Dr Reddy's Laboratories Ltd (RDY) 2008 Q3 法說會逐字稿

Good evening, ladies and gentlemen. I am Rita, the moderator for this conference. Welcome to Dr. Reddy's Laboratories conference call. For the duration of the presentation, all participant lines will be in a listen-only mode. After the presentation, the question and answer session will be conducted for participants connected to Webex International. After that, the question and answer session will be conducted for participants connected to India. I would now like to hand over the floor to Mr. Nikhil Shah. Thank you and over to you, sir.

Thank you, Rita. Good morning and good evening, everyone, and welcome to Dr. Reddy's earnings conference call for the third 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 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 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. Saumen will begin the financial summary, followed by discussion of key business highlights by Satish. 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 re-broadcast or attributed in press or media outlets without the Company's express written consent.

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

I would now like to turn the call over to Saumen, our Chief Financial 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 third quarter of fiscal year 2008. Let me first discuss some of the key highlights of the quarter on revenues.

The rebates paid to insurance companies in Germany were classified as SG&A expenses last quarter. It has been decided to recognize revenue as net of such rebates. Even though this does not impact profitability, it impacts the revenue and gross margin. The revenue for the third quarter reflects the rebate adjustment for this quarter only.

Notwithstanding above, we recorded an overall growth of 8% in rupee terms and 15% in dollar terms in our revenues on an adjusted basis, that is excluding AG and ondansetron. Branded generic business has grown overall by 14% in rupee terms. India grew by 16%, while Russia grew by 25% in dollar terms and 12% in rupee terms. This growth was laid by the strong performance of the key brands in their respective markets. U.S. generic business grew by 89% in dollar terms and 69% in rupee terms over last year, to $44m on an adjusted basis. [E.U.] generics recorded revenues of EUR36m, [also with] adjustment in this quarter. API business grew by 18% in dollar terms and 8% in rupee terms over last year. The CPS organic business witnessed a 24% growth, while the Mexico business recorded a decline of 31%.

Now, let me discuss the gross margins during this quarter. Overall gross margin is at 49% in Q3 FY08 as against 44% in Q3 FY07. Gross margin in API is at 22% compared to 39% in the third quarter of last year. In Q3 FY07 we benefited from higher margins in (inaudible) during exclusivity. Due to a good product mix, we have been able to deliver margins in the range of 30% to 33% on (inaudible) this year in API.

In the Finished Dosage business of rest of the world, gross margin continues to remain strong at 73% of revenues. Gross margin in the Generic segment, which includes U.S. as well as Europe, is at 45% this quarter as against 36% in Q3 FY07. Gross margin in the CPS business at 26% compared to 24% last year. Margin is, however, lower compared to the second quarter due to a higher proportion of revenues from Mexico in the third quarter.

Now I will mention about the remaining P&L and balance sheet items. The SG&A expenses are at $95m compared to $93m in Q3 FY07. R&D expenses are at 7% of revenues, well within our guidance range of 6% to 8%. On the ForEx side, we haven't seen any major movement in the rupee during this quarter and, as expected, the gains are lower at $1.8m, as compared to $7m and $6m in Q1 and Q2 respectively.

Now, we have taken an additional amortization of certain product-related intangible assets of betapharm to the extent of $60m. Now, this was necessitated by the impact of several price reforms, increasing rebates to insurance companies and change in the composition of our top products, and despite the improvement in the supply situation and higher contributions from products transferred to India.

The effective tax rate for the full year is about 11% excluding the impact of additional amortization. We have a tax benefit of about $18m, which will be spread over Q3 and Q4. For Q3 it works out to about $12m, which offsets the tax charge for the quarter and results in a tax gain. The profit after tax, without considering the impact of additional amortization, would have been at $26m as against the reported net loss of $21m.

We didn't witness any significant movement in the net working capital in the third quarter. Now, CapEx is at $40m. This includes $7.6m for the purchase of land for our new (inaudible) which is going to come up. Cash position as on December 31 is at $266m including short-term investments. Now, short-term borrowings have increased by about $16m to $62m as on December 31.

With this, let me now hand over the call to Satish for a brief update on the key growth drivers in each of our businesses.

Thank you, Saumen. While the reported financials reflect a 20% decline in the revenues, underlying revenues have in fact grown by 8% in rupee terms if we consider the relevant adjustments in both the quarters.

Let me briefly cover the key growth drivers for the Company and first talk about Germany. I am pleased to share that we recorded our highest ever quarterly sales in the third quarter on an adjusted basis for Germany. We launched olanzapine and risperidone in the third quarter and we are among the first few to launch olanzapine pending a final court decision.

In India, we continued to add several more patients onto Reditux, which was a biotech product that was launched early last year. It has moved into the top 10 brands in India this quarter for Dr. Reddy's within nine months of its launch. The growth in the flagship brands of Omez, Stamlo, Stamlo Beeta, Razo and Atocor have also added to the overall growth.

In Russia, we launched Irinotecan injection during the quarter. One of the new products in-licensed in the first quarter benefited from a tender and it has crossed $1m in sales this quarter. OTC and hospital segments in Russia continue to scale up rapidly for Dr. Reddy's and, taken together, these segments contributed 30% of the total revenues in Russia for the quarter.

In the United States we introduced two new products during the quarter. Omeprazole is now our single largest product globally and with its launch in the U.S. we hope to add to the global scale of this product. In the U.S. we have also witnessed some price erosion in finasteride during the quarter.

We filed a 5 ANDA, taking the total filings for the year to 14. During the first nine months we have received a total of 18 approvals including tentative approvals, the highest ever for the Company.

Going on to the API business, last year we have benefited from the launch of sertraline and this year we are benefiting from the launch of a few other products and also from expansion into new markets such as Japan. This has helped us largely offset the impact of sertraline from last year.

And finally, on the CPS business, as seen in the earlier quarters, the organic business is on a high growth mode and continues this growth momentum in this quarter as well.

Let me now cover some of the key trends for the fourth quarter. We expect the sales momentum in India to continue also into the fourth quarter. In the United States we launched Cetirizine OTC product this month and we have a few small product launches planned for the fourth quarter.

In the API and the CPS business, the year-on-year comparison will appear challenging for the fourth quarter as both the businesses had an exceptional fourth quarter in FY07. However, the organic part of the CPS business will continue its growth in the fourth quarter as well. Overall, profits are likely to be subdued due to the change in the business mix and higher rebates in Germany.

With this brief overview, I now request Prasad to provide the outlook for the next year.

Thank you, Satish. Let me begin with a quick recap of our year to date performance.

Compared to a like-to-like basis, we recorded a growth of 9% in revenues to $932m. This was driven by 11% growth in APIs and a strong growth in the markets of India, Russia and the U.S. Gross margin is at 50% of revenues, despite the strong appreciation in the rupee and the rebate adjustments in Germany. This was possible due to a combination of cost-saving measures, benefits from (inaudible) API production and overall business mix. We generated an EBITDA of $218m.

Let me now cover the broad outlook on some of our businesses. I will cover the details in the full year earnings call later this year, after our annual results are out.

In the U.S. we expect revenues to consolidate further, with planned new launches of about 10 to 15 in FY09. We expect to benefit from an accelerated launch opportunity in sumatriptan in the third quarter of fiscal '09, and this is likely to add significantly to the overall growth in revenue and profits. We have a Para 4 filing for [clobidobril]. Following the final FDA approval for this product, we are currently evaluating various options available to us.

We expect double-digit growth rates in India and Russia. New launches as well as volume growth in our existing portfolio is expected to drive growth in India. The OTC and hospital segments, which are growing rapidly from a small base, will add to the overall growth in the prescription segment in Russia.

Germany is an important market for Dr. Reddy's, as we execute towards building a sustainable and profitable presence in the key markets of Europe over the next few years. With the new reforms in April 2007, the insurance companies now have great leverage -- greater leverage in negotiating rebates, as the pharmacists are mandated to dispense only products under rebate. The influence of insurance companies is growing and they're negotiating high rebates. We are closely monitoring the developments in the marketplace for adapting our business model. We have already redeployed part of our sales force to focus on key account management with the insurance companies.

Our immediate priority is to de-risk the supply situation by transferring products out of our major suppliers. We have made very good progress and have received site approvals for 33 products, including six to our facility in India. I am pleased to share that two of the most important products, simvastatin and omeprazole, have already been shipped to Germany starting December 2007.

While the market will continue to remain competitive, we will target to improve the market shares on the back of assured supplies, new launches and cost savings from the manufacture of products in India. In the API business, our investments in building a strong pipeline, customer lock-ins and expansion into new markets are paying off with an increasing number of patent expiries across key markets. We feel very confident of the long-term growth and expect to benefit from at least one launch every year for the next few years.

In the CPS business, the overall -- the outlook for overall growth is quite robust as we add several new projects every year. The organic business is in a high growth mode and will contribute significantly to the revenues in this business and also favorably impact the gross margin.

Let me now provide you with an update of two of the three -- two of the four NC assets assigned to Perlecan, DRF 10945 and RUS 3108. The company has rejigged its development priorities and is looking at out-licensing DRF 10945 instead of developing it within Perlecan. In the case of RUS 3108, due to some safety concerns, it does not appear to be an ideal candidate to move forward. Consequently, we are working on back-up molecules in this class.

In the U.S. specialty business, as I mentioned earlier, we have in-licensed the distribution rights for two ready to market products. We are also working with a development partner on a third product, which is expected to be ready by the middle of this year. Our team is now preparing for the commercial launch of this business some time next fiscal year. We are also pursuing various strategic alternatives, including in-licensing and acquisition, to accelerate the business to critical mass with profitable and sustainable growth.

In the biologics business, we are targeting to launch a third product in India in the next fiscal year. We are also targeting to launch GCSF and Reditux in a few other international markets. We are very excited with the way the business is shaping up. In order to accelerate the development and commercialization of the portfolio, we are committing significant investments in creating the first phase of the required manufacturing infrastructure.

We expect R&D spend to be -- to remain in the range of 8% of our revenues. Our R&D programs are focused on creating a balanced mix of competitive products, as well as products with less competitive intensity and higher barriers to entry, based on technology, intellectual property or development complexity. As I mentioned earlier, we are aggressively driving some real cost improvement initiatives within the Company. We expect to realize the benefits of these initiatives in the next year.

To conclude, we remain confident of the outlook for FY09. We expect continued sales and profit growth from the core businesses in India, Russia and the APIs. We will benefit from the upside opportunity in sumatriptan in the U.S. And we remain committed to our shareholders to aggressively respond to the evolving market situation in Germany and build a sustainable and profitable business over the next few years.

This ends my presentation 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. At this moment I would like to hand over the proceedings to Webex International moderator to conduct the Q&A session for participants connected to Webex International. After this, we will have a question and answer session for participants connected to India bridge. Thank you and over to you, Laurie.

Thank you, Rita. We will now begin the Q&A session for participants connected to the Webex International bridge. (OPERATOR INSTRUCTIONS). We do have a question from the line of [Christian Sud] of [Civic].

Yes, hi. I was just wondering if you could shed more light on the German situation, the charge you took as well as what's going on with the AOK contract. And what do you see the outlook for that business in particular in fiscal '09? Thank you.

The charge is an additional amortization which we took because of the drop in prices of certain products in the portfolio that we acquired as part of the betapharm acquisition. This charge in -- this charge we think is a one-time thing as of now. The market is undergoing a transition but in the transition phase doctors, pharmacies, as well as insurance companies, each of them have some level of influence. Of course, the doctors influence the prescription, the insurance companies influence who gets the prescription among the shortlisted people and the shortlist depends on the rebates that you offer to the insurance companies, and pharmacies for stocking the product.

So, in this transition phase all three are becoming necessary, but we see the market evolving and moving towards a market where the biggest influence will be with the insurers. And we are readjusting our business model, as well as trying to improve the performance through volume increases. And as a result of the pricing coming down, the volumes have really gone up very, very significantly. The market is still in transition and we are still watching what form it will take.

Can I just ask a follow-up question? In terms of the AOK contract, I know you didn't win that contract a few months back. Is there another contract that's up for the next two years? Are you bidding on that? When will -- when do you expect to hear whether you'll be involved in that contract?

Well, as of now, the AOK contract went into some confusion with the Anti-Competitive Commission looking at the contract. The -- we're not sure what is going to happen with the bidding process with AOK. AOK is the only organization which is won by molecule by molecule bid, whereas the other companies have taken a portfolio approach.

This is about the tender which is floated by AOK, but we have rebate contracts with AOK, haven't we?

Yes. We have rebate contracts with organizations which cover almost 70% of the population in Germany.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of [Terence Glen] of Legg Mason.

Hi. For your CPS Mexico business, right, the run rate for this fiscal year has been significantly lower from what it was last fiscal year. Can you talk a bit about that and what is the outlook going forward?

Yes. As far as the Mexican business is concerned, it was reflected in the last quarter when we reported a big growth in the sales. There are a couple of reasons for this. One is clearly the raw material problem, the (inaudible) acid which was facing some constraints, and that's really resulted in one situation. And the other thing, main thing, is also the quantities that were contracted by the customer for naproxen, which is the main product of Mexico. Compared to the previous year, (inaudible) so consequently the volumes have actually gone down.

So we are seeing an overhang of that evil for this quarter. And the actions we have taken to take care of the outlook for the next year is also to find additional business to substitute for this loss in sales. And that's -- a portion of it has already commenced and we hope to have the full year benefit of sales for the Mexican plant for the next year. So things should improve very much.

Right, that's for the next fiscal year and not for the next quarter?

Yes, that's what I meant, for the next year, not for the next quarter.

Okay. Just one more question, if I may. What's your run rate for your U.S. OTC business?

The business has been a little slow in taking off because of the consumer -- because the customer replacement cycle is taking longer than what we originally planned. But we believe it will be in the run rate of, what, $2m a month at steady state.

Okay, thanks.

(OPERATOR INSTRUCTIONS). At this moment, there are no further questions from participants at Webex International Center. I would like to hand over the proceedings back to Rita.

Thank you, Laurie. We will now begin the Q&A session for participants connected to India bridge. (OPERATOR INSTRUCTIONS). First in line we have Mr. [Satya] from Cholamandalam Securities. Over to you, sir.

Hi, good evening. My question is about the biosimilars, this one you talked about, coming growth and kind of (inaudible), this one. Could you throw some light on it?

As you are aware, we have two products in the Indian market, (inaudible) and Rituximab. We also have an additional pipeline being built up. We believe this is the most extensive in the industry. We plan to take these two products to other select markets where the patents allow us freedom to operate. So that will bring in additional revenue. We are also looking at partnerships and expanding the portfolio to regulated markets, and launching one to two products every year from now onwards.

Any kind of number would you like to indicate?

I think it's a little premature to say.

Thank you. I will come in to you again. Thank you.

Thank you very much, sir. (OPERATOR INSTRUCTIONS). Next in line we have Ms. Visalakshi from DSP Merrill Lynch. Over to you, ma'am.

Yes, thank you very much. Could you give a little more clarity on how much is the rebate payments to those insurance companies which is adjusted against the revenues?

And secondly, you mentioned that there have been product switches to the India site. So have you already seen some savings on the costs and that has been offset by this rebate, because I am not understanding that?

To answer your question, I think the savings have not started accruing at this point (inaudible) the goods have not yet been sold and savings have not been (inaudible) yet. On your questions about rebate, we don't disclose this number. This is confidential information because it is a competitive situation based on the rebate.

(Inaudible) that number net of rebate.

Okay. But would that be the only reason for the gross margin drop?

You are talking about overall generic segment. We have not disclosed specifically for Germany.

No, I am looking at on an overall company basis. Your gross margin on a Q-on-Q basis is down.

Yes. So, on a company basis it is always a weighted average of all the business segments. I have already mentioned margins for each of the business segments.

Okay. So what would be the two key reasons for this margin drop on a Q-on-Q basis?

Overall increased competition across the businesses, especially generics, and also CPS, the --

The mix.

Business mix.

Mexico has been higher in this quarter compared to the previous quarter. And also in North America some of the key products there have been quite tough.

Okay. And finally, I also have a question on your omeprazole magnesium capsules challenge. Could you confirm that your patent challenge applies to Prilosec OTC?

Yes.

Okay. When does the 30-months expire on this?

Still over 24 months or so.

Okay. And do you -- is it going to be like a broader targeted OTC strategy? Could you just talk a little bit on the OTC strategy for omeprazole?

Well, it is nothing different from the regular OTC business that we have. We have set up a packaging operation in the U.S. through outsourcing. And we ship [on the switched] products that we have in our portfolio, and we sell to all the retail chains there. And omeprazole will be a key product that we offer to the market.

Do you think the launch could happen only after 25 months? Is that what you're saying? Or could we see a launch earlier than that?

Depends on the outcome of the court case but certainly not before the end of the state.

End of the -- sorry, end of the state. Okay.

Yes, unless there is a court decision before that.

Okay. Thank you very much.

Thank you.

Thank you very much, ma'am. Next in line we have Mr. Pradhan from JM Financial. Over to you, sir.

Good evening, sir. I have a few questions on your Germany business. Could you just throw some light on how has the SG&A expenses in Germany moved in the quarter?

Saumen, do you want to take that? We are not giving this.

We are not giving any -- Germany as a segment on each of the expense items and all.

Okay.

We can only talk about SG&A for the whole Company.

Okay.

But obviously the rebates currently are classified under SG&A, so in the previous quarters SG&A was inclusive of that. To that extent, it has come down.

Okay.

As revenue comes down, SG&A also comes down, because it is a profit-neutral kind of adjustment.

But could you tell us what is in the price reduction in the third quarter vis-a-vis the third quarter last year and also the previous quarter?

No, it is difficult for us tell. There are different announcements which is happening in terms of reference price, which happened two years back, again now, which has been announced which will be effective April 2008. There, it is broadly around 8%. But beyond that, from the previous year same quarter to this quarter, it will be difficult to tell you.

Okay. Could you give some broad sense about the gross margins there, in Germany?

We do not disclose Germany as a segment. Our segment is generics. That's why we disclose all the margin and everything.

Fair enough, fair enough.

For Germany, we -- end of the year, we talked about the EBITDA. That gives you a total understanding.

In the U.S. -- okay, just talk about the U.S. business generics. U.S. business on a [run rate] -- on a Q-on-Q basis has not grown. What were the reasons for this?

I said on a Q-on-Q basis, because there are certain price drops which have happened and that has impacted the overall margin also, as I responded to the previous query of someone else.

Yes. Just add -- to add to that, in finasteride in the second quarter, we also had the benefit from the launch for the (inaudible) the dormant business. And quarter on quarter, we've seen some moderation, which is quite natural in the industry when you have pipeline filling. Then, second quarter, you see that -- the next quarter, you see some moderation.

Okay.

But the run rate in U.S. generics has gone to around -- on the vicinity of $50m per quarter.

Okay. Thank you.

Thank you very much, sir. Next in line, we have Mr. Prakash Agarwal from Deutsche Bank. Over to you, sir.

Yes, (inaudible). Just -- can you give us some guidance on the sort of revenues that we can see from Germany, now that your sourcing problem's get addressed? And given the accounting issues on the rebates, can we see a flat revenue, or do we see a 10%, 15%, 20% revenue growth, or what type of revenue growth can we expect in the German market?

We can't give you specific guidance, but we can tell you that the volumes are going up. And in the last few months, we've not been able to supply the demand from the market and we've had repeated stock situations. As we shift the manufacturing out, we should be able to address that. Having said that, while margins will be helped by manufacturing the volume -- high-volume products in India, there will be some pressure on pricing as another round of price cuts is going to take effect in April.

Okay. But you're not even willing to say whether the volume growth would more than match the price cut? You're not even willing to say that?

I think we remain confident that we'll be able to maintain the sales and grow it a little bit, but beyond that I can't say much.

Okay. And you've seen some slowdown in the last couple of quarters in the Russia and CIS markets, which have generally been very high growth markets for you. Any specific reason?

I think they continue to grow. There is an impact of the dollar/rupee, which is creating that effect, but in dollar terms the growth continues.

Okay. The other question was on the price drop-off you -- price drop in the U.S. You -- did it largely happen in the third quarter, or you're talking about price drops over the year?

Third quarter, a little bit happened, but it has been nothing specific in the third quarter itself.

Okay, fine. Thank you.

Thank you very much, sir. Next in line, we have Mr. Sonal Gupta from UBS. Over to you, sir.

Thank you. Just a couple of questions. One was could you -- sorry for this but could you (inaudible) gross margins for various divisions? I have some of them. I don't have all of them.

The overall gross margin is 49%.

Right.

API is 32%. The branded [formulations] (inaudible) finished dosage rest of the world is 73%.

Right.

And CPS is 26%. And in the generics segment overall it is 45%.

Right. And could you give me formulations for last year and API for last year?

Last year, formulation was also 73%, but API last year same quarter was high, because sertraline was there. It was 39% last -- not last quarter this year, last quarter -- Q3 FY07.

Right.

This year, the API margin is more or less within this range of 30% to 33%.

Right. Just an observation, I believe the fourth quarter has generally been weaker for the international formulation business. Is there some sort of a seasonality effect out there or is it (multiple speakers)?

Yes, normally, last year, sales is lowest in the fourth quarter. And since that happened, the margin part of the finished dosage rest of the world will be the lowest in the fourth quarter among all the quarters.

Okay.

Because India (inaudible) will be higher.

Right, okay. And on U.S., you have seen pricing pressure, I guess, both on finasteride as well as on fexofenadine. So any outlook in terms of new launches which could be key launches for you, probably going forward and --?

Well, we had quite a few launches and we have a good number of launches which are coming up, so U.S. we're expecting growth.

Right. And on ANDA filings, how many do you expect to file on an average basis every year?

About 15 to 20.

Okay, great. Thanks a lot. Thank you.

Thank you very much, sir. Next in line, we have Mr. Sameer from Morgan Stanley. Over to you, sir.

Hi. One quick question on the NCE pipeline. You mentioned this 10945 you have now chosen to look for an out-licensing partner. What's the broad timeframe that you're looking at?

We've just started the process of making it available for out-licensing. There is no specific timeline as such.

Okay. And what's the update on bala's, latest one, in 1049? I'm sorry, is there a (inaudible).

1042?

Yes.

The -- progress is happening on the preclinical side and some studies that had to be done before the product was into the clinic. So we should see --

I'm sorry to interrupt, sir. Sir, your voice is breaking, sir.

I think the participant is using a speakerphone.

No, I'm using my hand phone.

Okay, Sameer. Okay. Well, 1042, there is nothing much to report except progress is being made on the protocols and other preclinical work. On balaglitazone, there have been meetings with FDA that have gone well. They've asked for certain changes and we are doing that. And there is -- the work continues.

Would you say that -- for bala, when would you say that your Phase III would be going ahead in a full-blown manner, not one or two trials that's on right now?

Yes, I think there's a trial going on. We are awaiting the results of that. Once that comes out, the other trials will start. There's a trial called the trial number C07 which has started and we'll await the outcome of that and then continue with [some others].

Okay. And just one question on the German market. If we just step back and look at drug pricing and then the rebates, so finally what is the net billing that happens to a generic company such as yours, on a portfolio-wide basis? What would you say that -- that your billing is happening at a 70% discount, or 80% discount in retail? How do you see the net pricing?

Depends on the portfolio mix, of course. If you have a higher proportion of newer products, the discount is likely to be significantly lower, less than all mature products. We are seeing the introduction of newer products. There the discount is considerably better. The older products are going through a lot of pricing pressures. The pricing is certainly lower than what it used to be before the reform process started, but it's still significantly better than the U.S. and U.K.

The U.S. pricing [goes on] as much as 95% or 98% --

Yes.

So it's a lot better actually, this 96%, because it's more than 200%. So any ballpark number that you can share that we should keep in mind that the pricing is 90% of the branded price, or --?

So it can range between as low as 5% to as high as 20% also.

Okay, so that's the broad variability.

Yes.

And as we go forward into next year, just taking a mid-term view, one to three years, do you see that this pricing can go down to -- all of it converge to the 5% or maybe even a little lower, in the various markets, of course?

That's something that I cannot predict, but right now it's important to continue the sales force for newer launches and also to influence the doctors. It's also important to be on the list of approved companies with the insurance companies (inaudible) rebates, because they're able to mandate whose prescription goes to whom, so -- and also the doctor, so it's a funny situation but all players continue to be important. But as we speak, things are changing and we are keeping a close watch and we'll certainly realign our business model. We of course want to grow the business aggressively by adding products from our pipeline and be an important player in the German market.

Okay. And just one final question, just to reconfirm, you said that you have got one exclusivity every year for the next few years, for the U.S. market.

I didn't say that, but I certainly think we should have one and we're working towards that.

Thanks. That's all from my side.

Thank you very much, sir. Next in line, we have Mr. Mishra from Credit Suisse. Over to you, sir.

Hi. This is just a clarification of what you mentioned earlier. The effective tax rate for the full year you mentioned will be 11% excluding the impact of amortization, and then you mentioned some benefit. Was that $80m?

$18m.

$18m.

$18m. And what was the impact already in the third quarter?

It was $12m.

$12m.

$12m, okay. So $6m remaining for the fourth quarter.

Yes.

And on sumatriptan, almost everyone seems to be settling. Will you be launching in December or November? Any -- can you give that clarity?

No, we can't.

And do you expect Cobalt also to enter by February?

We don't know.

I'm sorry?

We don't know that.

You don't know. Okay, okay, okay. Thank you.

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

Yes, hi. Thanks for taking my question. You mentioned that you will be discontinuing with 10945 from your NCE pipeline. What could be the reason? Is it -- sorry, not discontinuing, will be out-licensing. And what could be the reason? Is it because the financial investors are influencing the decision of (multiple speakers)?

The -- I think we have recast our priorities and we've looked at the risk profile of the compound, especially in the wake of the higher threshold for PPAR compounds from the FDA and have taken a considered decision that it's a better candidate to be out-licensed than being developed internally.

I see. So in that context, is the proof of concept already available on this product?

Yes. It has gone through a Phase II trial.

It has gone through a Phase II trial. And any color that you would like to shed about the proof of concept study?

No, nothing at this [point].

Okay. Which could be the nearest comparable in terms of the launched product?

Comparable to what?

Comparable to this molecule.

It has a number of indications that are not settled yet, so it's difficult to give you a comparator.

Okay. Finally, you mentioned that it is also to do with the risk profile of PPAR of late. So does this then increase the risk of balaglitazone as well?

Yes. Balaglitazone also is a PPAR plus compound, so we'd have to go through the safety studies that are required.

And so you -- do you see increased risk to this molecule, especially 10945?

I don't think you can compare 10945 and balaglitazone. But PPAR as a class has the carrier safety issue that (inaudible).

Okay. Thanks a lot. Understood, sir.

Thank you very much, sir. Next in line, we have (inaudible) from JP Morgan. Over to you, sir.

Hello. Yes. I just have a question regarding the in-licensing deal which was announced for Sinclair Pharma. Where are we right now placed on that and when can we see some of the revenues coming from that stream?

Certainly in the next fiscal year we're preparing launch plans. We could -- it's possible to launch this business as early as the first quarter of next year.

Okay. Thanks a lot.

Thank you very much, sir. Next in line, we have Mr. Agarwal from SSKI. Over to you, sir.

Hi, good evening. A couple of questions. One is, in the U.S., on the government supply business, what is the outlook which -- on the business in terms of the plans for the business?

At this time, we can't supply products from India, so we have a deal with Merck where we are supplying their finasteride through our channel into the government supplies.

But does one see newer products adding onto the business in the coming year, in the coming fiscal?

Not immediately, because India is still not recognized -- it's not a country which is on the list of countries which can supply to government and (inaudible) administration. Having said that, we are looking at options to try to establish a small plant or buy a small plant to start to take care of this segment of the business also.

Okay. Secondly, on -- in Germany, since you said the new product is something which is going to be an important element as far as business is concerned, what's the outlook in terms of new product launches in Germany going forward?

I think we are launching six to eight products in the next fiscal year, some of them from our own pipeline, some of them in-licensed. In the recent months, we have launched two important products. And we are quite pleased with the way the new products have behaved. And so the key to success in Germany would be accelerating the launch of new molecules and we are putting in efforts behind that.

Great. Thanks very much.

Thank you very much, sir. Next in line, we have Mr. Agarwal from Akash Ganga Investments. Over to you, sir.

Good evening to everyone. You seem to have had a lot of initiatives were mentioned on the call in terms of cost savings and also off-shoring manufacturing of betapharm to India. What kind of outlook can we expect going forward in terms of profitability? Can we see it from FY09 onwards we can see secular growth in profitability?

Yes, we certainly can see, actually. We will see it in on the back of growth in all the businesses, as well as cost containment and cost improvement. However, in betapharm, I have to caution that, while we will try to improve margins by moving manufacturing here, pricing will still continue to be under pressure and that may negate some of the benefits of transferring the manufacturing into India.

So the way we intend to improve the performance in betapharm is through a combination of cost-cutting through doing the manufacturing internally, as well as launching new products aggressively. Overall, of course, we are trying to improve cost structures across all businesses and that certainly should impact also.

Approximately what percentage of the value in FY09 will be manufactured from India for betapharm?

By the end of this fiscal year, by March, 60% of the volume should come from here. By June, July, we should do 80% from here.

Okay. That is great. And lastly, you did talk about that you would wish and you hope that you get one opportunity in the U.S. market to monetize in terms of Para 4 --

Every year.

Every year. Can you give color to your Para 4 pipeline? A lot of patent expiries are happening. How big can this be and in terms of quickly scaling up our business there to drive profitability?

Okay. Right now, we have a pipeline of about 26 products which have a patent challenge and where we are close to filing. In addition, we are filing almost every quarter patent challenges. We are also focusing our efforts on difficult products. We filed some already. Esomeprazole magnesium OTC is one such significant challenge. So our intention is to have at least one or two special products every year as we go forward. And we're also partnering externally to bring in difficult products. Recently, [Lonfondaparanox], which could be a relatively unique product, is one example of a partnership that we struck externally.

Okay.

And we're beefing up internal R&D, we are building partnerships through external collaborations to really strengthen our pipeline, to drive profitability as well as repeatable performance year to year.

Lastly, other than the AG products which you have done a few -- quite a few interesting deals in the past, could we going forward also see six-month exclusivity products launched, where you can have significantly higher gross margins?

Certainly possible and the management team is focused on creating more such opportunities.

Thanks a lot and all the best to you all.

Thank you, Agarwal.

Thank you very much, sir.

Rita, we'll take one last question.

Sure, sir. Next in line, we have Mr. Vihari from Enam Securities.

Hi, Prasad. You mentioned that you probably will have one more round of price cuts in Germany some time in April. Now, if you have that, will that necessitate another one-time write-off on intangible assets?

Firstly, the price cuts have been announced already in January.

Okay.

They'll take place starting April. And that has been taken into account and that should not necessitate any additional amortization expense.

Okay, thanks.

Thank you.

Thank you very much, sir. At this moment, I would like to hand over the floor back to Mr. Nikhil Shah for the final remarks. Over to you, sir.

Thank you, Rita. We would like to thank all the participants on the call. If you have any further clarifications, please feel free to email or call the IR desk. Thank you.

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