted to have some more clarity on the US business for next 12 to 15 months period, so like -- can you provide some -- what is the kind of -- how many product approval that you were anticipating for, let's say, next year, and what would be the size of those opportunities, or some clarity on -- that is one. And secondly, out of this 62, 65-odd pending of approvals, what proportion of that would be like a differentiated generic, or injectable or some niche opportunity that is there in your pipeline?

The number of launches would be more or less in terms of numbers, somewhat similar, give or take the approvals coming through in time. The intention and the pipeline is clearly moving towards more complex areas where a limited competition is what we hope for. But having said that this is our definition of complexity. Lot of generics companies are working on making -- moving out of (inaudible) product and trying to get to the niche one.

So, the time will tell whether we have -- we're sort of ahead of others in cracking these products or not, but overall I think we remain optimistic. Very difficult to exactly put on a year-on-year basis how things will move or go. These things in generics business, approval timelines, specific expiry time, the patent landscape, these are very dynamic situations. But consistently one message we are sending through that, as Satish mentioned in his section that R&D costs are rising and we have sent out thoughts on continually moving the pipeline from plain vanilla to more and more difficult, different types of dosages. So overall I think we should win the game in North America.

Okay. Regards this azacitidine it seems the market share seems to be lower than the anticipated levels, any particular reason for that?

The IMS data is still to come out, and we just launched a month back and for the innovator it's -- the IMS figure for the whole launch was $380 million. Sandoz is the [AGE], we're the only generic.

Yeah. In fact, my query was that because Sandoz has garnered a good amount of market share, though they have entered later, so that is why.

So, Surya, like what Mr. Abhijit explained, it will take some time for market share numbers to reflect.

Okay. Just last query on the PSAI side. See, in fact, what could be the key growth driver for PSAI subsequently, whether it is a custom synthesis kind of operation or is it the API business that would really drive hereon?

So, mix of both, right. So on the API side of the business, sales in one part of a geography are expected to pick up, so that's the growth driver for API. And on the CPS, it's really some of the contracts picking up with innovative companies.

Sir, the kind of the growth level what we have seen in the recent past, whether can we again reach that similar kind of growth for PSAI operation, considering the expanded or enhanced platform because of the OctoPlus acquisition in this phase?

Not, really. I think the drivers are completely different for this business compared to what OctoPlus represents to us. So, the simple answer is yes, the growth will normalize, right? I mean, the first two quarters were an exception in terms of how they grew compared to the previous year's quarters, because of the various things I have explained, this time and even the last time, but third quarter will see the revival of [gross margins].

Okay. Can you just extend your reply in terms of how many such custom synthesis opportunities are there, or how many projects like Phase III, Phase II molecule opportunities are there for supply opportunities, anything on that side?

That metric won't be important, right, because just to give a flavor of the custom synthesis business, there are contracts on which we work with some of these innovators over a period of time. There will be some which will be at a very early stage. There will be some, which are older products, for example, it is a mix of that. There are some, which are existing molecules. So there is a mix of all these things. So, it will be very difficult to give a flavor of exactly how many and all that. He doesn't really --

Okay. But, we're confident enough that the growth and momentum would be again reaching to that real levels that is what we are indicating?

It's a steady ramp-up, but I definitely see it happening.

Okay. Thank you sir. Thanks a lot. Wish you all the best.

Surjit Pal, Prabhudas Lilladher.

Good evening to everybody. Thanks for taking my question. I have just two questions, is that I think Lamotrigine here was supposed to be launched. It is not yet launched in last quarter?

Yeah, it's launched. It's not in the same league of the four mentioned, but it's launched.

Okay. The main question is that in your OctoPlus N.V. which you have said is that -- that company has patented technology in liposome. Does it mean that you can also venture into the two liposome technology drug available in US market? Given the current scenario you said just few months back -- few months back USFDA has formed a team, which will evaluate all nanotechnology drug. Could you throw some light on that?

So, the purpose of OctoPlus acquisition was mainly to gain access to their experience and insight into complex injectables. And I think at the moment that is the main objective. Few assets are being progressed through OctoPlus, specifically three or four. And these are high value assets, very difficult, time consuming, would be needing training and all are in progress.

That's true. But the point is that given the kind of profitability, as well as the very few competition of the two drugs, I mean, one is Lipodox and another one is Ambisome, Ambisome definitely no generic is there. But could you expect over a period of, say, two, three years, Dr. Reddy's could be there, is a possibility?

Yes, certainly a possibility.

Another question is what is the status of Vinovo? Number one. And two is that have you got any unexpected benefit for Propecia, because there is only one guy has got approval unexpectedly?

Yeah, we'll get back on the Vinovo piece, it's not very a large asset anyway. We'll get back on that. On Propecia 1mg, yes, actually there are two. There are two companies who are coming. We have lost share as well the financial erosion in that asset. So, all that -- actually there are quite a few assets where we have lost -- financially in terms of QoQ, we have lost out. So, definitely Propecia is one of them.

Thank you. I'll get back to the queue.

Manish Jain, Axis Holdings.

Yeah, hi. I just wanted what is R&D likely to be as a percentage of sales on a steady run rate basis, annually?

Manish, currently for the quarter it reflects about 9%, right. So, like we indicated, so there is a step up in R&D, which is something, which I have indicated quite some time back, but you're feeling -- you're seeing it in reality now. So, it is all about the kind of spend, but we're increasingly now putting in on biosimilars, since they've moved into development on one of the assets and also on the proprietary products, plus also the increase in the development of some of the generics, some with external partners also. So, I think if you see it on a yearly basis, it will be at the levels that we're talking about for the quarter or even slightly more than that. Again, it all depends on the sales that we clock.

Thanks. And second thing is If you can throw some light on progress of proprietary products in the US?

Not much significant milestones to report at this point of time, because like you would have seen our commentary in the past, there are several assets being progressed, but to be specific about which products and what has progressed I think it's a bit too early right now.

Thanks. I'll join back the queue.

Okay.

Sudarshan Padmanabhan, Sundaram Mutual Fund.

Yeah. Congratulations on a good set of numbers. See when I look into the balance sheet on the long-term debt, I do see a INR1,250 crores increase. And given the fact that the Company is in a position of generating fair amount of cash, I mean would my assumption be right that you would be looking at a short-term acquisition, probably in the US or in any part of -- in India?

At any point of time we have been evaluating any targets that comes in our way and it will be in line with our strategic plans, growth in emerging markets, as well as in North America in very specific niche area. So, [this] time we have taken some term long-term borrowing, but not a very significant amount, so that our net debt to equity ratio remains less than 0.3, actually it is 0.28.

And, sir, can you throw some light on your purchase agreement with [ecoLogic Chemicals]? Is it primarily to acquire capacities or is there something else to it?

[ecoLogic] actually had a very low cost ecology process for a key intermediate of one of our product on which we have significant business opportunities in the PSAI segment. So, that's the reason we thought acquiring that could give us vendor advantage over our competitors.

Thanks a lot sir. I'm joining back the queue.

Girish Bakhru, HSBC.

Yeah, hi thanks. Just taking you back to Azacitidine and Dacogen, can you give some color on how is the -- if you can give some breakup of whether there's more retail component to it or is it more mail order, like channel-wise how is the drug being prepared?

Both are oncology injectables and these are clinic-heavy products. So, there are institutions and there are GPOs. We had set up a team, front-end team for taking the injectables, derive value out of injectables, probably about eight months back and they were slowly sort of building momentum in preparation of these things happening. So, I think we are doing justice to both assets.

How much would be GPO, I mean if you can give a rough percentage?

I don't have that offhand at the moment to sort of hazard a guess, but the large part is as -- this is all [public line]. Pretty significant part of these are in the hands of two major institutional players right now, especially in oncology products. Just to have a feeler, in the range of, let's say, 50%, 70% of this market would be in the hand of retail and the rest GPO. But there are also other complexities here that is not all about the share garnering. But the compliance of getting those shares converted to volume and that's what I was talking about in terms of -- sometimes being in place on their feet trying to achieve that.

Right. And so then you say gradual pickup, would it be something like what we have seen in case of fonda or would you see a significant chunk coming say in Q3 as well and maybe then nose-diving from there?

Well, as I said that we don't -- we haven't heard any messaging in the market that anyone is imminent. But this sort of a thing can only take you -- take your visibility for a month, month and a half, two. Beyond that difficult reporting.

Right. And just other question was on Lunesta. I mean you had lost the appeals case against Sunovion. Just wanted to get a sense if you have the possibility to re-appeal or has it been re-appealed or is there a possibility of settlement, like many other peers have already settled?

It's actually not a complete reversal, it's actually -- if you read through the judgment it's mainly saying that it is -- they'll move on to [sub-judgment] -- there are situations. But having said that the percentage probability of our hitting has substantially come down. Re-appealing may not be the best idea, but we're trying to seek other avenues.

And your settlement would be one of that right?

Could be.

Fine. And just lastly on the CapEx side, you've already done INR580 crores in this first half, which is close to INR660 crores you did last fiscal year. What's the overall guidance there and where all this is being attributed to?

So, part of this is -- this [ecoLogic] effect first year that we had for which the CapEx has gone up, but for the rest of the year, we do not visualize more than, say, INR300 crores or so.

How much it is, sorry?

INR300 crores or so.

All right. Thank you so much.

Bino Pathiparampil, IIFL.

Hi. Again congrats on a great set of numbers. Just a couple of clarifications. Your $220 million in the US that you said, is that actual net invoicing in the US without any impact of hedging or currency translation?

Bino, it's actually dollar invoicing in US.

In US, okay. Right. Second, will you be able to comment anything on development of generic Premarin in the US?

Bino, we won't be able to comment on this product at this stage.

Okay, sure. And finally on the biosimilar pipeline development, you have increased your R&D spend, which clearly denotes to some advances in the pipeline, I guess. So, in which case at what time would you be able to publicly disclose some of the products in the pipeline and the stages et cetera?

Right now it's a very few assets, Bino, so I think probably in the next couple of quarters or so we can talk more about it.

Okay, okay, very few assets, as in -- is any of them entered or just about to enter a final Phase III trial or so or is it still a bit far away from there?

Okay, if you are talking about one of the things that I mentioned, yeah it is the one which is getting into clinical trials. That's why I said that yeah.

In clinical trial as in the pivotal trial or this early clinical trials?

This is a biosimilar, right, so it requires that trial.

Okay, okay. Okay, thank you. I'll join back the queue.

Sameer Baisiwala, Morgan Stanley.

Hi, thanks. Good evening everyone. Just for the US market for Divalproex ER, the IMS reports show very low market share right now, which is under 1% or 2%. So -- but I guess it also will be primary sales so it may come with a lag. So what was the market share that got digested in the quarterly results for the September quarter?

Well, I think we are probably the fourth meaningful player. The market still has inventories of -- some of their earlier players. Market share, being the fourth player is quite fair in our view. The way US market players out maybe you are well aware of. I think it's a fair market shares. Not a whole lot has got reflected in the Q2. There is some. But it will start ramping up as we speak.

Okay, excellent, okay. And do you expect the current price level for this product to sustain for the foreseeable future?

This is I think would a little more sticky product than many other products. I think it's complex. As you know, it has been generic for quite a while, only the effectiveness has gone up. So, I think it will be -- it will be sticky in our favor.

Okay, excellent. And, the second question is on Vidaza. I think you launched it pretty much at a latter part of the quarter, September or so, and so would you again think that the quarter reflected the full impact for the product or do you think this would been seen as you go forward?

So, in typically oncology injectable launches, first month has certain significance. Even though it's a month of launch as you know, it's not insignificant. But going ahead, second half would see the full benefits, provided of course we don't see more players. As you know, I mean, if you've studied this, this has gone through different way of justification. There is a lot of science involved in the approval and eventually which led to our guidance on [it] as well. So, we're cautiously optimistic.

And, for Nexium, do you think this would be meaningful material opportunity for the next fiscal?

Quite early to comment. November next year, long way to go.

Yes. But, I guess, because you are going to be as part of the settlement. So, you may have some idea how many players to expect over there?

Two are -- As you know, two are already there. Two would anyway show up. So, depends on how many more. We don't have public domain information actually on that and how many more. I wouldn't be commenting on this at the moment too much.

Okay. One final question, if I may. Looking beyond the traditional markets where Dr. Reddy's have been strong over the last few years, which is India, US, Russia et cetera, is there some other markets that you are training guns towards and you want to scale up going forward?

Not exactly at the moment. I think depth is still name of the game. We are aggressively looking forward to brand acquisitions in our therapy-focused areas in the similar markets, and I think we can still go much deeper in these markets. And having said that, strategic initiative at some point in time, maybe we will look at, but not at the moment.

Excellent. Thank you so much.

Saion Mukherjee, Nomura.

Yes. Hi, good evening. One question on the US launches. You mentioned about Sirolimus in fourth quarter. What's the kind of dynamics that you expect in that product?

I think there are two players already in public domain, including us. Having said that it's a complicated product. It's not very big as you know, but this is -- there are not too many big products as well. Again, it shouldn't be too bad.

But, is there any exclusivity kind of situation there?

Not to my knowledge.

Okay. And on biologics, Satish, you mentioned about this collaboration with Merck Serono. So how are we taking some of these big products? Is it like you're doing harmonized kind of an approach both for US, European markets or are we going to see some more launches in India and then taking these products to the developed markets? Any thoughts on that?

Right. So, on -- depending again on the product size, so some of these products are already launched here, which are also part of the deal with Merck Serono. Right, so the attempt there would be to also reach into markets which we have not launched before, on one side. Obviously, the big thing there will be Europe, right, because that has a very clear pathway. US is still sometime away, right. So the initial focus will be on Europe for a particular product to begin with. And then we also look at certain other emerging markets, large emerging markets. Whereas markets where we are present on our own we directly go and register these products. So if you take even the pipeline of biologics -- if your question was really on the pipeline of biologics, our intent always is to launch first in India.

Okay.

And then take it to emerging markets after that. That's been normally the trend.

Okay. And any object on [Retoz] in Russia or any other key emerging markets?

Nothing specific at this moment.

Yeah, [filing] in progress.

Okay. And one last question, can you share the cash flow hedge loss or gain that you might have booked in this quarter?

Saion, we have booked INR55 crores of hedge loss in the quarter.

I'm sorry, I didn't get that.

INR65 crores of hedge loss we have booked during the quarter.

Okay. Thank you.

Alok Dalal, Motilal Oswal.

Hi, good evening everyone. Sir, a question on Russia. You mentioned that the market is going through a declining volume phase. So, what are the reasons for the volumes declining in Russia?

There were a couple of reasons right, (technical difficulty). One of the things is clearly the GDP growth, which normally has a reflection on consumption of pharmaceuticals in the market, there's been a slowdown, right. So that's one reason at a very macro level. There is also the issue of the seasonal effect. So, this whole issue of the flu season and the consequent onset of winter and new things like that. So these also tend to play a role and that's one of the things that we are seeing now.

Okay. So, Russia, normally the December quarter is the strongest quarter, because of the onset of winter, is that correct?

That's correct.

Okay. And on Russia again is there a risk of the [VED] list expanding or in the foreseeable future?

Not probably in the immediate future, because -- if you're asking about the number of products in the EDL list?

Yeah.

No, I don't see that happening immediately, no.

Okay. One more question on Naproxen, sir what is our market share here, in Naproxen?

You're talking of AP, [synactose] or --

No, API.

I think we're the dominant market share holders globally on Naproxen sales.

Dominant market share?

Yeah.

Okay. And one last question on [ecoLogic] again. Sir can you provide any color on what is the sales of this company or what is the book value of this company?

Actually we put independent valuers to value the company and based on that we have purchased assets.

But would you be able to give some number?

We have disclosed in terms of the total value that we are paid in terms of both fixed as well as the current assets.

Okay, all right. Thank you very much for taking my questions.

[Ranjan Botra]

Yeah, hi. Couple of questions from my side. One on the Russian market, you mentioned that your growth would sustain at current levels and the OTC share is increasing. How much is OTC share right now?

OTC, of the total percentage of sales is in the range of 34%, 35%, up from 32% sort of a figure, which was last year. So, very healthy, rapid growth and we're in top tier growth companies as per IMS in the OTC sector in Russia.

Okay. And plus in the press release you mentioned that the SG&A increase also includes brand building activities in emerging markets. Does it include some one-off item or something lumpy, which may subside in the coming quarters?

Not really. I think with the growth in OTC, I think we are committed to more of ATL. ATL means television coverage and so on and so forth, needed in the OTC sector. So some of those -- these are, you know, part of the business. But, having said that, in the seasonal product, the intensity of spend can vary from quarter to quarter.

Finally, on the domestic market, you did a commendable growth in the quarter and the impact of the trade disruption is still not

over. How do you see the second half and the year beyond that, especially noting your enhanced efforts to get back above

industry level growth?

Trade disruption is largely, in our view is largely over. I think there is a general degree of amicable agreement. So, going ahead, I think second half, we are much more optimistic than the first half. It saw lots of these one-off disturbances, but I think second half, we are optimistic the markets in September has given those signals to us. More importantly, I think we are very focused now on what we would do and what we wouldn't do, mainly in terms of megabrands, therapy focus, getting sort of firing on all channels, including institution channels, we have rightly put in a team to sort of address the institution channels. Sales has started. So, some of those things. But India is one of the most competitive difficult markets to be in. It's going to take time, but I think we are on the right path.

Okay. And, the last question, the operating margins at 20% were clearly pretty solid. Is this is a benchmark we should look at

going forward? Of course we will take into factor the fact that R&D spend may go up and there could be some correction in gross

margins, but somewhere directionally where we're headed?

You're talking of India -- which one I don't know.

Overall operating margins. This quarter, we had 20% right. So, I just wanted to understand how should we look at from a

medium-term perspective, given our high margin launches are yet to scale up.

So, as I earlier also said that we -- the Global Generics segment for this particular quarter, we have got a very high gross margin, which is 66.1%, which is really not sustainable. So, there could be some drop in that margin. But at the same time, PSAI this

quarter is 34.6%, but there is definite scope of improvement there. So overall at a company level, gross margin is better than the

previous year and we can live there.

Okay. Thanks. That's it from my side.

Can we restrict the number of questions?

Okay. Can you take last two or three questions please?

Prakash Agarwal, CIMB.

Good evening. Thanks for taking my question. On [ecoLogic Chemicals], I mean, the focus clearly has been doing niche segment

R&D and stuff. I mean, now incrementally buying this and improving PSAI. So, when we said that normalizing growth in PSAI

going forward, so does that normalizing growth factor in this acquisition or do we expect more growth coming out of this?

So, again, just to clarify. This is an asset purchase, right, of one of the key intermediates. So the thing is if we were to

start ground-up, it would have taken us a much longer time. For a specific product opportunity in the CPS business, which is

why we did this, right. So, this is more for long-term, and securing that opportunity to serve the customer. That's how it should be taken as.

So, this can lead to gross margin -- some benefit on the gross margin or it would take some time to actually --?

It would take some time, right, because this is a huge commitment in terms of an order that we have from an innovative

company. So, it will take time before it plays out. But the important thing was to acquire that capability of the intermediate.

Understood. Great. Secondly on this -- I mean, the kind of good numbers we have, especially on the US with high margin products, so clearly we would see next couple of quarters a much good base, but just going back to three, four quarters back, we had a comment from the management saying that FY14 growth could be softer on a base of -- higher base of 2013 when we were expecting these products to come in. Question is, these products are coming now, so do we continue to see equally interesting products in FY15 or on this high base we could see some softer growth?

First, I think we have stopped giving guidance that we have earlier told. We are telling that every year we are expected to launch even a number of products. So, we can get around 10 to 15 products, anyway it's something that so our total portfolio and the development progress which happens then the filings are done accordingly. So in terms of specific products, how does it pan out, what is the competitive landscape at that particular point of time when the launch happens, it will be very difficult to predict and tell you often.

Understood. But any color on the equally interesting products, if you could help us there?

So as repeatedly we have been saying, we're increasing our R&D cost to make products which has more complex, more difficult. So definitely we have a lot of interesting products hopefully.

Yeah but when is the question, I mean whether it is -- you are specific -- it will be difficult for us to pin down next year everything. So it's an ongoing journey as I mentioned.

Understood. Great. And on Russia, I mean I think I missed on that did we say volume decline or we expect volumes to continue robust as -- volumes and value to be as robust as we saw in this quarter?

No I said that the market itself, the whole market of Dr. Reddy's, in the whole market the units have declined. That's what I said.

But would you --

Or otherwise if you see the value growth in the markets, it's roughly about 10%, compared to maybe 14% in the past, it's been slightly lower that 10%.

And would you have a comment on the already existing players in Russia, investing in local manufacturing facilities? So, are we also on the plans or it does not take too much time, because I understand seeing Pharma 2020 that one needs to be locally present to have continued growth in future?

Yeah, already in one of the complex products, we're in partnership and a few other oncology products as well. So, we have started partnership manufacturing in some of those, not very significant at the moment, but we can certainly scale up at some point in time whenever it was needed. The immediate thought is not to put a greenfield site or something.

And lastly on Betapharm number, can we have that number please?

At the Europe level we did about EUR15 million, Prakash, EUR15 million.

Betapharm especially?

I'll revert separately.

Thank you sir. All the best.

Mosin, can we take the last question please, in view of the time constraints?

Manoj Garg, Merrill Lynch.

Good evening to all of you and finally I made it. Just like to understand that clearly we have been investing into injectable and biosimilars as a focus on the limited competition drugs. Are there other areas also, which we intend to invest or we are looking to invest?

The development is in progress in areas of topicals, patches and one or two partnered C2 products for US.

And have we made filing any of these products or it's still there in under development stage?

They are all in development stage.

And when do we start seeing the filing happening out of OctoPlus technology platform, like whether we have started already filing the products or it will still take some time?

So, on the internal ones, azacitidine is a good example internally developed. So they have already been filed. Some of the external ones will start certainly be -- getting to the filing in -- oh, you're saying OctoPlus?

Yes.

These are very specific assays. We wouldn't put a timeframe to this, but advancing well.

Okay, okay. And the last question from my side, like someone had made a comment that you always keep looking or evaluating the inorganic opportunities, looking at the longer term strategic intent in mind. Do we have anything in the near-term or you're still in a very, very preliminary stage?

We're evaluating, maybe we will be doing diligence somewhere. So typically I'll not be able to say whether it is near term or medium-term, but -- and whether at the end we are going to acquire any specific assays or not, but there be will always the possibility.

Okay, okay. That's all from my side and wish you all the best.

Thank you. And anyone else, please contact our Investor Relation team.

Thank you. Sir would you like to give any closing comments.

So, thank you everybody for joining our senior management for Q2 FY14 Earnings Call. In case of any additional clarifications, please feel free to get in touch with the IR team. Thank you.

Thank you. On behalf of Dr. Reddy's Laboratories that concludes this conference. Thank you for joining us. And you may now disconnect your lines.