Dr Reddy's Laboratories Ltd (RDY) 2005 Q2 法說會逐字稿

Good afternoon ladies and gentlemen I'm Prathiba, the moderator for this conference. Welcome to the Dr Reddy's Laboratories conference call. For the duration of the presentation all participants' lines will be in a listen only mode. The presentation will be followed by question and answer session, first [inaudible] bridge, followed by Q&A session at the WebEx International Center and then a Q&A session for WebEx India. I would now like to hand over to Mr. Nikhil Shah. Thank you and over to Mr Shah.

Thank you Prathiba. A warm welcome to all of you. I'm Nikhil Shah the investor relations officer at Dr Reddy's. Thank you all for joining us on the call today as we discuss Dr Reddy's financial results for the second quarter of fiscal year 2006. By now you should have seen the press release as well as the additional financial disclosures which were released on Saturday afternoon. The results are also posted on our website on the home page under the quick links icon. To discuss the results we have on the call today G V Prasad, our Chief Executive Officer; Satish Reddy, the 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 query 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 made available on our website at www.drreddys.com under the quick links icon. 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 express 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 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 of and demand for our products, 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 afternoon and thank you all for joining us on the call today. As you are aware we released the second quarter results on Saturday afternoon, and by now most of you may have read the results and accompanying notes. Theme for the first quarter of Dr Reddy's has clearly been geographical diversification. We achieved [inaudible] growth in various geographies which enabled us to more than offset the decline of the US, resulting in an overall revenue growth of 7% to $259 million. Combining this revenue growth with efforts to control costs we were able to achieve a [inaudible]% growth in profit after tax to $28 million.

Coming to the review of the second quarter, revenues at $132 million grew by 7% over last year. Profit after tax was at $20 million compared to $12 million last year.

Moving on to the performance of individual businesses, let me begin with the API business. Driven by new product opportunities, the performance of the API business stood out this quarter with an overall growth of 17% in revenues to $48 million with a corresponding expansion in growth profits. Much of this growth was driven by specific product opportunities in the international segment leading to 22% growth in this segment over last year. In particular sales of terbinafine and sertraline to customers in Europe and Canada increased significantly with combined sales of $8 million during the quarter.

This performance reflects two important aspects we [found difficult] several times in the past. One is the higher level of customer engagement, resulting in deepening of our product portfolio with our key customers and the other is [inaudible] of the pipeline that we offer to our customers. With all 75 cumulative DMFs or drug master file, we are looking forward to capitalize on similar product opportunities for the next few years.

Moving on the finished dosage business in the rest of the world. The high nature of this business was the sustained growth momentum in all key markets into the second quarter [inaudible]. Overall revenues in the second quarter grew by 11% to $59 million. India grew by about 12% and the International segment delivered a 10% growth over last year.

In India after a lag in growth rates last year, we are witnessing resurgence this year. This has been possible due to the combination of several factors including greater focus on new product launches and efforts to improve sales force productivity.

In the International segment the growth movement continued in Russia, Ukraine and Kazakhstan. Key markets [inaudible] this region contributed significantly to the overall growth in the segment. In Central and Eastern Europe the growth was led by the performance over one year.

Let me now cover the performance of the finished dosage business in Europe. In the second quarter we continued to benefit from higher pricing in both omeprazole and amlodipine maleate, though the price has somewhat eased off compared to the first quarter. During the quarter we launched terbinafine in UK and also licensed it to certain other markets in Europe. Terbinafine contributed about $1.5 million in revenue. As a result of [inaudible] overall revenues from Europe grew by 46% to $11 million.

Let me now focus on the performance of the finished dosage business in the US. In early October we successfully launched [inaudible]. If you recall last year we captured significant market share, 15% on the day one launches of ciprofloxacin followed by citalopram, and now our sales and marketing team have done it again with [inaudible] capturing close to one third of the total market available to generics. But the challenges of the US market particularly on the pricing front continued to impact our overall growth as well as gross margins. We continue to face significant challenges in pricing of our key products, fluoxetine and tizanidine. The only way these challenges can be addressed is through new product launches, and with about 50 [A&DA] spending approval with [inaudible] we are looking forward to the launch of several of these products from the next fiscal onwards. With this update I will now ask Vasu to discuss the financials in detail.

Thank you Prasad, and a very good afternoon to all of you. The note that we issued on Saturday covers the detailed role of the second quarter performance. Prasad shared his views on the performance in the second quarter and the first half, now I would like to dwell on some of the key P&L as well as balance sheet items.

Let me begin with the gross margins for the quarter. If we look at the year on year comparison, the gross margin has declined from 55% to 52%; in fact the impact of the decline in margin from the US finished dosage business has been well arrested by the performance of other businesses. If you look at the sequential comparisons the sustained gross margins are 52% of revenue. On the [general front] the expenses for the quarter is about $40 million and sequentially better managed and due to improvement in overall cost management as well as in productivity improvement, but of course there is a marginal increase compared to the last year numbers.

Moving on to R&D costs, there is decline in costs as reported compared to the same period last year. As a percentage of revenue, R&D costs are at about 8% compared to 12% last year. The reason for the decline is two-fold. One, based on the India filing we recognize about $3.5 million of income under the ICICI R&D partnership. The other reason is the lower R&D costs, particularly on viral studies over the last year. The R&D costs are likely to accelerate in the second half due to increase in the number of viral studies. As a result of this we expect to see an increase in regulatory submissions across the businesses.

The other important point to note is that with the formation of Perlecan Pharma the clinical development costs associated with the [inaudible] and fees transferred will be borne by Perlecan Pharma. Dr Reddy's will provide Perlecan Pharma with the required R&D support services as envisaged under the agreement at an arm's lengh basis.

Moving down the P&L statement, we recorded other income of over $4 million in the second quarter largely being interest income. The profit before tax was at about $19 million as compared to $14 million last year. With respect to income taxes, we recorded a credit of $1 million against an expense of $2 million last year despite a substantial jump in profits. This was primarily due to a higher proportion of profits from locations which enjoyed tax exemption.

Finally, net income for the quarter increased by 72% to $20 million as compared to about $12 million last year. We ended the quarter with free cash position of over $163 million compared to $174 million as at the end of September. The [inaudible] was primarily on a [inaudible] working capital requirement due to higher level of business activity in the first half, as well as annual [inaudible]. We have concluded the discussions on the P&L numbers and now over to you Prasad.

Thank you Vasu. [Inaudible] of the current fiscal with revenues of about $259 million and profit after tax of $28 million. We are quite pleased with the positive performance in all our businesses. However, as we have reiterated earlier this year, the subsequent period of this year will still be a challenging period for the company.

An important aspect that I would like bring to your attention is that over the last six to seven months our teams have worked hard, [inaudible] on our commitments to explore suitable solutions to mitigate the increasing R&D investments in our R&D in terms of businesses of generic and brand [discovering]. I am pleased to say that we have successfully come to an R&D partnership with [inaudible] this year and in September we announced the formation of India's first integrated drug development company, Perlecan Pharma.

The formation of Perlecan Pharma marks an important milestone for the company, and we believe will place Dr Reddy's at the forefront of drug discovery over the next decade. This partnership [awaits] Dr Reddy's drug discovery programme [inaudible] to rapidly advance its existing as well as future [inaudible] assets through phase two development without significant additional investment. And at the same time it will enable us to redeem some significant part of the benefits of out-licensing, core development or joint commercialization of [inaudible]. [inaudible] enables Dr Reddy's to aggressively focus on [inaudible] new discoveries in the areas of metabolic disorders and cardiovascular disease, and in the process created greater shareholder value.

I would also like to draw your attention to the fact that Perlecan Pharma is managed by an independent [inaudible] with representation from two investors [inaudible] Dr Reddy's. In September we also announced our first international core development and commercialization deal for balaglitazone with Rheoscience. We are quite excited about this partnership as it provides us with an opportunity to commercialize NCEs in certain key markets which is our first major step in transforming Dr Reddy's into an innovation driven business.

As a company we are now more focused, we are now more focused than ever on business development initiatives in all our key businesses and geographies. We have put in place dedicated teams to continuously pursue potential opportunities but partnerships, alliancing and acquisitions to complement the [inaudible] development program and in doing so drive the overall growth particularly for the company.

In terms of the business outlook for the second half, let me cover some of the key trends in each of our businesses starting with Europe.

In Europe for the second half while pricing for aripiprazole and amlodipine maleate is expected to be lower compared to the first half, we will continue to expand our product portfolio for the UK markets with a few additional product launches in the second half. In the finished dosage business for the rest of the world, the International segments has grown by 27% in the past half. [inaudible] to measure growth performance of the International segment on a full year basis given the fact that this segment historically has performed better in the first half compared to the second half.

In the CPS business, while the current revenue base is relatively small, we are actively pursuing several business development opportunities and driving greater customer engagement targeted towards building critical mass of the business over the next few years.

To sum up, while the first half has been good, the second half still poses significant challenges for the company. I would like to approach the second half considering the facts that the revenue performance in the first half has always been better than the second half. The R&D investment was expected to accelerate in the second half with the bunching up of biostudies and filings in the US and Europe. Nevertheless we will continue to address the short term challenges as we look forward to work continuously towards building a centre of growth and leadership for Dr Reddy's. I am very confident that the outlook for the medium term remains very positive based on a very diversified geographical mix in our global generics business, and the global API business from the next year onwards.

This ends my discussion, and on behalf of the entire management team at Dr Reddy's, I would like to wish all of you a very happy Diwali and [inaudible]. Thank you.

We now leave the floor open for the interactive Q&A session and will be pleased to answer your queries. Prathiba can we have the first question?

Sure sir. At this moment I would like to hand over to Lucy to conduct the Q&A session at the Singtel Bridge. This will be followed by Q&A session from WebEx International and then WebEx India. Thank you and over to Lucy.

Thank you Prathiba, we will now begin the Q&A session for participants connected to the Singtel Bridge. [OPERATOR INSTRUCTIONS] At this moment there are no questions from participants at Singtel, I would like to handover the proceedings to Evelyn at WebEx International Centre.

Thank you Lucy. [OPERATOR INSTRUCTIONS]. At this time there are no questions, so I would now like to turn the call over to Prathiba.

Thank you very much Evelyn, we will now begin the Q&A interactive session for participants connected to WebEx India. [OPERATOR INSTRUCTIONS]. First in line we have Mr Abhay Shanbhag from HSBC Securities, please go ahead sir.

Good afternoon, congratulations for the good results to the Dr Reddy management. A question on the cost savings, [inaudible] announcing a substantial amount of cost savings with the company. How sustainable are these cost savings because if I look at numbers gross profits are more [inaudible] on a YOY Q '02 basis, but [inaudible] savings in costs which has really benefited the company. How sustainable are these going forward?

Abhay, there are two aspects to these cost other than the gross margin, that of the [inaudible] cost as well as the R&D investment. Prasad has clearly mentioned R&D investment, [inaudible] in subsequent quarters but there is also an offsetting [inaudible] which is coming from [inaudible], two partnership deals which are [inaudible], one on the generics, another on NCE side, that is something which you are to take note of. As well as the [G&A] is concerned we seem to have maintained the [G&A] under control as compared to the first quarter. It is at the same level, $40 million for both of these quarters, so it stayed at the same level. [Inaudible] step on the seasonal [inaudible] formulation business. In India and International because of this, [inaudible] product launches as well as the various investments going on in the marketing side. [Inaudible] the cost will be maintained well especially on the payroll, we have maintained as well. On the European side and the US side we have maintained as well, there will be a slight increase because of stepped up [inaudible] activities in other parts of the world, [inaudible] under control.

[Inaudible] growth or what sort of taxes can we look at for the full year?

You can play the overall taxes for the [obvious] and take it in to consideration.

Fine, thank you sir.

Thank you very much sir, our next question comes from Mr [Vajeev] of Continent Solutions.

Good afternoon. I have a question on pricing. Mr Prasad, you have stated that although your European have showed on a year and year increase, but when do the next two quarters, you think that your margins may get affected you do the price softening in Europe. Now what I want to understand, is do you see this across Europe or do you see this happening in some of the key markets in Europe, and what sort of price [inaudible] are you talking about. Would you just take us through the price range that you think that may [affect] your products.

Well our major market in Europe for [inaudible] UK so whatever price pressure they are talking about isn't in the UK market. As you know the UK market is pretty much a very competitive market with commodity kind of behavior so it's hard to predict what's going to happen on the pricing but we are seeing new entrants and sharpening of the prices and the demand [inaudible] which drew the price increase are coming down.

Okay and the same thing where I want to have your view on US as well, I mean are all other companies saying that they're seeing a price erosion of around, say 10, 15 or even 20% on their products, so what sort of price [inaudible] are you seeing the US?

Well most prices of the commodity type products are [inaudible] low single digits of the branded pricing, in fact the most [inaudible], the price was under 5%, in some places between 3 and 5%. So there was actually a price [inaudible] multiple [inaudible].

I believe this was a phenomenon of the [inaudible] and because of the very few launches [in this year] every product has seen a lot of pressure. Going forward as the number of launches increases, we hope that there will be less pressure but we cannot count on it.

The one last question I have on [inaudible] results product offers in the US, in the general [inaudible] market, they have been witnessing, you are getting a lot of market shares and Alpharma is losing a lot of market share on a week on week basis, I mean I know Alpharma has initiated that they adapt [inaudible] profitable, and could you comment on [inaudible] margin and the market shares of [inaudible] still 28% you have taken in and most of the gains have gone at the expense of Alpharma?

Well you can [inaudible] customers and that is what is happening and that is what is lightening market share. Long term we want to be a sustainable player in the US market, and we will either [inaudible] shares and later on driving the pricing mix and [inaudible] strategy.

Thank you so much.

Thank you very much sir. [OPERATOR INSTRUCTIONS]. Next question comes from the line of Mr Ashwin of Akash Ganga Investments.

Congratulations to the Dr Reddy management team on a very, very good set of numbers and very encouraging opening remarks.

My question is to Prasad. I'm talking of the Rheoscience deal for balaglitazone 2593. Could you indicate when would these phase 3 trials begin, in which countries are you going to begin and what could be the cost incurred by [inaudible] for these trials?

We [inaudible]. The [inaudible] studies will be completed next year, after which we will approach the FDA to get their feedback on the [inaudible], design of the phase 3 trial. So phase 3 trial should start some time in the next fiscal year.

In terms of cost it's not clear to understand what the cost will be, and it depends on the [inaudible] plan as well as the FEA's view on the design protocol as well as the positioning of the molecules which could be one [inaudible] or combination therapy. So I'm afraid I can't give you a lot of guidance on the cost of the trials.

I was just looking from the Rheoscience point of view, since I believe most of the cost would be borne by Rheoscience, why would they not want to have the US marketing rights for the product?

We didn't give it to them; we negotiated a deal where we would keep the US rights. They would definitely want it if we gave it to them, but in the negotiation we got US and Japan and other rights while they got the European rights and Chinese rights.

Okay, but didn't ensure the US approval for you?

The last payment that we owe them, which is $10 million, is based on the approval by the US FDA. They don't, if the product doesn't get approval of US FDA, one, they won't get the statement, two, we [shared] the European revenues also.

Could we expect this product to be around 4 to 5 million [inaudible] if all the approvals are issued and this is launched?

Thank you, it's possible.

And lastly, could you give us the update on the two product developments you are doing from the [inaudible] businesses portfolio, for specialty?

These products, still you're going through some development issues and they have not yet entered the clinic. One product, terbinafine, is going through a proof of study, study in Australia, but this is not a pivotal trial, this is a super study trial, proof of concept study.

Okay, and would you like to give us an update on the [inaudible], particularly on that [inaudible] on exclusivity, by any chance Dr Reddy's could also get an exclusivity post June 2006 patent expiry?

On [inaudible] we don't have exclusivity, we will launch our third [inaudible] days [inaudible]. On the second there is nothing much to report back. We still don't have an answer from the court.

Okay thanks a lot.

Thank you very much sir. Our next question comes from the line of Manish Jain of Deutsche Bank.

Just wanted to get an understanding on the specialty program in the US as to, in terms of how much time and rough investment will be required to get products into the market?

[Inaudible] existing portfolio of products which is the [Digenesis] Technologies, we don't expect to launch this business before 2009, this is our latest estimate.

On the investment [inaudible] from [Lombard] as we have said, working with FDA on the protocols, and we don't have a firm number in terms of investment in terms of trends today, but today we are spending around $10 million a year.

Thanks.

Thank you very much sir. [OPERATOR INSTRUCTIONS]. Our Next question comes from Mr Rahul Sharma of Karvy Stock Broking.

Hello, congratulations on a good set of numbers. I just wanted to know what type of R&D expenses we are looking at as a percentage of revenues; you have done around 8% for the quarter, and we are looking at sustaining these or a step up would probably be to 10% for the full year?

And on selling and G&A expenses also, we have been able to curtail [inaudible] growth of only 2% for the quarter, just wondered the outlook on this activity also?

[Inaudible]. In [absolute] terms it will in the ranges of last year, so you can calculate this on that, but that will be mitigated by the two R&D alliances that we now have, bought for generics and NCEs. To that extent there will be a step down in R&D compared to last year, from an accounting point of view.

In terms of [inaudible} again like Vasu mentioned in his remarks, it will remain at that [inaudible] level somewhat affected by the seasonality of promotions, most conferences tend to be in the winter and to that extent [inaudible] slightly because of the seasonality factor from our branded business and the step up in marketing expenses there.

Thank you very much sir. Our next question comes from the line of Miss Visalakshi, DSP Merrill Lynch.

Yes, thank you for taking my question. My question is on, you know, in the Indian GAAP consolidated you've talked about an agreement for sale of one of your formulation manufacturing facilities in [Goa], could you give us more details on this?

We have signed an agreement with one subsidiary of a US company who [inaudible] permitting, going to take place in a matter of months all the aspects will be closed, we'll be able to give you greater detail after we close this.

What are the reasons for selling this facility, any strategic reason?

Basically we are coming up [inaudible], which gives us both excess [inaudible] as well as income tax benefits, based on the capacity requirements and other aspects of the business we are [inaudible], taken care of our requirements, so this was a, when an enquiry came and an opportunity came we decided to take it.

Okay thank you. The second question is on balaglitazone; what do you think are the key differentiators for this product, vis-à-vis say the existing pipeline products?

It's too early to predict what actual advantage will be, but we hope to get better safety profile, both in terms of weight gain of [inaudible] and also cardiovascular [inaudible], safety will probably be safer than the existing products in the market, but that's the position we hope for which has to be demonstrated by clinical trials.

Thank you.

Thank you very much ma'am. The next question comes from the line of Mr [Anshu] with CLSA.

My question is about your Indian branded formulation business. The company has grown the business by 12% [inaudible] sequentially over the last quarter which has had a positive impact. So do you expect to sustain these growth rates or is it a one-off this quarter?

In the first quarter we did think there was a certain element of erratic [inaudible]. The second full quarter I would say [inaudible] health of the business itself. And as Prasad mentioned in his presentation that it was the [inaudible] we see in these Indian markets. But then we would still wait for the next two quarters and see how it pans out before we can conclude anything on this for all Indian industry.

What portion of the sales is coming from new launches let's say of this 15 billion rupees of sales this quarter?

About 2% of the sales come from the new products.

Did you launch in North America after September '04?

[Inaudible] Yes,[inaudible] was launched in late September.

In September -- after September '04?

Yes.

Hello?

In reference to North America launches?

After September '04.

Was September '04 the [last one] yes, we [think no]. Yes we had the [inaudible] launch and now we had the citalopram launch, and now we had the [inaudible] launch, two launches.

That's right, that's two?

That's right.

Okay. Thanks.

Thank you very much sir. Next in line we have Mr Pawan from Kotak]

I have questions on the API business. We've seen very strong growth in your ROW market; I think in the first half it had something like 40% in absolute terms each quarter, you've been doing additional business of approximately 200 million. I think you did explain that [Canada] is part of this where you had new launches. Can you explain, could we expect similar growth in the second half?

Canada [inaudible] segment so that's part of the [inaudible] shares. The ROW has grown because of focused promotion in certain key markets, but it cannot continue to grow at that level. This focus on ROW is driven by cost improvements in [inaudible] manufacturing and that has helped [inaudible] growth in ROW market. But obviously that growth rate, I feel growth rate will not be that going forward.

So should we expect that like you know typically we've seen in the past whenever like in Europe there's been [launch] quantity this quarter; in North American there's been [launch] quantity this quarter. Should we expect that in absolute terms going forward these numbers could come down?

They could come down but also be replaced by additional launches, so it's hard to predict that.

Pawan Nahar; What is the kind of outlook in terms of growth on the [inaudible] business say for next year?

The outlook is good, they're quite bullish because there are a number of launches next year.

Pawan Nahar; Okay fine. So can you run your R&D cost this year you've guided for absolute terms, [inaudible] as compared to last year? Next year would we expect, I'm not looking at the income side of the R&D [inaudible],in terms of expenses next year are we looking at a growth in R&D [expense] or are we looking at [inaudible]?

We can expect slight growth which is more inflationary in nature, but no major new initiative except perhaps in the specialty area driven by clinical trials.

Pawan Nahar; How big could that be?

I just mentioned earlier my response to monies [inaudible] question that you are currently spending $10 million, you're still developing with the FDA what are their clinical trial protocols, and extensively driven by that input from the FDA.

Pawan Nahar; Okay. [inaudible] facility when is that likely to be ready?

It will be operational next financial year.

Pawan Nahar; Okay, next financial year, what, H2 or H1, what --

[inaudible].

Pawan Nahar; Pardon?

[H1] of 2006.

Pawan Nahar; Okay thank you.

Thank you very much sir. Next in line we have a question from Mr Sameer Baisiwala of JP Morgan Stanley.

Good afternoon everyone. The first question is on [inaudible]. When do you expect to share the chemical data [inaudible] final phase to us [inaudible] companies are sharing them?

Well we are awaiting [inaudible] and that's going to happen some time in the next fiscal year. And at that time we'll share the [inaudible] study]and then the next milestone will be entering into phase 3.

Would you not be sharing the phase 2 later?

Or at this time unless we complete the [inaudible] study we don't want to share information.

Then once the study is over would you be sharing only personal [inaudible] studies or the phase 2 as well?

Well we will discuss everything [inaudible].

Okay. The second question is on [inaudible]; you mentioned the price at 3 to 5% in the rate of pricing. If I'm not wrong they're waiting 5 to 6 approvals, then was it a surprise that with not [inaudible] the prices still came out so significantly?

In this case there was an [inaudible] which [inaudible] launched earlier than everybody else capturing a significant portion of the business. And hence it got a little more complicated than just a plain launch.

And that had a bearing in pricing as well?

[Inaudible] that reduced amount of market available and then some of the competitors have been quite aggressive.

And but given the [inaudible] I think we saw the similar thing happening in [inaudible] where the [inaudible] launch was launched earlier, do you think this is happening more of a routine than an exception?

Yes I think in all, I don't know how long this kind of pricing can be sustained by innovators in the [inaudible] generics strategy in what is now we are seeing authorized [inaudible] coming in early and also coming in [inaudible] players and basically they were competing very aggressively.

Does it make you a little tentative about the prospects next year when we are going to see a fair amount of patent expiries, but if these [inaudible] still persist then we may not have as good a [trade] as we think right now?

Our view that generics will not [inaudible] our [inaudible] in the [inaudible] and we are factoring them into our planning practice.

Okay. The last question is about the European new launches; you mentioned a few of them in the second half. Would these be primarily be new patent expiries?

It's a combination of both [inaudible]; we have three to four launches which are lined up and it's a combination of both.

Thank you very much.

Thank you very much sir. We have our next question from Miss Shahina of IDBI [Gibson]

Yes hi, this is regarding the Indian market. The performance has been pretty good in this quarter. Could you give us a sense of how do you see this market going forward. Do you have any products that are scheduled for launch that you think should do well? And second question is, what are the margins that you are getting from the important geographies including India?

Well first of all I think there is some seasonality in the Indian market and historically H1 has always been better than H2, so you must factor this into your assessments. Second, in terms of margins the branded formulations business as a whole is quite profitable, the margins are good. Though of course international margins tend to be higher than Indian margins, and if you look at the hierarchy of margins I think branded formulations in the international markets are the highest, then comes the Indian [market].

About new product launches then. In the coming quarters you have --

Launching about 8 to 10 products every year and that continues.

Okay, thank you sir.

Thank you very much ma'am. Next question comes from Mr Rajesh Vora with ICICI Securities.

Good afternoon gentlemen, and congrats for a good set of numbers, good recovery. Just wanted to know Prasad's view in terms of potential M&A activity that company is looking with $250 million in the balance sheet, with what has happened globally in the generics phase with [inaudible] and [Sando] as the two big companies trying to become even bigger. If you could share your thoughts on one side, business dynamics are worsening while the price field is going up. Mr Prasad could you throw some light on that.

I thoroughly agree with you in [inaudible] the pressure of valuations do not think of it reflecting that. For although we are looking at options and we have been looking at options for some -- the past few quarters, we [inaudible] of investing aggressively into a market where the valuations are so high.

Okay, so, well do think this M&A activity and pricing pressure, obviously you mention about. but do you think this M&A activity despite defined business logic is likely to continue?

I suspect that in the next few quarters valuations should start becoming more realistic and I think that could trigger more consolidation, but I think valuations that we have seen [inaudible]

Oh potentially, difficult to put a timeline but as we move into the future and with lesser company in the fray in terms of the larger companies in the fray, do you think that potentially could be some silver lining on the pricing front.

Yes, we expect to improve, as valuations go down I think we will be [inaudible] again.

All the best and thank you very much.

Thank you very much. Next in line, we have a follow up question from Mr Rahul Sharma of Karvy Stock Broking.

Hello sir. I just wanted to know, do you have incessant pricing competitiveness in the US market? How do you look at the gross margins in US, in Europe, rest of the world and India? Could you just run us through that?

Well, I already spoke about this, Indian margins tend to be better than the US generics market today. But of course there is a [inaudible] in marketing costs in India, so the US market has been tough for the products that we have launched but it doesn't mean that its margins are low across the board, there are products with elevated margins. The market though is going to [inaudible] intense competition for the recent launches. In the long term we will [inaudible] collective market.

Europe is not one market; each market is different in Europe. The UK market tends to be the most competitive market being the generics market. Other markets, the pricing is better. Where does the detailing and [inaudible] branding involved, the pricing is more sustainable that the [inaudible]

Just want to, you have done very well on the International formulations front with CIS and Russia and Central Europe, Eastern Europe doing well. Do you foresee this strong growth in the second half of [inaudible]?

The business continues to be strong but just like I mentioned there is some element of seasonal [inaudible] and that was hard to predict.

Okay sir, thank you.

Thank you very much sir. [OPERATOR INSTRUCTIONS]. Next in line, we have a question from Mr [Abino] Sharma of ICICI Lombard.

[inaudible] margins and information [inaudible]

We do have the [inaudible] basically. I play the margins that are [inaudible] branded formulations [inaudible] 68 gross margin. [inaudible] in UK to over 41%. And in the customer [inaudible] difference of about 72%. [inaudible]

Thank you Mr Sharma. [Inaudible] sir.

Yes.

Thank you very much.

I think we will take a couple of more questions.

Sure Sir. Next in line, we have Mr [Inaudible] from Bridge Securities.

Thanks, my questions have been answered.

Thank you very much sir. Next is a follow up question from Mr Manish of Deutsche Bank.

Yes, actually on the gross margins, I just wanted the last year numbers like [inaudible] 32%, what was it last year, [inaudible] and others.

[Inaudible] It was more or less same [inaudible]. Sorry, [inaudible] branded formulation, it's more or less same, Manish. In generics last year we had a [inaudible] margin and the [inaudible] pharmaceutical services we had 69% margin in [inaudible]

Thanks a lot.

Operator we would like to conclude this one.

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

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