Dr Reddy's Laboratories Ltd (RDY) 2006 Q1 法說會逐字稿

Good evening ladies and gentlemen, I am Prathiba, the moderator for this conference. Welcome to the DRS First Quarter and fiscal 2006 Q&A conference call. For the duration of the presentation, all participants' lines will be in a listen-only mode. After the presentation, there would be a question answer session for participants connected to the Syntel Bridge (ph) followed by Q&A session for participants at WebEx International Center and then a Q&A session for participants at WebEx India. I would now like to hand over to Mr. Nikhil Shah of DRS. Thank you, and over to Mr. Shah.

Thank you, Prathiba. Good morning and good evening to all of you. I am Nikhil Shah, the Investor Relations Officer at Dr. Reddy's. I thank you for joining us to discuss Dr. Reddy's financial results for the first quarter fiscal year 2006. By now you should have seen the press release as well as the additional financial disclosures, which were released earlier this evening. The results are also posted on our website on the home page under the quick link 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 Vasudevan, our Chief Financial Officer.

Please note that all discussions and comparisons during the call will be based on US 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, 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.drreddys.com under the quick link 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 attributed in press or media outlets without the Company's expressed written consent.

Now the Safe Harbor statement. I would like to remind you that the discussion and analysis during the duration of the call might include forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and predictions of our 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 condition, our ability to successfully implement our strategy, the market acceptance of and demand for the product, our growth and expansion, technological change, and our exposure to market risks. By their nature these expectations and predictions are only estimates and could be materially different from 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 from Europe, and to those few in the US, a very good morning, and thank you all for joining us on this call today. By now most of you may have read the results and also the press note that was released earlier this evening. We had a good first quarter with adjusted revenue growth of 15% to $128 million, and profit after tax of $8 million compared to $4 million last year. The first quarter numbers have been driven by some exceptional performance from the Branded Formulation and the European generics people, and a relatively flat R&D spend.

Despite the strong performance in the first quarter, the year 2005-06 will continue to be challenging as we continue with our investments in building the US generics business and the innovation platforms and specialty and drug discovery. As many of you are aware, we are driving several initiatives to address the short term GAAP in our revenue and earnings performance, and I will discuss the progress on these initiatives later in my presentation.

On the first quarter performance, let's look at the factors driving the performance in each of our segments. To begin with, the Branded Formulation business. Revenues in this business grew by 30% over last year. This growth was driven by the exceptional VAT net growth in India and some exceptional trade demand ahead of even in Russia. Certain key international markets such as Ukraine, South Africa and Venezuela also performed strongly during the quarter adding to the overall growth.

In India, we have stepped up our investments in detailing to bring in the sharper focus on driving prescription growth for our key brand and therapeutic areas. We are beginning to see a pick up in the prescription growth rates and the full impact of these investments will be realized over the next few quarters. We also stepped up the pace of new product launches. As in the last year, we expect new product launches to be a key growth driver this year as well. When the first quarter does not reflect this release, we have lined up several launches over the next few months, and the full impact of these launches will be more visible in the second half. In the International market, while we expect the growth momentum to continue in key markets, the comparison should be made on a full-year basis rather than on a quarterly basis.

Revenues in the Europe generics business almost doubled to $13 million in the first quarter.

Let's look at the factors driving this growth. During the quarter, we benefited from the demand and supply gap in the market and consequent price increases for our key products of Omeprazole and Amlodipine. We are among the very few players in this market who are vertically integrated on both these products and hence we are able to capitalize on this opportunity. While the first quarter numbers are extremely good, our performance in the coming months will be sensitive to the price strengths for Omeprazole and Amlodipine. We also have a few product launches planned for UK and other European markets later this year.

On the business development front, we are focusing on specific opportunities to expand our reach in the key markets of Germany, France and Italy. We are also expanding the pipeline development effort for this region, which should translate into increased filings in the coming quarters. While on the Generic business, let me also cover the decline in revenues from North America. Over the last few quarters, the competition has intensified for our key products of Fluoxetine and Tizanidine, and this has led to a significant decline in revenues of about 41%. This impact continued into the first quarter as well. We will have to sustain the current challenges for a few more quarters, and I will discuss more on the current challenges and outlook of this business later in my presentation.

Moving on the API business, overall revenues remained more or less flat. The performance of other international markets helped offset the decline in US and India. They recorded a growth of about 51% in these markets outside US and India, led by the growth in the existing portfolio as well as expansion of the new product portfolio, including some unique IP-led opportunity.

In Europe, the decline in ramipril was largely offset by the expansion of our product portfolio. We expect to continue the growth momentum in the subsequent quarters though not at the same growth rates in these markets. In North America this year, the API business faces challenges similar to the Generics business with several product launches expected over the next few years based on patent expiries. We are clearly driving two specific initiatives, which we believe is based on the longer-term outlook of this business. First one being greater customer engagement across markets, which will enable the deepening of our product portfolio, both existing as well as new launches with key customers in all our major markets. That of course is the renewed focus on vast improvements, which will help us to compete effectively in the current competitive pricing environment.

Moving onto the Custom Pharmaceutical Services business, the revenue number for this quarter is relatively low compared to the immediately preceding quarters. However, we remain optimistic of the revenue scale up in the subsequent quarters based on the orders that we have on hand and opportunities that we are driving with large innovative companies as well as emerging Pharma companies.

The other business that the company is focusing on is Biologics. As many of you are aware, this segment presents significant growth opportunities to fund the (indiscernible) companies. Currently, we are in the process of building capabilities and infrastructure to position the company to address the potential opportunities as and when the regulatory path wave for Biologics in the regulated markets is clear.

Finally on R&D, the investment for the quarter was flat at about $12 million. This includes the benefit of about 1.7 million under the ICICI R&D partnership deal. During the quarter, we filed two ANDAs and 12 drug master files for the US FDA. In the UK, we filed two product license applications under the national filing system. We also filed about 159 new product registrations in various markets in our blended formulations business. The enhanced R&D activity in the API and finished dosage businesses, as well as the new initiatives will see increased investments in the coming quarters. This increase to a large extent will be mitigated by the income under the ICICI R&D partnership deal.

With respect to additional investments required for the clinical trials of the NCEs, we are fairly confident of arriving at a suitable partnership model for funding the clinical development of our key NCEs.

With this update, I will now ask Vasudevan to discuss the financials in detail.

Thank you, Prasad, and good morning and good evening to all of you. The note that we issued earlier this evening provides a detailed overview of our first quarter performance. Prasad shared his perspective on the first quarter performance, including the business updates. Now, I would like to discuss some of the key financial elements as well as the balance sheet items. Let me explain the improvement in gross margins for the quarter. As you may have noted from the release, the proportion of revenues from branded formulation business was higher compared to last year. Added to this was a higher growth rate in international revenue leading to further increase in margins, and as you all know, this business enjoys superior gross margins.

In the API business, despite of flat revenue growth, we saw a margin expansion on the back of a good product mix. In Europe generics, the steep increase in prices of Omeprazole and Amlodipine led to a substantial improvement in gross margins. These improvements enabled us to largely mitigate the impact of revenue decline and the corresponding margin decline in the US generic business. On the SG&A expenses, we spent about $45 million in the first quarter, it should rate about 35% of revenue. Last year, the SG&A expenses were at about 32% of revenues. In absolute terms, the expenses increased by about 19%, mainly on account of higher manpower costs across businesses, as well as increased marketing expenses. As Prasad mentioned, we have stepped up investments in detailing in India, and this is reflected in the increase in manpower as well as marketing expenses.

Moving on to R&D line item, this quarter we invested close to $14 million in various R&D projects. This was reduced by about $12.7 million of income recognition, under the ICICI R&D partnership deal. We invested about half of the gross R&D investments in drug discovery and specialty business. We invested a little under a third in the API and finished dosage R&D, and the balance in other R&D projects. Moving down to P&L, we recorded other income of little over $3 million in the first quarter, and this was largely due to interest earnings.

On the Forex line item, despite the steep depreciation of pound sterling, and euro during the quarter we were able to restrict the loss to about $1.5 million for the quarter. The profit before tax is at $9.3 million as compared to $3.3 million last year. This reflects to a substantial improvement over last year despite higher spend in SG&A this year. Finally, coming to the net income, for the quarter this was at $8 million compared to about $4 million last year. On the balance sheet front, we ended the quarter with a free cash position of about $175 million, and this compares to the $179 million at the beginning of the year. This was achieved after spending close to $7 million on property, plant, and equipment, and this is likely to go up in the subsequent quarters. Some of the new projects under the -- include the finished dosage facility, which is coming up at Wadi and the finished dosage facility for cytotoxic products. This concludes my discussion, and now over to you Prasad.

Thank you, Vasu. Let me take a moment and explain the short-term challenges that's based from the strategic perspective. The businesses of Branded Formulations, APIs, and Europe Generics performed very well in the first quarter, posting a combined revenue (ph) of both of 20% and contributing significant to cyclical profit. We invested a substantial portion of this in our US Generics business and innovation businesses from drug discovery and specialty. These investments are essential to secure long-term revenue and earnings growth of the Company. The generics industry in US is facing challenges at multiple levels. Newer challenges presented by the innovative companies, increasing competitions between large generic players to retain the leadership position, and also the emerging competition from India, Eastern Europe, and in the future from China. Despite these challenges, we remain committed to building a sustainable presence in this market. We have invested in creating a very significant pipeline, which will start delivering value from the next fiscal year onwards.

We have mitigated the risk of pipeline building in the short-term proofers (ph) sharing of risks and perks. We are also focused aggressively on partnerships and alliance to complement in-house product developments for this market. The innovation led businesses of drug discovery and specialty are the future businesses for the company. They require significant investments and have long lead timings. But, as they have the potential to significantly accelerate the Company's growth to sustain and stable cash flows protected by patent franchises.

We are investing in building the pipeline for these businesses. In the drug discovery business, we have six assets in development with DRF 10945 and RUX 3108 being most advanced. We are preparing to move DRF 10945 into Phase 2 clinical trials while the Phase 1 trials of RUX 3108 are focusing as per plan.

In the specialty business, we have two interesting assets, which are likely to set in the clinical developments later this year. Based on successful clinical developments and FDA approval, they expect the first commercial launch in the specialty business in the 2008 time frame. We will explore partnership opportunities to enable us to continue the advancement of our NCE and specialty assets while mitigating the risks and cost of development.

In the drug discovery business, as we discussed earlier, we are working with potential partners to arrive at a suitable model to fund further development of our NCE assets. We will explore similar partnerships for the specialty business as well.

To sum up, the first quarter has seen some exceptional performance in the relatively mature businesses. Our investments in the US Generics business as well as the innovation led businesses will mature over the next few years. We believe that the pipeline that we have created over the last few years will start unfolding from the next fiscal year onwards. We remain committed to meeting the objectives of the shareholders for a meaningful, profitable, and sustainable overall growth in the years to come. We now leave the floor open for the interactive Q&A session and will be pleased to take your questions.

[OPERATOR INSTRUCTIONS]. At this moment, there are no further questions from participants at (indiscernible). I would like to hand over the proceedings to Fathiba at Reddy's International Center. Over to you.

Thank you very much. At this time participants may press star one if they would like to ask a question. On pressing star one, participants will get a chance to present their question on a first-in-line basis. At this moment, there are no questions from participants outside of India. I would now like to hand the proceedings back to Fathiba (ph).

Thank you very much Sandya (ph). We will now begin the Q&A interactive session for participants connected to Reddy's India. [OPERATOR INSTRUCTIONS].

Mr. Madhusudan, Citigroup (ph)

My question relates to how you look at costs and the payback from these investments that you are making. The SG&A cost has gone up again. We thought there will be some stability based on what we had heard from you in the last few call, but it has moved very sharply. When do you think this investment actually starts paying back? That's number one. And number two if you could throw some more clarity on how the R&D expenses could move this year since I'm kind of wanting to know how the $22 odd million that you'll received from the ICICI deal would be broken over the four quarters. If some guidance can be given on that, that will be very helpful?

Madhu this is Vasudevan here, addressing your first question. As far as the SG&A is concerned there are two components to it. One is which are totally variables to the sales growth. As Prasad mentioned in the call there has been a 20% increase in various components of business. That has a relative SG&A cost which would have increased. The other is also, as we built the organization, there is a certain level of inflationary (indiscernible), and also still building in the manpower, which takes on a load of increase in the SG&A cost. The third factor is of course investments, which we deliberately to do for the new lines of business as well as substantial step up in the marketing activities in this year positively. We have floated a new division which has increased the number of detailing peak debt (ph) that has led to this. This we expect to stabilize after they reach their 12 months, full cycle of reselling has been completed.

So, should we assume that this investment that is going on currently will actually reap the real rewards sometime next year in the first quarter?

Yes, absolutely right Madhu, for the (indiscernible) expansion, we've (indiscernible) a 12-month cycle. Turning to R&D, we had to a tune of 22.5 million costs from ICICI. $2.1 million was recognized in the income in the fourth quarter of last year. $1.7 million has been recognized during the first quarter. The balance is not supposed to be recognized during the next three quarters.

So, but we don't know how this will be broken, it could be variable?

Well, it depends on our pricing calendar. Once the filing is completed at the end of the quarter we will be able to know how much we can recognize.

There is just one more question in leading to R&D which I had. Could you update on the status of the two molecules, which seem to be slightly in the back burner now (indiscernible). Is there any chance of revising those two molecules?

(Audio Gap) likely to revived. We have looked at the data and it looks good. (Audio Gap).

Rahul Sharma, Karvy Stock Broking.

Congratulations on good set of numbers sir. I just wanted some steel on -- do you see the momentums, the standing during the year for in the international business as well as domestic formulations business?

While overall we feel positive about the revenue growth, these two sector if you can't take into the trend. But there was some set mix in the first quarter results. We had the bad (ph) effect of the Indian numbers and we also had some advance buying in Russia. So, those two-segment growth will lightly make this less than what it was in the first quarter.

But, you will be seeing good growth trend in both the segments?

We're seeing positive trends in both the businesses.

Sir, any new product interruptions on the European side of business sir, in the formulation as well as API?

There has been (Audio Gap) launch for us in Europe both on the API side as well as completion sector. Apart from that (Audio Gap).

Sir cannot hear you properly, could you speak loudly?

(indiscernible) is one of the products that we launched. Both as a (Audio Gap) as well as the (Audio Gap).

Omeprazole and Amlodipines, do you see prices sustaining? What is the reason for such a despot in the realization and do you think this can go on for the remaining quarters, couple of quarters?

Well, it is difficult to predict how the pricing will behave. So, it depends on the number of new entries. The prices did go up because of the supply shortage and some players exiting the market. So, as and when supplies come in, (indiscernible).

On the tax front, so you will have had a deferred tax of around 73 billion odd. This has been due what -- because of change in tax rates. Can you please throw some light?

Mostly, to do with the income for the year. Based on the income for the year we had to create the deferred tax liability.

What type of effective tax rate you are looking at for this year, sir?

This year our effective tax rate based on the profit could be in the range of 15% to 20%.

Megha Lodha, DNA.

My question is pertaining to the Para IV challenges. How aggressive would you continue to be on this and if you could through some light on that -- I didn't get the name of that correctly, is that ondansetron? Could you please through some light on that?

We continue to refine our product portfolio to balance between upsides of Para IV as well as predictability of regular products. So, more or less, we are balancing it out. Basically, on Ondansetron there is nothing much to report, the hearing is complete. I think the judge has to give his judgment on the hearing. The Teva appeal is still pending. As you know, Teva lost the case at the lower court and they went on appeal.

Ajay (ph), CNSA (ph).

This is Ajay. Prasad, two questions. First is a big picture, the acquisition of IVAX by Teva. How do you see that of impacting the industry and especially the Indian companies?

My view is that I think there is a space developing between the two largest players in the next year. And I think that gives us room to grow into -- there will be a less competitive intensity because of two of the major players, the overlap products getting out of the markets. Overall I think I wouldn't look at the development as a negative development for companies like ours.

Okay. And secondly, in the last couple of conference call, you had mentioned that, especially, the growth in SG&A will be more like inflation. And this quarter, it's been almost 20%. So, what's the outlook for the next couple of years?

This quarter's numbers we have to take along with the fact that we have started a new division in Branded Formulations operations in India. That coupled with the freight and other associated costs with shipping larger volumes has led to the increase in SG&A. In terms of pure numbers of people, overall, as a global (indiscernible) we have not stepped up anything.

So the 195 crores is a run rate that we can look at least for the next four quarters; that's this financial year. Vasu, could just tell the gross margin segment-wise?

Gross margins in API business was at about 29%. In formulations, we have about 71% of gross margin, in generics about 49, and other businesses about 52%.

Ms. Faki Jain, Eterons Capitals (ph).

You had talked about biologics, with India's guidance on these four products, the path has become slightly more clearer, are there any immediate plans for (indiscernible) of these four products go?

(indiscernible) flat, headlines have come but still very high barriers to entry in terms of the works of development and principle drivers. Now, they are still watching the situation.

[OPERATOR INSTRUCTIONS]. Sandeep Bharadwaj.

I have two questions. First one was about the margin. Looking forward, do you think there will be any room for margin improvements, if yes by to what extent?

I think selectively there can be a margin expansion in the generics market depending on the kind of products we launch. API has the proportion of the regulated market sales but the overall sales goes up there can be margin expansion. And the other businesses have set fairly high levels and they will continue at that level.

Can you give some guidance from topline growth for the coming quarters? Do you have any percentage in mind?

We don't give guidance on the topline growth.

Rahul Sharma, Karvy Stock Broking.

I just heard today morning that you are planning to launch some seven products in US in FY 07, could you throw some light on the addressable markets that we are looking at and are they all para III or para IVs also?

(indiscernible) next year are based on predictability, that means that people (indiscernible) expired. So, they are all as a para IIIs or Para IVs on which the patents run out.

And what type of addressable markets are we -- all the products expiring or they have already expired and you plan to enter that space?

All of them are day-one launches.

The day-one lauches. What is the addressable market size, you know where to sell?

I don't have that number (indiscernible).

But it's seven products, right sir?

Yes.

[OPERATOR INSTRUCTIONS]. Manish, Deutsche Bank.

I just needed two things. One is gross margins which you highlighted segment wise, if you could comparative for last quarter as well?

The gross margins comparable with the previous year. For the API business, it goes up to 28%, formulation business about 67%, genetics 56, the other businesses 50%.

David, Banc of America.

It's David Maris. Question for you and I apologize if you have already addressed this but wanted to speak --if you could speak about the generic opportunity in 2006, 2007 in two parts, Satish gave a very interesting presentation recently at the international generic drug symposium, spoke about 70% or more of the products going off patent in '06, '07, facing 95% price degradation. One, where do you see that not occurring and what type of markets? Secondly, do you expect the same type of price pressures to eventually allow into other non-US markets? Third, do you expect it to migrate into the injectable market more broadly? And then I have a follow up.

The first question is where do you expect that competition, what's happening or where is the 30%? That's a difficult question to answer, we're really focused on the (indiscernible). But, having said that I think products where there is a technology play or there is some fixed in terms of intellectual property which can enhance your product or products where you are relatively -- you have competition enough, maybe two others or three others. Those would be the products, which could hold pricing. You know, having said that, again, even niche products are being checked by almost all the players that they no longer remain niche products. Example is Galantamine, which is a very difficult API to simplify, but we had 6% (indiscernible).

Non-US, we don't really expect this kind of price erosion except fewer generic markets like the UK. The UK is already a tough market, the prices are lower in many cases than in the US, but the other markets are relatively more attractive, the markets where your brands retain pricing for a longer period of time. So, markets like India, Russia, though there are pricing pressures, the pricing is much more attractive. Injectable business appears to be less intensive in competition when compared to oral (indiscernible) market, there are multiple players. So, it looks like that the injectable pricing will hold. Do you have a follow-up question?

Yes, a couple of questions. The first is, what do you think about industry capacity in 2006, 2007? Do you think that that will an issue? Secondly, on -- following the Teva/Ivax deal, part of the rational is that the scale is increasingly important. Do you feel that given your scale of presence in the US that you are disadvantaged?

In terms of capacity, I think capacity exists. I think all the medium players have enough capacity influence and are building capacity to meet 2006 to 2009 surgeon product patent expiries. In terms of the Teva/Ivax merger, I think the scale is important, but I think it is less important for Teva and I think companies like Dr. Reddy's can get into the multiple hundred billion dollar level to sustain our operations, and we see that happening for the next 3 to 4 years as their entire pipeline starts unfolding. I think for companies from India, I think scale is very, very important, scale as well as vertical integration both are important to achieve a sustainable level of business.

And then two last questions. First, a clarification, the example you used earlier of the product, I just didn't catch it on the audio.

Galantamine, this is a J&J product.

Okay. And then also when you look at the penetration of products and number of competitors per product, do you see that increasing or remaining relatively stable over the next several years and how much of your effort is being spent on focusing on R&D for new products going off patent versus, are you also working on back selling or going after products where there may be one or two competitors already in the market where you currently manufacture the product in India or in Europe?

I think if you see our generics R&D, about three-fourth of the effort is to go after products, day one launching, and the balance effort is in identifying products which have limited competition today with other technology or IT barriers. So, that is roughly the split that we are following in terms of making our pipeline. I don't think that while we put one-third of the effort on these technology related products, the number of products will be significantly lower because it requires a greater deal of effort to overcome these (indiscernible).

And then I promise the last question, would you support the elimination of the 180-day exclusivity or at least the reduction from a 180 days to say 90 days or 45 days?

No, definitely false. We have a pipeline where we have 30 products where we have first to file.

Fair enough. Thank you very much.

Sameer Baisiwala, Morgan Stanley.

Couple of questions. First is you mentioned about the file that you are working maybe one fourth of your filings for the regulatory markets specifically the US, we will draw the technology as -- what's the launch visibility when do you see them getting commercialized?

Two years from now. We see the flow of the products that we have modified delivery two to three years from now.

Two to three years. The second this is as far as your specialty growth is concerned for which you banned to take them to human trials by the end of this year. Could you talk a bit on what kind of delivery system or what kind of a technology platform do they belong to. We have basically three areas in our -- the platforms that we acquired from Trigenesis. One is enhanced penetration from the skin and the other one is a non-irritating platform. And the third one is a delivery device. So, we have -- we are using all these three platforms to develop products.

We have basically three areas in our -- the platforms that we acquired from Trigenesis. One is enhanced penetration from the skin and the other one is a non-irritating platform. And the third one is a delivery device. So, we have -- we are using all these three platforms to develop products.

And the two drugs to access, which are the furthest ahead, which do they belong to?

One is a device and other one is a cream.

With enhanced penetration?

Yes, enhanced penetration.

The other -- you probably are keeping two years in taking the launch sometime in 2008. Those two years will belong for the clinical trials, as well as the regulatory approval?

Yes.

The other question is about your research spend, it seems that for the drug delivery related clinical trials the span have gone down versus the specialties have gone up. I mean, what really is the reason for the drug discovery to go down? I mean, is it lesser number of molecules or --?

It's an issue of timing. When the clinical development starts that's when the bigger spend comes in. So, it's a question of timing nothing to do with the progress speed.

The same number of molecules continue.

Yes.

One last question is about, you talked about increasing filings from Germany, France, Italy, I mean, how do you plan to take these -- I mean, launch these, it's a partnership model or -- and second is what's really the launch visibility?

Right now we have only UK where we have direct marketing. The other markets we are working through partnerships, but we have an expiration to enter the geographies either through a small acquisition or through a startup.

So, should we leave that to you or I mean, it would be hydrate model or something?

Yes.

And when do you see the approval start coming through?

As of now the products that we are filing are under the mutual recognition process. So, they will be valid for all the markets of late.

You mean to say that the drugs which are in the UK, you will get them over here through mutual recognition?

Not all the 12. As if the prospect of filings will be under the MR process form.

And the MR process will take 12 months or something?

Yes.

And it could be (indiscernible), Omeprazole, Amlodipine?

Yes.

Rakesh Naidu (ph), Mehta Advisors (ph).

This is Faron Sha and Rakesh from Mehta Partners -- Mehta Advisors. We had few questions, could you give break up of SG&A expenses between legal and litigation costs and litigation maintenance expenses and selling end marketing and administrative expenses. I understand legal cost is clubbed with SG&A expenses?

These two parts are approximately $3 million for the patient challenge cases. The rest are the regular SG&A expenses.

And does this $3 million kind of more or less remain constant, has it remained constant over last four quarters?

That's right. For the last four quarters it has more or less remained at the same level.

My second question is with respect to about $200 million that you have in cash and what acquisition target did you look at or is this money kept for opportunistic acquisitions, and if so broadly in which area are you getting that acquisition?

We are looking at opportunities, like I mentioned earlier, to expand geographically into Europe, and we have evaluated a number of candidates. We are also looking at adding -- building critical mass to our US operation. So, these are the two areas and we are also opportunistically looking for other businesses, opportunities in Russia as well as India.

And Prasad, do you any see another API, which is where the prices have almost bottomed out and some suppliers may get out of -- many of you getting -- something what happened in Omeprazole and Ciprofloxacin, do you see such other opportunity coming for APIs in your large sort of market in next two to three quarters?

No, we don't see anything. I think Ciprofloxacin has a temporary phenomenon. Omeprozole, the supply remains good, except in the UK, some formulators have exited.

And with respect to the partnership that you mentioned in the call and also it is governing the annual report, when do we expect the announcement regarding the partnership for the NCE part and related only with financial investor and it will also be financial entity as well as corporate entity?

I can't disclose those details to you at this time, but we are in discussion with several players, we will make an announcement shortly.

Madhusudan, Citigroup.

This question is, one, the cash flows for the current year, do you think you will have adequate flows to kind of fund whatever expenditure you have in mind?

Yes, we do have. If you remember last year also, Madhu, we had a cash accretive situation of about $32 million. This year also we were able to spend up -- I mean whatever requirement for the infrastructure it was met from our own internal accruals. We are fairly confident we would be able generate enough cash.

And this is excluding the $21 million of ICICI which was there last year?

Yes, that's right. That has already come in end of last year.

[OPERATOR INSTRUCTIONS]. Rahul Sharma, Karvy Stock Broking.

Sir, do you see competition intensifying in major markets such as France and Germany since more Indian players are coming in and price erosion levels being as high as 95%?

No, I think France and Germany are not markets where recent players have entered in a strong way. I think these markets where pricing remains attractive.

[OPERATOR INSTRUCTIONS]. Rakesh Naidu (ph), Mehta Advisors.

I have a couple of questions here. First, I would like to now whether your domestic formation fees would continue to sustain the growth that is excellent in this quarter. And two is, how do you see your sales in the (indiscernible) market of Russia, and Europe shaping up over the next few quarters?

To your first question on the domestic markets, this in the first quarter was helped by these vast fill over benefits. So, you should not see that as a trend, but I'm pleased to say that we are performing strongly in domestic markets and we should show solid growth in this year. So, Russia, also we have seen strong performance. Overall, the international performance in the semi-regulated market has been quite good.

You see the current price of offsetting over a year or it would be below than what we have seen in this quarter.

Current growth rates of the quarter have some exceptional sales embedded in them. In the domestic, Kuwait, and in Russia there has been an advanced purchasing by our own fellows. So, you should not take that as a trend.

Thank you very much, sir.

Prathiba, can we take one last question.

Sure, sir. [OPERATOR INSTRUCTIONS]. There are no questions at the moment, sir.

Prathiba, we would like to end the call.

Sure, sir. At this moment, I would like to hand over back to Mr. Nikhil Shah for final remarks.

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

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