Dr Reddy's Laboratories Ltd (RDY) 2009 Q3 法說會逐字稿

Ladies and gentlemen, good morning and good evening. This is Rochelle, the Chorus Call conference operator. Welcome to the Dr. Reddy's earnings conference call.

As a reminder, for the duration of this presentation all participant lines are in the listen-only mode and this conference is being recorded. After the presentation there will be an opportunity for you to ask questions. (Operator Instructions).

At this time, I would like to turn the proceedings over to Mr. Nikhil Shah. Thank you and over to you, Mr. Shah.

Thank you, Rochelle. Good morning and good evening to all the participants. And welcome to Dr. Reddy's earnings conference call for the third quarter of financial year 2008/2009.

We hope you have all 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 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 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, the Chief Executive Officer, Satish Reddy, the Chief Operating Officer, Saumen Chakraborty, who has now assumed the role of the Head of our Global Generic Operations and, Umang Vohra, our Chief Financial Officer.

We also have on the call Kedar Upadhye and Raghavender R. I would like to mention that Kedar Upadhye will now take charge as the Investor Relations Officer of the Company and would be supported by Raghavender.

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 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 Umang Vohra, our Chief Financial Officer.

Thank you, Nikhil. I welcome all of you on the call today.

Moving on to the key highlights for this quarter, we grew revenues by 49% in rupee terms. Excluding revenues from Sumatriptan, our growth was 21%. Within this, revenues from our Global Generics business grew by 70% for the quarter. Excluding the revenues from Sumatriptan, the growth was 26% in that segment.

Revenues from PSAI, Pharmaceutical Services & Active Ingredients, grew by 6% in rupee terms. For the nine months of this fiscal overall revenues grew by [13%] in that business.

Gross profit increased by 70% over last year. The gross profit margin is at 56% versus 49% in last year, largely driven by higher margins on account of Sumatriptan.

Gross profit margin in the PSAI segment was at 27%, down from 30% in quarter three of last year. This decline is due to a change in the product mix, as well as higher import costs that we faced in the last two quarters.

Gross profit margin in the Global Generics business is at 65% as against 59% in the previous year.

EBITDA grew by 59% (sic - see press release) and is at $71m as against $45m in quarter three of last year.

Excluding the upside of Sumatriptan, SG&A expenses as a percentage of sales moved up from 34 -- are at 34% in this quarter versus 30% in the previous year -- previous quarter of the last year. The absolute increase was majorly on the account of the impact of additional costs because of the recent acquisitions and the scaling-up of our specialty business in the US.

While analyzing our results you will also note that, sequentially, SG&A has also increased. This is due to the fact that the base spends are the same. However, because of the ForEx rates you will see a sequential change in the SG&A numbers.

The last two quarters have been extremely volatile in terms of currency movements. This has resulted in the ForEx losses in this quarter more so at our subsidiary level in Russia where, because of the ruble -- sharp devaluation of the ruble, which was greater than 15%, we had a translation loss on the payments to India.

Profit before tax is at $48m. Effective tax rate for the full year and for quarter three of this year works out to about 17%. [PAT] is at £40m. Adjusted for the one-time write-down in the -- for the previous years in terms of the impairment, the PAT growth is at 150%. The EPS for the third quarter is at $0.2, roughly about INR11.

Let me now move on to the balance sheet. During the quarter we saw an increase of $52m on our receivables and a large portion of this was because of Sumatriptan in the US. Excluding this effect of Sumatriptan, our receivables declined by $14m sequentially. This was primarily on account of stronger control on receivable credit [commits] in geographies such as Russia.

Our inventories declined by $5m. You will recall that we had built up inventory in the first two quarters due to product launches and the sourcing issue that was coming out of China.

Capital expenditure for this quarter was $25m. We ended the quarter with a cash position of $78m, a large portion of which is parked in bank deposits with State run and top foreign banks.

Total net debt of the Company is $380m. Overall, the debt equity is at [0.43 as to one] as of December-end, as compared to [0.44 as to one] of June-end.

I would now like to turn the call over to Satish, our Chief Operating Officer.

Thank you, Umang. Before I get to the key business highlights for the quarter, I would like to discuss three important events that happened during this quarter. First is regarding Sumatriptan.

The Q3 FY '09 performance was well-supported by the successful launch of the authorized generic version of Glaxo's Imitrex, which happened in late November 2008. We are currently the only player in the market other than Glaxo, and have been able to capture an excellent market share, with margins that are [above the] average Global Generics margins.

In the recently-announced AOK tender results Betapharm has been offered eight products, translating to 33 contracts and representing 17% of the AOK volumes. We are among the top three in terms of number of contracts awarded, and this establishes Betapharm as a significant competitive player in the tender business in Germany.

The third event, if you recall, several companies, including Betapharm, had launched Olanzapine towards the end of 2007, based on the decision of the Federal Patent Court. In December 2008 the Federal Supreme Court ruled in favor of Ely Lilly upholding the validity of the patent. This is likely to result in a claim for damages for Dr. Reddy's so, accordingly, we have made a provision for EUR15m towards this, which is included in the other operating expenses.

Let me now cover the key business and financial highlights in each one of our important markets for the Global Generics business. In North America revenues are at $137m as against $36m in Q3 of FY '08. The growth was primarily driven by the successful launch of Sumatriptan.

Revenues excluding Sumatriptan grew by 80% in rupee terms and 46% in dollar terms. This was driven by high-volume growth in most of our top products in this market.

During the quarter we have filed five ANDAs, taking the total filings to 133. We have 69 ANDAs pending for approval at the ANDA -- at the USFDA, which address innovator sales of $47b. Of those pending approval, 32 are [panafours] and 19 are first to file opportunities.

In Russia we continue our fast-paced growth momentum. The growth was in line with the market growth of 27%. Revenue grew by 44% for the quarter in rupee terms and 17% in dollar terms. The top five brands in Russia are number one in their respective segments.

In the context of the recent economic scenario in Russia I would like to highlight that, as always, we have managed our growth strictly within the credit limits of our customers. Some of our customers in Russia are organizations that are as large as us, and we are managing the risks proactively.

In Germany revenues were marginally down, by 2% on a year-on-year basis. Our volume growth was 15% as against the market volume [degrowth] of 3.3%, due to the destocking by the trade on account of the AOK tender.

However, as you're aware, prices have declined over the previous year. This has largely offset the volume growth and, on a nine-month basis, our business grew by 26% year on year in rupee terms and 8% year on year in euro terms.

In the recently-announced AOK tender results the eight products offered to us do not include most of our top-10 products. So we believe that, based on the future market developments, we could expect to take an impairment charge majorly relating to the top-10 products in the subsequent quarter if the AOK tender uncertainty is resolved [over] some of the legal issues it's facing right now.

In India, revenues have remained flat. We have seen some temporary slowdown in the fiscal year. This is largely on account of delay in new product launches and also a reduction of stocks in the trade based on our conscious decision to move towards replenishment-based supply chain model.

However, the business continues to deliver competitive and attractive profitability in absolute terms, because of our strong [chronic care] franchise and growing niche presence in biologics and oncology therapeutic areas.

We have launched 10 new products in this quarter and are now beginning to see traction in the new products' performance in India. New products launched in the last 36 months have contributed 23% of the sales in Q3 FY '09.

Moving on to the PSAI segment, we have seen a period of low growth in this segment for the quarter. This was due to the loss of certain products, specific orders from some Generics customers in the US and Europe. We have also observed a slowdown in the orders from biotech companies in the services segment and also large pharma companies in the segment due to the recent global economic developments. However, we believe that this is only a temporary phase and our strong IT expertise and [gain of] pipeline should leverage the Group going forward.

During the quarter we have filed four [DMS] in the US and two in Canada.

I would like to now turn over the call to Prasad, for the discussion of outlook.

Thank you, Satish. To begin with, I would like to provide a status update on the guidance for this year. For the nine months ended this quarter, on the revenue front we've exceeded our guidance. We have grown by 35% in rupee terms, as against our guidance of 25%. Even at constant currency levels, we have matched our guidance.

Gross margin, at 52%, is above the guidance of 50% plus levels. R&D spend, at 6%, is in line with the 7% guidance. On profitability, we have given a guidance of improved profitability and, adjusted for one-time write-down, the current net profit at 9.3% is higher than the 8% for FY '08.

In Germany, because of certain developments with the Olanzapine withdrawal and higher than anticipated price erosion, we will be unable to meet the absolute EBITDA guidance of $39m for this year.

Moving on to the future of -- outlook, we are today focusing on a select few large and growing market/product segments which contribute disproportionately to our revenues and profits, and where we can leverage the decisive competitive advantages that they have been building in each of our business.

Let me discuss some of the growth drivers for these markets. The North American Generics business continues to scale up rapidly. As announced recently, we have settled the desloratadine patent challenge, which is in line with our approach of exploring all opportunities to best monetize our [para four] pipeline, to create visibility and certainty of launches.

In the past several years we have settled multiple para four product litigation cases. With those resulting guaranteed launches and other para four and difficult to make Generics, we are working towards the goal of at least one [upstream] opportunity with limited competition every year for the next five years. We expect that this will -- these will augment our already growing base revenues with above-average [gross] margin.

In Germany, this is the fourth largest Generic market globally, with a market size of approximately [$15b]. We are among the top five generic companies. It is a market rapidly transitioning from branded generics to commodity generics. The change in healthcare reforms and, [obviously], health insurance companies to influence the pricing of products through [prevailed] contracts as well as tenders.

Today, the health insurance companies cover more than 90% of the population and we believe the market is moving towards a tender-based model. In this scenario, our game plan going forward will be high volumes and low margins.

We are also suitably reviewing our business model and aligning our organization structure in Betapharm to remain competitive in the emerging scenario. We are also focused on the absolute profitability that we require [for] this market. We have already taken a step forward in this regard by successfully implementing the reduction in sales force at Betapharm last year, and we'll continue to build on these efforts.

In India, we expect to see a resurgence soon. We are implementing a replenishment-based supply chain model and are beginning to see a higher secondary sales growth on account of this implementation in some of the States that we are piloting this initiative. We expect the primary sales for the business to normalize by the beginning of the next fiscal year. And we believe that our level of profitability in this market has improved considerably and we are at very competitive levels versus the industry.

In Biologics, the niche segment of our India business, we expect to see significant traction, with nine products in the pipeline. We expect to launch two products in the next fiscal year, and at least one product every year after that.

In Russia, our growth is robust. We continue to see good sales growth. In the wake of the recent volatility in the ruble devaluation, we will be constantly monitoring the currency movement and periodically take appropriate measures, including the resetting of prices if the situation demands. We expect our growth going forward to continue at the same momentum, with an enhanced vigil on the credit limits of our customers.

Our Pharmaceutical Service & Active Ingredients business is the result of the synergies created by our manufacturing, R&D and IT expertise, catering towards the generics and innovator customers. With critical mass in place, we rank among the leaders in this industry and are well-positioned to show industry-leading growth.

We are already the second largest supplier to generic companies, with several top generic customers as our customers -- companies as our customers. Our [DMS] pipeline and customer lock-ins enable us to cover a large share of the patent [ex-filing] going forward.

In our custom services segment we are transitioning the business model to get us a manufacturing-based model from [our] R&D services model. And our DMS positions and IT expertise provide us a platform, as innovators and large pharma companies realign their research to focus on combinations of existing products, increasingly.

In our Specialty business in the US, Promius Pharma, we are beginning to see traction in prescription generation for our first product, EpiCeram. We are also ready to launch our second product over the next few days. However, it is early to arrive at sales estimates at this time.

In our [Discovery] business, our partner for [abaraglitasol] is in Phase III, but we do expect a quarter delay in the outcome of these studies due to the delay in patient recruitment for this.

To sum up, we are now confident that we can deliver consistent growth in sales and profits, year after year, from now onwards.

With this, we now 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 very much. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions). Our first question is from the line of Arvind Bothra of Bank of America Securities. Please go ahead.

Yes. [With that video], congratulations on a good set of numbers. Just a couple of questions. One, can you just explain on the cash side? I mean, on the balance sheet, the cash position has declined considerably and so has the investments, current and non-current. Can you just explain that bit?

Yes, certainly. The cash position has declined because we have invested in CapEx to the account of $25m in this quarter, as well as we're beginning to see the release of some of this cash now in the current quarter on account of receivables and inventory. We have liquidated some of our investments, which are basically mutual funds, which get shown in the IFRS line item that you were alluding to.

Okay. So, in terms of -- also a little bit more on the Biologics front. Can you give us the sales of the two Biologic product already marketed right now, Grafeel and Reditux?

Reditux is about -- clocking at about 24 crores for this year.

Yes.

Grafeel is roughly about 10 odd crores.

Okay, okay. And just the last question on the Custom Manufacturing business. Can you just give us an outlook on how much revenue this is making and what do you see the growth in terms of pipeline? I missed the last part when you said you were transitioning from, if I'm not wrong, [CM] model to [CR] model, right?

From CRO --

CRO to CMO models. So, can you just give us the pipeline? What kind of Phase I, Phase II pipeline you have in the CPS business and how would the cost within areas which you have been talking about translate in the CPS group?

Okay. This is Satish speaking. So, we don't give specific revenues of what our Services business constitutes, because now it's an integrated reporting that we are doing because of a change in the model that we are following today, in terms of utilizing our existing infrastructure to support all the businesses. So, for example, it's (inaudible) business.

Okay.

So I also won't be able to comment on specific Phase I and Phase II molecules, again, developed (inaudible) business.

Okay. But the margins -- if you leave aside the numbers, the margins would improve substantially from the historic levels, right, in this business, if not to quantify on a granular basis, but just to understand the business competitiveness?

I think they will remain at the 30%, 35% mark.

Okay. Thank you so much. That's it from my side now.

Thank you, Mr. Bothra. The next question is from the line of Pinakin Parekh of JP Morgan. Please go ahead.

Yes, hi. First question is it on Olanzapine. The provision that has been built, is this -- how can it change going forward? Or is it going to be also, over the next one quarter or something, there will be some more provisions?

No. That's the final provision made. We [have returned] the product. That's an estimate of what could be the settlement. And I -- we don't expect any big addition to that.

Okay. Now, the second question on Sumatriptan that, considering that the generic labels on 80 day exclusivity has still not got approval and no launch date. So does this mean that, for Dr. Reddy's, the field is still going to remain at [two] company players, therefore, the revenue accretion should be in similar lines?

We hope so. We don't know exactly when our competitor will launch the product, so --

Okay. My just third and last question is that, in Russia, it seems that Dr. Reddy's reported volume growth of 16%, against industry volume degrowth of 1%. Is there any bunching up of sales over there?

No.

We're not -- no, not -- we don't see any bunching up of sales. We have always outgrown market growth rate in Russia, and we see -- we are happy to see that trend continuing right now. So there is no bunching.

Okay. And, just lastly, on AOK, the tender has still not been finalized. So when can we expect for you to sign it and go and move forward? [I mean] (inaudible) is already finalized?

I think the hearing is going on right now. So there is expected final hearing on January 23 and, four weeks after that, the decision is likely to be announced. This is some of the information that we have at this point of time, so we have to wait [until then].

Okay. Thank you, sir.

We also request the participants to keep their questions limited to one at a time, to give a chance to other participants.

Thank you very much, Mr. Parekh. Our next question is from the line of [Venu Pattiparanvil] of [IIFL]. Please go ahead.

Yes, hi. Congrats on a good set of numbers, actually. I was just wondering if I could get some more details about the domestic market, the supply chain modifications that you are talking about. What is the logic behind that and what exactly you are doing and what's the timeframe for that?

Yes. Basically, we are moving to a replenishment-based model, which means instead of a push model it becomes a pull model, based on, actually, finally from the retail the offtake is replenished at every [00]. That is the philosophy, but there are buffers built in at each supply chain node.

Today, are model is based on pushing primary sales. From there, we are moving to a pool-based model, demand pool-based model. This involves setting up IT linkages between the various supply chain nodes and aligning the manufacturing also to that. This is going to take a few more months to complete. I think we are running pilots in various States. We should see a significant improvement in our supply chain and, consequently, sales performance, two to three quarters from now.

Is there any risk for undertaking this right now? I mean, what is the benefit you are deriving [and why]?

This gives us increased availability and -- which means for reduced shortages in the marketplace, having the right product at the right place and managing inventory prudently. So there will be significant benefits of the finished [area] going forward.

Okay, right, right. And then, if I could just, quickly, follow up just one more question on this pharma services and the API business, it seems to be pretty volatile over the last quarter; Europe has gone up significantly, North America has come down significantly, the other markets have come down significantly. So why is there so much of volatility and is it likely to continue unpredictable like this?

I cannot follow where you got these numbers from. There has been a slowdown in the CPS business and we have been alluding to that. One based of -- the businesses based on biotech has been under pressure because of lack of financing, whereas, large pharma have been seeing some kind of delays, but that should normalize itself. But volatility is not something that we are seeing here.

Right. I was just comparing with the numbers, the last quarter you gave in Europe, North America, geography-wise.

I think that geography is -- So I don't think you should look at these numbers quarter on quarter. So it depends on the billing in that quarter and the --

No. Okay. Thanks. I will join the queue. Thanks.

Thank you. Our next question is from the line of Neelkanth Mishra of Credit Suisse. Please go ahead.

Yes, hi. If I could ask you to repeat the margins by segment. Sorry, we missed that in the initial segment.

Yes, certainly. The gross profit for the Global Generics business is at 65%, --

Okay.

-- as against 59% last year. And in the PSAI segment it's 27%. It was at 30% last year.

And -- okay. So there is no barrier formulation. When -- any updates on [Fondaparinux]?

We haven't filed the product yet, and we'll let you know when we file it.

Your partner, Alchemia, they have put out a press release that the milestone payment is due. So should we assume that you're close to filing it?

The milestone is based on certain development [firm] in milestones, not on filings. So we will let you know when we file the product.

Okay. When do we see the growth in domestic formulations coming back to industry average now? What I understand from your explanation is that, this quarter, because of the change from push to pull, perhaps some channel inventory got depleted.

Right.

Should we see a bounce-back? And when should we expect that?

You should see that in the next few quarters, I think. Starting from next quarter, it's when we should see a reversal in the trend, building up to the next few quarters.

Okay. I'll join back in the queue. Thanks.

(Multiple speakers) seen secondary sales from [mowamba], and that should catch up on the primary part.

Okay. But while the IMS data seems to suggest that October/November saw significant declines, is that not representative?

Okay, so -- this IMS data of mowamba which IMS also has acknowledged has some errors in the reporting. And this is to do with some of the pricing figures that they have taken for that particular month where there's been a change, right? So, once that gets corrected, you'll actually be able to see the correct numbers. So it's not to be taken as the exact number what's been reported by IMS, which reflects a very downward trend. It's not as bad as what it looks like.

Okay, thank you.

Thank you, Mr. Mishra. Our next question is from the line of [H. L. Gala] of [Quest] Investment Advisors. Please go ahead.

Hi. I just wanted to know, if things go favorably for us, how large will be this AOK opportunity that we are talking about? Very broadly, if you can tell us.

I think it has to be seen in a larger context, because we are talking about a change in the business model. Where in the past it used to be very much of the branded generics market, it's moving towards a more commodity-based market. So the influence is shifted from the prescribers to the health insurance funds.

That's right.

(Multiple speakers) you're now looking at this health insurance fund which started with AOK who have started floating tenders. There'll be other --

Okay.

-- in funds also which will start floating tenders. So that's the situation.

Yes. But how large do you think that opportunity can be, in terms of the top line? We do recognize that the profit margin will be very less, because it is a tender-based business. Can you give some highlight -- some idea about what kind of top line we are looking at?

You see, what we are talking about is this transition in the model, right. So, as and when it becomes more clear --

Okay.

-- (multiple speakers) when more tenders come in, that's when we should be able to give a clearer picture. So it's very difficult to predict exactly what the numbers are at this point of time.

Okay. But if these are tender-based business and it is more volume-driven, do we have enough capacities at different branch to cater for that kind of requirement?

Yes (inaudible). Many of you --

(Multiple speakers).

-- in the US, specifically asking about -- it isn't a tender where the specific quantity is ordered. It's a tender that you get and not to get to [tender]. On that specific SKU, in that specific region, you are the supplier.

Okay.

And it also depends on what is the total enforcement of the AOK tender in that particular market.

Okay.

Now, in terms of the capacity of the [year] previous, we're doing everything which is required to be done at our end with all the tenders that we are [winning].

Okay. Okay, fine, thank you very much.

Thank you, Mr. Gala. Our next question is from the line of [Serajeev Kornava] of Angel Broking. Please go ahead.

Hi, Vish Vishandya from Angel Broking. Your other expenses have gone up. Is this primarily because of the provisions for claims, or any other reasons?

Yes, (inaudible) for Olanzapine claim.

Primarily because of claims?

Yes.

Again, sir, your North American market has grown approximately around 55%, excluding the Imitrex and acquisitions. (Inaudible) be the key drivers and whether this trend will continue in future?

We certainly think it will continue. Part of the benefit has been from the problems our competitors have been having. We've got some of that where we have benefited by some of that. But we also see volumes going up based on our superior service levels to the marketplace.

And new products.

Yes, and new products.

Last question. Your tax provision seems to be on the lower side as for the Indian consolidated GAAPs. (Inaudible) specific thing?

We are not discussing Indian GAAP, but we are following the same [play] close to the ADR that we had in the previous quarter as well.

Okay, sir. Thanks. That's it from my side.

Thank you. The next question is from the line of Rakesh Agarwal of Deutsche Bank. Please go ahead.

Yes, good evening, this is Abhay Shanbhag here. Just a couple of questions, number one, on Imitrex. Can you give any sort of a feel as to what sort of price discounting or what sort of market share you would be having on this product?

Abhay, sorry, because of [computer] reasons we won't be able to disclose anything on the pricing or the market shares.

And obviously you'd indicated earlier, but with your (inaudible) not coming [and due], what sort of timelines? Do we see it's a couple of months? Or at least [not till] March, till May, end we won't see anybody coming in? Or what sort of timelines do we view for this product?

It's a little bit uncertain. It depends on the launch of the product from the company which has the exclusivity. Or if they delay it longer, then (inaudible).

Okay, one last question on Germany. You were indicating that the [8% growth] were different from the top-10 you have. Is that -- is this true, that -- ?

Yes, it is true.

Okay, and what happens? Would -- in terms of guidance, if the UK center actually happens on April 1, do we see revenues being flat or do we see revenues going down because your top eight products or your top-10 [are] really large in terms of value terms. So --

Right now it is very difficult to actually understand what these -- what will happen for the AOK in Germany. And so this is something which will be understood better when we are getting into the year end reporting.

Okay, so just now you're not giving any sort of guidance for Germany for next fiscal?

It's very difficult. One has to understand past litigation (inaudible) let it come into (inaudible) -- or, let's say, how it is panning out. Then all those [answers] can be made.

Okay, fine, thank you.

Yes. Abhay, just sorry, we hope to maintain revenues in Germany at the current levels despite the AOK tender result.

This is for fiscal '09 -- fiscal '10?

Fiscal '10. So we are trying, working towards a plan to achieve that and maybe subsequently we will be giving out more details.

Okay, fine, thank you.

Thank you, Mr. Agarwal. The next question is from the line of Jesal Shah of JM Financial. Please go ahead.

Yes, hi. My question is on SG&A expenditure. Your sales have grown about 21%, minusing the Sumatriptan contribution. But the growth in SG&A expenditure is about 34%. So I just wanted to understand if there were any one-time expenditures or -- which are the -- which businesses really have driven this increase in SG&A?

So our acquisitions that we made at the early part of this year, as well as the launch of our Specialty business in the US, you will see the effect of that when you compare it vis a vis last year. If you look at our SG&A vis a vis quarter two of this year you will find it is more or less at the same level, except for certain ForEx changes on account of the exchange rate movement.

Okay. So, basically, we can work on the same current SG&A as a base going forward?

Yes, that should be fair. That should be a fair adoption.

Okay. The last question is on the foreign exchange gain and loss side. This -- what is the hedge position and what are the different contributors to this foreign exchange loss that you've booked, in terms of whether -- how much of it is because of the hedges versus MTM?

So let me just try to deconstruct the loss for you a bit. Out of the 48 crores that we have reported, 30 crores relates to our Russian subsidiary on account of the rapid movement of the ruble from 25 to 30. And the balance amount of it is out of the Treasury operations that we have. So obviously the effect of the hedges is not very significant here, in the P&L.

In our balance sheet we are carrying $75m worth of hedges which would come to our P&L in the next three months. That is carrying mark-to-market loss of 58 crores. And other than this we have $120m which is taken at the rate of $10m per month for next year. And those were booked at rates between 49 to 50, and those are, as well, carried on our balance sheet. And there is no significant mark-to-market loss on account of that.

Right. And the reason for Russian currency giving you losses on the foreign exchange side is -- ?

Yes. It's because of the translation effect. There's a ruble payment and there's a -- there's a ruble receivable and a dollar payable to India.

Right. Okay. Okay, thank you. Thank you so much.

Thank you, Mr. Shah. The next question is from the line of [Buleev Adya] from MP Advisers. Please go ahead.

Hello?

Please go ahead, sir. If you are on a speaker phone, please switch to your handset.

Surely payable has decreased in this quarter and, whereas, your trade receivable has decreased, so any particular reason for this?

Our trade receivables have -- net of Sumatriptan, our trade receivables have decreased. So it's because the receivables on account of Sumatriptan billing that you're seeing the increase. If you take that out, we've actually gone down on our receivables.

Okay. And on payables it has decreased significantly; any particular reason?

No specific reason except that maybe our systemic (inaudible) has improved.

Okay. And you said about the AOK impairment. What will be the amount of that?

We have not calibrated that as of now. We are trying to see what the outcome of the AOK is and, post that, we'll be able to give a picture.

Okay, so any [assumptions]?

No assumptions at this stage, no. We're still looking at the numbers, but we can -- if you look at our filings with the -- that we've made, you'll be able to get a perspective on what the top-10 products have in terms of carrying value. And then we obviously -- as Satish mentioned, some portion of that will have to be tested for impairment.

Okay, okay. Thank you.

Thank you. The next question is from the line of Rahul Sharma of Karvy Stockbroking. Please go ahead.

I just wanted to know that, do you assess the SG&A expenses of $5b to be a good run rate because of scale-up in the business going forward quarter to quarter?

So, part of the SG&A is available cost, like freight and all that. That will of course go up marginally as volumes grow. But the fixed component of that should still stay at that level.

But without Imitrex (inaudible) will have to correlate, what will be a fair number? Would be around 29%, 30%, would be a fair number?

Yes, I don't deal with the exact number. Part of the SG&A increase is also due to our international costs as a result of the dollar moment. So there's an exchange effect also on SG&A.

Okay, okay. Thank you.

Thank you, Mr. Sharma. The next question is from the line of Nitin Agarwal of SSKI. Please go ahead.

Hi, good evening, everyone. A couple of questions. One is the [AR]. Prasad, on the overall business you have been undertaking a bunch of restructuring/efficiency improvement exercises across different segments. At what stage are we in terms of as far as some of the exercises are concerned? Do we -- clearly the last bunch of exercises that restructuring, Prasad, that are happening across the organization and you can we expect more stable businesses over the next quarter or so? Can we link anything from there?

Could you -- I think your question is -- what you're saying is -- we haven't done any major restructuring as such. In parts of the business we've streamlined them based on the business needs. We have undertaken an initiative to reorient our supply chain. Those initiatives have started delivering results. But the full impact of those results will be felt in the next fiscal year.

No, all I really meant was we've got a strategy change of sorts really happening in our domestic business as well as in our -- in the (inaudible) business or the custom manufacturing business. So in terms of fundamental changes like these do we foresee any of those fundamental changes which have a near-term impact on growth really coming through in some of our other business segments also, or this is what it is right now?

I think the Global Generics business as such is getting significantly centered and that gives us the confidence to say that they will deliver a more consistent performance going forward. The impact of these initiatives will be felt certainly in the next fiscal year.

Okay. And, secondly, on OTC business in US, has there been -- can you share some more light on in terms of how do you see that business really ramping up? Because there seems to be a lot of talk about increased RX to OTC switches really coming through US going forward.

So from the time we entered this business it's just been based on a few products, so there are more products in the pipeline which are in the process of getting approval, so that's when it gets scaled up. But our primary focus will continue to remain on the products that are going off patents on the prescription side. That's still the mainstay of our business.

Okay, great. Thanks very much.

Thank you, Mr. Agarwal. The next question is from the line of Sameer Baisiwala of Morgan Stanley. Please go ahead.

Hi, good evening. I just want to check on what's the outlook for the non-AOK insurance business in Germany?

Again, this also depends on the AOK, right? As you get the AOK products, that will have an impact on the non-AOK business also. In non-AOK business also is under some level of transition. Some of them are moving to tenders. But, as we see it today, I think the growth should be somewhere in the high single digit of the non-AOK business.

Okay. When should we assume with the non-AOK business all the contracts would be coming up for renewal?

They are not bunched up. They are at various times during the year.

Okay, so over the next six or 12 months, all of that would -- all the prices will get reset?

That's almost like (multiple speakers) process where they come for the (inaudible). It is not a tendering kind of a process. So maybe some of these non-AOK insurance funds can move into a tendering process. That possibility is (inaudible).

Okay. And just on AOK business, although you mentioned that you strive to have the same level of revenues even next fiscal. Now just very broadly speaking the impairment is -- or rather, the intangibles and goodwill is a function of underlying cash flows undiscounted into the future. So if you are going to have impairment charges, but at the same time [intend on the same] (inaudible), isn't the two inconsistent?

Okay, first, I think let me clarify. What we want to say is that we will continue to maintain the same level of revenue (inaudible) overall Germany revenue, not specifically for AOK or non-AOK kind.

Now what we'll also say, that if you read our 6-K and (inaudible) all that we are carrying our balance sheet, the carrying value is specifically mentioned each of the top-10 products and then other marketed products, new product and then brand intangible (inaudible). And now today the AOK tendering process is not complete. So it's still going to a litigation. You have to understand the final outcome when it happens.

And then there are several assumptions which is to be verified once the UK tender process is executed in how it is coming out in the marketplace. Based on those announcements, then we'll have to do a complete impairment testing. And then one can find out how much of an impairment can happen. But [our leverage] will be on the specific product-wise in the top-10 products. Otherwise, on goodwill and brand, I think there is sufficient (inaudible) product to believe that overall cash flow which is anticipated is good enough to protect us.

But each of the top-10 is something that's been set aside already. And as in generating the (inaudible) changes, so in future top-10 products will be significantly different from the top-10 products which we had for the years past, or even what is there today.

I hope it helps to explain. We are not in a position to give you a very correct understanding of what is going to happen in Germany in next one to two quarters. But maybe by the time we go for the whole year-end result one will be in a position to give you much more clarity. And by the time we'll be able to test the impairment and come back with really proper kind of understanding.

Okay, excellent. And just on Imitrex, is it (inaudible) expected to come some time in the first quarter calendar '09? That too is a settlement with Glaxo. Is there any uncertainty about that?

Why don't you check with them?

So we're not aware -- Sameer, we don't have the detail on that. But we've also heard what the market's been saying, but we don't have a fair understanding of when they would probably come into the market.

Okay. And, just on Imitrex, I don't know if you can give us some color as to what kind of inventory is out there in the market, as you saw it?

It -- we still believe that we're approximately -- we're not carrying inventory which is in excess of what the market would require as a consumption amount.

We are very carefully managing the (inaudible) habits in the market.

Yes. So we have changed some of our agreements with the trade in terms of how much we expect them to carry at any point in time.

And that could be about a month or something like that?

Less.

Maybe even less than that.

Okay. And just one final question on the base business. You've given all the revenue comparisons y o y. But if I just look at QQ sequentially, and if I just take Imitrex out, then probably versus $16.1b last quarter you have done $14.8b in this quarter, that's for the base business, despite dollar having -- rupee having depreciated 10% on an average basis. Where is the disconnect?

I didn't get that, Sameer. Can you repeat that, please?

If sequentially your base revenues, excluding Imitrex basically, your revenues have gone down about 7% to 8%, whereas, rupee has depreciated that it favors above by 10%. Actually, the base business doesn't seem to be doing too well. Is that (inaudible)?

Yes. So I think the two issues in the base business which are that could lead to your answer would be the slowdown on account of the PSAI orders that we've seen as a temporary phenomena this quarter, and India, which remains flat.

Okay. Okay, excellent. And just one, I'm not quite sure, Nikhil, whether you're going to be here next time around because -- but, just in case, then best wishes from my side.

Nikhil is handing over to Kedar now. So Kedar will be the contact point for investor relations. Nikhil has moved into Operations.

Good luck to you, Nikhil.

Thanks. Thanks, Sameer.

Thank you, Mr. Baisiwala. The next question is from the line of Ranbir Singh of [Hanratty] Securities. Please go ahead.

Yes, hello, hi. Good evening, everybody. So I just wanted to know the cash balances. Is this balance in India or abroad?

So most of the cash balances are in India. We have close to 200 crores in fixed deposits with top State banks as well as the top MMC. And the balance are in current accounts, both in India as well as in our operations and subsidiaries, to sustain the performance and payments related to salaries etc. in each of the subsidiaries.

Okay. And that debt, $75b you talked about, it's -- can you explain that debt structure (inaudible)?

Sorry, (multiple speakers).

Debt, how much borrowings is overseas borrowings and --

Yes. So we have EUR192m of debt, which is the debt we took on account of our acquisition at Betapharm -- sorry, the number is EUR196m. And that's at an interest rate of Euribor plus 70 basis points. Euribor is now around 2%. And then we have another $10m, $11m at LIBOR plus 70 basis points. That's the long-term debt. The balance is the short-term debt in the form of PCSC and some rupee loans.

Okay. And mark-to-mark losses, it's not (inaudible)?

The mark-to-mark losses on our balance sheet are roughly about 58 crores. And it pertains to contracts that will mature in the next quarter.

Okay. That's fine, thanks.

Thank you, Mr. Singh. The next question is from the line of Rajesh Vora of ICICI Securities. Please go ahead.

Good evening, gentlemen, and congrats for a good set of numbers. Mr. Prasad, you -- in your opening comment of the call you mentioned about consistent growth from here on, year on year, and also about one big product launch almost every year over the next five years. Would you like to give some color on whether it will be in something like 15%, 20% more, or some more color on that?

I think we will continue to give you yearly guidance.

Sure.

I think we feel confident enough that we have reached a stage where we can now show you consistency in both top-line and bottom-line growth.

Okay. And in terms of the building blocks of that, you would consider, obviously, the US generics market before the (inaudible) rates and all that? Is that one of the cornerstone? Is there any other pieces of growth blocks that will drive this?

The two major businesses. So this is the Active Ingredients. There's a lot of pipeline built into it in terms of DMS customer lock-ins, large pharma customers for products. And all this will play out to drive that growth of that business. The Global Generics business, I think we are working on some new initiatives to improve our competitiveness of our business. Overall, we should turn the corner in Germany through focused initiatives, improve our supply chain globally and, thus, increasing our service levels to our customers and, of course, the portfolio itself. So all these [new] initiatives that it should come together very well; consistency and profits and growth.

Okay. And an extra launch you think in fiscal 2010 is possible? You mentioned about the filing to be done yet in the US. Do you think that's possible? As Alchemia talks about --

(Multiple speakers), I mean it's possible.

2010.

2010?

It's a possible, plausible (multiple speakers) --

Sure.

-- filing. Until we have filed, we can't give you a date.

Sure. Sure, sure. Okay. All the best, thank you.

Thank you very much.

Hello, Rochelle, do we have any more questions lined up?

Yes, our next question is from the line of Mr. Manoj Garg of MK Global.

Hello?

Yes, hi. Could you just give us some light on Russia in the sense of growth going ahead and the receivables there?

Yes. So, in Russia, we continue to expect that our business would growth at the levels that it's grown in the past. We haven't seen a slowdown as yet. And we manage our receivables strictly within the credit limits. We don't have -- our partners are all the top distributors and we don't have issues in terms of our receivables.

Okay, thank you.

Thank you, Mr. Garg. The next question is from the line of Saion Mukherjee of Nomura. Please go ahead.

Yes, hi. Can you give the break up of the SG&A. How much is rupee nominated, approximately?

Saion, we can come back to you on that. We have the data but we are not carrying this (inaudible) outside now. We can supply that data to you as a percentage of the total SG&A.

Okay. And just one clarification. You mentioned [mix] to $75m hedge carrying an MTM loss of 58 crores. That would be realized if the currency remains at the current level over the next three months. Is that what you mentioned?

That's right. That's right, Saion. That's based on the MTM. The 58 crores is based on the MTM, based on the rate horizontally December 31. And if the rupee remains in this level, we will see that effect coming to P&L on the sales line.

Okay. And this [19 FDF] opportunity that you have, can you indicate what's the brand [like]?

Yes, the value of that would be to within the range of [$15b].

$15b. Okay, thanks.

Thank you, Mr. Mukherjee. Our next question is from the line of Ranjeev Kaparia of (inaudible). Please go ahead.

Sir, I just wanted to know, in this global meltdown, is there a way any biotech company having suffered bad debt, or are they likely to suffer bad debts because of biotech companies or from machine operations?

Nothing as of now. We have a very small exposure to one distributor in (inaudible).

And, sir, can you quantify how much is that?

It's about $0.7m.

Okay. That's very small amount. Okay, thank you very much and all the best.

Thank you, Mr. Kaparia.

Rochelle, we'll take two more questions.

Sure. Our next question is from the line of Prashant Nair of Citigroup. Please go ahead.

Yes, I just wanted to get a sense of the gross margins in the base business, excluding Imitrex. I know you may not give exact numbers but, broadly, is it in line with the trend what we have seen over the last few quarters and in line with your guidance, around 50% range?

Yes.

Okay, great. Yes, thanks.

Thank you, Mr. Nair. Due to time constraints, the next question is -- which is the last question, is from the line of Mr. Sonal Gupta of UBS Securities. Please go ahead.

Yes, just a couple of questions. One was, if I got it correctly, is it Sumatriptan margins are above Global Generic margins? Is that correct?

Global Generics average.

Average range.

So, average what? EBITDA margin? Average (inaudible)?

Average gross margins.

Gross margins.

Yes, average gross margins.

Okay. And I just wanted to know what is the sales force in Betapharm now?

120 people.

And what's the plan of action?

I think we will retain them for the time being. We will see as the model readjusts itself, also look at aligning the harmonization structure.

Okay. And just the final question was, like you mentioned in the beginning, there was a shift in the CPS business from contract research or contract manufacturing model. Could you just spend some more time and just tell us what the thinking is behind that?

I think we are focused on providing manufacturing and large volume production to innovators, and less of biotech customers than we do a lot of early stage work, because the accretion is quite high. So we are leveraging on our API pipeline, which many companies are focusing their research efforts and developing combinations based on existing molecules. We already have B&F, we already make these products and we are trying to leverage on them. And that is giving us good traction.

Okay, great. Thank you so much.

Thank you.

Thank you, Mr. Gupta. Ladies and gentlemen, that was our last question. I would now like to hand the conference over to Mr. Nikhil Shah and the management for their closing comments.

Thank you, everybody, for participating on the call. For any further questions, please feel free to get in touch with the IR team. Thank you.

Thank you, gentlemen of the management. Ladies and gentlemen, on behalf of Dr. Reddy's Laboratories, that concludes this evening's conference call. Thank you for choosing the Chorus Call conferencing facility. And you may now disconnect your lines. Thank you.