Dr Reddy's Laboratories Ltd (RDY) 2004 Q3 法說會逐字稿

Good evening, ladies and gentlemen. Welcome to (indiscernible) Q3 (indiscernible) '05 results conference call. For the duration of the presentation all participant lines will be in a listen-only mode. After the presentation the question-and-answer session will be conducted for participants connected to (indiscernible); after that there will be a Q&A session for participants connected to (indiscernible) international bridge followed by a Q&A session for participants connected to (indiscernible) India. I would now like to hand over to Mr. Nikhil Shah of Dr. Reddy's Laboratories. Thank you and over to Mr. Shah.

Good morning and good evening to all of you. I'm Nikhil Shah, the investor relations officer at Dr. Reddy's. Thank you for joining us to discuss Dr. Reddy's financial results for the third quarter of fiscal 2005.

By now you should have seen the press release as well as the additional financial disclosure that we released earlier this evening. The results are also posted on our website on the homepage under the QuickLink's icon. To discuss the results we have on the call today, G.V. Prasad, our Chief Executive Officer; Satish Reddy, Chief Operating Officer of the Company; and V. Vasudavan, our Chief Financial Officer.

Please note that all the discussions and comparisons during the call will be based on U.S. GAAP numbers and the IR desk will be available to answer any queries relating to the Indian GAAP immediately after the conclusion of the call. To ensure full disclosure we are conducting a live webcast of this call and a replay of the call will also be available on our website soon after the conclusion of the call.

Additionally the transcript of this call will be available on our website at www.Dr.Reddy's.com under the QuickLink icon soon after the conclusion of the call. Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcast or (indiscernible) on media outlets without the Company's express written consent.

Now the Safe Harbor statement. I would like to remind you that the discussions and analysis during the duration of the call might include forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and predictions about future events. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially.

Such factors include but are not limited to changes in local and global economic conditions; our ability to successfully implement our strategy; the market acceptance and demand for our products; our growth and expansion; technologies and change; and our exposure to market risk. By their nature expectations and predictions are only estimates and could be materially different from the actual results in the future.

And now to get started, let me turn the call over to G.V. Prasad, our Chief Executive Officer.

Thank you, Nikhil. Good evening to those of you in Asia; good afternoon to the people in Europe; and to those of you in the U.S. a very good morning. I wish to thank you all for joining us on this call today. By now most of you may have read the results and the note that we released earlier this evening. As you can see, revenues are lower by about $11 million resulting in a decline in gross results by about $5 million. It has definitely been a challenging quarter and I will discuss the individual business dynamics shortly.

Coupled with (indiscernible) our increased investments in pipeline expansion and business building activities has resulted in the profit after tax being significantly lower at about $1 million compared to $13.7 million in profit for the same period last year. As you are aware, all of last year we (indiscernible) we have made a significant in R&D. And as many of you will agree, it is important to fuel the R&D engine that provides for future growth even though our profitability would have been much better without these investments.

A strong emphasis on pipeline expansion helped us to build a pipeline that now includes 39 pending ANDAs in the U.S. with 63 BMFs (ph) and with more than 30 projects under development. Of the 39 ANDAs, 13 include non patent challenge and about 26 include patent challenges addressing innovator sales of $22 billion.

As we go forward we are now focused on building a balanced portfolio that will help us deliver consistent year-on-year revenue growth. In our innovation lead businesses of discovery and specialty we now have six (indiscernible) at various stages of development and a niche dermatology specialty portfolio. We believe that it is the strength of our expanding pipeline that will enable us to deliver significant value in the long-term.

Coming back to the third quarter, while Vasu will cover the financials in detail I'd like to discuss the revenue performance of the individual businesses in greater detail. Let me start with API where the decline has been quite steep. Revenues at $33 million are down by 27 percent; this decline, of course, is not a trend and we will see improvements as we continue to expand our portfolio and drive new product launches across markets in the coming quarters.

Revenues from India are down by over 25 percent. Our revenue this quarter reflects a higher level of competition and pricing pressure. Having said this, while this market has its own challenges, it (indiscernible) us with a strategic platform for product development and cost improvements which will benefit the other markets.

Let me now talk about Europe. This quarter our revenues in API -- or in Europe are down by 60 percent to about $5 million. Much of this decline is due to ramipril which, as you are already aware, achieved close to $29 million in revenues in the whole of last year. As we indicated earlier, the volumes and pricing have normalized this year following the completion of initial launch of (indiscernible) last January. Despite lower prices we have maintained our margins on this product through continuous process improvements. However, excluding ramipril our revenues from Europe or up by 21 percent driven by growth in our product portfolio.

In North America our revenues declined by 18 percent for API this quarter. However, if you look at the performance in the first 9 months, we've been able to grow volume growth in all our key products. This helped sustain revenues despite no significant product launches with an overall marginal decline of 3 percent over last year. We remain confident of the long-term potential of the API business in the U.S. as well as Europe as we continue to expand our portfolio and deepen our pipeline and relationships with our customers.

In the rest of the world markets we recorded a growth of 6 percent. Interestingly these markets now (indiscernible) opportunities to leverage our (indiscernible) and strength and the product development work done for the regulated market. One such opportunity was Amlodipine Maleate in Korea in the second quarter. In our global generics business our revenues this quarter are at $22 million, down by over 9 percent.

Let me now does discuss the revenue split between North America and Europe separately. Europe has been growing consistently this year and, in fact, this quarter we reported a growth of about 50 percent. (indiscernible) revenue are expected to be in the range of $25 to $28 million and (indiscernible) that most of this revenue is from Europe/UK.

During this quarter Alan Sheppard joined our management team as the head of our European genetics business. Alan has been associated with several European Pharma companies and brings to Dr. Reddy's a wealth of experience in building generic businesses in Europe. Under his leadership we intend to drive forward several of our growth initiatives in UK as well as the other European markets.

As far as North America is concerned, while we have launched three new products this year the competition in our key products of Fluoxetine and Tizanidine have intensified and offset much of the gains from these new product launches. Particularly this quarter we witnessed a sharp decline combined revenues from these two products at $4.8 million as against $9.6 million in the immediately preceding quarter.

During the quarter we launched Citalopram and it has been a very good success for us. Let me give you a brief background on Citalopram. We filed an ANDA in January last year and within 9 months we were able to secure FDA approval. We were among the first to launch the product in the U.S. And not only that, we also captured significant market share despite stiff competition. We recorded about $4.4 million in revenue from this product with a market share upwards of 20 percent.

The (indiscernible) of Ciprofloxacin in the second quarter and Citalopram this quarter, we have demonstrated the strength of our sales and marketing team in capturing significant marketshare upwards of 20 percent despite stiff competition from larger generic players and multiple players launching it on the first day.

As I mentioned in the previous call, we are making good progress on increasing the predictability of our product portfolio through a greater focus on products not involving patent challenges and also difficult to formulate and difficult to synthesize genetics. This will be evident from the nature of our filings this quarter with four of the six ANDAs being nonpatent challenges.

Finally on our branded formulation business, all our revenues are up by about 3 percent to $47 million. The decline in revenues from India by about 5 percent has largely been offset by the (indiscernible) growth in our international markets. Revenues in India declined primarily due to a weak quarter for our key brand Omez. However, I'd like to highlight the expansion of our product portfolio in this fiscal year.

Contribution from new product launches this year has increased about 5 to 7 percent of the total revenues. And driven by our continued focus and investments in adding greater value to our pipeline, we expect this percentage to go up in the coming years.

In the international space, while Russia is still driving much of the international growth, our portfolio for about 40 countries is shaping up quite well with revenue potential matching that of the Indian business. In this quarter we did quite well in markets such Kazakhstan, Ukraine and Bellaroasch (ph).

The Russian market has proved to be one of our most successful international markets. In the first 9 months of this fiscal year Russia grew by 21 percent which accounts for much of the international growth. We have achieved this growth by leveraging our presence in this market. We expanded our market coverage to about 48 cities with focus on Moscow and St. Petersburg. We entered into the hospital segment elsewhere and followed a differentiated strategy for our key brands in the pain and gastro segment.

Having said that, the third quarter revenues are not quite compatible with the same period over last year. The revenues in the third quarter last year were exceptionally higher due to spillover sales from the second quarter.

Let me now talk about our custom pharmaceutical business which is a low-volume but high-value business. This year revenues from this business are expected to be in the range of $7.5 million, which is quite satisfying. During the third quarter revenues were up by about $2.5 million. In the long-term this business is beginning to evolve well with a lot of traction from large Pharma companies as well as emerging Pharma companies in the biotech space.

Now I'd like Vasu to discuss the financials in greater detail; and after that I will update you on the progress on the execution of our strategies and our initiatives to achieve the balance between short-term profitability and long-term growth aspirations.

Thank you, Prasad. A very good morning and good evening to all of you. (indiscernible) for the quarter in great detail. What I'll try and do is discuss the numbers on the P&L statement in detail and I will conclude with a brief overview for the fourth (ph) quarter. Let me start with the gross profit margins.

Our margins for the quarter are at 52 percent of revenue. This also includes the positive impact of $1.2 million of license fees that we recognized on our (indiscernible) project, DRF 2593, pursuant to the completion of all obligations and our agreements with Novo Nordisk. This decline (indiscernible) due to 8 percent decline in revenues as well as changes (technical difficulty), let me cover the complication (ph) of gross margins by individual businesses.

They margins in our branded formulations business been quite (indiscernible) and in fact have benefited from higher mix of international revenue this quarter. The margins increased to 70 percent as against 66 percent last year. The highly profitable custom pharmaceutical services business also positively impacted the overall gross margin buildup. These increases have been offset by the decline in our API margins to 22 percent due to the falling revenues and as Prasad has already detailed the reasons for this decline.

In our generics business we have been successful in offsetting to some extent the decline in margins due to the fall in Fluoxetine and Tizanidine with the launch of Citalopram. The margins are (technical difficulty). Our G&A expenses at $40 million are at the same level as in the second quarter of this fiscal. In fact, in (indiscernible) terms the G&A base is lower than in the second quarter. The R&D spend has increased by 37 percent to $16 million. In percentage terms it's at about 15 percent of total revenues. Much of this increase is due to the higher number of R&D projects in (technical difficulty). In addition, we also experienced about $4.5 million in (indiscernible) as well as our $1.3 million on our dermatology portfolio specialty products that we acquired from Crygenesis (ph) in year 2004.

(indiscernible) a million dollars as (indiscernible) $1.4 million last year. Despite the steep decline in rupee/dollar parity (ph) during the quarter, some of it 46 at the beginning of the quarter to over 22 rupees to a dollar at the end of the quarter. We have been able to mitigate most of the translation losses on our assets due to proactive product management.

Finally on the tax (indiscernible), the (indiscernible) tax of a little (indiscernible) dollars and (indiscernible) lower profits (indiscernible) and higher R&D exemptions. As a result of the above factors, the net income for the quarter is about $1 million, as against $13.7 million in the third quarter of last year. Let me touch upon key balance sheet items as highlighted in our (indiscernible). Our net cash position as of the end of the quarter is at about (technical difficulty) million dollars compared with (indiscernible) dollars as of the end of September. Our cash position increased despite $10 million of investment in CapEx and an $8 million reduction in our (indiscernible). (technical difficulty) due to better collections during the quarter.

We are also managing our inventory position proactively as seen in the direction of inventory position by $2 million. (indiscernible) for the fourth quarter of this year. For the fourth quarter, the pressure on (indiscernible) means (indiscernible) additional competition. In India in the formulation segment, we will have to address the challenges of (indiscernible) implementation and also the MRT (ph) (indiscernible) implementation. (technical difficulty) likely to soften in the fourth quarter. In fact, we expected this to happen in the third quarter itself.

In the API (ph) segment (indiscernible) pressure in India is likely to continue. We are looking forward to the performance of our portfolio in the regulated markets. R&D expense is also likely to be higher as the (indiscernible) budget for this year. This concludes my (technical difficulty).

Thank you. As (indiscernible) see from the results, the third quarter was quite challenging on all fronts. And as Vasu (ph) touched upon the outlook for the fourth quarter, we expect to face similar challenges in the short term (technical difficulty). However, we continue to make good progress on the execution of our strategy to invest in transforming our product portfolio to make it more focused on innovation within an intellectual property framework. And at the same time, (indiscernible) in our generics portfolio and maximize the potential for our API and value (ph) formulation businesses. To repeat what I said earlier, over this last year we have made significant investments in R&D. It is important to fuel our R&D engine that (indiscernible) for future growth, even though our profitability would have been better without these investments.

To give you the numbers, in the last 3 years we have more than doubled our API pipeline with many of the top-tier generic customers -- (indiscernible). In our generics business, we have more than doubled our ANDAs with a healthy mix of patent challenges as well as nonpatent challenges, with greater focus than ever on building a balanced portfolio (indiscernible) revenue growth in the future.

In the specialty segment, we have made good progress on two of our dermatology assets, and we will continue to provide more information on this as (indiscernible) achieve (indiscernible) milestones. In the (indiscernible) segment, we have completed Phase I of our (indiscernible) for the treatment of (indiscernible) in Canada. This is our DRF-10945. We have also completed regulatory toxicity studies on RUS-3108 for a lead candidate for the treatment of atherosclerosis, and we will be soon initiating Phase I trials.

Looking ahead, we will continue to invest meaningfully on our pipeline and growth drivers, and (indiscernible) building a future of growth and leadership for our Company. We are committed to creating long-term shareholder value and are determined to find ways to balance short-term profitability and long-term growth through partnerships and alliances. We are actively pursuing collaborations in our R&D intensive businesses, to share the risks and opportunities in our growing portfolio with (indiscernible) of partners.

To sum up -- a powerful and highly productive R&D engine, integrated API and formulation capability, and a global presence in key market are the pillars on which we are building the Dr. Reddy's of tomorrow. We are increasing our efforts at managing the balance between short-term profitability and our long-term aspirations. We'll now leave the floor open for interactive Q&A session as we would be pleased to answer anybody now.

(OPERATOR INSTRUCTIONS) At this moment I would like to hand over proceedings to Canada (indiscernible) to conduct the Q&A for participants connected there. Thank you and over to Canada.

At this moment there are no questions from participants at Syntel (ph). I would like to hand over the proceedings at (indiscernible) international center.

(OPERATOR INSTRUCTIONS) David Maris, Banc of America.

On the U.S. generic drug pricing environment, do you have any comments on what you're seeing on individual products? Is it the number of competitors or the discounts that each competitor is taking? Second, several of your competitors say that Citalopram is not profitable for them, but is it still profitable for you and maybe you can tell us why is that? And then third, you mentioned that some of your recent filings were products that don't involve patent challenges. Is part of your filing strategy focused on products that are already genericized but where you have a cost or production advantage, or are these just products where there won't be a patent protecting the product?

On the U.S. generics side we had three launches during the current year and all three were quite competitive with multiple players on day one. We have not been setting the price on these products and we have just (indiscernible) been following the market trends and the (indiscernible) process. All three products we have seen very high-level of price discounts being offered and this could be a mix of trying to get rid of stock as well as for some players to gain market share. However, we have been very successful in at least two of the three launches where we have close to 20 percent launch in the case of Cipro and more than 20 percent share in the case of Citalopram.

Turning to the Citalopram profitability, we remain profitable at the current pricing. Although if the pricing was better we would've been -- our expectations for profits were higher we still remain profitable at current pricing levels. You asked me about our filings and the non patent challenges. It's a mix of both predictable launches which don't involve any patent challenge as well as some patent expired product. But for the patent expire products, we (indiscernible) legal products there we have assurances or arrangements with our customers to source them out exclusively and not entering the general expired products and adding to the competitive intensity.

Just as a follow-up, it would same where you have such production or advantages or cost advantages with your API that backfilling or going after products which are already genericized and applying some of the pricing pressure to get share would be a good strategy. Why is that not the case or is it selectively?

I think it is selectively and I think our approach is to talk to customers and (indiscernible) feel they can get the benefit of vertical integration. And selectively tie up with either our customers or other players who are already supplying to these customers rather than disrupt pricing and sparked off another price war in the given products.

And my last question is you mentioned in your release that you hope to have an arrangement with one or more pharmaceutical companies to help offset some of the R&D spend. Is that in the proprietary side? And what sort of drug companies are you looking at? Are you looking at generic companies that have branded divisions? Are you looking at large drug companies? What sort of player should we expect you to partner with?

I think we are trying to work at a (indiscernible) level and they're not necessarily pharmaceutical companies. They would be companies who could be just financial partners or strategic partners and creating value out of the R&D that we've already done or are doing. We have two levels of discussion; one is to work on the generics pipeline itself. As we have shown, we have been quite good at developing products and filing them, but the cost structure of doing all this R&D has been very high.

So we're partnering with somebody with whom we can give them a portion of our revenues in return for funding R&D. And this could be companies or financial partners. Similarly on the proprietary side on the (indiscernible) side we are looking at various options to take our products forward without us investing money in developing the -- investing money in clinical development, but our contribution could be our assets and clearly partnerships (indiscernible) commercializing these products.

Thank you very much.

At this moment there are no further questions from participants here. I would like to hand over the proceedings back to Perteva (ph).

(OPERATOR INSTRUCTIONS) Ajay Sharma, CLSA.

One question (indiscernible) in two parts. In (indiscernible) 2008 same time, how many products do you have in the U.S. generics market and if you could just give us a little of probably how many would be patent expired and how many will be new product launches?

I didn't understand the question. Are you asking me how many products we will have in the market in 2008 -- the generic market?

Yes.

I would suspect it to be a number between 10 and 20 depending on how -- 10 or 20 additional products, somewhere in between. 10 would probably be the worst-case and 20 would be (indiscernible).

And the second very small question is -- you've already invested over the last 2 years, as you mentioned, in developing a very nice U.S./India pipeline as well as the BMS pipeline. Why at this stage would you want to share the leverage that you will get going forward with another investor? R&D we understand, yes, it probably makes sense.

I think we have to have performance, we have to sustain our performance and one thing -- what kind of a deal that allows us to do more R&D and we have the capacity to do so. We are looking at complex formulations, complex synthesis, a large number of products on which we can lock in a customer. It gives us financial flexibility to do more on R&D or calibrate our R&D to maximize the return on investment. And we believe that it would be prudent in the amount of money we share with our partners won't be very high.

Kirit Gogri, ASK Raymond James.

I just wanted to ask when do you think that (indiscernible) between long-term (indiscernible) and the continuations of these (indiscernible) do you expect to get satisfied? And now there are three or four quarters in running where -- you know that short-term (indiscernible) starts assuming some meaning?

It's my estimate that in the year 2006, 7 we will have a good balance between current performance levels, profitability and the transition that we have initiated towards innovation. And there will be a very healthy balance from that time onward. We still have another four or five quarters of challenging times ahead of us.

And then is it conceivable that we have (indiscernible) losses for that feature (ph)?

It will give an (indiscernible) level of performance; I don't think (technical difficulty) the competition. I think there are really (indiscernible) in a very high kind of profitability.

(indiscernible) Investment needs.

Yes, in terms of our R&D investment.

Thank you.

(indiscernible)

Prasad, could you tell us the status on the Ondansetron and Olanzapine verdicts?

On Olanzapine there is no new development. We are expecting a verdict sometime last year (indiscernible) but we haven't yet -- we don't have any clarity from support on that. But it should be coming anytime soon. on Ondansetron I think the judge is sitting on the case and he will hear it as soon as he gets clarity on the (indiscernible).

Okay. How many ANDAs have filed? Is the total 9 in this year -- in the 9 months?

This is Nikhil. For the first 9 months we have filed a total of 7 ANDAs.

And the target is still 18 to 20 for the full year?

Yes.

And lastly for Mr. Prasad, you are still sitting on in excess of 150 million in cash, but have you identified any (indiscernible) from brand acquisitions or any company acquisitions either in the U.S. or the European markets?

We have been in discussion on several fronts. Our priorities remain acquiring marketed products in the U.S. for our branded business. We haven't found yet an attractive opportunity that should be both accretive as well as strategic to us as well. After that we're looking at adding critical mass to our generics business either at the U.S. or UK. And finally looking at brand acquisitions in India or (indiscernible) in Indian, again which are both accretive as well as strategic. But continuing on that front we have the (indiscernible) of many opportunities but we still don't have a (indiscernible).

Okay. Lastly, in the last few conference calls you have shared your aggressive plans on the API supply front wherein you have said from 2007 onwards for each of the major APIs you will be supplying to two or three suppliers as well as you will be having your own ANDAs also. Do you have any more to add on this business? How this business is shaping up? How confident you are from then onwards to ramp up this?

I think optimism continues and we have established a very strong franchise of API business. We are supplying for most of the top 10 (indiscernible) companies in the world today. There is a little bit of pricing pressure in the environment, especially from India. That may lead to some declines in terms of pricing but overall (indiscernible) very optimistic about this business.

Could you just put a ballpark number in 2007-8 what could be the revenue potential from API's generic ANDAs?

We don't give any forward-looking statements (indiscernible) our profits.

Okay. But do you expect any (indiscernible) challenge when it will launch in the next 12 to 18 months?

Yes, we discussed Olanzapine is spending and (indiscernible).

Could either of these things, if they happen --?

Yes, it could change the financials.

Thanks and congratulations to you and the team.

(indiscernible), Goldman Sachs.

My apologies, I joined this call late so please excuse me if this question has already been asked. Could you please give us a sense of what you're looking for from the pretrial which takes place in the States on the 4th of March (indiscernible)? And secondly, there's a possibility about litigation from (indiscernible) on the same product being bundled up with the litigation by Dr. Reddy's and (indiscernible). Could you comment on that as a possibility, please?

This is Nikhil here. March 4th is more in terms of the pretrial schedule where they discuss various aspects of taking the case forward into the hearing. So there's nothing significant in terms of output; it's essentially putting timelines to the hearing at the District Court. That's what's going to happen on March 4th.

Nikhil, if I can just dig into that. My understanding is that on the 4th of March the judge will announce whether this is going to be a judge or jury trial. Is that accurate?

Yes, it's part of the District Court proceedings in terms of how they want to take it forward.

And consolidation of (indiscernible) with the Reddy and Apotex litigation?

We see Apotex being the case -- part of being the case, but I'm not sure (indiscernible).

Okay, thank you.

(indiscernible).

I just want to know (indiscernible) how many players are there in the generic market and where does the price fall in the (indiscernible)?

I think the price is somewhere around let's say 10 percent to 6 percent.

6 to 10 percent in both cases?

Not in both the cases; I'm just talking on an average year. And it will just -- (indiscernible) be on the single digit side. And as far as the genericization (ph) is concerned (indiscernible) about 80 percent being genericized.

So you're saying that the (indiscernible) market share, you're still profitable. What about the Profloxacin, are we profitable on that?

The Profloxacin, as you know, for the API we are not at largest capacity yet, but currently we are profitable on that product.

So we are profitable on both the fronts on (indiscernible) as well as (indiscernible)?

That's right.

Okay. Thank you.

(indiscernible), Capital markets.

I have a question on the (indiscernible) business. (indiscernible) the revenue has increased by 29 percent in the last 9 months (indiscernible)?

Yes, 21 percent would be accurate.

But in the last quarter the (indiscernible) business has declined. (indiscernible) business (indiscernible) the revenue has declined by somewhere around 3 percent to (indiscernible) 595 (ph) million.

That's right.

So what does that mean? Can you just --?

In fact, as we mentioned earlier on the call, in the third quarter of last year sales were higher because of the lower effect from second quarter. So if you just go back and see the revenue (indiscernible) last, you will see that the second quarter that the revenues dipped significantly and they bounced back and the third quarter. And hence we mentioned earlier also that the growth number is not really compatible. And also if you look at the first three quarters of this fiscal, the revenues have been quite in line.

Thank you so much.

(indiscernible), Morgan Stanley.

One clarification. You mentioned that there's a possibility that in case a favorable ruling is (indiscernible) an extra month. Is the assumption out here that you would not wait until the (indiscernible) Court decision and the District Court would be good enough?

No, that would depend on the ruling and how the ruling is and how we feel about the ruling. We should make a judgment before that.

So both (indiscernible)?

Yes.

Okay. The second question is about two candidates from (indiscernible) the acquisition which are very recently developed. When do you (indiscernible) them into human trials (indiscernible) and what could be a false implication?

One of them has gone through the FDA pre ANDA meeting. So it should be fairly soon. These are products which are not entirely novel in the sense that the chemical entity has been tested, so it would be a Phase III trial (indiscernible). The trials are not large but we are not sharing exact estimates at this time for each product. We'll keep you informed as the components move forward.

What (indiscernible) the cost implication and the timelines were to be a 1-year trial or something?

It again depends on the product and if the product -- the first product that we get in will be launched in the period of 2007/2008.

And you would be taking the entire button off developing it, or will you looking at a partnership more for this product?

We are exploring all options.

Just one last question on these clinical for the 2NC10945 and 108 (ph) (indiscernible) for Phase I. I mean I think the (indiscernible) less time. Are you waiting for a partner or (multiple speakers) important?

We're continuing the work; the work is not suffering for last of a partner. But in all likelihood going forward they'll (indiscernible).

Just one last question before I sign off. For the non U.S. and Europe in business for the next four quarters what kind of outlook do you have?

You're talking about non U.S. and non Europe outlook?

That's right.

I think the formulation business is continuing to grow and it's going quite satisfactorily. We expect the Indian business to turn around and favorable growth now. And the API business, it's not a -- a huge chunk of revenue comes from rest of the world, but it still grows single digits or close to double digits. More double digits.

Thank you very much.

(indiscernible).

My first question is on R&D expenditure. In absolute terms do you think that this will grow next year and approximately how much could this grow by (indiscernible)?

It should maintain at current levels.

Second question is on the R&D (indiscernible), I'll split this into two, the ANDAs and the CE (ph). On the ANDAs you said that you're looking at a financial partner who will fund the R&D first and probably take a share of the benefit, is that correct?

Yes.

And CE (indiscernible) funding again is just going to be a financial partner or (indiscernible) do you know?

It could be either. In the case of NC they could be a corporate or a financial partner.

Or a financial partner. So you think that it is not (indiscernible) on this side?

It would depend on the terms but it's still open now.

Actually my question is, to be more precise -- you've licensed three compounds to big Pharma and (indiscernible) have not gone ahead. What is the experience there -- do you think that you ought to be doing much more work internally which you are actually doing and probably licensing it at a much later date (indiscernible)?

I think there are several arguments in terms of increasing the value of the asset before outlicensing, but that's again subject to the absence of funding available. Licensing out to large Pharma has its upsides and its downsides also. So the criteria for (indiscernible) quality for a large Pharma Company is $1 billion, whereas for a Company like us, several hundred million dollars also would be quite attractive. So it depends on what you have and what (indiscernible).

Do you think any of these two (indiscernible) that have been dropped were actually dropped because of the (indiscernible) reason?

Each one of you was dropped for different reasons.

Yes I know two de novo ones are probably because (indiscernible) but probably the Novartis one was (indiscernible)?

(indiscernible) the reasons that (indiscernible).

Okay, fine. You have said that on the (indiscernible) are you expecting (indiscernible) whatever three near-term events are. And one was (indiscernible) that you spoke about. Can you please explain your position in (indiscernible) because we've been given to understand that Apotex is the first to file that?

Yes, Apotex is the first to file. But there could be a situation of shared exclusivity depending on certain circumstances.

Could you elaborate a little on this?

I think it's an argument based on the filing of the -- the timing of the challenge that we (indiscernible) patent. And under certain circumstances it could be shared exclusivity but it could also be exclusivity before Apotex (indiscernible) second launch.

Finally my question is I see that now you are increasingly trying to balance your knockoffs (ph) versus revenues (indiscernible) mismatched. Now you are talking a lot more about therapy filings and you're not basically avoiding the first (indiscernible). But I just want to be asking the Company this that the normal generics business, is it profitable enough for (indiscernible)? I mean the Cipros and the Citaloprams are -- I mean for you to be with your high-cost overhead, is it profitable enough for you to be getting into it? I mean (indiscernible) are they new companies with much lower cost structures into it?

I don't think you're avoiding (technical difficulty). I don't think you can build a business on the of launching a number of old products. You need to have something which your customers want and those are products like (indiscernible) the customers make a lot of money on. Our products which are unique. I think it will be extremely difficult to just build a business based on patent expired products by which I mean products already launched.

Dislodging and established relationship between a customer and supplier is not easy. And to just focus on products that have no patent challenges but which are predictable. The story of the Ciprofloxacin and the Cipro brands, they had a very intense competition. And only an integrated player like us which has the API and the formulation in house and a lower cost base will be profitable in such a situation. We expect the non-integrated players to drop-off pricing pressure. So it's not a strategy of just avoiding (indiscernible) or just going after patent expired products as a combination of having all of them in a broad enough market and a certain element of predictability in your (indiscernible).

One just last question. Why would you like to buy any generics business in such a difficult environment when you know there is so much uncertainty? I really don't know whether you're looking at some proposal or anything. You said that possibly even in the generics space. So where would you like to be?

Unless we take the business and make it much more viable and competitive this won't work and I agree with you on that. We will have to take shift production supplement ANDA and recover only API and make the business attractive to make it work at one level. Another level critical mass is important. We can't build a business based on a few products; having a broad selection of products and (indiscernible) is important. So both these factors are important when considering an acquisition.

Thanks a lot and I really wish you all the best. May your hard work payoff.

Rajesh Vora, ICICI Securities.

If Mr. Prasad can answer a question on pricing pressure that we are seeing in the U.S. -- appears to be some sort of unprecedented and looks like continuing as we get there from other companies and the industry I would like to have your view on that point. And also in the same note, if API pricing pressure in India, outside India is something is also what is your outlook going forward in general and for your Company?

First on the pricing on a generic. I don't think it's unprecedented -- wherever there are multiple players -- whenever there were multiple players there was this kind of pricing pressure. It's just that the whole industry is going through a lean patch in terms of product introduction. So you feel much more intense competition. Of course, the number of players is also increasing, too, and this will add to the competitive pressure in the future. Yes, on the API side also there is pricing pressure, but this is mostly for products that have nothing (indiscernible). But there are plays in which you can create a lot of value on the API with (indiscernible) position and also being that also noninfringement. So it is not a generic thing that all products will be highly competitive.

So for the rest of calendar year 2005 what's the outlook you expect for the industry in general, for the U.S. dosage form and API in general?

Yes, in 2005 the number of products (indiscernible).

Mr. Vora, are you through with your questions?

Yes. Thank you so much and all the best.

(indiscernible).

I just wanted to ask you, we've got around 12 ANDAs which we want to file in the last quarter. Would the R&D expense (indiscernible)?

It is likely to bunch up in the fourth quarter.

So how much would there be of (indiscernible)?

We can't give you that level of guidance.

What type of tax rate you're looking for the full year initially (indiscernible)? For the quarter (indiscernible) it's been much lower than that.

For the full year we right now are looking at a (indiscernible) of more than that.

Could you repeat it? I could not follow it.

We are looking at a (indiscernible) rate of tax, minimum alternate tax rate for full year.

And going ahead will '06 also be similar?

It depends on our investment programs in R&D.

Okay then. Thank you.

(indiscernible).

I just want to ask Mr. Prasad if he is having (indiscernible) India spending approvals with the FDA. Within the next 18 months how many of them do you think will actually start cultivating to a generic business in terms of revenues?

If you don't consider patent challenges and a decrease in patent challenges the number could be about six to eight in the next 18 months.

Six to eight. Which (indiscernible) challenges and any other litigation?

Yes.

Okay. And do you think this will help us achieve (indiscernible) mark? So right now we have about $80, $90 million for the generic business, what your internal assessment would be of critical mass by which we would then be in a position to front line investment needs as well as deliver for short-term profitability?

Mr. (indiscernible) asked the question, when will we be having critical mass to achieve the balance. (indiscernible) that it will be in the year '06/'07 when we have a sizable number of launches and from that year onward we should have enough critical mass.

Okay. Is there an absolute number in terms of when our generic business (indiscernible) on which you are looking at?

I think we have an R&D burn rate of over $20 million for the year in the generics business. Since we have other expenses about close to another $25 (ph) million. So since the (indiscernible) contribution we need from the business to cover up our (indiscernible) after (indiscernible) of profit. So we are definitely looking at number which is (indiscernible) $150 to $200 million (ph).

Okay. The other question I had was to Vasudevan. This quarter what is the percentage of legal costs in our other expenditure?

Legal costs maybe not as a percentage; it's at a less than average of $4 million a quarter.

Less than 4 million for this -- for Q3?

Yes.

Thank you and all the best

Ajay Sharma, CLSA. Mr. (indiscernible).

I had one simple question. What's the issue with the domestic business? We've seen a large number of other of those come out. Is that end of the ship seems to be going on all right with other companies. Is there any specific problem that you're facing?

One of the main reasons was for -- in the quarter was Omeprazole which took a hit. I think the specific problem that we face is the lack of new product introductions during the past 1 year which built up into sizable brands. Having said that and during the year currently we've launched a number of different products which are slowly gaining traction and we expect (indiscernible).

And if I can just follow-up, do you think that stretched in some manner that you have just too much to do and too much (indiscernible) world? And that needs to be balanced going forward?

In a way I say, yes. I think we are going to (indiscernible) and that's the reason we are seeing the performance pressure. But I think there is more capable (indiscernible) than we have been able to -- that we leverage. So going forward with our (indiscernible) we can see some of that.

(OPERATOR INSTRUCTIONS) (indiscernible).

Mr. Prasad, you mentioned that you were probably looking at $150 to $200 million of critical mass from the U.S. generic business by let's say '07. Am I correct?

Yes.

And so --.

We didn't give you guidance on the numbers.

Okay. Just a ballpark of 150 to 200, so let's take the lower case of 150. So in the next 2 years (indiscernible) of looking at six to eight products to be launched over the next 18 months from the 39 pending approvals and (indiscernible) 90 million so you expect this 90 to work with 150 on the back of (indiscernible) from these six to eight products and plus something else or --?

No, we said six to eight products in the next fiscal year -- in the next 12 to 18 months. But there are a large number of launches lined up into fiscal '06, '07. And the combination of these six and those launches will give us critical mass.

Okay. That means we'll probably see the U.S. business going at (indiscernible) more than 25, 30 percent over the next 2 years (indiscernible).

The main growth will come in the later part of next year because of the timing. It will be towards the end of next fiscal and the year after.

And the other thing was regarding the European leg of our generic business. We are now seeing that (indiscernible) quarters is now probably stabilizing about $7, $8 million per quarter despite (indiscernible) new product launches that we've been doing over the last four quarters. So what is the outlook for this business in terms of growth given your internal visibility on the product registration that we've been doing?

The products that we launched -- two of the products have done a very good job at (indiscernible) market share. And as we launch products further depending on how they perform I think (indiscernible).

Okay.

I'm not giving numbers (inaudible).

Okay, thank you, sir, and all the best.

Ajay Sharma, CLSA.

Mr. Prasad, you mentioned that R&D will be the same level as this year. Around 15 percent of sales in this quarter so in an absolute amount it's approximately (indiscernible) to the quarter. Should we take that as a run rate for '06 (indiscernible)?

I think you've got part of that may be part of a partnership.

And on every (indiscernible) now it's approximately $40 million this quarter. (indiscernible) very broadly to $160 million for the year. What's it going to be from here? Will is grow a lot, will it remain flat? (indiscernible) -- how do you see that, just a broad indication for the next 2 or 3 years?

You can take this as a base number, $40 million, and just look at some inflationary increases.

Which would be what, a range mid single digits?

Yes, that's right.

For the next 2 or 3 years?

Next year at least.

Wonderful, thanks a lot.

(OPERATOR INSTRUCTIONS). At this moment there are no further questions from participants. I would like to hand over the floor back to Mr. Nikhil Shah for final remarks.

We would like to thank all of you for joining us on the call today and for any further clarifications please feel free to get in touch with the IR desk either on phone or on e-mail. Thank you.

Ladies and gentlemen, thank you for choosing (indiscernible) conferencing services. That concludes this conference call. Thank you for your participation. You may now disconnect your lines. Thank you and have a nice evening.