Dr Reddy's Laboratories Ltd (RDY) 2008 Q2 法說會逐字稿

Good evening, ladies and gentlemen. I'm Pratibha, 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 Webex international bridge, followed by the question and answer session for participants at the India bridge. I would now like to hand over to Mr. Nikhil Shah. Thank you and over to you, sir.

Thank you, Pratibha. Good morning and good evening, everyone, and welcome to Dr. Reddy's earnings conference call for the second quarter of fiscal 2008. We issued the press release earlier this evening. The results are also posted on our website on the home page under the quick links items.

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 item.

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 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. Satish will begin with the financial summary and key business highlights, followed by a discussion on financials by Saumen. Prasad will end the call with the outlook and key trends.

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

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 Satish Reddy, our Chief Operating Officer.

Thank you, Nikhil. I would like to thank all the participants for joining us on the call today as we discuss Dr. Reddy's results for the second quarter of fiscal year 2008.

The second quarter has been a very good quarter in terms of both financial performance, as well as some of the initiatives that we are driving for securing long-term growth. The performance has to be evaluated against a 15% rupee appreciation in the last 12 months, the reforms and supply constraints in the German market, and an exceptional year in the fiscal 2007 driven by upsides.

Let me begin with a quick summary of the financials. Saumen will cover the specifics later on in the conversation. Revenues are up 20% in dollar terms, excluding the upsides from authorized generics last year. However, in rupee terms the growth was lower, at 4%, due to the rupee appreciation. Gross margins, at 51%, are higher due to favorable business and product mix. With no upside revenues Q2 actually represents a base quarter, unlike the same period of the previous year, where the margins were lower due to the upsides from authorized generics.

R&D spend is about 6% of the revenues but we expect it to increase in the next two quarters. The SG&A spend was higher than expected but it is likely to normalize in the remainder of the year. Profit after tax is at $67m, significantly higher than profit before tax, due to the $36.5m of benefit that was accrued from the deferred tax reversals related to betapharm.

Let me now discuss the revenue highlights in each of the businesses. But to begin with, the global finished dosage market and then I'll cover the key markets. Starting with Russia, it's one of our most profitable markets. It continues its growth momentum. Revenues grew by 25% on the back of new products launched last year and higher sales force productivity. Overall, we are now the 15th largest pharmaceutical company in Russia. In the OTC segment we have moved up nine ranks in the last 12 months.

The market is also witnessing tremendous growth led by a very strong economic outlook. We are the leading company from India in Russia. And we believe that we will be able to extend our leadership into the future by maximizing the growth potential of the prescription retail, OTC and the hospital segments.

In India, which is our home market, we grew about 9% last year -- over last year. This was driven by the performance of some key brands and new product launches in the last three to four quarters. Having said that, in the last few months there has been a slowdown in the new product introductions, largely an issue of timing, I would say. Also, recently we reorganized the sales force into more number of divisions for greater focus on key customer segments.

The combination of these factors has resulted in lower-than-industry growth in the last couple of months. However, on a 12-month trailing basis, as per the August ORG-IMS data, we are growing ahead of the industry growth rate and we hope to sustain this trend over the long term.

Let me now talk about our performance in North America. Revenues were up about 63% adjusted for the upside from authorized generics last year. In September we commenced sales of finasteride under the government business and also launched our first OTC product, which is Ranitidine 150 mg. The full impact of these opportunities will be reflected in the second half.

We continue to track well on the market shares for several of our products, particularly in fexofenadine. We have improved our market share to about 46%. The higher market share, however, is at a much lower price compared to last year. Overall, we launched four new products during the quarter and this takes the total number of approved ANDAs to 42. And we filed one ANDA during the quarter, with several lined up in the next two quarters.

As we think of the second half, we will continue to benefit from the new product launches, including the full impact of the OTC launch and the finasteride government business.

I'll now move on to Germany. Revenues from betapharm are at $47m. In rupee terms, revenues have declined by 12% over the last year as well as the first quarter. The main reason for the decline over the first quarter is the ongoing supply constraints that we're facing. We were unable to service the orders on hand completely, due to the lack of consistent supply of the key products currently being sourced from Salutas.

The new product launches for the year include oxycodone, amlodipine and finasteride. Oxycodone is performing extremely well and contributed about 7% of the overall revenues of betapharm, with a market share of about 8.4%. We also have a few interesting new product launches lined up for the next few months. As per INSIGHT market research data, the combined volume growth for July and August was about 28% in terms of prescription volume.

In addition to the key markets that I just covered, we're also scaling up rapidly in several of our international markets. Ukraine and Romania are among the promising markets for Dr. Reddy's, with annual revenues in excess of $10m. We also look forward to adding more new markets to this list in the next few years.

Let me now talk a bit about our Custom Pharmaceutical Services business. The revenues from the organic part of this business, largely serviced out of India, spilled over to the second quarter, adding to the overall growth in revenues. This part of the business is scaling up very rapidly and we expect to double the revenue base this year.

The Mexico business is witnessing a slowdown compared to last year and we expect this to continue probably through the rest of the year also. The supply issue with respect to one of the raw materials is behind us right now, now that we have commissioned the new manufacturing facility for this particular material in India. As a result, though the performance of the organic business is quite strong, the overall revenues have declined by 30% over the last year.

Also, the organic business enjoys much higher gross margin compared to the Mexico business. This explains the high gross margin for this quarter, and for the full year will help sustain the gross margins closer to last year's level.

Finally, on the API business, the business continues to perform well on the back of new opportunities, both in development sales as well as commercial launches. Revenues grew by 11.5%, largely driven by sales growth in North America.

In terms of new markets, we are making good progress in Japan. We have made inroads into some of the key customers with a few products and we are quite excited about the future potential of this market. The base gross margins in this business have moved into the 30% to 33% range on the back of higher scale of operations and expanding portfolio of products. While the business continues to perform well, please bear in mind that in the second half of the last year we benefited from the upsides in sertraline and rabeprazole. This will present some challenges on a growth comparison for the second half.

Globally, the generics industry, as we can see, is witnessing rapid changes in the form of regulations, competitive intensity, consolidation and market discontinuities. They are presenting opportunities as well as challenges for the Company. We are responding to these changes through a combination of initiatives at a strategic level and also at an operational level.

Let me discuss some of these initiatives that we are driving towards improving operational efficiencies, including improving our cost positions, building new capabilities and increasing our manufacturing capacity.

In terms of cost improvements, our relentless focus on execution excellence in areas of sales force productivity, manufacturing efficiencies and cost improvement for our key products are beginning to yield results and will help us sustain the competitiveness in our key markets.

In terms of capability building, we are building new skill sets across various functions to address the new growth opportunities. In biologics, we have assembled a technical team of almost 200 people engaged in R&D as well as manufacturing of biologics.

We are also making significant investments in creating new capabilities -- in new capacities. We recently commissioned a 2.5 lakh square feet R&D center which takes care of process development, and we have moved the R&D teams of both APIs and finished dosages now to one location. We believe that this will help us in improving the overall effectiveness of the R&D teams for process development.

We also have increased the manufacturing capacity for finished dosages to about 12b to 15b units this year from about 8b to 9b units last year. And we further intend to double the capacity in the next two to three years.

With this, let me now hand over the discussion to Saumen for an update on the financials.

Thank you, Satish. A warm welcome to everybody on the call.

The overall performance in the second quarter has been good, despite some sharp movements in SG&A and tax line items. Satish has covered the revenue highlights in detail. Let me start with gross margins.

The gross profit margin for the quarter is at 51%, and the GP margin in Q2 of last year at 41% is really not comparable due to the impact of significantly lower margin from the upsides from authorized generics last year. The GP margin in the finished dosage business in the rest of the world is slightly higher, at 73% now. The GP margin in the API business is at 32%, well within the 30% to 33% range. CPS margins are much higher, at 47%, due to spillover of high margin organized business from first quarter to the second quarter. The margin for the first half, at 35%, provides a more balanced view. Combined margins from North America and Europe, generics, are at about 48%. The gross margins in betapharm have improved compared to Q1.

SG&A spend in Q2 is high, at $105m, as it contains certain exceptional items. The SG&A ratio to sales for the first half is at about 30%. We expect some improvement over that in coming quarters.

There are no major movements in R&D and amortization line items. The R&D spend for this quarter includes a milestone payment of $1.5m to Rheoscience on commencement of Phase 3 trials in Europe. On the ForEx line item we recorded a net gain of $6.4m, as a result of combination of medium-term hedge instruments and a higher hedge position. So these gains partially offset the impact of rupee appreciation.

The tax provision includes a benefit of $36.5m. We created a deferred tax liability at the time of betapharm acquisition, at the then prevailing tax rate of 39%. During this quarter there is a change in the German tax law and the rate has come down to 29%. To that extent, the deferred tax liability is reversed and this is captured as a benefit in the tax provision line item.

The net investment in capital expenditure during the quarter is at about $26m, and the net increase in operating working capital is $46m. We expect to see an improvement in the working capital position in the next quarter.

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

Thank you, Saumen. As you all know, in the first six months we recorded revenues of $621m, with a profit after tax of $77m, which includes the benefit from the reversal of deferred tax liability.

To reinforce what Satish mentioned, you should evaluate our performance in the first half against the exceptional performance in FY '07, the strengthening rupee and the pace of market reforms in Germany. Considering all this, it is certainly a creditable achievement. However, we are working on various initiatives to further bring down costs and improve the profitability as we go forward.

Globally, the market dynamics are changing rapidly, presenting us with several interesting new opportunities in terms of new geographies as well as discontinuities in existing markets. We are responding at different levels to these changes to maximize the overall growth and value-creation opportunities.

We intend to build a leadership position in our APIs and global finished dosage businesses. We will make these businesses globally competitive through aggressive focus on cost and productivity improvement, create a global portfolio of products by leveraging our pipeline across markets and continuously expanding our pipeline to include products of high competitive intensity as well as products with lesser competition as a result of technology challenges and other barriers.

Simultaneously, we are also pursuing various initiatives to accelerate the commercialization of the innovation businesses comprising biologics, specialty and new chemical entities to sustain and grow profitability in the long term.

As we think of the initiatives for driving growth in the future, I would like to recap what we have delivered so far in our key markets and the confidence it provides us to continue to drive sustainable and profitable long-term growth in a highly competitive global market environment.

We have established strong and profitable businesses in India and Russia. We have grown at a compounded annual growth rate in excess of 20% over the last five years in both these markets. We are pursuing additional growth opportunities to maximize the potential of these markets. In Russia we are doing that with entry into hospitals and the OTC segments and greater focus on end licensing. In India we are exploring new growth opportunities including new therapeutic segments, rural markets, and also evaluating the impact of new growth models.

In the last few years, we have made significant investments in building a deep pipeline for the U.S. generics market as well as for the API business. These investments are beginning to yield results. The API business has been benefiting from several new product launches and has scaled up to the range of $300m in annual revenues. Today we are probably one of the largest and most profitable API suppliers globally. We remain confident to the future of this business through a combination of initiatives that we are driving in our relentless pursuit of cost improvement, deepening of relationships with key global customers and development of new products with IP protection.

The generics business in the U.S. this year will get closer to the $200m mark and we are likely to achieve this without the benefit of any upsides. We currently rank in the top five in terms of pipeline. The various growth drivers for this market are beginning to fall in place now. We have a pipeline of 69 ANDAs pending approval, including partnered ANDAs, and this would result in six to eight new launches every year for the next few years. We are building on the OTC and government business opportunities. We are also partnering with several companies to broadbase our portfolio to include other dose forms.

We believe that the pricing environment will continue to be competitive. In response, we have stepped up our focus on costs and productivity improvements, as well as increasing the portfolio of products which will have less competitive intensity through both in-house development as well as alliances. We are also beginning to get good visibility of upside opportunities starting with sumatriptan in FY '09.

Let me now give an update on Germany. As you are aware, the competitive environment in Germany has intensified significantly over the last year. The market witnessed significant price erosion in the last year as a result of the new regulations in May 2006 and consequent competitor response. We had to renegotiate the supply agreement with Salutas and accelerate the timing of product transfers following the cancellation of the contract by Salutas and severe supply constraints in the last quarter of fiscal 2007.

Despite these challenges, we managed to deliver $39m EBITDA last year. We achieved this through a combination of higher volume growth on the strength of strong relationships with the insurance companies, cost rationalization measures, as well as the benefit from new product launches. With the implementation of the new regulations in April this year, we are clearly witnessing the increasing influence of the insurance companies on pricing through tenders and rebate contracts. However, we remain confident of the long-term potential of this market.

Our response to the rapid changes in the German market is twofold. We are aggressively driving several initiatives to secure the competitiveness of our existing operations. And we are also building a strong pipeline of products through in-house development programs, as well as business development initiatives. We intend to fix the supply situation by transferring the products out of Salutas in a phased manner. And this, we believe, will enable us to compete effectively in the marketplace.

We are making good progress on moving products to our own supply network. We commenced the activities for the transfer of products in March this year. This is by far one of the most aggressive projects for the transfer of products of this scale and magnitude. Our teams have responded extremely well to this challenge. And we are already beginning to see the results with close to 20 products already transferred out of Salutas [till date], including the key products of simvastatin and omeprazole. Simultaneously, the teams are working on transferring several other products to India as well as to contract manufacturers within Europe.

In the recent AOK tender we participated on a limited number of products. The current status is that we have not been awarded the tender for any product. However, the AOK is in the process of responding to clarifications being sought by several companies on the tendering process itself.

With respect to the balance market, which covers about 60% of the insured population, we have rebate contracts with several insurance companies. Once the supply constraints are behind us, mainly on the key products, we expect to leverage our existing relationships with these insurance companies to drive additional market share gains.

We are continuously evaluating our operating model, realignment of sales force and overall cost structures. And we are aggressively pursuing near-term commercialization opportunities through a combination of in-house and business development. Our pipeline for Europe, as I mentioned earlier, addresses more than $10b in innovative sales.

While FY '08 will present challenges on top line as well as bottom line when compared to the previous year in Germany, we remain optimistic of the outlook for FY '09 and thereafter based on the above initiatives.

At the Company level, we are pursuing opportunities that enable us to leverage our global market presence and achieve sales. The development of the oncology pipeline is one such initiative. We now have over 10 products under development for various markets.

Moving on to the CPS business, we believe that this business will continue to grow aggressively on the back of various business-building initiatives. And while doing this, we will also actively pursue inorganic options to create non-linear growth opportunities for this business.

We have talked about biologics earlier and we believe that the biologics business will provide us with the next big growth opportunity. We are assembling what we believe is one of the best R&D teams and world class R&D and manufacturing infrastructure to capitalize on our first-mover advantage.

With two biologic products in the market and a pipeline of eight, we believe that we have one of the largest pipelines, at least within the Indian context. The pipeline has the potential to provide non-linear growth for Dr. Reddy's and form as a bridge to launching our own innovation-based products in specialty and new chemical entities.

Let me also provide an update on the progress of the launch of our specialty business in the U.S. dermatology segment. We have in-licensed the marketing rights of an approved dermatology prescription product. We are under late-stage discussions for in-licensing one of the approved products. We intend to build a portfolio of at least three to four such products with immediate commercialization potential over the next year or so. This will enable us to evaluate the launch of the business, with a portfolio of three to four products and a sales force of about 30 to 40 products. We could then continue to accelerate the growth through a combination of in-licensing and organic development as we go forward.

On the NCE pipeline there are a few developments. Our collaboration with Argenta for developing a clinical candidate for the treatment of COPD is progressing well. Argenta has finalized the candidate for initiating pre-clinical development. On balaglitazone the end of Phase 2 meeting with Rheoscience is likely to be scheduled towards the end of this year.

The first half has been good and I certainly see the momentum continuing in the second half as well. We are building a robust product pipeline across key markets for securing our long-term growth. We are aggressively pursuing various cost and productivity improvement initiatives to ensure our long-term competitiveness. We are also making significant investments in building new capabilities and capacities to address new growth opportunities. Taken together, I strongly believe that these initiatives will enable us to build a strong foundation for creating a future of growth and leadership at Dr. Reddy's.

This brings to a conclusion my discussion and we now leave the floor open for a Q&A session, and we will be pleased to take your questions at this time.

Thank you very much, sir. At this moment I would like to hand over the proceedings to Laurie to conduct the Q&A session for participants at the international bridge. This will be followed by Q&A session at India bridge. Over to you, Laurie.

Thank you, Pratibha. We will now begin the Q&A session for participants connected to the Webex international bridge. (OPERATOR INSTRUCTIONS). At this moment, there are no questions from participants at Webex International Center. I would like to hand over the proceedings back to Pratibha.

Thank you very much, Laurie. We will now begin the Q&A interactive session for participants connected to the India bridge. (OPERATOR INSTRUCTIONS). First in line, we have Ms. Visalakshi from DSP Merrill Lynch.

Yes, hi. Thank you for taking my question. Can you explain the sharp increase in SG&A spend for the quarter? And how do you see this going forward? Also, what is the extent of the exceptional SG&A that you have mentioned in the note?

Normally, out of our SG&A expenses, only one-third is employee costs. We have several other items like freight, legal and consulting, selling, general expenses, (inaudible). There are exceptional items in the area of legal. There's quite a bit of things which has happened in this quarter which we do not expect to repeat in future. And there are certain exceptional item which has come from betapharm, particularly the (inaudible) which has been given to the (inaudible) which has been factored in the SG&A expenses.

Could you quantify this exceptional SG&A item?

No, as I said, overall, if you take the first half, if you take the SG&A as a percentage of sales, it is coming around 30%. And we want to improve from there in the second.

Okay. And one more question, if I may ask. Could you quantify as to how much you have done on both the government business as well as the OTC business in North America?

Finasteride is what we have put in the U.S. [return] business. And you are asking absolute numbers?

Yes.

So finasteride is INR63 crores, [13m] plus. And OTC business we have just started, which is hardly anything, less than 1m for this quarter. But we'll get good revenue in the first half -- second half, next half.

So this entire INR63 crores is government agency business, is it, for finasteride?

Visa, it also includes the regular business. It's a total figure. It's a consolidated figure of INR63 crores.

Yes. So within that I wanted -- is there a significant portion which is the government agency business?

Yes, the government agency business is a large part of that, but we are not providing the split.

Okay. Thank you.

Thank you very much, ma'am. (OPERATOR INSTRUCTIONS). Next in line we have Mr. Ranjit Kapadia from Prabhudas Lilladher.

Other income has increased significantly from 1.9 to 5.6. So can you quantify which are the items?

Overall, our interest cost has been managed very well, despite our borrowings are much higher than whatever debt that we have. I think it just neutralized. And then there is an accounting change whereby we are now capitalizing the interest on the projects, and that has given around INR5 crores of impact.

Okay. Thank you.

Thank you very much, sir. Next in line we have Mr. Shardul Pradhan from ASK Securities.

Hi, this is Jesal. I just wanted to understand, you talked about the CPS business and you've seen in the second quarter also the Mexican business has declined. Can you give us some idea about what we're expecting? What's going on in that business? And when do we expect those things to turn around in terms of production problems, when do you think this can get resolved?

The production problems have been resolved. There's no such -- any issue continuing on that front. However, the demand for naproxen has softened, largely because of inventories piling up with our customers. And hence we see this period of adjustment of inventories as a temporary period, and going forward we should get back to increased volumes.

So do you think from the coming quarter we'll go back to our original volumes in the Mexican business?

Last year was a little exceptional. We would get back to normal volumes, but not probably at the level as last year.

Okay. And moving to the domestic formulation business, you've seen a little slowdown in the second quarter. Do you see anything really changing on that front compared to the first quarter, because there's a big difference in the growth trend? So do you think that we should now look at more the first half trend to look at the full year and the next year?

I think that next year certainly we'll see increased or improved growth. But in the next two quarters we do see growth continuing at the current level.

And is there any particular reason you (multiple speakers)?

I think it is a natural process of product introductions and a certain (inaudible) in the marketplace.

Right, right. And moving to betapharm, I don't know whether we disclosed the EBITDA margins. So would you like to give some indication as to how the EBITDA margin is versus last year?

Jesal, we are not giving betapharm EBITDA margins. For the whole year basis, we did it last year and this year also we'll provide for the whole year. But all that we can say is the margin compared to Q1 has improved. There our SG&A which has gone up because of higher EBIT.

Sorry, I missed that. Did you say that margins on a sequential basis have --?

Have improved from Q1 to Q2. But the SG&A item has gone up.

So when you say margin, it actually means gross margin?

Yes.

Okay, okay.

There have been certain one-time charges which have resulted in that.

In the SG&A line?

Right.

Okay. And we are hearing, obviously, (inaudible) is also restructuring its [exports] and all that. Are we taking any steps to bring our SG&A costs down on a structural basis in Germany?

Yes, we will take the steps, Jesal, but this will be over a period of time. We are definitely trying to align our cost structure to suit whatever is changing in the market. So the program is very much in place (inaudible).

And have you seen any sequential price erosion in Germany or is it more volume driven now? The sequential decline that we are seeing, is it more of prices or is it more because of volumes?

The supply situation has been the main factor, Jesal. It's not really the price. The demand was always there but because we had limitations on supply we couldn't really service the market.

Okay. And just a last thing, some clarification on this $1.2m milestone income -- sorry, expenditure which Saumen mentioned. I did not capture it too well.

Yes, the -- when balaglitazone is -- we had -- our deal with Rheoscience includes a milestone of $1.5m when the Phase 3 trials commence. So our R&D costs include $1.5m paid to Rheoscience.

Okay. Thank you.

Thank you very much, sir. (OPERATOR INSTRUCTIONS). Next is a follow-up question from Ms. Visalakshi of DSP Merrill Lynch.

Hi, thanks. My question is again on betapharm. Now that nearly 40% of the market is something which you may not see growth from because you've not got anything in the AOK contract, what is your -- is there any growth outlook that you would like to give for this year? Earlier you had mentioned that you expect growth, but now is that changed?

Like I mentioned, we are going through a phase of transition, where we are moving the products back to India. In fact, if we had supply -- assured supplies, we would have done much better than what we did. So we're not in a position to clearly outline what our growth will be because of the various complications of supply and the tender situations. But certainly I think we are seeing volume growth, and if we de-bottleneck supplies I think we should be in a good position.

Would it be a significant, 10%, 15%, kind of decline? How do we look at betapharm this year versus last year? Last year was, what, [$80b].

Actually, in the first quarter we did better than the first quarter of the previous year. Second quarter we've been plagued with supply problems. And we believe that going forward even during this year that will improve and result in sales coming back. So I certainly am not able to give you an exact picture because of the supply situation.

But the current revenue trend of, say, INR1.9b, should we look at a similar trend at least being maintained in the coming quarters?

Certainly and actually growth on top of that.

Okay, thanks. And finally, on products which is to India, how many have happened so far for betapharm?

Six products have happened. The most recent is omeprazole and simvastatin, which are major products for us.

Okay.

The site approval has come. The product will be launched next month.

So you have not yet seen that impact on your margins?

At all. The site approval has happened. It is getting manufactured. And that has also got a consequence in terms of our working capital increase. But the product launch will happen only from next month.

Okay. Thank you.

Thank you very much, ma'am. Next question comes from the line of Mr. Neelkanth Mishra with Credit Suisse.

Yes, hi. Most of my questions have been answered. There's just one. The net debt position seems to have worsened quarter on quarter. And the inventories, the only reason for inventories going up is that inventory build-up for the betapharm launches or is there some other reason as well?

Betapharm as well as some North America launches.

And CapEx.

And the reason why in the GAAP positions, if you are trying to put them, there has been CapEx, almost INR111 crores of CapEx in this quarter, as well as we had the dividend payout during this quarter.

Okay. And of the 20 products that you said had been transferred out of Salutas, are they also lower cost? Because you had mentioned that the Indian supply would be 30% to 40% lower cost. Are these new suppliers also lower cost or are they just more reliable suppliers?

Some of them could be marginally lower cost. But only the products which are shifted into India will give us that 30% to 40% benefit.

Okay. And what percentage of revenues come from these 20 products that have been shifted out of Salutas?

I don't have an exact number, but by the end of March a very large portion of the products will be shifted into India.

You had mentioned some time back it would be 60%. Is that a fair number to go by?

Yes.

Okay. Thanks.

Thank you very much, sir. Next question comes from the line of Ms. Cheenu Gupta with ING Mutual Fund.

Hello, sir. Hello?

Yes, go ahead.

Yes. I wanted to ask regarding the CPS business, I do understand the growth in India has been much higher and we've had a degrowth in the Mexican business, which is a lower-margin business. But even then, what would be the kind of sustainable gross margins in this business? Is it this one time of high profitability products that we've got in India or is it (inaudible)?

I shared with you what is the first half gross margin of CPS. It is 35%, which provides a more balanced view rather than taking the Q2 gross margins.

Okay. And just as a clarification rather on betapharm, you were talking about a certain constraint on the supply side. Now, are we saying that the restoration will happen when the products will shift to India? Or we are talking about the supply side problem being overcome even before that?

Gradually, I think we are shifting product by product. So right now we have shifted six products into India. To that extent, supply should ease. So it will be a gradual process and until -- by the end of this fiscal year we should have shifted out the majority of the large products. So there will be some easing but not complete easing of supplies in the next two quarters.

Okay. And regarding this tax benefit that you had from betapharm, is it just the one time, this quarter? Or the benefit would accrue in the coming quarters as well?

No, no. This is a reversal of deferred tax liabilities which we had put up at the time of acquisition.

So this year (multiple speakers).

In fact, that happened because of a reduction in the tax rate.

In Germany.

In Germany.

So it is accrued one time, completely?

Yes.

Okay. And lastly, just a question on the growth in the Indian markets. You were mentioning you were growing at 9%, which is an average growth. But what kind of growth do you see for the Indian market as such?

9% only happened for two months, July, August. But if you take the last 12 months average, the growth has been higher than the industry growth rate.

No, I'm questioning more on the industry growth rate. Do you see that kind of 14% growth rate?

Around that.

Okay, for the industry as such?

Yes.

Okay. Thanks a lot.

Thank you very much, ma'am. Next question comes from the line of Mr. Nimesh Mehta with Mehta Partners.

Yes. Most of my questions have been answered. I just have one question, if I have missed that. If you can just share the margins of each division, sir.

Okay. Bear with us, please, just one sec. Branded Formulations is 73%.

API is about 32%. Then U.S. and Europe Genetics put together is 48%. CPS business is 47%.

That's for the quarter.

For the quarter, second quarter.

Okay. Thanks a lot. That answers.

Thank you very much, sir. The next question comes from the line of Mr. Sonal Gupta with UBS.

Hi. Just a couple of questions, one was on the finasteride. Is it -- because last quarter you stated that around $13m of sales had come from the authorized generics, so is this still under the authorized generics contract or is it totally out of that?

Yes. The whole comment with this contract in (inaudible), continuing total manufacturing being done in U.S.A. So this is where, as I said, we are getting some [hallmark] out of that authorized generics line that we have had here.

Okay. And on the R&D side, could you -- what's the sort of percentage spend that you see on the NCE research versus generics?

We are not giving that break up between NCE and generics. Overall, this quarter R&D has been at 6% of our sales. We said an optimum level is at 7% to 8% of sales.

Right. And just to understand, I might be slightly unaware as compared to the rest of the participants, on the -- what's the approval process for -- in Germany for products? Because you're saying you are shifting it product by product. So for each product do you need to get a site approval first, or will you get a site approval and then you can launch as many from there as you want?

Each product you have to get a site approval.

But you're confident that by the end of the year you should be somewhere around --?

Whatever we have targeted, we are on track in terms of [getting a return].

Okay. Okay, great. Thanks a lot.

Thank you very much, sir. Next question comes from the line of Mr. Rahul with Karvy Stockbroking.

I just wanted to know -- get more clarity on the (technical difficulty) opportunity for you, please, sir.

We're not sharing the details of that settlement.

Okay. And some approval was there recently among the banks, stating our intention of getting into pharma retail and insurance.

That was a misquote.

Okay, okay, okay. Because I just wanted further clarity on that. Thank you, sir.

Thank you very much, sir. Next in line we have Mr. Nitin Agarwal with SSKI.

Hi, good evening. Just a couple of small questions on the biological front. When do you see (inaudible) biological sales start making a material impact on our financials?

FY '09 onwards.

Okay. [So this finally] is going to get to current products that you'll be -- you will be selling in the third world countries?

Right, right.

Okay. And on financials, is there a component simvastatin operation costs in these sales?

No.

There is no component at all, no?

No.

Okay. Thank you very much.

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

Hi, good evening. First question is what kind of pricing cut have you taken on fexo? The market share has gone up a lot, but not the sales.

We had a significant price cut. We are not sharing precise pricing information.

Okay. And is the rate of sale -- what percentage of the original buying price that it is at right now?

We are not sharing that information. (Inaudible) information.

Okay. Just to persist on it, when do you expect the competition to come in?

The competition is already there. The three players --

No, I mean to say the additional competition.

We don't know. [Vilan] has had some approvals and [Baxir] has had some approvals, but we don't see them at this point.

Okay. And the second question is what is the current equity stake in [Pelikan] and any plans to list it at some point in time in the future?

Current we have around 14%, although there are -- the index can trigger to go up to 23%. That has happened. And since there are other investors there and it is the current goal, so I cannot safely talk about what is the Pelikan plan in terms of IPO or any such thing.

Okay. Just a final point on organic pipeline for specialty U.S. derma. When can we expect the first related filing, probably an NDA?

The first NDA should be some time around 2010, 2011.

Okay. That's all. Thanks.

thank you very much, sir. (OPERATOR INSTRUCTIONS). Next question comes from the line of Mr. [Prashant] with Lehman Brothers.

Good evening, sir. I would like to know what's the status on [reverse] segment trade?

We've not yet -- in terms of litigation, we have not yet got any dates for the court trials.

Can you repeat that, sir?

We are still in the discovery and deposition process and the lower court hearing dates have not yet been finalized.

Okay. So, do you have the share exclusivity along with [Sen]?

Yes, it's an [NT minus one] filing, so all two or three players who file, all of them have share exclusivity.

Okay. Thank you.

Thank you very much, sir. Next is a follow-up from Ms. Visalakshi of DSP Merrill Lynch.

Yes, hi. Thank you. My question is on what are the potential upsides that you -- one-off upsides that you can see in the next 12 to 24 months, where you are fairly confident that there could be a positive ruling or maybe a settlement, etc.?

Yes. Visal, in terms of next year, you already have (inaudible); we've talked about it earlier. And in terms of court cases, there are a few that are going on and (inaudible) like, for instance, we are expecting a court decision. It's overdue and it should happen any time in the next few months. So that is something that we are watching out for. And the (inaudible) we have touched upon it in terms of the court dates have not yet been finalized. So these are the two court cases which are quite -- which are ahead of the others, just from a process point of view.

So, for next year we have sumatriptan and then we said it's finasteride but it's further out. And rosiglitazone, (inaudible) has said that will be an opportunity but two or three years down the line.

What about generic additives? So, this case has gone in favor of Lupin, so will you be launching post-Lupins exclusivity or how is this looking?

We haven't settled that yet. I think it's not settled yet that Lupin has exclusivity.

Okay. Do you expect competition on additives?

There should be some competition.

Thank you.

Thank you very much, ma'am. Next is a follow-up from Mr. Shardul Pradhan of ASK Securities.

I have just one question on this foreign exchange, if you can tell us what is the hedge contracts outstanding?

We have more than 500m further.

And what is the exchange rate used for current quarter and the first first quarter?

You are saying the convenience translation rate?

No, the actual one, conversion here.

Hedging, it's around [43].

For this quarter? Okay. Thank you.

But one thing [we sell] --

Yes, yes.

You have to understand, when we took the foreign exchange gain, it actually fairly offset the rupee appreciation impact.

Sure, sure.

So actually, there is no foreign exchange gain, although our P&L is down, there will be higher profitability coming from the business.

Great, great. In the first quarter you've mentioned that almost all of your foreign exchange gain was realized. How about the second quarter?

Yes, these are all realized. There is nothing like a translation kind of thing.

Okay, that's good then. Okay. Thank you.

Thank you very much, sir. (OPERATOR INSTRUCTIONS). Next in line we have a question from Mr. Purushothaman of Enam Securities.

Yes, hi. On a sequential basis you had practically the same total turnover in Q1 as you have now in Q2, but the accounts receivable have gone above 20%. Is there any particular reason for this?

Yes. There are some in Russia and particularly, well, one or two repayable (inaudible).

Okay. Thanks.

Thank you very much, sir. Next question comes from the line of Mr. (inaudible).

Hi, good evening. Could you -- would you like to throw some light on the [phase of balaglitazone]?

It has gone into Phase 3 clinical trials and we just paid -- we made that milestone payment. But you want to understand about the study?

Yes.

I don't think we have anything specific to report at this point of time, [Mehta], but you know we intend to (inaudible) later this year. So if there's anything specific you would like to ask, you can just let us know and maybe we can answer that.

Yes, right. Thank you very much.

Thank you very much, sir.

Can we just take two more questions, please?

Sure, sir. Next is a follow-up from the line of Mr. Shardul Pradhan, ASK Securities.

(Inaudible) because we had some effects in the current quarter and (inaudible) worked out to be [18%] for the quarter and it was 9% for the previous quarter. So what is it going to be for the full year and for next year (inaudible)?

For the full year we are estimating between 10% and 11% (inaudible).

And for the next year?

Maybe next quarter we'll come back to you on that.

Okay. Thank you.

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.

Thank you, Prathiba. 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 email. Thank you.

Ladies and gentlemen, thank you for choosing Webex Conferencing Services. That concludes this conference call. Thank you for your participation. You may now disconnect your lines. Thank you and have a nice evening.