Dr Reddy's Laboratories Ltd (RDY) 2007 Q3 法說會逐字稿

Good evening, ladies and gentlemen. I am Prathibha, 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. After the presentation, the question and answer session will be conducted for participants connected to SingTel, followed by a Q&A session for participants connected to 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. Thank you and over to you, sir.

Thank you, Prathibha. Good morning and good evening everyone, and welcome to Dr. Reddy's third quarter earnings conference call. We hope you've all had a chance to review our press release which was issued earlier this evening. The results are also posted on our website on the home page under the quick links icon.

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 all discussions and comparisons during the call will be based on U.S. GAAP numbers and our IR desk will be available to answer any queries relating to the Indian GAAP immediately after the conclusion of the call.

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 Saumen Chakraborty, our Chief Financial Officer.

Please note that today's call is copyrighted material of Dr. Reddy's and cannot be re-broadcast or attributed in press or media outlets without the Company's express written consent.

Before we proceed with the call I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call and the webcast.

I would now like to turn the call over to G.V. Prasad, our Chief Executive Officer.

Thank you, Nikhil. Firstly, I would like to thank all the participants for joining us on the call today as we discuss Dr. Reddy's results for the third quarter of fiscal 2007.

It gives me great satisfaction to come back to you on the back of a great quarter. I am pleased to share with you that we have crossed the $1m revenue milestone for the first time in our history. We have now set the ball rolling and are seeing [across] various geographies and businesses are already working hard towards further growth.

Starting as an API manufacturer just in the Indian market, over the last 22 years of our journey we have evolved into a vertically integrated global pharmaceutical Company with activities spanning the entire expanse of the critical value chain. As I share this achievement with all of you today, I would also like to take this opportunity to recognize that this would not have been possible without the continued hard work, dedication, teamwork and execution of every single member of Dr. Reddy's family, which has now grown to over 8,000 individuals.

For the first nine months of this fiscal, our revenues are at $1.1b, with profit after tax of $138m, translating into earnings per share of $0.88 or INR0.39. While the two acquisitions and the outside opportunities have definitely accelerated this achievement, it is important to note that underlying these upsides is a strong and profitable growth engine in our core businesses of API, Finished Dosages for the Rest of the World and Custom Pharmaceuticals services. This, I believe, is a key strength of our business model and will continue to create significant value in the coming years as well. Let me talk about the specific achievements in each of these businesses for the first nine months.

In the last two quarters we talked about the strong visibility of crossing the $1m mark, our revenue mark for CPS and I am pleased to share we have passed this milestone in this quarter. This has been made possible by the successful integration of the acquisition in Mexico and the outcome of the new development activities over the last several years. The Finished Dosage business has achieved $270m in revenue with an overall gross margin ratio of 71%, which is by far one of the strongest in the industry today.

The API business is scaling up quite well, having achieved $180m in external revenues with a gross margin ratio of 36%, which is much higher than the historical range, largely due to the [inaudible] [billing] opportunity. If you include the internal API shelf life, this business has also grossed $200m in revenues. This reflects our strength in vertical integration and the significant value that our API business adds to our Finished Dosage business in various markets.

While we are witnessing strong growth in our core businesses, we continue to make good progress in getting closer to achieving sustainable and profitable critical mass in the U.S. generic business and also expanding our presence in Europe.

Let me also talk about what I strongly believe is the key differentiator at Dr. Reddy's, the strong product development engine, which is focused on creating one of the broadest and deepest product pipelines in each of our businesses. We recognize that today we are operating in a highly challenging and complicated global generics environment. And in the course of that we are also working towards building a well-balanced portfolio of unique products as well as highly competitive products.

We are aggressively expanding our internal product pipeline and supplementing it by acting on opportunities to expand our presence into other therapeutic areas and growth forms. In order to extend our growth well into the future, we are making and will continue to make significant investments in innovation-based product ideas, both in products with high entry barriers in the generic segment, as well as in our innovation-led businesses of specialty, biologics and drug discovery which we ultimately believe will lead us to transition into a discovery-led global pharmaceutical Company.

Let me now briefly discuss the highlights of the third quarter. We continued the growth momentum in our core businesses. We saw a further improvement in performance at betapharm and, of course, towards the end of the quarter we had the successful launch of ondanestron with 180 days of market exclusivity.

The factors of this launch demonstrated the capability that Dr. Reddy's has done over many years, beginning with product development, legal and regulatory strategies and finally the efficiency of the supply chain and our effective sales and marketing teams. We have captured a good 55% share of the total market and several categories of product rolled out of our premises directly to our customers within a few hours of the expiration of the patent. Due to the revenue recognition policy we were able to record only $5m in revenue during the quarter, though the actual billing was much higher.

Coming to the numbers, the third quarter performance was characterized by continued growth in each of our businesses. As I mentioned earlier, the API and Finished Dosage business for the Rest of the World continues a growth momentum into the third quarter. This helped more than offset the decline in revenue and profits from the authorized generics products as well as the higher R&D spend.

The API business reported a strong growth of 29% over last year. A significant part of this growth was on account of supplies to [inaudible]. The Finished Dosage business in the Rest of the World markets grew by 18%, with both India and Russia delivering growth in the range of 18%.

Betapharm sustained its performance in the third quarter with higher top line as well as EBITDA compared to the second quarter. In the U.S. the prices of simvastatin and finasteride declined significantly following the expiry of the exclusivity and yet account for the shelf stock adjustment which is a standard industry practice. We do not see any additional competition in the U.S. for [simvastatin] though the pricing was lower compared to what it was in the second quarter.

The CPS did not sustain its performance with revenues of $36m that is compared to $3m last year. All our revenues were at [$350m] compared to $134m in the same period of last year. R&D spend was higher at $15m, as compared with $12m last year. Even on a sequential quarter basis this is higher, and this is in line with our discussion on the previous call. SG&A is tracking at [9] in absolute rupee terms. And profit after tax for the quarter is $43m compared to $14m last year.

Let me now turn the call over to Saumen for a more detailed review of our financial results. Thank you, Saumen.

Good morning and good evening to everybody on the call. We're starting this session to cover the key performance highlights [we call] the financials in detail. The revenue for the quarter, as Prasad disclosed, is at $350m as against $134m in the same period of last year.

The gross profit margin is at 44% of revenue as against 51% in the same period of last year. If we exclude the impact of [AD] products, the gross margin of the underlying business has actually improved during the quarter, led by an improvement in the overall business and product mix. Let me give some of the key highlights for each of the businesses, beginning with API.

The revenue in the API business was at $62m as against $48m last year. As in the previous quarter the gross margin ratio has expanded to 39% during the quarter and is in the historical range of 28 to 33%. The growth in revenue and [expense and in] margins was primarily driven by the opportunity in sertraline [inaudible].

Revenue in Finished Dosage business for the Rest of the World market also [registered] a growth of 18% to $72m. More importantly, the gross margins expanded significantly to 74% of revenues as against an historical range of 68 to 70% of revenues.

The growth in top line was led by the continued strengthening of [inaudible] in India in last year. Both India and Russia recorded a growth of 18% each. Let me share some of the market statistics for each of these markets because of the improvement in our market position. In India the details [inaudible] for the period of July to October 2006 [inaudible] the first step to growing company [inaudible].

As for [inaudible] the [operation] has been consistent in improving its market ranking from twelfth in August to ninth in November. The expansion in gross margin was also in part due to the benefit of the excise duty [inaudible] for the full quarter [inaudible] the operation.

Revenue in the U.S. generic business was at $105m as against $11m in the same period of last year. Of this 80 products contributed $77m, net of the sales staff and other inventory adjustments. Tax under [inaudible] contributed $11m revenue. [Inaudible] contributed about $5m to our revenues, also following the expiry of 180 day exclusivity we launched of simvastatin under our own [A&D].

The revenue for Europe generic business was at [$59m], as against $8m last year. As Prasad mentioned, betapharm was sustained its performance into the third quarter with revenue up $60m and a gross margin of 56% of revenue. On a sequential quarter basis the EBITDA [met with] a further improvement.

Revenue from the CPS business was at $36m as against $2m last year. The gross margin this year for the quarter is at 74% of the revenue. It is lower compared to the earlier quarters of this fiscal, primarily on account of the change in the product mix in the [shelf] corrected [sales] going forward.

Moving on to expenses, SG&A was at $82m as against $46m in the same period of last year. As a percentage of normalized revenue, that is excluding AD revenue, the SG&A ratio is at 30%. On a sequential quarter basis the SG&A is at the same level in rupee terms.

The R&D spend came in [heavier] at $30m as against $12m last year. As we indicated in the previous call the R&D spend is likely to be better in the second half of this fiscal as compared to the first half. We expect a similar trend for the fourth quarter as well.

Our GAAP flows improved significantly in the third quarter. As a result we reduced the level of short-term borrowings from banks. Added to this, we also benefited from the interest income on the [follow on areas] for the month particularly the overall late interest expense reduced to $7m, as against $8.4m in the second quarter.

On the tax front, during the quarter we had a tax benefit of $0.6m, as against a tax expense of $6.5m in the same period of last year. The level of government [sector launch and [inaudible] facilities, the total share of profits exempt from tax is higher. Added to these, R&D spend was also much higher and the level of full year effective tax rate reduced to 13% from 18% in the first half, resulting in a benefit for the third quarter. So net income for profit after tax for the quarter is $43m as against $40m in the same period last year.

During the quarter there has been an improvement in the net operating working capital, primarily due to unlocking of the receivables to $209m, as against $219m as at the end of September. [The collections] started flowing in during the third quarter which was used in reducing [deferred] payables. Receivables reduced from [$223m] to $137m and [inaudible] payables reduced from some $208m to $121m. Inventories are also lower at $194m as against $234m.

With this overview, I will now hand over the discussion to Mr. Prasad to make the concluding remarks.

Thank you, Saumen. Fiscal 2007 has seen the continued strengthening of our core businesses which are very much strong growth driven by broad-based improvements in key markets as well as [inaudible] specific opportunities. We were able to maximize the authorized generic opportunity in [inaudible] and further demonstrate the operating strength and marketing capabilities to participate in a meaningful manner in one of the largest opportunities in the U.S. generics industry.

Added to this was the [inaudible] launch of fexofenadine, which has also been a significant contributor to overall revenues in the U.S. The acquisition of betapharm is the first step towards building a strong presence in Europe over the next few years.

On a different order of magnitude, yet very significant, was the acquisition of the ADL business in Mexico which helps us scale up our Custom Pharmaceutical Services business.

Another important aspect that I would like to highlight is the fact of the new product engine which beginning to deliver value over the additional several new products from our robust pipeline across businesses and geographies.

In the U.S. we launched seven new products and I want to discuss some of these opportunities in detail. In Germany we launched six to seven new products in the system. In Russia we launched six new products and in India we launched 18 new products including [line extension]. We expect to accelerate this momentum into the coming years as well. Let me spend a few minutes on the outlook for the third quarter before I conclude the call.

Given benefits on a full quarter of [inaudible] sales [inaudible] in the U.S., in line with the seasonality pattern we will see sales soften in India, Russia and Germany during the third quarter. R&D spend, as Saumen discussed, will be higher in the fourth quarter than in the third quarter.

To conclude, we feel it has been an extraordinary year in our history. We have benefited from upsides in our authorized generic products, certainly in sales and [ondansetron]. Of course, most of [ondansetron] will come in the fourth quarter. While the upside is definitely good, and we remain confident of continuing the growth momentum in underlying core businesses. In securing the contribution for [off size] the base businesses will show significant growth in the next year.

Having said that, I would like to highlight for the last several months we have made over in increasing the [inaudible] which have been addressing the volatility in earnings. For instance we have ondansetron in FY '07 [inaudible] in FY '09. We are also pursuing some interesting opportunities which we believe could provide additional potential upside opportunities.

So [inaudible] growth agenda following each of our businesses and geographies we will be offering [inaudible] as well as exciting opportunities. We will embrace both new people with enthusiasm and remain committed to building a future of growth and leadership at Dr. Reddy's.

Prathibha, now we will open for Q&A. Can we start the Q&A?

Sure, sir. At this moment I would like to hand over the floor to Salvia to commence the Q&A session for participants at SingTel. Over to you, Salvia.

Thank you, Prathibha. We will now begin the Q&A session for participants connected to the SingTel bridge. [OPERATOR INSTRUCTIONS].

Hello? Hello?

Yes, sir?

[Inaudible]?

Yes, sir we --

We will now begin the question 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 Laurie.

Thank you very much. [OPERATOR INSTRUCTIONS]. At this moment there are no questions from participants at the international center. I would like to hand over the proceedings back to Prathibha.

Thank you very much, Laurie. We will begin the Q&A interactive session for participants at India. [OPERATOR INSTRUCTIONS]. Participants are requested to kindly [inaudible] the answers while asking a question. [OPERATOR INSTRUCTIONS]. First in line we have Mr. Subhabrata Majumder from Macquarie Securities.

Hello, everyone. Congratulations on a good set of numbers for the quarter. I just wanted to know what the ANDA filing numbers that you've done in 3Q '07 and what's the outlook for ANDA filings over the next 12 months.

[Inaudible]. For the first nine months of this financial year we have filed about 18 ANDAs and for -- on a full-year basis we expect to file about 25 ANDAs going forward.

This is for the fourth quarter -- seven for the fourth quarter or --

Accumulated for nine months 18 filings?

Yes.

And going forward from the next financial year there is 25 numbers to that. For this year also including the fourth quarter it should be about 25.

And what you're also saying this is over the next quarter [inaudible] there will be 25 ANDA filings?

Correct, on an average, yes.

Okay. And why is there a slowdown in Mexico on a quarter-on-quarter basis?

There are certain things will -- it will be made up in Q4.

It's more a timing issue.

It's more a timing issue.

Okay, fair enough. I'll come back with questions. Thanks.

Thank you very much, sir. The next question comes from the line of Mr. Rajesh Vora with ICICI Securities.

Good evening gentlemen, and congrats for a good set of numbers. Mr. Prasad, you mentioned in your initial speech that, due to revenue recognition policy for the quarter, all the central revenues are quite less and most of that benefit will come in fourth quarter. In fact in the standalone numbers you have given the number at close to $53m. So could you give some light in terms of how -- what is that policy and how is it being done?

I think you are referring to I GAAP standalone numbers?

That's right, yes.

I GAAP standalone numbers are not meaningful, I ask you look at the U.S. GAAP numbers.

Sure, sure. I'm just looking at the difference between the two.

The differences in revenue recognition, the U.S. GAAP has certain [inaudible] [met] --

Okay.

-- before the revenue recognition can be done. And the sales that meet the U.S. GAAP criteria for the quarter was $5m and we are convinced of that. Now revenue recognition is a big chapter in itself in the [inaudible] annuals so I won't go into those details. We can outline [inaudible].

Sure, sure. And you mention about 55% market share. So is -- in the market already, the shipments are already in the market?

Yes.

In terms of what?

The [55%] is estimated based on historical trends of the customers we have and the market share they are likely to get so we must take this as an estimate.

Sure, okay. And you mention a very important point about significant growth opportunity and outlook for base business for next fiscal year or next one year. Is there any particular segment -- do you expect the overall contribution as you've seen in this year so far from all the businesses? Do you -- are you upbeat about any particular business? What will drive the base business growth? Because betapharm is a big piece of that, the API is a very solid business, so what is it that's going to drive that?

If you -- the best part of this is that all businesses are showing consistent growth. If you take out the upsides and look at the base businesses every business, including the U.S. generics base business, is showing considerable growth. And if you look at the current year's numbers to date, the base businesses, if you include the one-time opportunities, grew by 38%. And that to me is a very significant number. And going forward we are seeing healthy growth quarter-on-quarter in all our businesses.

Okay. Okay. So you --

It is not driven by any one set of businesses or events.

Sure, sure. And you also mention about some interesting opportunities being pursued the way you have done some of them this year. Is that something we will get to see in fiscal '08 or beyond?

It is possible that there will be something in fiscal '08. But that is subject to many discussions that we are having between various parties.

Sure, sure. I wish you all the best and thank you very much for taking my question.

Thank you, Rajesh.

Thank you very much, sir. Next question comes from the line of Mr. [Ashuni Agarwal] with [Financial] Investments.

Congratulations to the management team on a very good set of numbers and a very positive, encouraging statement by Mr. G.V. Prasad. My question is on the biosimilar strategy. Mr. Prasad, you highlighted about biosimilars. Could you add color to the biosimilar strategy and the product portfolio, the number of products you are developing, particularly for the EU?

Let me give you some background. We have one biosimilar in the market which is G-CSF. The other -- we have a large number of products in development, and I'd like -- for confidential -- for confidentiality and competitive reasons, I don't want to really disclose the names or numbers of these compounds. The biosimilar strategy for Europe and U.S. is an evolving one.

We certainly are interested in these markets but there are a lot of hurdles to be overcome before we can say that we can launch a biosimilar in the EU or in the U.S. Hurdles are in the [inaudible] landscape, in the regulatory pathway, in the basis for [inaudible], as well as for marketing. These are not products which can today be [inaudible]. They have to be -- efficacy and safety have to be proven today. So based on all this I think it's a little premature to think of a European or a U.S. launch for biosimilar. We certainly are working in that direction, but we don't have a timeframe or clarity on when and how.

Secondly, to expand on the question of the earlier speaker, do you feel in the U.S. generic business in FY '08 you will be closer to the critical size which you would like to have in that market?

Yes, I would say that even a bit close to critical mass.

Which would be around $150m or $200m?

I hate to give revenue guidance, especially in a volatile business like [in the generic] business.

Okay. For ondansetron you mentioned indicative market share of 55%, so what will be the break up of the [patent] product and the authorized generics?

I don't have those numbers.

Okay. Lastly, [moxyprocasin], the district court [inaudible] this out?

I don't have an update on that, Ashuni, I can get back to you on that one.

Okay, and lastly, Nikhil, can you confirm the total ANDA filed [inaudible] 95 pending approval 64?

The pending approval is 58 actually.

Okay, and total? You will be filing?

Total accumulated filings is --

We'll get back to you.

We'll get back to you on that one.

Okay, thanks a lot.

Thank you very much, sir. The next question comes from the line of Mr. Neelkanth with Credit Suisse.

Hi. Again, congratulations for a great quarter. On betapharm, is there seasonality in the numbers? Because you're already running at 20% year on year, despite the big price cuts in the middle of the year. So should we assume similar growth numbers, similar revenue numbers for the coming quarters?

No. In fact in my script I did talk about seasonality. Q4 is usually softer. Q4 is the weakest quarter --

For Germany as well?

Yes.

Okay. And, fexofenadine, you said there is no competition. You did mention price declines as well, but now the revenue declined 40% quarter on quarter and there was some [TRX] growth. What was the reason for the price declines?

Competition in -- amongst the existing players.

I'm sorry, could you repeat that?

Competition amongst the existing players.

Okay. Got it. Thanks.

Thank you very much sir. Next question comes from the line of Ms. Visalakshi with DSP Merrill Lynch.

Yes. Hi. Thank you for taking my question. I would like to have an update on likely milestones on your R&D going forward, over the next 12 to 15 months, especially, on balaglitazone. What are the key [inaudible] we should expect?

Balaglitazone, the next key milestone would be the entry into phase three. Certain studies are being done to enable this and these studies are in progress. And in the next 12 to 18 months we should see balaglitazone entering the phase three. But that by itself is not a milestone, because phase three results will take a couple of years to come out.

Are you saying that the entry into phase three itself will take another 12 months?

Yes. It could take up to 12 months because of the number of other studies that we have to do to get in.

So that means that there is a delay in balaglitazone progress? Am I --

There is no delay in the progress. There are certain additional studies which were required to be done and they are in progress.

Okay, thank you. And I would also like to have an update on what is the likely trend one should assume for R&D spend into fiscal -- looking into fiscal '08 as well as on the SG&A spend?

I think the SG&A spend should not show any dramatic increases.

The R&D should be a little higher because we are now launching a full fledged development for the European market and we are expanding our pipeline into Europe. We are also expanding the U.S. pipeline with both internal and external R&D. So on the generic front the R&D should go up.

So would R&D be higher than sales growth or would it be lower than sales growth?

If you look at the sales growth on a base business point of view, I think it will be in line with that.

Okay. And finally what is the shelf stock adjustment for simva and finasteride? How much was it this quarter?

We are not discussing specifics on that Visa.

Okay, thank you so much.

Thank you very much madam. Next question comes from the line of Mr. Nimish Mehta with Edelweiss Capital.

Yes. Good evening everybody and congratulations for a good set of numbers. I have a couple of questions. First, if you can give us an overall outlook on betapharm and the German market in general, given the fact that the price cuts you have been able to take on, [good sales increase as well as you] have been able to maintain margin.

Second, if you can just run me through the margin. I might have missed a few on some of the divisions that Mr. Chakraborty ran through?

And finally, I just wanted to know whether there is an authorized generic in ondansetron right now, or do you expect that?

In the German market definitely there is a pressure which is there on the pricing front. But I think one is in terms of the market share and the product launches which have happened and we have performed well and we have also been able to contain our SG&A very well in betapharm.

But, having said that, as I had mentioned there is a seasonality which is there. So we have to take into account that when we really see the next quarter. So far sequentially we have improved and it is a healthy trend.

Beyond the quarter, over a 12 month outlook, do you see this quarter run rate going forward as [on current] basis and the margins that can be maintained?

This is something which will again fall in the category of guidance. So normally we are not giving future guidance, but this is a very challenging market. So we are doing everything possible to ensure that whatever synergies that have to happen between betapharm and our Dr. Reddy's R&D capabilities, manufacturing capabilities, will take place as early as possible. And when we completely [drop] the synergy, definitely there will be considerable improvement.

Are you expecting any further price cuts? Just to complete on the betapharm part.

We have already did something in the month of October. And we have to also see how market behaves. What we have been observing that all the players in the market is behaving very irrationally now. So we have to all go with the market dynamics.

But are there any price cuts further, or you are not expecting any?

As of now there is nothing announced as such. The price is also a factor of competition.

I see. And the price cuts of the October month have already been played out in the current numbers.

Yes. Absolutely. The other question was there with authorized generics in ondansetron. As far as our knowledge is concerned it is [inaudible].

Okay.

[Inaudible].

You wanted to know what is --

Yes. Gross margins --

what is gross margin in each of the segments? In API it is 39.4, in Formulation it is [34], in Generics it is 36.3.

Okay.

In Emerging Business it is 68.2.

68.2

And in CPS it is 24.1

Pardon?

In CPS it is 24.1.

24.1. Thank you very much.

May I request all the participants to restrict their questions to one at a time. This will give a chance to the other participants to ask questions. Thank you.

Thank you very much sir. Next in line we have a question from Mr. Pawan of Kotak Securities.

Yes, hi. Can you give us a break up of the authorized generics sales?

And, two, how come there is no tax despite having U.S. authorized generic sales?

I beg your pardon, I couldn't understand the second question?

There is 22% of revenues coming from U.S. authorized generics. So I presume there you would have to pay profit given that it is -- you would have to pay tax, given that it is trading cost.

What is the question?

What is the question?

I'm saying that U.S. you've done authorized generics business there.

Yes. You want to understand what is the total authorized generics business is it?

No. I'm saying that you would have paid tax there on the profits you would have made, right?

Yes.

Yes. So I'm just trying to understand, how come it's a negative number?

You want to understand why there is a tax credit?

Yes. Despite having paid --

Yes, multiple factors. One is, of course, ondansetron launch during almost the end of the quarter. The other is that the higher profits coming from both our new [inaudible] facilities, where there exemptions as well as the [UU]. And also added to that then we have spent more on R&D.

[Inaudible] trading profit.

Pawan, the reason why you see that for the third quarter there is a tax credit, I think that's your specific question as to how could there be a tax credit.

Yes. Correct.

And the reason for that is that with ondansetron now kind of happening, on a full year basis when you look at your tax, the tax -- the effective tax rate comes down. And, hence, you result in a benefit for the third quarter.

I'm sorry. I've probably not understood, you know, if you've understood my question. My question is authorized generics, you've have done profits on that, so you'd have paid taxes on that, right. So you would not be able to offset that against any other thing I presume?

Okay. Now I understand your question specifically. Of course, there is some shelf stock adjustment, inventory write-off, that you will have to take into account.

Okay. And can you give the break up of this authorized generics business you've done?

We have done about -- you're saying nine months or only for this quarter?

Only this quarter.

$77m.

That's [right] simva and finasteride, the break up.

We are not giving details, Pawan. And can you restrict the questions to one for each participant, please?

Sure. And finally, Mr. Prasad if you'd like to answer this. Do you think a flat EPS is possible for next year?

We don't give guidance of that. And we can't [say anything] going forward. [Inaudible].

Okay. Thank you. All the best.

Thank you very much sir. Participants are requested to kindly restrict to one question in the initial round. Next question comes from Mr. Rahul Sharma of Karvy Stockbroking.

Hello sir. A good set of numbers. Actually I have a query on the tax front, you are having a tax credit in U.S. GAAP, whereas, on Indian GAAP you are paying out $650m. Could you just make me understand more why the difference is so much?

As I was saying, there are multiple factors. So there have been certain assumptions which have been made until Q4 and we had to take the exact situation as it happened in Q3 and, accordingly, we had to adjust the Q3 things.

But this statement in U.S. GAAP and I GAAP that's so considerably different, that's a different set of things which are coming in I GAAP and U.S. GAAP. So we are more going in terms of this call, what is the number we are giving as far as U.S. GAAP is concerned, and I explained the basis. So far as I GAAP, I can -- off line you can call Nikhil to get the detailed explanation.

Okay. Thank you.

You're welcome.

Thank you very much sir. Next question comes from Ravi Agarwal of JPMorgan.

Yes, hi. This is Jesal. I just have one small clarification. On the authorized generics sales, when you talk about shelf stock adjustment, what does that really entail? And would you like to throw some light on whether that would bring down the margins on that in the third quarter versus the second quarter on authorized generic products?

Yes, Jesal. The shelf stock adjustment essentially is in terms of the price during the exclusivity period and the price on day 181 on the inventory that is lying with the trade. So that's the shelf stock adjustment that we have to take. And as a result of that, obviously, when you compare the second quarter and third quarter, the profit margins are lower on account of this.

Thanks. So I guess when you knock out your shelf stock adjustment, I guess your sales also are lower to that extent.

That's correct.

So if the sales are lower to that extent, just so that I understand it better, whatever is the margin on those sales, so meaning if you reported $75 -- $75m sales in this quarter, whatever is the margin on those sales will be the same compared to the preceding quarter?

No, you take it off the margin. You actually write down the value of the inventory in the warehouses and that directly will hit your margin.

Right. Is there a major swing for you, in this quarter?

Every 180 day opportunity, at the end of the six-month period has to go through this process, especially, where the price dips quite a bit. So there is a write-off on that account.

Okay. So, adjusted for that write-off, excluding the authorized generics, what would you say is your -- I mean you've talked about this in your opening remarks, that your gross margins have improved.

Yes.

But, on an absolute basis, if I was to remove authorized generics from revenues and the contribution of that from the gross profit in the second quarter and compare that with the third quarter, would you say there was an improvement in the absolute gross profit? Because your sales are almost in line, excluding authorized generics, in the two quarters.

Jesal, in terms of the -- if you adjust it for authorized generics, the gross margin for the U.S. generic business also is influenced by fexofenadine where the pricing has lowered, right? So when we ran through the gross margin percentages by business, you would have noted that in the Granted Formulations the gross margins have expanded. So that helps in addressing the overall gross margin mix.

Even API --

Even API has expanded. So for further details we can discuss this after the call, Jesal.

Okay. Thanks so much.

Thank you very much sir. Participants are requested to kindly restrict to one question. Next in line we have Mr. Chirag from Mehta Partners.

Yes, hi. Thanks for taking my question. My question is on the Custom Pharmaceutical Services business. Are you experiencing some kind of pricing pressures over there, because your margin seems to have contracted to 24%?

And, going forward, what would be the outlook on that?

See the margin for different segments of the business is different. The margin for the business that we acquired is largely manufacturing margin, whereas, our earlier margins were including development and also they were in the nature of an R&D kind where the margins were significantly higher. Having seen that the blended margin is still quite attractive for us in this business.

First quarter you had margins of around 32%. Now they have gone to 24. So are you shifting more towards manufacturing from R&D right now?

You should not compare quarter on quarter on a business like this. You look at the complete year and look at margins. Certain quarters, when there are more sales of a certain type it can influence margins for that quarter, but that's not a trend.

Okay. But now, are you shifting more towards manufacturing from R&D, you just commented?

If you saw last year's numbers, last year was entirely R&D.

Okay.

And this year there is a large chunk added which is manufacturing from our [inaudible].

Okay. Could you give some ballpark figure as to what proportion would be R&D and what would be manufacturing?

I can't give you that break up at this time.

Okay, no problem. Thanks a lot.

Thank you very much sir. Next in line we have a question from Mr. Nitin of SSKI.

Hi. Good afternoon everyone. Just one small question. I just didn't get the gross margins for the generics, was it 36.3 or 26.3?

36.

36, okay. And, two, if you could give me some clarity on what exactly is the status update on the Perlecan asset as well as the specialty projects that you were talking about?

The Perlecan assets continue to be moving forward in the clinical trials. There is nothing major to report apart from our last announcement on the tests.

Okay.

The second question was what?

Specialty.

The specialty products. Specialty products also there is nothing to report as such, but we are making steady progress on the development of the products.

Okay. Thank you very much sir. Next is a follow-up question from Mr. Shubham Majumder with Macquarie Securities.

Given that a significant part of revenues and profits this year came from authorized generics and the exclusivity opportunities, and the fact that ondansetron will play out for about a quarter or more in this year. And we do not have any clear visibility on exclusivity based products into fiscal '08, what do you reckon will be the key drivers for top line and profit growth for next year? Just some color, we don't want numbers, but just some color as to what the key factors would be.

First of all I think we should look at the business as a base business plus upside. This year the base business itself grew by 38%, if you exclude the upside opportunities. That kind of growth is going to be possible again next year. We are not giving exact guidance on the rate of growth, but growth continues to be very good in all our businesses. So that will take up a large portion of the revenue that we lost -- which we will lose through these -- lack of these one-time opportunities.

Although, having said that, there is also possibility of some events happening which could trigger opportunities like what we've had in the current year.

And what would you reckon, sir, would be the likely time set for any improved visibility for fiscal '08?

In terms of one-time opportunities?

Yes.

I think in the first half, towards the end of the first half, we should know.

Okay. And just a small follow-up question. Merck KGaA, one of the leading generic figures in the German market, is going up for sale possibly as quoted by the media. Any thoughts here? Would you be participating like some of your Indian competitors? And what would be the likely scenario, or consolidation opportunities be in the German market post that?

Certainly this is not a German asset, it's a global asset, with a presence in many countries, a small portion of which is in Germany. We certainly don't talk about any acquisitions, either which we can comment on, whether we're evaluating or whether we're not evaluating, any opportunities at any given time. It's been our philosophy not to comment on ongoing businesses.

And has there been a material change in betapharm's market share from the time you acquired it over the last two or three quarters, in the overall German market?

No. It has remained at this level.

Okay. Thank you so much. All the best.

Thank you very much sir. Next is a follow-up question from Mr. Neelkanth from Credit Suisse.

Hi. Just a quick question. Has the authorized generic been launched and is the 55% market share including the launch of the authorized generic?

Yes, the authorized generic has been launched.

Was it launched on the same day?

Yes, one day later, I think but pretty much the same time.

Okay, thank you.

Thank you very much sir. Next question is a follow up from Mr. Chirag of Mehta Partners.

Hi. Thanks for taking my question. I wanted to understand about Balaglitazone. The [evaluation] delay that you have, is it on account of extended duration of the three year toxicity study?

No.

Or is it some additional study that has been mandated by FDA after submission of the data?

No. We haven't -- there's nothing on the [current] studies as yet.

Okay.

There are certain studies such as bioequivalent studies and other bridging studies that need to be done for the European regulator.

Okay, for the European. What about the U.S. regulator?

As of now there is nothing specific for the U.S. regulator.

Okay. Thanks a lot.

Prathibha, we'll take two more questions.

Sure sir. Next question comes from Mr. Saion Mukherjee with BRICS Securities.

Hi. Thanks for taking my question. You mentioned in the remarks that your filings for the European markets will go up significantly. Can you throw some light on the strategy for the European market, besides the betapharm, which other markets and how would be the product ramp up there?

Currently we have presence in U.K., Germany. We are in the process of establishing our presence in [inaudible - technical difficulty]. But going forward, our goal is to deliver products for as many countries as possible from a commercial attractiveness point of view. So we are going to expand the number of products as well as the number of countries that we cover from our pipeline and that's going to account for increased R&D activity and expenditure.

So, in these markets you would have your ground presence, or what is the business model you would be following for most of these European countries?

No, it is not, you know -- we have a certain set of core countries where we will establish a direct presence. But that may happen next year or the year later. So we have a group of countries where we aspire to have our own direct presence. Then other countries, we'll work towards through partnerships, licensing as well as a combination of distributors as well as partners.

So what's the kind of growth outlook you have for the European business excluding betapharm?

It's going to take a while, because right now these territories are in incubation. So we'll see growth, but there will be a two year lag before our pipeline kicks in. It's really too early for me to give you an outlook.

Okay. All the best.

Thank you very much sir. At this moment there are no further questions from participants. I would like to hand over the floor, back to Mr. Nikhil Shah for final remarks.

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

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