Dr Reddy's Laboratories Ltd (RDY) 2008 Q1 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.

The presentation will be followed by a question and answer session for participants at the SingTel bridge, and then question and answer session for participants at the international bridge, followed by a Q&A session for participants in India.

I would now like to turn over the call 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 earnings conference call for the first quarter of fiscal 2008. We hope you'll have 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 the IR desk will be available to answer any query 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. Also joining us on the call are our colleagues from Finance, [Umang Vohra], Corporate Controller, and [Ganesh], the Head of Treasury.

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'd 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 this call today as we discuss Dr. Reddy's results for the first quarter of fiscal 2008.

Following an extraordinary year in 2006/2007, I am pleased to come back to you with a good set of numbers for the first quarter. Revenues for the quarter are at $296m. In the same year revenues were at $264m, if you exclude the benefit of authorized generics. And if you don't, the relevant number is $346m.

On a like-to-like basis, thus, we have achieved a 10% growth, driven by the good traction that we are witnessing in all our businesses.

The gross profit margin for the quarter is at a healthy 51% of revenues. SG&A and R&D expense were relatively lower at 26% and 7% of revenues respectively.

Profit after tax is significantly higher at $45m, against $34m in the first quarter of last year.

A substantial part of the revenue growth continues to be driven by the contribution from our core businesses of APIs and Finished Dosages in the rest of the world. These businesses registered a growth of 13% and 15% respectively.

In the U.S. Generics business we benefited from the first full quarter impact of new products launched in the last year.

In Germany, revenues registered a 27% growth on the back of significant volume growth. I would like to approach this growth with cautious optimism. Revenues are at [$53m] against $41m last year.

In the CPS business, our revenues were lower compared to the same period of last year due to certain supply constraints at our Mexico facility and Satish will discuss this in his section.

During the quarter, we filed eight ANDAs, including three ANDAs at first-to-file positions. The eight filings during the quarter address an opportunity of [$5m] in [the weight of] sales.

We also filed 11 drug master files globally, and we filed three dossiers in Europe and 76 dossiers in other international markets.

About a third of our development pipeline today comprises products with less competitive intensity, based either on IP formulation or chemistry complexity.

With this brief introduction, let me hand over the presentation to Satish to discuss the performance highlights by -- business by business for the first quarter.

Thank you, Prasad, and welcome to everybody on the call. I think we have had a good start to the year with a broad-based growth across the businesses. Underlying this growth is a good mix of products and [markets trend overall] gross profit margin.

Let me first begin with the Finished Dosages business in the rest of the world. For the first time the revenues in a single quarter have touched the $100m mark. Overall revenues grew by 15% over last year, driven by continued growth in our key markets of India and Russia.

In India, we recorded a growth of 16% with revenues of $50m. All the key performance indicators, as per ORG IMS or MAT of May 2007, provide evidence of a healthy overall growth in the business. We continue to outperform the industry growth rate and continue to rank as the second-fastest growing Company in the top 10.

For April, as well as May, we grew faster than the industry growth rate. Also, our industry rank has improved to the ninth position. Our key brand franchises, including Omez, Nise, Razo, are growing faster than the respective segment growth rates.

During the quarter we launched seven new products, including line extensions. New products launched in the last three years contributed close to [15%] of the total revenues.

We've further expanded our sales force during the quarter and added two new divisions, marketing divisions, to focus on dermatology and nephrology.

In Russia we registered a growth of 11% over the last year. Revenues for the quarter are at $31m. Over the last one year we have added more than 50 sales reps across the three segments of Prescription, OTC and Hospital divisions. We now have about close to 240 sales reps in Russia, driving growth across all these segments. This is evident in the performance of some of our new product launches.

BION 3, the trademark was licensed from Merck in September last year, and it has already crossed $1m in revenue within 10 months of its launch. And this is a significant achievement.

Together, Hospital and [OTC] segment contributed 30% of the total revenues in Russia this quarter and these segments are growing rapidly on a low base.

Going on to Finished Dosage business in the U.S., revenues were at $43m. On a like-for-like basis, revenues have increased to $38m from $24m in the same period last year.

Let me provide an update on some of the key products in our portfolio. In Ondansetron, post-exclusivity, we have retail market shares of about [54%, though] pricing is down to less than 2% of innovator price.

Revenues for the quarter were at about $2m, largely due to impact of the shelf-stock adjustment. Saumen will cover more on this in his presentation.

In Fexofenadine, we have more than doubled our market share in the last three months to 25% as we locked in some large customers. This, we believe, will more than offset the price declines.

In case of Simvastatin, our market share is in the range of 22% and we expect to maintain our current share, while units should increase as the therapeutic class continues to shift to Simvastatin.

In addition, in some of our older products, such as Tizanidine, Ciprofloxacin, Oxaprozin, Glimepiride, our market shares are upwards of 25%. Even in the most recent product launch of Terbinafine in June, we managed to capture 15% market share in [15 clear] market.

Let me now talk about our Finished Dosage business in Europe. Overall, revenues for the quarter were at $61m. In Germany, to add to what Prasad mentioned, revenues grew by 27% on a [end of back] basis, $53m on the back of significant volume growth.

As per INSIGHT May 2007 data, the pharmacy purchases in volume terms grew by 36%. This growth in volumes has helped to deliver relatively higher EBITDA for the quarter. In fact, in the month of June we achieved the highest ever monthly sales at betapharm.

Let me talk through the reasons for the growth and the initiatives that we have been pursuing for the last several months.

Betapharm, I believe, has built a very strong relationship with several insurance companies by leveraging the beta brand equity and the highly effective corporate social responsibility initiatives, driven by the (inaudible). As a result, today, betapharm has the largest number of contracts with the insurance companies which cover about 70% of the total insured population.

Out of the new regulations, the active ingredients covered by these contracts will be benefited by preferred prescription by doctors or mandatory dispensing by the pharmacies. The implementation of the enabling software in the pharmacies became effective from May, and this has resulted in higher demand for our products covered under these contracts.

Over the last one year we have also reorganized our business in response to the changing business dynamics to focus on key customer [constituencies]. With the implementation of the new regulations, this effort has helped us create the right impact, resulting in volume growth across key products.

Let me discuss some of these achievements. In Simvastatin, we recovered lost ground with market share climbing to 12% from a low of 6.6%. In Alendronate, we are among the leading players in the market, with a market share of about 17%. We also launched Oxycodone earlier this year and, despite the late entry, we have changed ranks rapidly. Currently, we are among the leading players, with a market share of close to 6%.

Moving on to the API business, we recorded a growth of 13%, driven by growth in the international markets. Our revenues from the international markets grew by 24% over the last year, led by the specific product opportunities with key global customers.

Driven by a favorable product mix, the gross profit margins improved to 35%. If you recall, last year we had an upside in Rabeprazole. Excluding [that], we expect revenues to grow on a year-on-year basis. We are witnessing an increasing trend of several large generic players assuming calculated risk and maximizing unique launch opportunities. This obviously presents interesting opportunities for the supply of [EPAs] as well.

We remain optimistic of being able to leverage our large product offering and deep customer relationships effectively, maximizing several of these product opportunities in the long term.

In addition, we are also building a portfolio of IP-based portfolio which could provide significant growth opportunities in the long term.

And finally, on the CPS business, our revenues have declined in the first quarter to $25m. As a result, the margins are also relatively low for the quarter. The key reason for this decline is that we were not able to service orders from our Mexico facility due to supply constraints in some of the key ingredients.

While the supply constraints could impact sales in the immediate near term, the good news is that we have commissioned a new facility to produce the ingredient in-house. This will provide us with [the stringent] control over the entire value chain, benefiting us in the longer term.

The business in India, which enjoys relatively higher margins for the CPS business, is witnessing a lot of traction and is expected to contribute significantly to the overall revenue mix this year. If you recall, last year, the India-based revenues more than doubled. We hope to repeat that this year as well. This, we believe, will help us sustain margins closer to last year levels on a full-year basis.

We continue to remain confident of our ability to aggressively build the business organically in the long term. Simultaneously, we are also actively pursuing inorganic options to accelerate growth. The focus is on pursuing transactions which provide portfolio of customers and products with steady-state business and access to infrastructure which can be leveraged for future business building using the [forward] Dr. Reddy's proposition.

For the update on the key financials, I now hand over the presentation to Saumen.

Thank you, Satish. A warm welcome to all of you. Let me share the key highlights of the first quarter, then move on to the full year.

[Overall our] revenues are at $296m for the quarter. In the first quarter of last year, our revenues at current [convenient transfers in rate] would have been $346m. If you recall, the revenues from authorized generics products in Q1 of last year was about $82m. So, on an adjusted basis, we have grown by more than 10% over last year, despite rupee appreciation by 12% over the same period.

I am sure all of you would want to know the reasons for the lower revenues in Ondansetron. Let me discuss what happened in Ondansetron. As you are all aware, the exclusivity for Ondansetron expired on June 22. During the exclusivity period we captured a market share of more than 60%, and the pricing was in the range of 40% to 45% of the innovative price.

Following the expiry of the exclusivity, the prices have gone down to less than 2% of the innovative price. And as is (inaudible) practice, we have to provide for sales stock adjustment for the drop in prices. The inventory level with the customers was higher than what we expected and, hence, we had to provide for a higher amount of sales stock adjustment. So after adjustment of this provision, our net sales in Ondansetron were about $1.6m.

The gross profit margin this year for Q1 is at 51%. In absolute terms, the gross profit has actually increased, despite the significant contribution of authorized generics products last year. This reflects the strength of the underlying businesses which have delivered strong gross margin.

APIs delivered a gross margin this year of 35% on the back of a profitable portfolio mix. The Finished Dosages in the rest of the world registered a margin of 72%. This improvement in margins is a combination of higher contribution of international revenues to total revenue, favorable product mix, and the benefit of [at the] operation.

Gross margin of Generics business, U.S. and Europe together, is at 48% of revenues. The margin in the CPS business is at 21% of revenues [and is] significantly lower compared to last year. The reasons for the lower margins are the lower sales base and the relatively lower proportion of sales from India which normally enjoy higher margins.

On the currency risk, if the rupee remains the range bound in the current bank, then we do not anticipate any major downside to the margins. However, if the rupee were to appreciate further from the current level, then we might see some [compression] of the margins.

On the operating expenses, SG&A ratio to sales is at 26%. The R&D to sales ratio for the quarter is at 7%.

Generics interest expense line item includes a one-time charge of about $2.7m towards the prepayment of non-recourse part of the outstanding term loan.

For the quarter, we recorded a tax charge of $4.5m. The effective tax rate is about 9% of pre-tax profit. The net profit for the first quarter increased by 31% to $45m, as against $34m. We have achieved this growth despite the significant contribution from authorized generics products in the first quarter of last year, and very low contributions from Ondansetron during this quarter.

Moving on to the balance sheet items, we ended the quarter with a cash reserve of $274m, as against $458m as at the end of March. This decline is on account of the reduction in the borrowing level to $377m, from $610m at the end of March. During the quarter we repaid [$130m] [in lieu of the] long-term notes and about $54m of short-term borrowings.

Our net debt position has improved considerably and stands close to $100m now.

With this overview, let me now request Prasad to make his concluding remarks.

Thank you, Saumen. After crossing $1b in revenues, and as we look to the future, two things seem to have changed significantly for Dr. Reddy's, the scale of operations and the quantum of opportunities.

The challenges in effectively marshaling all our resources, which include people, products and infrastructure, to not only manage the scale of operations but also to maximize future growth opportunities.

In response to this challenge we have made some changes to the Organization to better organize ourselves and prepare for the next wave of growth. Among other changes, we have integrated all our API manufacturing operations into what we call the Chemical Tech Operations, Technical Operations, to create synergies and execute seamlessly on the increasing scale of operations across the API and CPS businesses.

On the business outlook, I will discuss the developments in North America and Europe, and Satish has already covered the rest of the businesses.

In the U.S., we have been pursuing a strategy to increase our operating leverage by selling our products into new channels for meaningful additional revenue and margin generation with limited incremental SG&A and R&D.

During the current year, we expect to deliver on this strategy along two lines. The first aspect of the strategy is to our decision to enter the Private Label OTC business, following the suspension of the OTC Packaging and Distribution Act which is [at line] now. The initial customer traction and product launch planning is proceeding very well.

The second aspect of the strategy is an opportunity to supply Generics to U.S. Government agencies, such as Veteran Affairs and the Department of Defense. We are pleased to announce that Dr. Reddy's has become an authorized supplier to the U.S. Government. The first product in this category is Finasteride 5mg.

In terms of near-term launches, we anticipate at least 10 new launches this year in the U.S., including Carvedilol, Omeprazole, Amlodipine Besylate, Cetirizine, and others.

On the patent challenges, we expect lower core positions in Rivastigmine and Galantamine towards the end of the calendar year. If the core position is favorable, these products could present interesting opportunities in the near term.

Let me now talk about Europe. This geography represents -- presents significant growth opportunities, even as many of the markets are transitioning due to various reforms. In terms of market presence, we now have commercial operations in Germany, U.K., Spain and, most recently, we have opened an office in Italy.

Betapharm's addition to the Dr. Reddy's family has created a strong regulatory group for Europe. As we step up the regulatory activity, this group will evolve into a globally integrated and networked organization, addressing pan-European filings.

In terms of pipeline, the current development pipeline for Europe addresses an opportunity of over $10b in innovative sales over the next five years. This will translate to 10 to 15 filings every year for the next two to three years.

We are also aggressively pursuing in-licensing opportunities to complement our internal product development programs. We intend to maximize the value of our pipeline through a combination of launches under our own label, as well as out-licensing to third parties. We expect to leverage all of our capabilities and assets in building a dominant Generics business in Europe over the next few years.

Let me also provide some specific update on Germany. In terms of near-term outlook, we expect to launch about eight to 10 products this year. In addition, we are also pursuing unique opportunities which could provide potential upsides in the near term.

We are currently tracking changes in the marketplace and, as we mentioned earlier, we will respond to the changes by adapting our operating model to achieve success in the long term. We are cautiously navigating to the supplies under the new supply contract to make the most of the opportunity on hand.

We continue to believe that the higher costs under the new contract in the short term will be more than offset by the volume growth over time, as we ship the products to our manufacturing network.

I am pleased with the progress on our aggressive plan of moving products from our current supplier to our own supply chain network. The level of commitment and integration between the various teams in India and Germany, working on this project, is extremely encouraging. By the time we come back to you in October we expect to have transferred the first few products to our own network.

Our teams are working aggressively in completing the transfer of all key products currently sourced from the suppliers to our network by the end of this financial year. This will enable us to drive volume growth on guaranteed supplies and also build a competitive cost position.

While we may be faced with challenges in the immediate short term, I strongly believe that, in the long term, the potential of Germany -- I strongly believe in the long-term potential of Germany which continues to remain a key market for Dr. Reddy's.

Before I provide an update on our NCE pipeline, let me briefly describe and discuss the successful launch of Reditux in India. This product has been extremely well received by the specialist physicians as well as the [break] channel. This launch has also generated significant visibility for Dr. Reddy's internationally as a serious biologics player. With a pipeline of over eight products, Dr. Reddy's is committed to building a globally generic biologics business for the future.

On the NCE pipeline there are a couple of developments. We have discontinued further development of DRF -- DRL 12424 for mixed dyslipidemia, as it does not meet our criteria for biological activity in terms of patient benefit. The positive news is that our lead compound, Balaglitazone, or DRF 2593, has moved into Phase III clinical trials and dosing of human beings -- humans has begun. Our partner has commenced the trials in Europe following the approval from EMEA.

To conclude our discussions, we remain confident of achieving healthy year-on-year growth, of course, excluding the significant upsides of last year. We are cautiously monitoring the rupee movement for possible impact on our margins. We are also closely tracking the supply situation under the new contract in Germany. We are also examining our overall cost structures closely, in order to optimize costs and drive productivity towards building a highly competent organization for the long term.

This ends my discussion. And we now leave the floor open for the Q&A session and we'll be pleased to answer your queries.

Thank you very much, sir.

Prathibha, may I request the participants to take one question at a time so that we can cover everybody in the queue? Thank you.

Thank you, sir. At this moment, I would like to hand over the floor to Zaine to cover the Q&A session for participants at the SingTel bridge. Over to you, Zaine.

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

The first question is from Mr. Neelkanth Mishra from Credit Suisse, India. Go ahead, sir.

Hello. Congratulations; great numbers! On betapharm, what kind of numbers should we expect on a year-to-year basis for the full year?

We are not giving guidance in terms of specific numbers.

Okay.

But the situation looks good. And we are watching the supply situation, as well as the market dynamics in terms of the changing on regulatory -- the situation in terms of tenders.

Our understanding was that, because of high price renegotiated contracts [has diluted] the margins and betapharm could decline this quarter, but they don't seem to have declined as much.

Yes. They have declined compared to the original pricing.

Right.

But margins are healthy still.

And even in terms of the last we discussed -- the understanding was that before the products were moved back to India it would be difficult to sign insurance contracts. Has that changed?

I think we are waiting for securing the supplies before we aggressively bid for tenders.

Okay, thanks. [I'll go back in the queue].

(OPERATOR INSTRUCTIONS). At this moment there are no further questions from participants at SingTel. I would like to hand over the proceedings to Elizabeth.

Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS). The first question comes from [Krishnan Said].

Good morning, or good evening. Just a question back on the German market. Do you think that in 2008 that you would be able to grow overall profitability in Germany '08, I guess, for you, fiscal '09 over '08, would you expect there to be growth in terms of profit -- overall profits generated by betapharm? Thank you.

Yes. Certainly we believe that we can do that. I think the condition for that to happen is to get our supply chain in order by moving on the main -- key products into Dr. Reddy's and also a few interesting launches. But we certainly feel we can do that.

Okay, thank you.

The next question comes from [Kimberly Ha].

Hello, good morning and good evening. The U.S. sales posted a decline. Will Dr. Reddy's be focusing on acquisitions in the U.S. to strengthen sales?

And earlier this year there was an abandoned takeover of South American -- [South Africa's] Adcock Ingram. Will the Company -- how strong and how aggressively will the Company be focused on acquisitions this year?

Yes, firstly I think the de-growth happened in the North American market because we didn't have an authorized generics. And the [deep] business is building up; the base business has shown very strong growth.

Acquisitions are certainly a part of our strategy and we continue to look for good acquisitions at the right price. Having said that, I think we are not focused on acquiring a U.S.-based generic company at this time.

Right. Thank you.

(OPERATOR INSTRUCTIONS). The next question comes from Krishnan Said with [Global].

Yes. Hello. Just a question on the pricing on the -- on your U.S. business, the base generic pricing. Can you make some comments as to what you're seeing on a year-over-year basis and pricing on that? Thank you.

Well, the pricing environment for products where there are multiple players remains highly competitive. And pricing is on a downward trend in the U.S. for products where there are multiple players.

As a response we are looking at products which are likely to have limited competition through some barriers to entry, whether it is intellectual property, whether it's technology complexity or chemistry complexity. So, in short, I think the pricing situation remains to be very tough.

(OPERATOR INSTRUCTIONS). At this moment there are no further questions from participants at the international center. I would like to hand over the proceedings back to the India moderator.

Thank you very much, Elizabeth. We will now begin the Q&A interactive session for participants connected to India Bridge. (OPERATOR INSTRUCTIONS).

The first question comes from the line of Mr. Rahul Sharma with Karvy Stockbroking.

Thank you. I just wanted to get clarity on the CPS business. When do you think we will be able to get a new traction in this business?

Okay, the issue for the first quarter has been that the Mexican business has been affected because of the supply of one of our key intermediates. That's the first quarter reality.

We expect things to be back on track [over a] period of time for the following reasons. And that's going to [be] next year. Because what's going to happen this year is we have already commissioned the facility for that intermediate so whatever is contracted for the remaining quantities we'll be able to service it. But whatever we've lost because of the first quarter, that'll be difficult to make up. That's the Mexican part of it.

However, on the Indian side of the business, like if you remember we have doubled that side of the business last year, we still hope that as the year goes by we should still be able to deliver that kind of result for the Indian part of the business.

How much was the Indian side last year?

We doubled it actually over the previous year. And that percentage was approximately --

Last year, we had almost 20% of the revenues coming in from the India business.

$30m?

Yes.

Okay. The revenue section and the Mexican thing will pan out in '09, right?

In the current fiscal we'll be back on track. But we won't be able to make up for the sales that we lost in the first quarter. That's what Satish was telling you.

Okay, thank you.

Thank you very much, sir. The next question comes from the line of Mr. Shubham Majumder with Macquarie Securities.

Can you just run us through the gross margins on a segment-wise basis in this quarter, as well as the comparable numbers for last year same quarter?

This quarter number, I already said. I'll once again repeat. But this quarter number in API was 35% gross margin. [Net pharma] is 72%. Generics overall 48% and CPS 21%. Overall gross margin is 51%.

Shubham, I don't have the gross margin by segment for the same period last year but I'll get back to you on that after the call.

Sure. Am I allowed to ask one small question?

Go ahead.

Okay. Clearly, in terms of the strategy going forward both for the generics business as well as for the API businesses, clearly all companies talk about technically complex products or niche product opportunities.

Can you give us some more color or strategic thoughts as to what this could potentially be in terms of broad therapeutic areas, and what the timeline expectations are in terms of some results or some actual developments you have on the ground?

You're right, the generic companies telling you that we will focus on complex products.

Yes, it's become a generic statement.

Yes, yes. And actually I am seeing that some of the niche products, actually, are not niche any more. If you take a product like Galantamine for example, there were some five filers on day one and then another four after a few months. Nine products on a very small product and a very challenging product. So in a way, if everybody does the same thing, it doesn't remain a niche any more.

But I think there are areas where not everybody can achieve filings. And I think really the evidence of filing technically -- products which are technically complex should be in the filings. And I think we have a few products to tell you that we've filed. Some of them are, unfortunately, not public so we cannot share them with you.

One product which is public is Fluoextine 90mg once a week. Propranolol LA which is again, we are not the first filers but we are in a market where there are only two players. These two are an example of complex filings. We will have to come back to you with a more comprehensive list as we file these products, many of which are in the development pipeline today.

Okay, thanks. I appreciate it. Thank you.

In answer to your previous question of the last year same quarter what was the margin, so there in branded formulation we had 70% which has actually gone up by 2% year-on-year basis. On API it was 27%, which has considerably gone up. Whereas in generics, last year we had [authorized] generics so margin was less. It was 39% last year in the same quarter. For CPS we had more than 29% last year. It has come down to 21%.

Thank you.

Thank you very much, sir.

Next question comes from the line of Mr. Bhavin Shah with Daulat Capital.

Good evening, sir and congrats on the great numbers. My question pertains to betapharm. As such, do we believe that the supply still remains from HEXAL and by the end of this year we then do get the product launch, products being supplied from India. That is how I think it's going to be done.

And my other questions pertaining to betapharm, is are there any product launches which have happened during this quarter?

The first one I don't need to answer, you answered it yourself. The second part is, yes, we have and I think a good example is Oxycodone, which has done very well. We've had several launches and most prominent of them was Oxycodone.

Okay, sir. And any developments happening on the CapEx that you've spoken about, $100m on the SEZ?

The SEZs have been slightly delayed because of land acquisition complexities. We are close to acquiring the land for the Finished Dosage SEZ. For the APIs SEZ, we are still seeing some more delays.

All right, sir. Thank you very much.

Thank you very much, sir. The next question comes from the line of Mr. Rahul Khaitan with Capital Market.

Good evening, sir. Can you give me the break up of the other income given in the (inaudible)?

No, we are not giving that break up.

Is there any ForEx gain included in that? And if yes, then what is the tax implication on that?

Rahul, are you referring to the U.S. GAAP?

No sir, the Indian one.

Yes. On the Indian GAAP, the ForEx is included in the other income line item.

Okay, but what is the amount? Can you say that please?

Roughly INR20 crores.

INR20 crores. And so what is the tax implication on this?

It is already reflected in the tax rate, that is the tax charge and the tax rate in the (inaudible).

Okay, fine. Thank you, sir.

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

Yes, thank you for taking my question. My first question is on your OTC store brands strategy. Could you give us some more color in terms of products, what sort of revenues this could achieve? And when do you expect a critical size to be reached for this particular initiative?

And secondly, on betapharm, you mentioned about contracts with the insurance companies. What does that mean in terms of prescription volume coverage, essentially in U.S. dollar million?

On the OTC part of it, since we have terminated the agreement with Leiner, we have decided to go on our own. And we are pretty close to launching our own OTC business. Some of these products are the ones which Leiner used to sell before. They have come back to us and we are going to launch them. So that's the profile of the products at this point of time.

We may not be specific in terms of the revenues we earn from that. But just to give a rough idea it'll be to the tune of, say, it will be about $20m. That's about the OTC part.

On the betapharm, I think your question was our contracts with the insurance companies.

Right. What would that cover?

70%.

It will cover 70% of the patients, [that's what you ask], 70%.

But what does that represent in terms of value, in terms of the market value?

The contracts are not for supplies of goods. But they are more to include us in the dispensing with the pharmacies. So 70% of the insurers have betapharm on their list of approved vendors for the products that we supply. That's what it means.

And what would that translate in terms of revenue growth outlook, if one were to build that?

I think it's very difficult to model that. It depends on the supply situation that we have. It depends on the pricing. It depends on a lot of factors.

As per the new legislation, the contract is mandatory for substitution at the retail end now. So betapharm has been having this contract. Everybody else is now gunning for this contract. So how can you predict the value without knowing what is going to happen at the other end.

One final thing. So according to you, how do you compare with say a Stada or a Sandoz?

Well, like I told you, we are facing situations now in terms of supply. So unless we have completely de-bottlenecked our supply it doesn't make sense for us to talk about the business -- about the potential of the business.

Okay, thank you.

Thank you very much, ma'am. Participants are requested to kindly restrict to one question in the initial round.

Next in line we have a question from Mr. Chirag Talati with Mehta Partners.

Yes, hello. Thanks for taking my question. My question pertains to branded formulations. This year you have included the emerging business in branded formulations side.

Could you give a split of the emerging business, in terms of how much it would have contributed to India versus international?

Chirag, we've already included this in the table, but to just give you -- we'll give you specific numbers. About INR14 crores which was earlier represented as a separate line item has now been added to branded formulations.

Okay. And this would be present largely in the international [branded]?

No, this would be largely India.

Okay.

This is the oncology segment which was earlier included as the emerging business. And a large part of it is in India, which is now being included within the overall India business.

And correct me if I'm wrong, but last year this portion was INR198m, roughly INR20 crores. So has this de-grown, or I have my first quarter numbers wrong?

There are two parts to it. One is even the biotech product. The last year comparable number against the INR14 crores is about INR12.7 crores.

Okay.

So that's the year-on-year comparison for the Oncology business.

Okay, that's fine. I'll get in the queue, thanks.

Thank you very much, sir. Next question comes from the line of Mr. Sameer Baisiwala with Morgan Stanley.

Hello, good evening everyone. Could you give me the break up for ForEx gains in the [consoli] GAAP? How much is on account of translation? How much is on account of forward cover gain?

But mostly this gain is realized.

I'm sorry?

Mostly this gain is realized. We're not giving detailed break up.

But it's important to know that -- did you make translation losses, gains?

Most of our contracts are short end and we have actually realized the gain as of June.

Net, was it gain or loss?

Net is a gain.

In translation account?

Yes.

Yes.

Okay. So this [INR285m] has both translational gains as well as forward cover gains.

Yes.

Okay. Any update on the orphan drug DRF 1042?

It's -- we've got orphan drug status. We are still looking at the various options. We haven't finalized our complete portfolio of indications that we're developing this product for.

But you've got that status from EMEA?

Yes, for osteosarcoma we got that.

Okay. So when do you -- what would be the pathway going forward? And when do you want to start the clinical?

I think we are doing a commercial evaluation with respect to that particular indication. We're also looking at a wider range of indications. And we're trying to see the dynamic between the orphan drug development as well as the wider development and how it impacts economics. We haven't finalized our strategy yet.

Okay. If you were to expand the indication would that mean going through the whole regulatory chain?

Not the whole chain; certainly Phase II and Phase III.

Okay. Just one question of Bala, would you be looking to share the Phase II data now that the product is in Phase III?

I'll have to talk to my partners. We have to make a joint decision on that.

Okay. That's all from my side. Thanks very much.

Thank you very much, sir. Next question comes from the line of Mr. Prakash Agarwal with Deutsche Bank.

Good evening, sir. This is Abhay from Deutsche Bank. Just two questions, one on the U.S. market. What sort of margins do you -- gross margins do you expect from the private labeling or the government administration business?

The government administration business is slightly higher than our current margins. The private label business will be similar to our generics business.

So for both the businesses, it will be much better than the current generic business of 39%?

The private label -- it depends on the products that we launch. It cannot be a blanket average.

Okay. And what sort of numbers would you -- can it be, say, a $30m, $40m business in about three years' time?

In three years' time I think, certainly, it's possible.

Okay. One last question on Germany. It's grown by 5% on a y-o-y basis. Any sort of breakdown you can give in terms of how much has been the price decline, or the volume growth or whatever?

It was clarified by Satish that whatever growth figure was indicated on Germany was net of that [adjusted]. The real growth was higher. The volume growth will be almost 27%.

Okay. And going forward now, any outlook in terms of do you expect prices to stabilize, very roughly?

I think it's a little early to conclude on that. We are watching the market and we'll see what happens.

Okay, fine. Thank you, sir.

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

Good evening, gentlemen. I just wanted to know one number. Gross profit margin in betapharm, if you could share.

We are not -- because segment-wise we are [sharing]. That's why I said that was for entire generics business.

Sure. The last few quarters you had shared this one.

No, we didn't share last few quarters. Only in the year-end analysts' call we talked about the entire EBITDA figure for the year.

Okay. Has it been better than FY '07?

In terms of?

The margin, betapharm, for the quarter?

When you're saying quarter, Q1 FY '07 you are comparing?

Yes. No, I'm saying this quarter, first quarter 2008 fiscal, is it better than the level of margin that you achieved in full year FY '07?

A little bit better.

Okay, thank you. All the best.

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

Sir, I have one question.

Was there any API revenue contribution from Rabeprazole this quarter?

No, there was no contribution of Rabeprazole.

Okay, thank you.

Thank you very much, sir. Next is a follow up from Mr. Rahul Sharma of Karvy Stockbroking.

I just wanted clarity on how the gross margins on the CPS business will pan out towards the next two years, with them coming in. And do you foresee the improvement in margins from the current 21% in the current year?

Yes, certainly they'll improve over the current margin level. The margin is a blend of high-value growth business from India, which is developmental products and relatively lower margins on the mature business, which comes out of our manufacturing business from Mexico. As a blended business, they should compare well with the API margins on an ongoing basis.

Over a longer period of time is it? Next two to three years?

It will significantly improve towards the next two to three years because what we're trying to say is that the Indian side of the business, right, which is the higher margin that is expected to increase significantly and that will improve the margins much more than what it is today.

So can I assume that our Indian businesses margins are in line with the API business?

They're higher.

They're higher.

They're a lot higher. But, again, if we -- and it's a blend again of manufacturing and developmental products. But, on the whole, I think we will achieve a level which is close to the API business on an ongoing basis.

Okay, thank you.

Thank you very much, sir. The next question comes from the line of Mr. Ravi Agarwal with JPMorgan.

Yes, good evening. This is Jesal. First of all, congratulations for the excellent results.

The question actually is on the SG&A line. We have seen a year-on-year decline in SG&A costs. Would you comment on exactly what's really driving this decline? And how should we look at the SG&A for the balanced three quarters?

Yes, Jesal, some part of our SG&A cost is in international. So whenever there is a rupee appreciation it definitely benefits us on that. But overall, I think on the legal front we had very good control, so there is a decline on the legal costs. And both in betapharm and branded we have controlled the selling expense as well.

So have you seen, in the betapharm business as well as in branded business, the SG&A as a percentage to sales to have come down? Or when you say control, what does it mean?

Reduced.

Is it growing?

Particularly in betapharm in Q1 FY '07 there was also a lot of samples and other [pieces] there.

I think overall, the Company is looking at costs very strategically and trying to bring down costs across the organization. As a part of this drive even SG&A is being controlled.

Okay. So for the balance period we can expect similar line of --

A similar range. I don't want to commit to a number. And I'm sure you won't do that either by multiplying it by four. But, certainly, I think we are exercising caution and control.

Okay. The second question is on Fexofenadine, or basically more like the U.S. business. On a sequential basis, we have not seen too much of growth, whereas, in Fexofenadine we have seen market share increase almost double in the last three months. So what's really driving -- why have we not seen increase in the base U.S. business on a sequential basis?

There has been some price compression but that doesn't completely explain this. I think there's some sales returns we had to book and as a net result you are seeing -- you don't see the full effect of the growth.

To add to that, Jesal, in terms of the market share that has gone up, we will see the units improving as we go along. So there is some lag between that number and the sales that we report.

That's right.

So, would you like to give some indication as to what kind of price erosion have you seen in Fexo, given that competition, if anything, has actually reduced?

Well, pricing competition is still there. There is an authorized generic out there and there has been some price compression. I think the price compression has been significant because of the customer mix also that we got. Certain customers enjoy a higher discount and these are the large chains and their expectations are a little different. So to that extent we have seen price compression.

Right. The last question actually was on Russia business. It's grown only 11%. What kind of -- are you seeing any change in the trend in the growth rate in this business? Or should we, for the full year, look at the historical growth in excess of 20%?

You have to take into account higher rupee has also appreciated. So this is despite the 12% appreciation we have still grown by 11%.

The billing to Russia is in dollars and there has been an impact of that.

I see. Okay, thank you so much.

Thank you very much, sir. The next question comes from the line of Mr. Shekhar Singh with Goldman Sachs.

Hello, sir. I just wanted to know what are the factors which led to such a sharp improvement in margins for the API business compared to last year, from 27% to 35%.

It's product mix, basically. So we did sell some very attractive products plus some few launches. Amlodipine Besylate is a key product launch which gave us good margins.

It's the nature of the API business when you have a product launch you ship a large quantity of goods, especially if you are taking advantage of [at risk] launches or exclusivity launches; they provide a lot of upside.

Okay, thanks a lot.

Thank you very much, sir.

We'll take one last question maybe, or last two questions.

Sure, sir. The next question comes from Mr. Ashwin Agarwal, with Akash Ganga Investments.

Good evening and congratulations on a very good set of numbers.

Can you give an update on cumulative filings for the U.S. market and under FDA review with [G Para 4] breakup?

Nikhil.

Yes. Ashwin, the cumulative numbers of -- the number of ANDAs that we've filed are 109.

Okay.

And of the ANDAs that are pending, approval are 71. And close to 35 ANDAs involve patent challenges.

Okay. And last year you had made around 33 filings including the product partner filings. So this year also the level of filings could be close to similar levels?

Yes, we actually have filed eight in the U.S. this year, this quarter.

Okay. For the full year it could be close to last year's level?

Yes, yes.

Mr. Prasad, can you repeat the two litigation opportunities you spoke in the call? I missed those.

Rivastigmine and Galantamine.

Okay, thanks a lot.

Thank you very much, sir. Our last question comes from the line of Mr. Nitin Agarwal with SSKI.

Good evening, sir. Did we record some sales of the authorized generics even in this quarter? Like for Simvastatin?

We -- this is actually the sales stock adjustment and what you call bill back claim.

[For] authorized generics?

The authorized generic revenues in the first quarter.

Yes, little bit.

We have Finasteride which is being still sold under the authorized generics transaction. And we also had about [$5m] on Simvastatin that we recorded during the quarter.

Okay, so about INR30 crores?

$13m.

$13m?

Yes.

Okay, thank you.

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 further clarifications 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 WebEx 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.