Dr Reddy's Laboratories Ltd (RDY) 2009 Q2 法說會逐字稿

Ladies and gentlemen, good morning and good evening. Welcome to the Dr. Reddy's Laboratories quarterly results conference call. As a reminder all participants will be in the listen only mode and there will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Please note that this conference is being recorded.

I would now like to hand the conference over to Mr. Nikhil Shah of Dr. Reddy's. Thank you and over to you, Mr. Shah.

Good morning and good evening everyone and welcome to Dr. Reddy's earnings conference call for the second quarter of financial year 2008/2009. We hope you all have had a chance to review our press release which was issued earlier this afternoon. The results are also posted on our website on the home page under the quick links item.

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.drreddy's.com under the quick links item.

Please note that all discussions and comparisons during the call will be based on IFRS 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 and the outlook we have on the call today, G.V. Prasad, our Chief Executive Officer; Satish Reddy, the Chief Operating Officer of the Company; Saumen Chakraborty, our Chief Financial Officer and Umang Vohra, the Deputy Chief Financial Officer of the Company.

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 Saumen, our Chief Financial Officer.

Thank you, Nikhil. We thank all participants for joining us on the call today.

I am pleased to announce that we have successfully transitioned from US GAAP to IFRS financial reporting effective Q2 FY '09. There is no significant difference in net profit between IFRS and US GAAP for Q2 FY '09.

The accounting adjustments resulting from the transition from FY '07 and FY '08 have been incorporated in the opening equity line item as on April 1, 2007 and April 1, 2008 respectively.

During FY '07 we impaired beta brand value by INR60 crores as per US GAAP. Under the IFRS the assessment is examined at a gross business level and has thus been restored.

During Q3 FY '08 the Company recorded accelerated amortization of product related intangibles amounting to INR240 crores as per US GAAP. This has increased under IFRS to INR295 crores.

In the release issued earlier this afternoon we have provided the following. One, the revenue and profit details as per US GAAP and IFRS for FY '08, Q1 FY '09 and Q2 FY '09. And two, we have also provided the detailed income statement for Q2 FY '09 as well as Q1 FY '09 to help you model your numbers.

Now from Q3 FY '09 onward we will be reporting the results only as per IFRS.

Now before we move on to the Q2 performance I would like to bring to your notice a few important aspects that you need to consider while evaluating the Q2 results.

First, the rupee depreciated significantly in the last week of September and was at INR46.45 at the end of the quarter. For reporting purpose the rupee figures are converted to the dollar at this rate, INR46.45. However, the underlying dollar figures have been converted into rupee at the quarter average rate of INR43.78. So there is a difference of almost INR3 which I wanted to highlight. And hence the dollar growth rate as per the convenience translation rate may not reflect the actual growth rate.

Second, in Q2 FY '08 we recorded a one time tax benefit of INR151 crores related to betapharm tax rate change.

And third is we recorded a ForEx gain of INR26 crores in Q2 FY '08, whereas for Q2 FY '09 we stand at a ForEx loss of INR30 crores.

With this I now hand over the presentation to Prasad.

Thank you, Saumen. Once again I welcome all of you on the call today. I will discuss the key performance highlights for the second quarter and end the call with some comments on the outlook for the second half of this fiscal year.

Moving on to the Q2 performance the key highlights are as follows. Revenues have grown by 30% in rupee terms. In terms of average rate, dollar growth rate is at 18%. This is the average during the quarter.

Revenues from Global Generics grew by 40% in terms of rupees. Dollar growth at the average rate is at 27%. For the first half, the revenues grew by 32% in rupee terms.

Revenues from the PSAI segment grew by 10% in rupee terms. The growth was flat in dollar terms at the average rate. However, for the H1 of FY '09, overall revenues grew by 18% in rupee terms.

During the quarter we launched 35 generic products worldwide and filed for 24 new products globally.

Gross profit increased by 27% over last year and gross percent -- GP, gross profit percentage is at 49% as against 50% during the same period last year.

Gross profit in the Global Generics segment is at 58% as against 59% in Q2 FY '08. Gross profit in the PSAI segment is at 29% down from 36% in Q2 FY '08.

Operating income has increased by 78% over last year to INR200 crores.

EBITDA is at INR275 crores as against INR220 crores in Q2 FY '08.

SG&A and R&D together have increased by 17% in Q2 FY '09 over last year. Sequentially, the expenses have declined by 2%. For H1 FY '09, the SG&A ratio to revenue is at 30.5%. This includes some exceptional legal expenses in both the quarters and certain one time expenses related to the social plan in betapharm.

R&D spend is well within our earlier guidance of 7% of revenues.

Amortization at INR47 crores is higher than in Q1. This increase was largely on account of one time amortization charge related to the early termination of the Salutas contract. And hence from the next quarter onwards we expect it to be in the range of INR40 crores to INR43 crores.

Q2 has been a very volatile quarter in terms of currency movements. This has resulted in some ForEx losses at the subsidiary level. Out of the total loss some part of the loss is a timing issue. We expect to recover it in the subsequent quarters through sales realization.

PBT is at INR152 crores and effective tax rate for the full year is estimated at 17%. For Q1 FY '09 it's at 14% -- it was at about 14%. For Q2 FY '09 the tax rate works out to 20%.

PAT is at INR121 crores and the EPS for the second quarter is at INR7.20 per share.

Let me now cover the key revenue highlights in each of our important markets. In North America revenues grew by 54% in rupee terms. Dollar growth was about 40% at the average rate. We are witnessing some pricing pressure in a few key products. This impact is likely to be more than offset by new product launches in the coming quarters.

In the US, in about 50% of our portfolio of about 40 products we are among the top three generic players. This reflects the strength of our marketing organization in the US and we are confident of increasing our leadership position in many more products.

In Russia we continued our growth momentum. Revenue growth was in line with industry growth rate. Revenue grew by 36% in rupee terms. The dollar growth was about 23% at an average rate.

Out of the 21 brands that we sell in this market today, we are in the top three position in as many as twelve brands. We are ranked the seventh largest branded generic company and we are confident of growing further on our strong position in this market.

In Germany revenues grew by 68% in rupee terms. This growth was driven by the launch of an in-licensed vaccine. This is a seasonal product and we are pretty much done with the sales for this product for this fiscal year. During the quarter on the base portfolio we grew ahead of the industry growth rate in volume terms.

Let me also provide an update on the AOK tender. This tender covers 64 APIs and the submissions are due in the first week of November. The tenders will be effective from March 2009 until February 2011.

In India the revenues grew by 9% and during the quarter we forayed into the inhaler segment with the launch of four products. This will help us in strengthening our portfolio offering in the respiratory segment. I will talk about the outlook for the second half in the outlook section.

During the quarter, the net current assets increased by over $100m. This was primarily driven by increase in inventories. The inventory build up is due to stocking up in Germany and preparation of new product launches for several markets. And we expect the inventory to normalize in the second half.

We also incurred a capital expenditure of about $30m primarily for expanding capacities for PSAI and Generics and for acquiring land for the proposed SEZ for the PSAI business. This was largely funded through a combination of increase in short term borrowings and liquidations of short term investments.

We ended the quarter with a cash position of $110m with $29m in short term investments. We expect the working capital position to improve significantly in the second half of FY '09. The overall debt equity ratio is at 0.45 to 1 as of end of September, as compared to 0.38 to 1 at the end of the previous quarter.

Before we conclude, a few comments on the outlook for the rest of fiscal year '09. Our revenue guidance of 25% growth in rupee terms remains unchanged. In the PSAI business, the quarter to quarter fluctuations in growth rate masked the underlying growth momentum. The second half will be driven by the sustained performance of supplies to generic customers and with significant improvement in the contribution from the innovator customer segment.

In India, the subdued growth rate in the first half was a combination of decline in some of the key brands and some temporary supply situations. We have taken the necessary corrective measures and are confident of improving the growth rate in the second half.

In Germany while we are driving for volume growth in the base business, we will be able to provide greater clarity on the overall market dynamics and the trends post the results of the AOK tender. We remain confident of sustaining 50% plus gross margin in the second half.

R&D spend will be within the 7% of revenues for the full year. And we also expect improvements in SG&A spend in the second half of FY '09.

The cost savings measures that we have put in place are yielding results in dollar terms. This will become visible in the second half of this fiscal year.

We look forward to the launch of several new products across key markets in the coming quarter including the launch of Sumatriptan authorized generic in the third quarter.

With this we come to the end of our presentation. We thank you all for your time and attention today. Now we will be happy to take your questions.

Thank you. Ladies and gentlemen, we will now begin with the question and answer session. (Operator Instructions).

The first question is from Mr. Arvind Bothra of Merrill Lynch. Please go ahead.

Hi, congratulations on a good set of results.

I just wanted a quick update on your CapEx plans. You've incurred CapEx of over INR257 crores in H1 FY '09. What would be your CapEx guidance for the year? And could you also give some break up on where this INR257 crores is spent?

Okay, we have spent INR257 crores for the first half. If you see the comparative figures like last year we would have spent close to $140m. That's total. So the expectations are that by the end of the year it will be under $100m. That's the expectation for the rest of the year, right. So for the overall year it will be less than $100m.

Now in terms of the spend that has gone on, it's like there's been three, four areas where we have spent. One is expanding capacities. Both on the formulation side as well as on the PSAI side, the capacities have been expanded. One is in terms of -- to accommodate obviously the future growth in volumes both in North America as well as in Europe on the formulation side. And also increased volumes on the -- especially on the API side because of the new products coming in, right. So that's where most of the spend has gone.

Okay. And you would likely to maintain this CapEx trend for FY '10 also?

It probably will taper down a little bit after that because significant expenditure has already been done in the last year as well as what will be done this year.

So when would these CapEx spend commercialize or be completed?

Each of these projects are at different points of time. Some have already been completed. Some expansions are ongoing at this point of time.

So this is not one big project. This is a series of projects in various plants.

Okay.

And we're adding to capacity. We're adding to compliance and GMP.

And does this include the acquisitions also?

On the capacity, no, this is outside of that.

This is organic. Okay. Thanks a lot.

Thank you, Mr. Bothra. The next question is from Puneet Adiya of MP Advisers. Please go ahead.

Yes, good evening and congratulations on a good set of numbers. I'm Nimesh Mehta.

My only question is to understand whether the worst in Germany has been over or we are likely to see some more pressure on a slightly longer term basis not just on a one or two quarter basis?

Okay. What we're indicating in Germany is a change in the business environment because earlier what used to be the influence mostly coming in from the prescribers has now -- the influence has now turned to the payers, which is mainly the health insurance funds popularly known as sick funds.

So when we talk about this tender, the AOK tender, AOK is again a group of these insurance companies who are floating the tender and they cover about say 40% of the population right now. So this is the tender that's coming up.

Now it's again the situation where this tender will probably prompt the other sick funds also to probably launch tenders. So we're really looking at the market turning fully more into a tender based market. And that's a possibility that we expect might happen.

So since the business model has changed, our plan is also to align our organization and the structure to be in line with the market reality once this market fully turns to tender. So we are prepared to that extent. And this is what we have been communicating to investors in the past.

What would be the average -- further price reduction assuming that the entire market will turn tender based?

Again we'll have to wait for the outcome of the first tender which will give the indication. Obviously, prices will reduce. There will be a drop in prices. So we really have to wait for the outcome of the first tender once it's completed.

And are we still guiding an EBITDA from betapharm of almost $42m? That is something that we had --

That was at the beginning of the year, without factoring in the tenders when it will come and what will happen with that. But now this being the current reality, although this tender will be applicable only -- a significant portion of it for the next year, going by the performance of the first two quarters the guidance that we gave at the beginning of the year may be a little bit difficult to achieve for Germany.

And guidance was $39m not $42m.

$39m I think we gave as guidance, $39m at the beginning. So that might be a little bit of a stretch.

I see. Okay. And how long are we going to amortize the betapharm related expenditure in the P&L? You said INR40 crores, INR43 crores will likely come in the next quarter. How long will it persist?

No but INR40 crores to INR43 crores is overall. Everything doesn't pertain to only betapharm. It includes even the other acquisitions.

But how will it pan out basically? How big is the betapharm related and value you would expect?

We expect to amortize betapharm for the next 12 to 15 years depending on the type of potential.

For the next 12 to 15 years.

Yes.

Okay. Thank you very much.

Thank you, Mr. Adiya.

The next question is from Mr. Rajesh Pherwani of HDFC Mutual Fund. Please go ahead.

Good evening. Just one clarification. I think I missed the first part. What was the average rupee realization for you for the quarter?

That's what I clarified right at the beginning.

INR43.78.

It is INR43.78.

That's on the sales. And what would be the hedging losses for the quarter?

The total as per accounting it is INR30 crores.

Okay. That is on hedges.

Total ForEx loss.

Yes. So that is on hedges.

What do you mean by that? The total ForEx loss we are saying INR30 crores. There are different components to it.

Okay, can you break that up?

We do both cash flow hedging as well as receivables hedging.

Okay.

As I earlier also told, so far as our hedging policy is concerned we don't go long term. The maximum we hedge will be for 12 to 18 months period. And we only hedge around 25 -- up to 25% of the expected dollar export earning.

So on FY '09 cash flow we have about $150m worth of one.

Okay.

And then FY '10 we have another $120m which we have hedged. That is a cash flow hedge which sits at balance sheet and it gets re-evaluated on a mark to market. Right now it's about closer to INR47. Now that is one component.

Then of course we do the hedging of receivables as and when it is becoming receivables. And that is very close to the current dollar INR kind of a scenario.

And then of course when all the subsidiaries gets consolidated then all the impact of respective currency and INR (technical difficulty) all get accounted. And then finally the total ForEx loss for the quarter is accounted as INR30 crores, out of which the realized loss will be roughly around INR6 crores. The rest of it -- the rest INR24 crores will be more because of translation and accounting.

Okay, great. And what would be the euro rate that you would have realized for the quarter?

If you ask me specifically about Germany, what we have showed the growth which was there, 68% in euro terms. Actually it was 40%. So the euro rate, do you have the figure straightaway? Or we will get back to you after getting the exact euro rate.

That's fine, thanks.

Thank you, Mr. Pherwani. (Operator Instructions).

The next question is from Mr. Chirag Dagli of Deutsche Bank. Please go ahead.

Yes, this is Abhay Shanbhag from Deutsche Bank. A couple of questions. Number one, with the rupee depreciation also we have not seen margin improvement in the India GAAP numbers. Any specific reasons for this?

I think first of all you should see the IFRS numbers rather than the India GAAP numbers.

Okay.

So that we are consistent through.

Okay. But there should have been a margin improvement given the fact that the rupee has depreciated.

Margin is a function of several things. One is the business mix, the higher -- lower CPS mix. So that affected margins somewhat. Then the other factor which contributed to margin pressure was the pricing environment both in Germany and the US. And the third one was rise in input costs. Actually we have had some margin pressure in the quarter.

But you've been able to shift a lot of products from Germany to India in terms of sourcing. So even those sort of margin improvements have not really been seen. Do we expect to see an improvement going forward for this India sourcing now?

We don't share margin at that level from a business component wise. But overall margins will increase.

The second thing is in terms of the growth how much is organic growth and how much was inorganic growth excluding those small acquisitions that were done?

The acquisitions contributed to a very small percentage of earnings.

(Multiple Speakers).

(inaudible) came from acquisitions, 9 from Shreveport and 6 from (inaudible).

Okay. And in terms of capacities, for the products shifted to India if you get a big part of the AOK tender do you have sufficient capacities to cater to them? Or how will it work out?

We will have capacities.

So that is not going to be a constraint for you. I mean you will not have to ramp up CapEx or whatever going forward.

We have been investing in CapEx so we're always creating capacity ahead of demand. We will continue to do that to meet the demand requirements.

Chirag here from Deutsche Bank. I just wanted to understand how your ROW sales get impacted by the currency. Are these done in dollars or are these done in -- for example, your Russia sales would they be done in the Russian currency or some other currency.

The Russia sales would be done in rouble through our wholly owned subsidiary. The sale there is roubles.

The worry was that specifically in some of the emerging markets currencies, with the currency depreciation, would you be able to take price hikes or there would be a -- you would have to take some price hikes over a period of time to account for the currency changes.

Yes, we can take price hikes. And there have been some pricing actions taken by competitors in the Russia market already.

Okay. No because in the last couple of weeks a lot of emerging markets' currencies have been very weak. So would you be able to take that sort of price hikes in a very short time frame?

We can't be as dynamic as the currency is. But over time we can certainly improve.

So that would you be able about what, six, eight months? One year?

You can't be as specific as that.

Okay, fine.

It doesn't make sense to revise prices every quarter.

Absolutely. Fine. Yes.

So over a year we will move the prices up.

Okay, fine. Thank you.

Thank you.

Thank you Mr. Dagli. The next question is from Mr. Rahul Sharma of Karvy Broking. Please go ahead.

Sir I did not get on the tax saving front what you said about betapharm. And I believe you have reduced the saving on SG&A expenses in the second half. Could you please elaborate on that?

Yes. What we said is in the Q2 of FY '08, if you recall our PAT was much higher than PBT. And that was on account of deferred tax benefit we took due to the change in the Germany's tax regulations.

Okay, okay.

And so far as SG&A is concerned, we hope that our SG&A will improve in H2.

As a percentage.

As a percentage of sales.

Okay. Thank you.

Thank you Mr. Sharma. The next question is from [Mr. Tushar Manudhani] of Prabhudas Liladhar. Please go ahead.

Sir, just a couple of questions. One thing is I wanted to understand is health insurance, the tender which they come out. So what will be the frequency of this tender coming out and how much would be given to a particular company? How much of this tender would be given to a particular company?

Okay. So the tender is for a duration of two years for a supply.

Okay.

Right. So what is being announced as of now is just the AOK group. You know it's a group of insurance companies that's called AOK. So they've announced the tenders. So that's the current --

And for a particular company, how much would be the amount of -- for example, let's say Dr. Reddy's participate in that tender.

Yes.

So how much of that could be achieved by Dr. Reddy's?

No, we can't comment specifically on how much we expect --

Is there any restriction --

To garner and all that.

There is no restriction, but it is molecule by molecule, region by region.

Yes.

Six regions I guess.

Five regions.

Five regions.

Okay. And sir, the seasonal vaccine contributed how much?

We're not sharing that number.

We won't be able to give the specifics of that.

Okay. And sir, this exceptional legal expense was with respect to?

It was a case for --

Olanzapine.

Olanzapine for United Kingdom.

Okay. Thanks a lot sir.

Thank you Mr. Manudhani. The next question is from Mr. Jesal Shah of JM Financial. Please go ahead.

Yes. I have a few questions. What is the volume growth in Russia?

We don't have the specific numbers as of now, Jesal. We can get back to you with that.

Do you have that number for Germany?

See, volume growth will be different for each product. So overall how can you comment on a volume total? Are you saying how many pills we supplied or something like that?

No. I think in your comments you mentioned that the volume growth in Germany has been higher for betapharm than for the industry.

Right.

So I just wanted some idea about that.

But that's across products. So for each product it's different.

Okay. So the second thing is that in the PSAI business we have seen total, if you exclude the acquisition, the overall sales growth has come off versus what we saw in the first quarter. So what is the reason for this?

In PSAI segment there is a CPS business which is serving innovators. We have a number of biotech customers and they have been affected by the financial turmoil, so some of them have dropped off. And also large pharmas, some of the larger pharma customers also have been going through some restructuring in terms of operations. So net result is some of our CPS revenues have been pushed out. And that's why we have, you know -- the growth is muted.

The generic customers continue to buy, and that's -- that segment is going quite strong.

Fine. And just on that topic, are you seeing any movement on that front in Russian market? Are you seeing -- what are you seeing in the market with respect to your customers because of the liquidity situation?

As of now we don't find any alarming situation because, obviously, we deal with the core distributors. And currently they're okay.

And we're quite prudent in terms of our credit limit and so on.

Fine, okay. And the other thing was on Perlecan. I think last quarter it was mentioned that you would be buying a stake. Has that already happened?

Yes, it has happened.

Okay. And the other thing was on SG&A expenditure. You mentioned that as a percentage of revenues it will remain -- it will actually be under control. But given that we expect Sumatriptan launch, on an absolute basis would you like to share whether it will be in line with what we've seen in the first half?

You know, SG&A is a combination of so many heads of account and some of them will go up. For example, if sales go up, freight has to up. So at an absolute level, it will move up, but it won't move up in line with the revenues. It will move up at a significantly lower percentage than the revenue growth. So you'll see some leverage on the SG&A.

Right. And should the gross margins also not improve with the contribution of Sumatriptan in the second half?

At the absolute level it should. But as a percentage we have to see the transfer price and so on because it's an authorized generic.

Right. Okay. The constant currency growths are -- I'm just going back to Russia, what is the constant currency growth in Russian market?

We will come back with that.

I think it was the rupee number. The rouble number we don't have. Actually the rouble depreciated, so it should be higher than that.

Jesal, we'll come back to you on that.

Okay, okay. And the last question is on the interest cost. We've seen -- I'm not sure about this, but I think in the second quarter we've seen a greater interest cost than we saw in the first quarter. Any particular reason for this? I see that the borrowings have gone up but --

The working capital is higher. And also CapEx is there. So there have been short term borrowings.

Okay. And what's the break up of your debt? How much of your debt is in dollar, euro and rupee terms?

See the betapharm loan is in euro. And the rest, most of the debts are in rupee.

So it's -- about EUR200m is the betapharm debt.

EUR200m? And that will be at what rate?

That will be at the Eurobond rate which is prevalent at [these times].

Even flat.

Yes. Same as a margin rate.

Okay. And the Indian rupee debt is at what rate?

Jesal we'd appreciate it if you can restrict the number of questions as there are several others lined up --

Sure, sure. Okay. Fine. Thanks.

There are different rates even in there.

Can we request all the participants to restrict their questions to one, so that the others get a chance to ask their questions? Thank you.

Thank you Mr. Shah. The next question is from [Mr. John Walsh] of American Century Investment. Please go ahead.

Thank you. I was wondering if you could be a bit more specific regarding the measures you are taking to address the shortfall in business development in your home market in India.

Yes. The Indian growth.

Okay, the Indian growth in formulations has shown just 9% growth compared to the double digit growth rates which the market has shown. So if you see the reasons in terms of what happened in the first half and how we are planning to work in the second half, the main reason the first half was to do with some of our older products where our -- we faced a supply issue because of the raw material on one of the products which was being imported. So that led to some shortfall in one of the major brands. That's something we have now faced.

And also, the plan for the new products that we were to launch was somewhat behind planning. They got launched later in the second quarter, so we didn't have the good benefit of that.

So in the second half again, while we continue to expect the market to keep growing in double digit growth rates, we also should be able to improve. Because once some of the product backlog that we have, that's in place, and also we address the supply concerns, then hopefully we should see a bit of a run rate every month that will probably bring the market -- that will bring the growth rate back to the market growth rates for the Indian formulations.

Are you doing anything to stimulate the effectiveness of the sales force?

Most of these measures have already been done in the sense that we had launched more divisions. Everything was done. The important thing was to have launched the new products on time, which is what I was saying. There was a certain lag. So probably we should see the effect of that in the next two quarters.

Thank you.

Thank you Mr. Walsh. The next question is from Dr. Preet Pal of JP Morgan. Please go ahead.

Hi. All my questions have been answered. Thanks.

Thank you.

Thank you Mr. Pal. The next question is from Mr. Puneet Adhya of LMP Advisors. Please go ahead.

Hello?

Yes.

Yes.

On the total net ForEx loss of INR296m, how much is the translational loss?

Roughly INR23 crores will be translation loss. INR23 crores, INR24 crores.

So most of it, it is because of the translation, right.

Yes.

Okay. Thank you.

Thank you Mr. Adhya. The next question is from Mr. Sameer Baisiwala of Morgan Stanley. Please go ahead.

Hi. Good evening. Prasad, when you had given the guidance a few months back, at that time rupee was much stronger at, I don't know, INR41, INR42. And now it's more like INR50. So despite 20% appreciation and you having such a large foreign sales there still is no change in your sales guidance. It remains at 25% growth.

Yes. That is true Sameer because of the -- it could be higher but we're not guiding the higher revenue today. Based on what we know today, I think we are just maintaining the guidance.

Okay. And just a second question is on the AOK tenders. If I just think about your current sales in Germany is roughly about, give or take $200m.

Yes.

How much of it is right now leveraged to AOK?

About 45%.

Okay. And just one final question. It's on Imitrex opportunity. Do you think you will have a very low competition market for two months or for six months?

Not able to give you clarity on that yet.

So we'll know at the time of launch.

It would be quite unusual to have it for two months isn't it? What is it that's really driving this uncertainty?

The uncertainty is the nature of the transactions that have been entered between GSK and the others which we don't have access to today.

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

Thank you.

Thank you Mr. Baisiwala. The next question is from Mr. Chirag Dagli of Deutsche Bank. Please go ahead.

Good evening again sir. Just a question on the VRS, Germany. You said you cut down the sales force from 250 to 100. Have you been taking the charges on the VRS in the P&L?

It has been already taken.

Yes. We call it the Social Plan. That's what I referred to.

Okay. So can you quantify the amount?

We don't give that details of things, but whatever Social Plan charges that were there, it has already been taken to our SG&A in the previous quarter.

Okay. Thank you so much.

Thank you Mr. Dagli. The next question is from Mr. Rajesh Vora of ICICI Securities. Please go ahead.

Good evening gentlemen. Referring to the vaccine sales in the Germany which is in-license and seasonal, would you be able to give some number in terms of how much was the revenue?

We are not giving. I think we told earlier also.

Okay. Sorry, I missed that. Okay. And will that be next year sometime you will be again doing it, or is it not certain?

Yes, we'll do it next year also.

Okay. And Mr. Prasad, US FDA has been appearing to be a little bit stringent. And do you see that impacting more companies in India, and the process of approval, or the time for approval getting delayed? What's your general sense on that? And do you think that should delay the approval and impact the companies in general?

I don't see anything different from what the FDA has been doing in the past.

Okay. Okay. And in terms of pricing pressure, are we still seeing about 5%, 7% price erosion in the US in general?

In general, multi-source products are continuing to be very competitive.

Okay, okay. And any update on the Prilosec OTC?

No, there's nothing to share at this time.

Okay. Thank you. All the best.

Thank you.

Thank you Mr. Vora. The next question is from Mr. Krishna Kiran of Capital Markets. Please go ahead.

Hello?

Yes.

My question is relating to other income according to Indian GAAP. Sir, other income has fallen 75%. Just to clarify that ForEx profit has been added in other income.

Actually, we only refer to now IFRS numbers in this discussion. Anything related to I GAAP, you can refer to our IR desk later.

Okay, sir. Thank you. That's it. That's all from me.

Thank you.

Thank you.

Thank you Mr. Kiran. The next question is from Mr. Neelkanth Mishra of Credit Suisse. Please go ahead.

Yes. Apologies if this is a repeat. I think it is. I joined a few minutes late. The working capital ratios seem to have deteriorated substantially. I remember Prasad's comments were some went to inventory build up for product launches. About the receivables, any specific market where the receivables have gone up?

Receivables seem to be in line with --

There was a quarter on quarter increase which seemed to quite sharp.

In the receivables space we are not seeing anything different.

Okay. I thought there was an increase in the number of days as well. I'll--

There has been some increase, but not very significant. That's what that is. It is not -- receivables have not been alarming in any specific country in any way.

Okay. Okay. Thanks. And there was a decline in other income even in IFRS even on a quarter on quarter basis.

Yes.

Any particular reason for that?

Sequentially, if you look at the note, we mentioned that in the first quarter we've taken some benefit on account of the negative goodwill related to the Dow acquisition. So sequentially, that's the decline, a large part of the decline.

Okay, okay. Thanks.

Thank you Mr. Mishra. The next question is from Mr. Sonal Gupta of UBS. Please go ahead.

Thank you. Just a couple of questions. One was I just want to clarify in the IFRS accounts you have two heads of financing income and finance expenses. And both of them -- what all does come under each of them? I just want to understand.

Financing income would include interest income and the expense would include the like. And we also classify ForEx in these accounts.

Okay. But the finance income would include interest income plus ForEx gains, so it shouldn't be a negative number -- okay. So you take. But it's--

ForEx loss would go to expense. So when you net those two off, you'd get the answer.

Sorry?

The ForEx loss would go to expense.

Right.

And the income gain would be the interest income. And then the interest loss -- the interest that we pay would be in the financing expense.

No. I'm just comparing the number of ForEx gain of INR259m and your finance income of INR93m. So there is a negative number out there. I just want to understand what negative heads are there which are reducing this.

It is put as within bracket because it is -- do we know?

Sonal that INR93m is an income.

Right.

And there's no change in the numbers. Actually, if you look at Q2 FY' 08, the number is INR48 crores. And it includes interest income -- a higher interest income compared to this year, plus the ForEx gain. And that has come down. And ForEx, the finance expenses you see that year on year there is an increase. And that is on account of higher interest expense as well as the ForEx loss.

He is actually confused because of the brackets --

Yes.

(Multiple speakers).

Yes. The parentheses is more in terms of the format.

Right. Sorry, I got that. I was just -- I think because of the Q2 FY' 08. Sorry.

And I just -- if you could just repeat the gross margin for the Global Generics business for this quarter and last year -- corresponding quarter last year?

58% this quarter. Last time it was 59%.

Okay. Thank you so much.

Yes.

Thank you Mr. Gupta. The next question is from Mr. John Walsh of American Century Investments. Please go ahead.

Hi. I'm fairly new to the Company. I just want to understand exactly what this P&L means. The growth in operating profits at 78% is obviously unsustainable. And so I need to better understand what's in other operating expenses and other operating income please.

The other operating expenses actually for the quarter is almost nil as against about INR24m, which is -- INR24m last year.

Yes. I have the numbers. I'd like to know what they represent.

Accounting -- in terms of their classification?

That is what he's asked.

So, for example, the sale of scrap would be an income, right. If we sell the scrap that becomes an income and stuff like that. So it's more related to the business. Any transaction related to the business comes here. If there are some licenses which entitle us to get certain ForEx related exemptions and we sell those or we buy those, those come under expenses and income correspondingly.

So the negative operating -- the negative other operating income of INR142m --

That's a gain. That means it's a gain of roughly INR14 crores.

Right. Okay. And is that considered to be sustainable?

Yes. Should be, more or less, because the quarter in the previous year you had INR9 crores.

Thank you.

Thank you.

Thank you Mr. Walsh. The next question is from Mr. Saion Mukherjee of Nomura Securities. Please go ahead.

Yes, hi. Good evening. Prasad, when you gave a guidance like for the second half we will have a gross margin in excess of 50%. Are you including Sumatriptan in that?

Yes. But Sumatriptan margins will depend on the transfer price and somewhat, as an average, it may be lower. But overall I think it will be more than 50%.

Okay, that's fine. And what should be the effective tax rate that we should consider for the full year?

We have taken slightly less than 17%. You can take it

17%.

17%.

Okay. And finally can you give us an update on the fondaparinux filing and the opportunity. And if you can give some color as to what could be the size of that opportunity for that deal?

The product hasn't been filed yet. So we'll talk about it when we file it.

Do you -- any time line that you can suggest for the filing of the product?

I think it will be done in the next fiscal year.

Okay. Thanks. And all the very best.

Thank you.

Thank you Mr. Mukherjee. The next question is from Mr. Ankhit Ladhani of Anvil Research. Please go ahead.

Sir, can you give some guidance on your revenues going forward?

25% is the guidance that we gave for the full year, and we're maintaining that.

Okay. And the margin is 50%? Okay. Sure.

50% plus we said.

Okay, 50% plus. Okay. That's all. Thank you.

Thank you Mr. Ladhani. The next question is from Mr. Sameer Baisiwala of Morgan Stanley. Please go ahead.

Hi. Yes, just a follow up. What's the update on biosimilars?

The biosimilars business -- are you talking about the domestic market or the international market?

The domestic market after Reditux.

Yes. After Reditux we are doing clinical trials on one product. That should be launched in the next fiscal year. We were hoping we would launch it in this year, but we're seeing a slowdown in the patient recruitment. So that would probably spill over to next year. And the next year we probably will launch maybe two or three products.

Okay. And what do we see here in innovative product sales, revenue mix by segment? Is this Reditux by any chance?

It is basically Promius Pharma dermatology business.

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

Yes. That's fine. We'll take one more question.

Sure sir. The last question is from Mr. Shantala Shenoy of [Span Capital]. Please go ahead.

Yes, hi. I have just two questions. I was curious about the (inaudible) becoming a subsidiary. So how will the development charges be accounted now, under what head?

Under R&D it will be.

Under R&D. Okay.

Yes.

Okay. And what is the status on balaglitazone?

There's no change in the status. The product -- the clinical trial is continuing. We should have the results of this trial sometime during the middle of next fiscal year.

Okay. In the middle of next -- okay. Thanks.

Thank you.

Thank you Ms. Shenoy. Ladies and gentlemen, that was the last question of the day. I would now like to hand the conference over to Mr. Nikhil Shah. Please go ahead sir.

We thank all the participants for joining us on the call. For any further clarifications please feel free to get in touch with the IR desk. Thank you.

Thank you Mr. Shah. Ladies and gentlemen, on behalf of Dr. Reddy's that concludes this evening's conference call. Thank you for joining us and you may now disconnect your lines.