Dr Reddy's Laboratories Ltd (RDY) 2006 Q4 法說會逐字稿

Good evening ladies and gentleman. I’m [Pativa] 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 a question and answer session, first the Singtel bridge, followed by a question and answer over Webex international and then a Q&A session for Webex India.

I would now like to hand over to Mr. Nikhil Shah of the IR. Thank you, and over to Mr. Shah.

Thank you [Pativa] and a warm welcome to you. I am Nikhil Shah the Investor Relations Officer at Dr. Reddy. Thank you for joining us on the call today as we discuss Dr. Reddy’s financial results for the full year 2005/6.

By now you should have seen the press release as well as the additional financial disclosures, which were released earlier today. The results are also posted on our website on the home page under the quick links item.

To discuss the results we have on the call today GV 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 are based on U.S. 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 be available on our website soon after the conclusion of the call. Additionally, the transcript of this call will also be made available on our website at www.drreddy’s.com under the quick links item. Please note that today’s call is copyrighted material of Dr. Reddy 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 U.S. Private Securities Litigation Reform Act of 1995.

We have based these forward looking statements on our current expectations and prediction 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 GV Prasad, our Chief Executive Officer.

Thank you Nikhil. Good afternoon to all the participants and thank you for joining us on the call today.

Earlier this afternoon we announced our results and by now most of you have read the results -- must have read the results and the accompanying notes. Before I begin my discussion, let me talk about the key announcement that we made today.

As many of you must have read from the release, the Board of Directors of Dr. Reddy’s have recommended 100% dividend for the year 2005/2006. In addition, the Board has also recommended a bonus issue in the ratio of one is to one for every share held. This reinforces our belief in the future of Dr. Reddy’s. We are also happy to announce that Dr. Reddy’s is the first manufacturing company in India to be compliant with Section 404 of the U.S. Sarbanes Oxley Act, well in advance of the mandatory deadline of March 31, 2007.

Over the last three years the Company has faced multiple challenges in creating the balance between managing shareholder expectations in the near term and securing the long term strategy of the Company. Despite these challenges the Company stayed on course and is executing a strategy towards building a sustainable global Generics business and also investing in innovation led businesses of Discovery and Specialty.

I am happy to report that we have made significant progress on both these counts and much of this is evidence of the overall performance for 2005/2006. I believe that the year 2005/2006 has been a fully exciting one and satisfying one for all of us, as we were able to improve the short term profitability without compromising our long term strategic initiative.

We were able to achieve both these objectives through a combination of corporate initiatives, as well as improvement in operations. Our revenues for the year crossed the $500m milestone producing a 17% growth, excluding the contribution from acquisitions.

The most satisfying part of our performance in this year has been the contribution from all key geographies and businesses. This diverse portfolio of businesses and geography enabled us to more than mitigate the short term declines and seasonality factors in certain segments as they were in -- particularly in the fourth quarter. More importantly, we also bought many of the cost and productivity ratios in line with the overall growth, whether it was R&D investment or SG&A expense.

We achieved improvement in post tax profits to $35m from $5m in the previous year driven by a combination of factors - strong revenue growth, corporate initiatives to reduce R&D investment in Discovery and Generics, and a greater focus on cost control.

The financials also recognized the integration of the acquisitions for a short period, Betapharm for 27 days and Mexico for 90 days. The acquisitions did not, however, contribute to profits in 2005/’06. But their contribution will be quite significant in the next fiscal year, the first full year of consolidation.

The Company also aggressively pursued several business development opportunities to improve short term performance as well as secure the long term of the Company. Let me recap some of these initiatives, which many of you are already aware of. First, the acquisition of Betapharm in Germany enabled us to expand our geography presence in Europe. And the acquisition in Mexico enables us to acquire critical mass and key customer relationships in our Custom Pharmaceutical Services business.

The partnerships in our discovery achieved multiple objectives. We did start future investments in clinical development of Perlecan, unlocked the value of NC -- our NCE asset, [one] outlet zone for the core development and commercialization deal with VO5, and further leveraged our brand discovery capabilities to target unmet medical needs in other therapeutic areas, the collaboration deal with Argenta.

The business development deal from the U.S. Generic segment involved product acquisitions, core development and marketing alliances to accelerate growth in the coming years. The Merck authorized generic deal, the first such deal from India, the acquisition of brands and development alliances for oral products and other dosage forms added to the momentum.

We believe that through these initiatives we have further strengthened the foundation for achieving sustainable and profitable long term growth for the Company.

On this exciting note, let me hand over the presentation to Satish for a discussion of the key performance highlights of the year under review.

Thanks Prasad. Good evening to everybody in India. Good morning to all joining in from the U.S.

Before I move on to the discussion on the full year results, let me answer the question on top of everybody’s mind right now. This is a subdued performance in the third quarter -- in the fourth quarter for the Company. The fourth quarter revenues increased by 64% to $157m, driven by very diversified growth across businesses. The gross profit margin as a percentage to revenues was lower at 42% as against 48% in the same quarter of last year. This was largely due to the change in the business mix during the quarter and the revenues in branded finished dosages the rest of the world segment were lower following a strong performance in the first nine months of the year.

The margins in the U.S. Generic segment were also much lower. The prices of Omeprazole and Amlodipine Maleate in this market have normalized and this has resulted in the lower margins.

Also, pleasing were the financials of Betapharm that relatively earned higher gross margin, but included only for 28 days, whereas Mexico returns were relatively lower gross margins, almost at the same level as the API business was included for the full quarter.

SG&A expenses increased by 32% as against the overall revenue growth of 64%. We have had to record some one time acquisition related expenses as well. Also, please note that the other income was lower by $5m compared to last year as we invested our funds in making strategic investments and the impact of these acquisitions will be more visible from the 2006/2007.

Coming back to the full year performance in 2005/2006, the revenue growth was characterized by the momentum in the core businesses of APIs and Branded Formulations. In U.K. we benefited from price increases on our key products. And in the CPS business we further expanded our customer and product portfolio. Adding to all of this, we witnessed a well diversified revenue growth which helped more than offset the decline of U.S. Generics business.

Revenue growth was also supported by acquisitions in Germany and Mexico. Oral revenues grew by 25% to $546m. Even if you exclude the contributions from the acquisitions, the revenue growth still stands at an impressive 17%.

Moving on to the performance of individual businesses for the year let me begin with the API business. This business grew 19% to $184m driven by an interesting mix of markets, as well as product opportunities. We achieved 30% growth in Europe, 41% growth in the rest of the world market. They had comfortable product opportunities in Setraline, Terbinafine and Montelukast, to name a few products. This was well supported by the 16% growth in India as well.

This well diversified growth across markets helped more than offset the 10% decline in the U.S., largely driven by price declines in powerful key products. We expect this momentum to continue into 2006/2007 for several reasons. The Company is driving greater level of customer engagement in key markets, resulting in deepening of our product portfolio with key customers. The Company is also focused on creating global leadership for its key products and at the same time adding fine unique product opportunities in key markets and protecting them through patenting strategies.

With the patent of over 81 cumulative drug master filed in the U.S. and 25 drug master files in Europe and patent expiries in several markets in the next few years, the API business has its growth trajectory well laid out.

Moving on to the Global Pharmaceuticals business beginning with the rest of the world segment. Revenues in this segment grew by 27% to $237m. All our key countries witnessed a good growth rate this year with, of course, seasonal demand patterns driving higher growth earlier in the year. This has been true for -- clearly of India and Russia, where uptake in the fourth quarter has been lower following strong sales in the first nine months of the financial year. This partly explains the decline in profits in the fourth quarter.

Both India and Russia performed well on the back of strong, underlying industry growth. The Russian pharma market grew by 30% while the market in India grew by 9%. Against this, we achieved a 23% growth in Russia and 27% growth in India. Growth in India was led by the performance of the top 10 brands coupled with the brand new growth in the portfolio of products launched in the last three years. Our growth in India was also partly benefited by the lower effect of VAT, the Value Added Tax.

Growth in Russia was driven by continued market share gain for key products and also the [inaudible] listing program that was launched by the Government. Other markets in CIS region, countries like Ukraine, also in Eastern Europe, Latin America and South Africa, have also performed very well on a relatively smaller base. And these markets offer greater potential for growth in the coming years.

Speaking of 2006/2007 in India we expect to grow above the industry growth rate and we expect the growth momentum in Russia to continue.

Let me now talk about our performance in the U.K. and the U.S. Revenues in the U.K. grew by about 23% to $37m driven by volume growth in key products. We benefited from higher prices for Omeprazole and Amlodipine in the first two quarters.

In the U.S. the revenues declined by 27% over the last year, primarily due to the continued decline in sales of Fluoxetine and Tizanidine. The impact of this decline was partially offset by the launch of Glimpiride with revenues of $3m. With the successful launch of Glimpiride we also -- we continue demonstrating the strength of our sales and marketing capabilities ending up at about 18% market share.

We also expanded the portfolio of products sold under our label. And we should benefit from this in the year 2006/2007 on a full year basis.

During the year we also filed 12 ANDAs and received 12 approvals including tentative approvals. Today it is over 49 ANDAs pending including 10 tentative approvals, the other addressing innovative sales of about $41b as reported by IMS.

We will begin to realize the benefit of our investments with the launch of several products starting 2006/2007 onwards. In 2006/2007 we are targeting new product launches with innovative IMS sales of about $12b. Key launches -- key product launches include Fexofenadine the generic portion of Allegra, Simvastatin, the generic portion of Zocor, Finastoride 5mg which is the generic portion of Proscar, and Ondansetron which is the generic portion of Zofan. Earlier this year we acquired three off patent [filing then] and these are likely to contribute about $4m in full year sales next year.

In our Custom Pharmaceutical Services business, excluding the contribution from the Mexico acquisition, revenues have scaled up to $12m, a growth of 68%. Contribution from Mexico is also about $18m in revenues, all of this coming in from the last quarter. Our base business is scaling up very well and with the addition of the business in Mexico we hope to target $100m business in the next 12 to 15 months.

Let’s move to the other elements of the profit and loss account starting with the gross margin. Let me put the margins for the full year in perspective first. Margins are 49% of the revenues as against 52% of the revenues last year. This is primarily due to the addition of CPS business in Mexico, which enjoys margins that are somewhat below the other businesses at this point of time. Excluding the impact of acquisitions, our gross margins are at 50% of sales. And the point to note is that the overall diversified growth across businesses has resulted with steep decline in margins in our -- in the U.S. Generics business. Over the next few years margins will expand driven by new product launches in key geographies and overall sustained growth in key businesses.

On the cost side, the SG&A expenses increased by about 18% to $181m. This compares to the 25% growth in revenues. For 2006/2007 we expect the SG&A increase to be well within the overall revenue growth.

On the R&D investment, we ended up the year with net R&D investments at 9% of revenues at $48m compared to $63m last year. This represents a decline of $15m for the last year. The decline was largely driven by the $9m of income that was recognized under the Generics deal with ICICI Venture and also the decline in Generics and Drug Discovery R&D costs overall. In 2006/2007 we expect the net R&D investment to be in the single digit driven by the benefit under these initiatives coupled with the revenue growth.

Also, the point to note is that we have now the maximum number of projects under development in the history of Dr. Reddy’s addressing all the key markets including development of the biogenetic portfolio.

In response to the significant growth opportunities we’re clearly in the generics and CPS segment. We are also making significant investments in creating additional capacity for these businesses.

To sum up, we are looking forward to the prospect of a very healthy financial performance in the year 2006/2007. With this brief overview I will now request Prasad to make the concluding remarks.

Thank you Satish. So, this on [top] slightly we are quite excited about the growth opportunities in the next fiscal year. And I believe it will be the year of inflection for Dr. Reddy’s.

The two key priorities that we need to address as part of our long term agenda remain building a global -- a dominant, global Pharmaceutical business, a global Generics business and launching our innovation based business. These two challenges are the same which we have been integrating over the last couple of years and we continue to make progress on both of them.

Let me first discuss the challenges in building a dominant position in the global Generics business. In the U.S. market our key challenge is to build size and critical mass and more importantly, create a sustainable growth engine for the long term. I believe that we will begin to reap the benefit of our investments that have been made by plan building with the skew of new product launches starting ‘06/’07. We should see a sharp turnaround in our U.S. Generics business from ‘06/’07 onwards on the back of new product launches. Simvastatin and Ondansetron could provide potential upside opportunities and we are eagerly looking forward to the developments on these products.

We are also actively pursuing several business development opportunities to create additional growth opportunities, such as in market product acquisitions, development alliances to complementing our pipeline expansion, and the authorized [antigens] which have compelling business rationale.

Satish already talked about product acquisitions. We have also entered into R&D alliances with a few companies. We are expanding our pipeline in oral solids as well as other dose forms.

Many of you are already aware of the authorized generic deal with Merck. This is the first authorized generic deal from India and we see it as an endorsement of our capabilities in the U.S. Generics market.

With the acquisition of Betapharm, Europe is now our single largest geography and assumes special significance to the long term growth of Dr. Reddy’s. We have now announced a new dealership team to drive the European agenda. The next steps are to put together a Pan European strategy focused on key markets, which will enable us to further build on that acquisition in Germany, drive scale in the U.K. and expand our presence in other important markets of Europe.

The integration process in Germany is well underway and we are also exploring various opportunities in the key markets of Spain, Italy and France. We have made a beginning in Spain this month with the acquisition of a portfolio of in market generic products and pending market authorizations. The initial value of these acquired products should be about €3m annually.

In our core businesses of global APIs and Branded Finished dosages for the rest of the world we expect to continue the growth momentum in ‘06/’07. While the broad Group’s objective for this business has been laid out, our focus will be to maximize the business opportunities to further accelerate the growth momentum, and build leadership position on certain brands, markets, products, customers and cost.

Thus for the long term, we are creating a global commercialization platform with presence in all our key geographies then supported by a global product development engine. And as we orchestrate the growth in various markets and product segments the key challenge will be to integrate the platform to drive scale globally. A successful example of this is Omeprazole, which create value of about $65m in global revenues and is still growing.

In the Custom Pharmaceutical Services business the integration of the Mexican acquisition has been completed successfully and we are already beginning to see the benefits of the customer portfolio that we acquired. As mentioned earlier, we remain confident of achieving the scale of $100m in the next 12 months.

On the innovation based businesses let me talk about our plans for the Specialty business to begin with. Our immediate priority is to launch this business with in licensed dermatology products. Subsequently we will add additional products from the ongoing in-house product development program and ultimately this business will further the bridge with the launch of our NCE.

In the Drug discovery business today we have seven NCE assets with four in clinical development and three in the pre-clinical stage. On the research side, we will continue to expand our discovery pipeline with greater focus on creating new platforms in the chosen therapeutic segment, such AMPK modulators in metabolic disorders. On the development side, we will continue to advance the development of our NCE assets through a combination of in-house and core development initiative. We will also pursue opportunities to leverage our discovery research capabilities to address unmet medical needs in other spheres.

Our most advanced asset in clinic development is Balaglitazone. The two year [clinical] studies have been completed and the preliminary findings appear to be very promising and should support further development of this product. We are, however, waiting for the final report to come by the end of this year. We are also making good process with the clinical development efforts of DRF-10945, RUS 3108 and DRL 11605. Clearly, with the increasing number of assets moving into clinical development the key priority for us is to create a roadmap for commercializing the NCE assets in key territories. This will include building clinical development as a capability, commercialization capabilities in key geographies and strategic partnerships and marketing alliances for unlocking the value of the assets that have yet to have [underway].

To conclude, we are looking forward to the prospects of a very healthy financial performance in ‘06/’07 and we remain very confident of the outlook for the medium term.

I would also like to take this opportunity to thank all my colleagues all over the world for your commitment and resilience in embracing all the challenges that we went through and surging ahead towards realizing our vision of becoming a discovery led global pharmaceutical company.

This ends my discussion and we now leave the floor open for the question and answer session and we’ll be pleased to answer your queries now. Can we now have the first question?

Thank you very much sir. I would hand over the floor to [Sylvia] at Singtel to conduct the Q&A session for participants connected there. This will be followed by Q&A session for U.S. participants and then India participants. Thank you and over to [Sylvia].

Thank you [Pativa]. 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 hand over the proceedings to April at U.S. bridge. Over to you, April.

Thank you very much. [OPERATOR INSTRUCTIONS]. Okay, at this moment there are no questions from participants outside of India. I would like to hand over the proceedings back to [Pativa].

Thank you very much April. We will now begin the Q&A interactive session for participants connected to the Indian bridge. [OPERATOR INSTRUCTIONS]. First in line we have a question from Mr. Pawan of Kotak, please go ahead sir.

Yes, hello thanks. My question first is on the financials. Mr. Vasudevan, if you could give us an idea of the segmental margins for the full year?

Yes, Pawan, you mean the margins for various businesses?

Yes.

Starting with the Finished Dosage?

Yes.

Formulation business this is about 69%. Then we have the [Generic] business which added about 36% margin. Then we have the API business which is at 28%. These are the significant businesses we feel. The CSI margin stable.

What about CPS now that you have a large turnover there?

CPS has a full confidence to it. So, we are not discussing in a greater detail only, Mexican acquisition because it’s only for a top period of 90 days. The CPS business in India has a margin of over 35%.

Okay, okay. And during the call it was mentioned that you had in this quarter acquisition related expenses. Can you elaborate on that?

Yes, the acquisition related expenses relate to the metered cost and other expenses. It is about $700,000.

Okay. Then I wanted to ask you was on the intangible. Either you could tell us how much would you think would be for amortization charge effect in 2007 or you could give us the break up of the amortization charge this quarter and, therefore, the FY07 number?

Yes, the ’07 number it’s all taxes because the acquisition could be in the range of $13 to $15m.

$13 to $15m?

Yes.

Okay.

Net of taxes that is.

You mean after providing for taxes [investment]?

After gaining from the tax. What will happen is there will be a tax gain on the amount. So, it will lead to a net amount of $13 to $15m.

$13 to $15m, okay. Then -- okay, and your tax rate for ’07, how much do you expect that will be?

Our tax rate will depend on the business mix where the commitment today is operation.

Right.

And what will come out of this is tax rate. We are not looking at any tax on Germany at this moment because we have certain acquisition related costs which will account for a tax break. The one area of business which will attract tax probably could be the API business and any significant movement in our Generic business in U.S..

Okay.

So, I think effectively if you would remove the operation big business, the effective tax rate possibly in the range of 10%.

10%, sure. And -- okay, then can you give us some idea how much would be the intangibles in the balance sheet at this moment, goodwill, plus [CapEx] whatever?

All that relates to the -- we already put out the balance sheet on the website.

Okay.

For a significant amount is the refinancing $36m acquisition.

Okay.

I think the details are there for --

Okay, sure. Okay, Mr. Prasad, now could you give us some update on the [Plavex] settlement? How is it progressing, anything that you’d like to share on that?

Well, there’s no information to share on that.

Okay, I got it. And second on the ICICI generics deal you are -- I believe it was the first -- the second joint [venture]. Are you going to exercise that or what’s the update there?

We haven’t decided on that yet. We have an option to exercise that. But we may not do it.

Okay. And then there is a balance amount that is yet to be recorded -- recognized in the P&L. So, would that happen inside 2007?

Yes, that could happen inside 2007, sure.

Okay, and are you still [inaudible] the products [A-Z]?

Yes, it covers all the products from -- starting with 2004/5.

Yes.

Until they complete this deal.

I -- so, basically clear?

Yes. And then they may do more than two years.

Okay, sure. Then, Mr. Prasad, could you give us some idea on margins on the operating Generics business. What should we assume?

Pardon me?

Our margins on operating generics.

Operating generics, we cannot comment on that now. We are bound by a confidentiality agreement on that arrangement. We cannot comment on that.

Okay. And,

I wonder if it's a good idea to take the follow up questions later because of the people waiting.

Sure. My last question is impact of possible price cuts in Germany.

Yes. As you know, there has been new legislation and maybe Vasudevan you can do it.

Sure and this was given the number 2005 because then the legislation is commonplace. It takes effect from July. As the new legislation effectively there is the waste, the different price which will be more than what it is today and we are looking at the pros [inaudible]. And the prices are going to decrease because of this. But this is offset by the free goods which we used to offer in the market. Effectively, we are looking at as the best case scenario of being neutral and we have to see how it works once we work out all the details product by product pricing.

Okay. Fine. Thank you.

Thank you very much, sir. Our next question comes from the line of Mr. [Ashurin Athrivon with Akashdandi] Investments. Please go ahead, sir.

My congratulations to the management team on a good set of numbers and a very encouraging outlook for the year 2006/7 onwards. Mr. Prasad could you fill us in little details on the derma brands which you are talking of in licensing for the Global Branded business?

Of course we have started to negotiate these things. The deal is not complete. But we hope to launch this business some time next year with two to three products which we are licensing in. So at this time I cannot really share any details because there is no conclusion on the negotiations.

This will be for which geographies?

Primarily for the U.S.

Okay. And the [inaudible] portfolio also you are working can you give the status for the products in that portfolio?

We have narrowed down the list of products to two flat ones. One is what we call the dermostick.

Okay.

Basically it's a waxed lift stick applying steroids. And another product for nail fungus. And these two products are still in development and in clinical trials. So, it will take maybe three to four years to get them passed through the FDA processes. Especially in the current environment they require extensive studies and that's why we don't see them hitting the market in the near term. They will come in the medium term. Until that time, we don't want to wait for the launch licensing products and get them and launch the business.

Okay. Lastly, this year we saw mainly you had high [loan] data for the NDAs. Going forward also this would sustain or you have a better plan?

I think it depends on the opportunities. We are constantly looking at the opportunities. We have become more thorough in some in deciding what cases to challenge. Also, if you see the innovators, in the early days their patenting was not as strong as it is now so the opportunities for successful challenging are also declining. So, overall, this really depends on the products we are selling and the opportunities that we see to challenge weakness in any other patents.

And you plan to fight how many NDAs this year?

We are running today at a rate of about 12 to 15. Maybe at a stretch it will be 18. So somewhere in the range of 12 to 18 we will find.

Thanks a lot and congratulations.

Thank you very much, sir. Next in line, we have Mr. [Shumin Magabar] from [Equine] Security. Please go ahead, sir.

Hello everyone. I have a couple of questions. One is we are already seeing generic companies in Germany taking price cuts, announcements coming from marketable players over the last one week in terms of the likely price cuts that will take. You obviously have probably formulated some kind of first strategy in terms of the extent of the price cut we will probably take in Betapharm in terms of some parts of the product portfolio. Can you just give us the extent of the price cuts that'll likely happen in response to what the competitors are doing?

This is Vasudevan here.

Yes. Hi Vas.

The response is basically based - the competition's response is based to what does that mean with the reference pricing. So all offers relate to the reference price. The [selling] prices today. So we do see an effective price cut in some of the products specifically. In some of the products possibly not. And this will depend on the various details which you are to get in future of the products. But this is going to be offset by not having any more free goods to be given to the trades there. So we see a balancing effect here that no free goods need to be offered any more to the trades there. That is going to offset this.

Further, the advantage of doing a price cut also, it frees us from giving any rebates to the insurance funds there. So there are offsetting effects that happen whenever we give a price cut. We are working also on details of every product. We don't have to give price cuts on every product. We will work out the details and work out.

Right. Any sense in broadly or what percentage of the portfolio will likely to have to see a price cut, like if it's 40% for example and for numbers that are coming, you know?

Yes. It could be in the range of 40% but you have to remember that this is going to be offset by the free goods. And then we try to give not any more rebates.

Okay. And does this in any way change the outlook we were looking at from Betapharm's top line growth prospective over the next 12 to 18 months? We were possibly looking at 20% top line growth going ahead especially on the back of 35% line growth we have seen over the last few years. Does that stance change with this development?

No. Where we grow to more or less depends on the new product launches. Betapharm has a plan to launch over 20 products this year. That is continuing. And the new products are not under this reference pricing pressure. So effective, but we haven't put any growth rate for Betapharm as such. We are not giving a guidance on that.

But, Vasu shouldn't the top line growth, whatever the outlook was previously, shouldn't that still stand lower basically because of the realization coming down on whatever portion of the portfolio and the EBITDA level may still be neutral because of the cost cuts that will happen but, at the top line level, it should be quite a substantial cut down, right?

Well, there could be a cut here but you have to remember that it's going to be made up by the free goods, not being any more free goods. They are going to become much more contributor of [inaudible]

Right. And will there be any kind of time lag between these two announcings happening?

No. There will be no time lag.

Okay. And so we basically aren't looking at any significant lowering in terms of the guidance on Betapharm in terms of profitability?

No. Betapharm at this moment, no. We have not put out the guidance earlier. So there's no need to look at reducing the data.

Sure. And with regard to the growth margin, we have looked at the decline that has happened, what is the growth margin going to be? Were you kind of pick out generic deals, what is the kind of growth margin outlook that you could probably present?

In terms of giving you a number we will give you some factors affecting the gross margins. Clearly the U.S. generates which was at 47% last year will see expansion. So, because of the portfolio going in. We launched Fexofenadine. We feel -- we don't see hugely -- huge competitive pressures there. So, the entire U.S. generics will see our core margin.

The CPS business, average margins should settle at the APR blended margin level. The Branded Formulation margins should remain at the same level. And although we are seeing the scale effect, because we see significant top line expansion last year. So I think the trend is towards expanding the margins overall.

But what are the gross profit at the Betapharm level there?

Right. That's the point.

Okay. And, given that you are just coming out of two large acquisitions lately over the last one to two months, are you looking at any more significant acquisitions in terms of plugging any strategic gaps or at present studying business in any market, anything like in the next month?

We will not see large acquisitions like Betapharm but definitely we are looking at acquisitions to further our strategic intent, which is to expand into Europe, into other geographies. But we started in a small way in Spain. We are looking at other opportunities in various countries.

I thought the acquisition slice for the €3m businesses is?

The,

You talk about the Spain,

It was not an acquisition, it was a,

Planned acquisition, right?

It was a set of products that we acquired. I think it was roughly €4m.

Okay. Sure.

That just enabled us to kick start operations and we are looking at other opportunities to scale up.

The other areas we are looking at is the Dermatology business itself and we are looking for assets, if possible, to get into the market early. With regard to strategic priorities, we remain flexible in our outlook. If there is an organic option we'll pursue it.

And lastly a financial question. You have done some reclassification. You have just spent on other income recognition on the Goa plant. Can you just throw a little bit more light on that because it's not really apparent and clear from what you put out in the press release?

Yes. Just when we [inaudible] reclassification. It's neutral to the bottom line. What we have made up earlier in the third quarter we have taken the income from the sale of Goa plant as other income. That has been reclassified now to other operating income. That's it. So it's very neutral to the bottom line.

So should we basically take that number out from third quarter and insert it in the fourth quarter now?

No, no, you should put it in the third quarter only. But what I'm saying is in the fourth quarter it's really neutral. You should remove it from the first quarter, both from the other operating income and other income.

Okay. Okay. Okay. Fair enough. So from a purely profit perspective it's basically neutral at the back level?

That's right.

But it's not neutral at the EBITDA level, right?

Yes. It depends on, because it's in respect of the sale of the plant.

Right. Right. Vasu, thanks again.

Sure.

Thank you very much, sir. Participants are requested to try and limit it to one question in the initial round. Next in line, we have Mr. S Sabharwal from Lotus India AMC. Please go ahead, sir.

Hello. I have just one question particularly relating to the accounting policy related to goodwill. I just wanted to know whether Betapharm, if the next year's sales of profits should be lower than what they were this year, then will we be required to provide for some kind of impairment of goodwill?

Not necessarily. It’s in a very limited rate. Because, dramatically this shifts but we exactly are to review this in terms of where to put it to impairment test. It's not as if it's on every, very, very marginal basis.

Okay. And there's no quantification of directly in a sense 5%, 10% or anything?

I think that depends on the events that warrant a re-look at this.

Sure. Thank you very much.

Thank you very much, sir. Next in line, we have a question from Miss. C Visalakshi of DSP Merrill Lynch. Please go ahead.

Yes. Thank you for taking my question. I have two specific questions. One is on Q4 numbers. We have had a significant contribution from Betapharm as well as the Mexico acquisition on the top line. Could you quantify the impact in terms of what are the extent of losses in Q4 specifically? Although I understand it's only for one month and three months respectively.

And, the number two, it's on Balaglitazone. Are we expecting Balaglitazone to enter Phase III clinical trials this year?

Yes. To take the first question [inaudible]. Regarding the revenues from the acquisitions, what we are saying is we are cautioning here that we are not separating them from the regular business. The Mexican business falls under the CPS business. And the Betapharm business comes under the [Gen Dex] European business. And both are for what we call stop periods and they have no relevance. So what we do is we are not really splitting up their revenues and the profits and the margins here because they are for stop periods that we cannot update. Especially for Betapharm and close them the year-end for a period of 27/28 days. So we are not really looking at separating it out and sharing the details.

Okay. But you said that it's not contributing to profits. Does that mean that they are actually, you know, making losses in this specific quarter if, hypothetically, one were to separate?

It is not operating for a full quarter for us. It's only for few days in a month. That's one thing. It is also acquisition-related cost to it. But exactly what we can state is Betapharm in the gross margins are in the levels of [our Finish] business. [inaudible] business that's the gross margin level on an annual basis for Betapharm.

Okay. And from an SG&A perspective what -- would there be an unproportional amount of Betapharm related SG&A?

No. It's nothing unusual there. We don't have any unproportional expansion in SG&A.

And the question on Balaglitazone.

Sorry to interrupt, could you please come back for a follow up question as there are participants in the queue?

Yes.

Thank you very much. Our next question comes from the line of Mr. Sameer Baisiwala of Morgan Stanley.

Quickly on your balance sheet, your net debt, I think stands at about $120m. How much payment do you need to do for the acquisitions that you have done and how will you find the CapEx that you have planned for the next 12 to 15 months of $100m?

Yes, Sameer, the net debt is about $450m.

Okay.

Which is the gross debt to $697m and we have cash flow of $245m. So the net debt is about $450m. We are looking at what our CapEx percent of debt. That will be conduct to the internal records.

Okay. Second question on Fexofenadine, why is the market share so low? I think I understand it's 2%. Is that what you're seeing on a primary sales aspect?

No. We are seeing a higher amount of primary sales. In order for the sales flow to catch up as a second quarter there will be a lag. You are in the lag period that's why you're not seeing very much picking up those numbers. But at the same time we are not going very aggressively after market share. We are maintaining pricing so we don't see -- we don't want to go and affect pricing very significantly.

Do you expect competition in June?

No. Not in June.

Okay. What do you think on Zocor appeal? What are the time lines that you are looking at?

I think this whole Court thing won't get resolved within the period in which the patent will expire. So we believe that there will be an exclusivity option and the case will be resolved much later. And, based on our information, it looks likely that they will actually launch the product towards the end of June under the exclusivity period. And we have reason to believe that they are still not going to come in the way of the launch of the generic at that time.

Okay. What happens after 180 days? Would you then supply your own products into market?

Yes. We have that option.

Okay. Okay. And that would not impact your customer engagement that you had giving 180 days?

I didn't understand the question.

If you had significant market share, can you easily convert that using your own material?

The relationship with our partner continues even after the exclusivity period.

Is that part of the pharmacy chains and wholesalers.

I mean the operating in Merck.

Yes. I was referring to the wholesale of the pharmacy chains.

The relationships continues, so it doesn't matter whether Merck supplies us operating supplies and whoever has the best cost operation will supply.

Okay. The final question on [pro batia], what is the situation there. Will you be looking to launch in June? Just one 1mg version?

No comment on that.

Okay. That's all from myself. Thanks.

Thank you very much, sir. [OPERATOR INSTRUCTIONS]. Next in line, we have Mr. Manish Mehta from [EDI] Capital. Please go ahead, sir.

Mr. Mehta?

Can you hear me?

Yes, sir.

[inaudible - technical difficulties]

Thank you very much, sir. Next in line, we have Mr. Sameer Narayan from SSKI. Your line is open, sir, you may please go ahead.

[inaudible].

Hello, sir?

Hello.

Your voice is quite feeble. Can you please use your handset if you are on a speakerphone?

Okay. I just said, on the $30m debt that we have, I just want to get a sense of the kind of interest that we will be paying for the year.

The interest will be approximately at 5%.

Okay. Thank you.

Thank you very much, sir. Next in line, we have Mr. Rahul Sharma from Karvy Stock Broking.

What is the initial assessment of how much the German markets are favorably growing in the current sales?

We are not giving a guidance on the gross sales.

Well, why not, we have already talked about the general market per se.

It could be around 10%.

Okay. Even after factoring the price cuts and everything?

Right.

Okay. Thanks.

Thank you very much, sir. Next in line, we have Mr. Gerard Filardi from Mehta Partners.

Hello. Thanks for taking my call. My question was on the U.K. business. You have mentioned that it has lower margins this year. So what is the outlook going forward in the U.K.?

In U.K. we do not expect many new product launches. But definitely the revenues which you have seen last year was very good because of certain pricing advantages which will not be visible this year.

Okay. So going forward we may experience a drop in the gross margins in the U.K.?

Yes possibly so.

Okay. Thank you.

Thank you very much, sir. Next in line, we have a follow up question from Mr. Sameer Baisiwala of J.P. Morgan Stanley.

Well, on Balaglitazone the sales two years study over now. What is stopping the product from going into Phase III?

There are some additional studies we have to do. Our initial Phase I studies, which we need to complete, before we do the Phase III.

And that will take how much time?

I think we expect to enter Phase III sometime this year. This fiscal year. So, towards the end of this fiscal year we could probably see that. So some additional studies which were not done in the past but all these need to be done before we can go to the next level.

Okay. And just finally on German pricing situation. The key question here is that the discounted [sales] might have been banned but the key worry here is that pharmacy chains etc. may find a different way to make the German companies pay up a [actual] discount. Is that a possibility and that can hold the company and not be offset the price decline?

I think we have to wait to see how the situation unfolds. Our discussion with the management of Betapharm is in confidence but there are some mitigating factors but really we have to wait to see how they pan out.

Okay. Thank you very much.

Thank you very much, sir. At this moment 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 clarification please feel free to get in touch with the IR desk either on phone or on email. Thank you.

Ladies and gentlemen, thank you for choosing the [Next Conferencing Service]. That concludes this conference call. Thank you for your participation. You may now disconnect your lines. Thank you and have a nice evening.