Dr Reddy's Laboratories Ltd (RDY) 2010 Q1 法說會逐字稿

Ladies and gentlemen, good morning and good evening. This is Melissa, the Chorus Call conference operator. Welcome to the Dr. Reddy's Q1 FY10 earnings conference call. As a reminder, for the duration of this conference, all participant lines will be 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 now like to hand the proceedings over to Mr. Kedar Upadhye of Dr. Reddy's. Thank you and over to you, sir.

Thank you, Melissa. Good morning and good evening to all the participants and welcome to Dr. Reddy's earnings conference call for the first quarter ended June 30, 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. Additionally, the transcript of the call will be made available on our website.

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 Indian GAAP immediately after the conclusion.

To discuss the results and the outlook, we have on the call today G.V. Prasad, our Chief Executive Officer, Satish Reddy, our Chief Operating Officer, and Umang Vohra, our Chief Financial Officer. 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, Kedar. I welcome all of you on the call today. Before I begin, I would like to mention that all figures have been translated at the convenience translation rate of $1 to INR47.74.

The financial highlights for the first quarter are as follows. Revenues are at $381m, which represents a growth of 21%. This includes Sumatriptan revenues of $43m. Excluding revenues from Sumatriptan, our growth is at 7% year-on-year. Revenues from the Global Generics business is at $273m, and this grew by 27% versus the quarter last year. Revenues from our PSAI business are at $102m, which represents a growth of 6% from the quarter last year.

Gross profit margin at the Company level is at 56% as against 50% in the previous year, and reflects the benefit of the margin sales from Sumatriptan as well as certain cost and -- cost synergies that we have been able to obtain in this year. Excluding the impact of Sumatriptan, our gross margin percentage is higher than last year. Within the segments, the margins for Global Generics and PSAI are at 64% and 35% respectively.

SG&A expenses, at $124m, registered a growth of 17%. This includes two exceptional items - first, the exit costs of the sales force at betapharm, amounting to EUR7.2m; and second, the costs related to the closure of our Atlanta research facility, amounting to $1.5m. Excluding these exceptional items, our SG&A expenses grew by 6%.

EBITDA, at $91m, represents a growth of 90% over last year, and at the current EBITDA levels the EBITDA is at 24% of sales. PAT, at $51m as against $23m in the previous year, represents a growth of 120%. In the same comparison, PBT at $66m shows a growth of 65%. This quarter, our mix of business from North America is higher. And as a result of this, our tax rate is 23% versus our full year estimated tax rate of 17%. Diluted EPS is at $0.30 for the quarter. Adjusted PAT is at $60m, translating to an adjusted EPS of $0.35 (sic - see press release) and a growth of 116% over the previous year.

Moving on to the balance sheet. On receivables, we had a release of $26m during the quarter, largely from the outstanding Sumatriptan collections at the beginning of the quarter. Inventories increased by $15m during the quarter, in line with the requirements for expected launches in subsequent quarters. Capital expenditure was at $14m and is expected to scale up in the subsequent quarters.

We continued with our foreign currency exposure hedging practices, as per our policy. As of June 2009, we currently have $138m worth of cash flow hedges. The total net debt of the Company is at $208m, and this translates to a net debt to equity ratio of 0.22.

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

Thank you, Umang. I'll now take you through the key highlights of the quarter.

Our Global Generic segment revenues grew by 27% over the previous year. As we had indicated in our previous earnings call, we were able to extend the gains from the Sumatriptan opportunity well into the first quarter of this year in the US market. Russia and Germany witnessed a slowdown relative to the previous quarters, while India is beginning to turn around, as shown by the trend in the increased sales month after month this quarter. Growth in other emerging markets besides India and Russia clocked a very good performance for the quarter.

So let me now cover each of our large markets, starting with North America. Revenues in the US were at $123m, which represents a growth of 83%, largely driven by Sumatriptan as well as volume expansion in many of our top products. Even if you exclude Sumatriptan, our year-on-year growth is 21% and the sequential growth is 12% in dollar terms. In Sumatriptan, we continue to hold onto a majority market share. However, from the second week of August, we expect multiple players to launch the product.

About a month ago, Omeprazole Mg OTC was approved by the US FDA, and we are hopeful of the launch by the middle of this quarter. The window of opportunity for this product will be much higher than the usual [1 HD] product, and we believe that it is likely to be a three-player market in the near to medium term.

We now have 67 ANDAs pending approval at the US FDA that address innovator sales of $68b. Of these pending approvals, 28 are Para IVs, out of which 16 are FTFs. And the 16 FTFs address a market size of $9b.

Moving on to Germany, starting June this year, AOK tender product supplies have started. While it is too early to predict the pattern of sales in the German market based on this particular development, the initial de-stocking in the market on account of the AOK tender has resulted in a de-growth in revenues for Dr. Reddy's. Revenues are at EUR24m for the quarter, which represents a 38% fall over the previous year.

For the eight products that we won the AOK tender, we have seen a significant increase in volumes. We are also seeing a fall in volumes of non-AOK products. However, we will be in a better position to comment on this trend only after a few months of supplies to the AOK.

We are seeing an increased trend of tender activity by other secured health funds, health insurance funds also, and this is clearly emerging to be a dominant trend in the German generics market. In this scenario, our plans of ensuring cost competitiveness and evolution towards a frugal organizational structure are absolutely on track. During the quarter, we agreed for a social plan of the Works Council in Germany, and as a result we have restructured our sales force to reduce to approximately 50 today, from 110 as of (technical difficulty).

Excuse me, sir, this is the operator. Hello?

Hello?

Sir, you were not heard on the call.

Where did we lose out? Maybe we --

Can you tell me where we lost out?

While giving out the figures, sir.

Okay. Maybe we go back to the eight products in the AOK. Maybe go back to the eight products. I think what happened was probably the others pressed the mute button. So we go back to the eight products and we start from there, so the eight products that we won in AOK.

Sorry for the delay. I'll just get back to the German part of it. What I was saying was, after reporting revenues at $24m (sic) for the quarter, which represents 38% fall over the previous year, so for the eight products that we won in the AOK tender we have seen a significant increase in volumes. And we are also seeing a fall in volumes for non-AOK products. However, we will be in a better position to comment on this trend only after a few more months of supplies to the AOK.

We are seeing an increased trend of tender activity by other SHIs also, and this is clearly emerging to be a dominant trend in the German generics market. In this scenario, our plans of ensuring cost competitiveness and evolution towards a frugal organizational structure are absolutely on track.

During the quarter, we agreed for a social plan with the Works Council. And as a result, we have restructured our sales force to reduce to approximately 50 today from 110 as of March 2009. Even this sales force of 50 is largely covering pharmacy reps as of today. No more physician sales force. So on account of this, we have taken a one-time severance charge of EUR7.2m.

With a significant decline in prices in Germany and the balance of the market moving towards the tender-based model, we expect continuing challenges in this market, which is likely to cause our revenues and profits to be lower than the previous year.

Now, moving on to Russia. Revenues are at $31m, registering a fall of 13% over previous year. The growth, led by price increases in products, was offset by the depreciation of ruble currency. Volumes were lower compared to the previous year, due to a correction of inventory holdings by the trade and also partly due to the liquidity issues.

The secondary prescription sales trend for the generics pharmaceutical market in Russia for the months of May and April, compared to the same period last year, indicates a de-growth of 4% in volumes, which is a de-growth of 5% in dollar value and growth of 34% in ruble value terms. During these two months, our secondary sales grew by 3% in dollar value terms and 46% in ruble value terms. However, the volumes were lower by 8%.

The ongoing financial crisis has impacted liquidity in the Russian market. We continue to maintain our focus on receivables and credit terms and we are holding on tight, in spite of a possibility of losing sales due to this stance of ours. In spite of a difficult situation in the market, we have grown modestly if you compare sequential quarter-on-quarter sales, which is at 5% in ruble terms.

We believe that we will be among the better performing players in Russia, in spite of the current situation in the market. And the sales trend in Russia normally shows a pickup in sales in the third quarter, as a consequence of which the second half performance is usually better than the first half, and we are closely tracking the situation.

Now, I move on to India. Revenues are at INR2,393m, as against INR2,202m in the previous year, which represents a growth of 9%. The growth was led by some of our major brands - Omez, Nise, Omez-DSR and Razo.

In our previous earnings call, we had talked about implementing certain measures, combined with our supply chain excellence, to help us return firmly on a growth path in India. We have now begun to see this turnaround in this quarter. The secondary sales trend for the two months April and May shows our growth slightly higher than the market growth rate of 10%. As we have now matched the industry growth rates, our next focus in our efforts is to grow at par with the top 10 in the industry.

We have also just received the June [trimester] figures, and against a market growth rate of 18% for the month, Dr. Reddy's has grown at 24%, so -- which again is a positive trend for us.

Sequentially, the value growth is at 15%, largely on account of volume growth of 14%. We have launched 14 new products in India for the quarter, and the contribution from the new products compared to the previous quarters is much better than -- is much better. And we expect the number of new products to be launched to gradually increase in the latter half of this year.

Talking about the PSAI segment of our business, the trend in the order book, which had weakened in the second half of the previous year, has shown an improvement. It is up 27% from the earlier quarter, which represents approximately two months' sales. More than two-thirds of our order book is comprised of orders for the regulated markets of North America and Europe, and we see the business growing faster for the balance of the year. As a result of this, our revenues for the PSAI business grew by 6% over the previous year.

With the reversal of the recessionary trends in some of the unregulated markets, we are beginning to see traction for this business in these markets. In the regulated markets, we have been able to create a strong pipeline of launches and key customers. We have cumulatively filed 355 Drug Master Files globally till date, of which 288 DMFs relate to the regulated markets. We expect the PSAI business to grow in double digits for the balance of the year.

Before I conclude, just a quick comment on the regulatory situation. In the recent past, we have been hearing about a number of Indian and US industry players attracting US FDA action on regulatory aspects. Our focus at Dr. Reddy's on the regulatory and compliance aspects in our development and manufacturing facilities remains high, and we have adequate infrastructure in place to ensure the required compliance. A few months back, some of our FDA plants were inspected by the US FDA, and we are pleased to inform that we have had zero audit observations.

I now hand it over to Prasad.

Thank you, Satish. Before we begin the Q&A session, I would like to comment on our guidance and also briefly discuss our strategic alliance with GSK, as well as a few of the ongoing key developments.

At the beginning of this fiscal year, we guided to a 10% sales growth over the high base of the previous year and an ROC of mid to high teens. We remain fully committed to this guidance. And on a full year basis, the continued performance of our US base business, India, the PSAI and the impending Omeprazole Magnesium OTC launch will help offset the headwinds that we are seeing in Germany, as well as partially in Russia. Also, the ongoing cost control initiatives are showing the desired effect, and this will help us enable -- and this will enable us to meet our guidance on our profitability.

Let me now touch upon the strategic alliance with GSK. This partnership will expand our reach in the emerging markets and leverage our product portfolio and process development strength across generic formulations and differentiated products, with GSK's market knowledge and extensive presence in the emerging markets. It is also a matter of pride for us to work with a reputed global leader like GSK and realize the full potential of all our strengths.

In the past, Dr. Reddy has expanded into several emerging markets on the strength of our capability in product development and marketing skills through a mix of front-end options, such as distribution driven in some markets, joint ventures and direct presence in some few markets. While this served the purpose initially in establishing a global footprint, it increasingly added to the complexity of operations as the Company scaled up its presence.

In a shift in our strategic approach, in line with our long-term goals, we decided to exit some of these emerging markets and decided to focus on large markets that offered headroom to grow significantly and contributed to the overall corporate performance.

With this GSK alliance, we are now able to access the market with a fresh value proposition without resourcing up the front end, which may conflict with our profitability -- with our approach on sustained profitability. After the deal announcement, we have now started working together with GSK and are in the process of identifying the portfolio for several emerging markets.

I also want to reiterate some of the other ongoing value-enhancing strategic initiatives. The rollout of excellence in the supply chain model across our businesses and geographies is gaining momentum and is progressing well. We are on track to significantly improve our performance at the global level.

Secondly, the restructuring of our R&D processes. We have now completed the integration of all our discovery facilities and key employees with Aurigene, our discovery -- our partnership-led discovery business. We also closed down our Atlanta facility. And these initiatives should lead to improved productivity of our R&D spend.

Thirdly, our portfolio planning and capacity exercise is nearing completion, and the plans to invest in SEZs are now finalized. Land acquisition for both the SEZs has been completed, and we have now begun obtaining licenses to commence construction at both these sites.

Finally, on the biosimilars front, the recent move by the US Senate Health Committee to give biologic drug developers 12 years of exclusivity from the date of the drug's initial launch could be seen as a negative development for the regulated market business. Our current biologics strategy is focused on commercialization in India and other emerging markets, where significant opportunities for growth do exist. We continue to track further development in the legislation process in the US Senate, but at the same time we are investing in building infrastructure for the development and manufacturing of biologics.

We are focused on building our regulated market business model and are exploring partnerships in line with calibrating our R&D investments. Meanwhile, our less regulated market strategy will be supported by partnerships in several markets, and the launch of two biosimilar products is planned in India later this year.

Now, thank you very much for your attention and we'll be happy to take your questions at this time.

Thank you, sir. Ladies and gentlemen, we will now begin with the question and answer session. (Operator Instructions). The first question is from the line of Punit Adhia from Mehta Partners. Please go ahead.

Congratulations for a good set of numbers. Can you please tell me the breakup of AOK business and non-AOK business in betapharm?

No, we can't comment on that because it's just been one month of sales in June, plus we don't give breakup of sales to that level --

At the customer level.

At the customer level, we don't give a breakup.

Okay. What was the EBITDA from betapharm this quarter?

Again, I think we also mentioned in the previous earnings call that we now look at Global Generics as a whole business, and we won't be able to share any country P&L items.

Okay. And in this quarter your gross margin were higher and you mentioned that that was because of your US business. That will continue going forward, this high gross margin?

To a certain extent, there will be some fluctuation in margins as Sumatriptan ends in August.

Okay. But I thought Sumatriptan also your margins were higher in this quarter.

Yes, that is sustainable.

That is sustainable?

Yes.

Okay. And can you tell me the -- what has been -- is there any margin reduction in Russian business or no?

No, there has been no significant contraction on margin there.

Okay. And what is the outlook on --?

Punit, before you continue, may I suggest that you please limit your questions to two at a time, so that we give other participants a chance? And you can come back to follow up later.

Okay.

Thank you, Mr. Adhia. The next question is from the line of Manoj Garg from Emkay Financial Services. Please go ahead.

Yes, good evening. My question pertains to the GSK. When do you start probably launching the products through GSK's tie-up or [credit] tie up in the emerging markets?

There will be some marginal sales this fiscal year, but that will be very small. The sales will build up to meaningful numbers in the 12 to 18 months timeframe.

Okay. And which are the markets, like in emerging countries, where you would like to focus [as an individual] entity?

See, we are currently focused on a few markets, starting with Russia and the CIS belt, Venezuela, Brazil, South Africa, Australia and New Zealand. These are the markets we'll continue to grow. But we don't see us entering into any new territories in the near future.

But that means that in these markets GSK will not launch [tie up] products with you?

Not necessarily.

Okay.

GSK has rights to launch products in most markets, and we can also co-launch along with that. So there is -- the agreement provides for both of us to co-exist in certain markets.

And will this agreement also include your existing products, or maybe like new molecules and maybe new brand names?

It includes both existing and future products.

Then how would be like the sharing of the profit and all those things?

We're not sharing specifics of the deal. The transaction terms are confidential.

Okay. That's all from my side. Thank you.

Thank you, Mr. Garg. The next question is from the line of Ms. Sally Yanchus from Tradewinds Investments. Please go ahead.

Yes, hi. A question on the German market. Do you have an estimate of how much value decline you expect in the overall German market this year? That includes AOK plus non-AOK business, just an estimate for the market. Do you have any estimate for how much you expect the market to decline in value?

And then, secondly, on the tenders for the AOK, is there -- you mentioned there's a lot more competition for these tenders. Is there -- are there contracts or tenders that you will simply not bid on, because you're not making enough margin, i.e. is there some price at which you will -- you are just not interested in participating?

Okay. As far as sales is concerned, I can't give a specific number on what we expect the sales to be, but broadly we have said that compared to, say, the previous year's EUR150m of revenues, we expect, based on the first quarter's trend, that it will be lower, right? So that's what we have said broadly. So that's on the sales part.

When it comes to the continued tenders, what's happening is more and more of the insurance funds are going in for tenders, and it will remain competitive. But we have shown ability to take products -- to win products in the tenders. Eight products we have won last time, which represented 33 contracts. And we will continue to bid aggressively for all the tenders that keep coming up.

Okay, thank you. Just one further question on Omeprazole OTC in the US. What's your strategy to penetrate the market and gain market share in the US? It's a different market for you than just commodity generics.

Well, we have been participating in the OTC market for some time now. We expect to slowly ship -- gain market share, but we don't expect a huge price decline.

Okay, thank you.

Thank you, Ms. Yanchus. The next question is from the line of Balaji Prasad from Goldman Sachs. Please go ahead.

Hi. Thanks for taking my question. I just wanted to get some clarity on the domestic market growth. What do you think could be the market growth rate [in terms per se], not just of Reddy's? And what do you think could be headwinds for this growth? Could NPPA or lack of fresh launches be headwinds for this growth maybe this year or next?

So, Balaji, our expectation is that the growth in the market could be close to 14% or so.

Okay.

And as Satish has mentioned, we probably are looking -- we've matched market growth rate so far. This month, we've beaten market growth rate. And our expectation is to grow at par with the top 10 people going forward.

Okay. Thank you. And my second question was on AOK. Do you see fresh tenders coming in there in the near future?

They've already announced, Balaji, there's another tender of a list of about 94 products which are going into tender.

All right. When do you expect --?

And these are smaller products than the ones that originally went onto the tender and this tender would begin supplies from January.

Okay.

But we expect the bidding to be in August, September for this.

What is the market value of this, like [Balia] tender was around $3b?

This is significantly lower. We can get back to you with the exact detail, Balaji. It's just been announced about three to four days back.

Okay, sure. Thanks, Umang.

Yes.

Thank you, Mr. Prasad. The next question is from the line of Prakash Agarwal from Deutsche Bank. Please go ahead. The line has been disconnected. Should we move on to the next question?

Yes.

Thank you. The next question is from the line of Ashish Kacholia of Lucky Securities. Please go ahead.

Yes. This is Mitul Mehta. What could be the size of the Sumatriptan market in US alone and what kind of margin in total do we see once more and more players come into play?

So I think the -- we don't know what the exact value of the market would be, because it's now a multi-player market. This was approximately, I think, a $700m to $800m drug, at innovator sales, close to $1b. And we would think that, once the other players come in, the pricing would crash much further and it will be at par with other product prices in the market.

Okay. But apparently the margins on this particular product would be as high as 70%, 80%.

We don't give out margins on specific products.

Okay. Thank you, sir. And sir, my second question would be what kind of CapEx do we plan to spend this year and year after that?

We are -- we have guided earlier during our annual call. We are looking at about $100m to $125m of CapEx in this year and probably going forward as well.

Okay. Thank you very much.

Thank you, Mr. Kacholia. The next question is from the line of Prakash Agarwal from Deutsche Bank. Please go ahead.

Yes, this is Abhay here. Just a question on gross margins. What have been the drivers of gross margins? Is it a better product mix, is it raw material prices coming down or is it currency?

I would say all three. There has been an element of mix of the business. There's also an element of the fact that prices have come down on the raw material side. Some of the products for which we have taken the cost improvement measures are now beginning to show, as well as the fact that ForEx rates are effectively better than last year.

Okay. And as you indicated in the question earlier, you would expect the gross margins to continue.

Yes. Our expectation is that we would have gross margins probably better or at par with last year levels.

Just one last question on -- in terms of Sumatriptan. What is the level of inventory in the system for Sumatriptan?

Abhay, we won't be able to share at this moment.

Okay, fine. Thank you.

Thank you. The next question is from the line of Ravi Agrawal from Edelweiss. Please go ahead.

Yes, good afternoon. Thanks for taking my call. Congratulations on great numbers. Just two questions, actually. One is on the GSK alliance. I was just wondering is there any further CapEx which you might have to do just on account of this alliance, in terms of the kind of products which you are planning to make here?

Not immediately, but certainly some volumes will -- as the volumes increase, we will need to look at our capacity. But in any case, we have budgeted and planned for the investments in SEZs, which should more than be adequate for the expansion. But it won't be significant relative to the overall business.

Okay. And the second question is on the margins. I know you don't want to share specific to any particular category or product. But typically, these kind of alliances, would the margins actually work out to be better than, let's say, some of the returns which you might be making on some of your other RoW markets today?

See, the thing is it's a branded generic market that we are going after.

Sure.

So, to start with, the realizations are much better than commodity generic markets. And then, if you look at the fact that there is no SG&A involved, overall these products will be pretty attractive for Dr. Reddy's.

Even on the transfer pricing there, because they will be sharing a part of the revenues with us.

That's what I said, yes.

Okay. The second question is again on [CFDF]. It's something which -- I know people have asked this question, but is there any element of any one-offs which are there in the field, just because the margins have really expanded very sharply?

There is the whole Sumatriptan, which has limited competition as of now, so that certainly has a bearing on margins.

And then my final question, I see you've not filed any ANDA this particular quarter. Is there any specific -- is this just something which just happened, or some specific (multiple speakers)?

It's just a matter of timing. I think we'll soon see filings.

Okay. Thanks for that.

Thank you, Mr. Agrawal. The next question is from the line of [Krishna Kharran] from Capital Markets. Please go ahead.

Congrats for a good set of numbers. I have two questions. First question, conversion rate of euro to rupee, how much it is?

It would be roughly INR67.

INR67.

Yes.

Regarding SEZs, said like two SEZs coming -- upcoming was -- what would be the CapEx for both of them (multiple speakers)?

See, it's hard for me to give you precise numbers as the scope of the products -- projects are still being developed. But we look -- together, both these SEZs should be in the region of $150m.

Okay. Thank you. Thanks a lot.

Thank you. The next question is from the line of Bino Pathiparampil from IIFL. Please go ahead.

Hi. Congrats on a good set of numbers. Just a follow-up on betapharm. I understand that there has been a stocking-down in the non-AOK products, but I would naturally expect a stocking-up on the AOK side of the business. Didn't that happen in this quarter or is it likely that we'll see that ahead?

Let me clarify. There is a de-stocking that happened that was before the supplies on the AOK tender products commenced. That's what I was referring to, right? So from June onwards, there is a ramp-up. Yes. That's what happening right now.

Okay, right. Right. Okay. And just a couple of housekeeping questions. One, the amortization charge seems to have jumped up over the previous quarters, so how is that accounting?

Bino, the amortization charge in this quarter includes the charge for the beta brand and we -- earlier, this was an indefinite lived asset, which we've now converted to a definite life asset. So we amortize it. Earlier, we weren't amortizing it. And we have guided towards this at our annual call as well. So there's -- the increase is largely on account of that.

Right. So this will be roughly the rate going forward?

That's right.

Okay. And also, could you just tell once more what were the one-offs included in the SG&A? One I think was the EUR7.2m regarding the sales force reduction.

Yes. And the second was the Atlanta research facility --

Right.

-- where we've closed it -- closed that facility. That amounts to about $1.5m.

Okay. Okay, I will join back the queue. Thank you.

Thank you.

Thank you. The next question is from the line of Madhuchanda Dey of Kotak Securities. Please go ahead.

Yes, hi. Sir, the Sumatriptan opportunity is kind of coming to an end and you have also indicated about a subdued outlook on the German market, and the Russian market also seems to be in trouble. If you could -- in the backdrop of all this, if you could help us understand what kind of assumptions that goes into the 10% guidance that you still maintain.

Okay. Russian market is not in trouble, right? So that's the first thing. What -- all I said about Russia was, the first quarter, the volumes -- generally, if you take the overall market itself, it's re-grown, so at some point of time it will recover. So there's no issue with that. So that's not in trouble the way you're thinking about it.

But if you see the sales, right, so when we guided for 10% and we continue to maintain the guidance, what we are saying is the US market continues to perform well on the base business, even if you leave out Sumatriptan. And after Sumatriptan gets the multi-player kind of a situation in August, we also have Omeprazole Mg coming in, in terms of launch, which will happen this quarter, right? So put that together with India growth, which is turning around; we also talked about the latest figures in June. So whatever we're losing in Germany, and partly Russia, it will be offset by the growth that we will get from North America and India. That's on one hand.

The second thing is the PSAI business. Like I said, the starting was low because that was how it was planned to be, right? And I clearly said it will be double-digit growth in the second half of the year. So that should give an indication of what [it is currently].

To add to what Satish said, there could also be some other interesting launches in the US market apart from Omeprazole during the later part of the year. So, overall, this gives us confidence that we can meet the guidance.

Yes, I was just coming to that. Just if you could -- if you could just indicate broadly how many products, new products, were factored into this kind of guidance, beyond Omeprazole?

I think overall we'll look at about six to eight launches, but we're not sharing specific details.

So the new product activity is more for the India business, where we also have the biosimilars. And other than that, we've also -- there is some new product activity in the US, but the contribution from that will not be very significant, other than Omeprazole Magnesium, for this year.

Okay. So, basically, it's going to be Omeprazole and the better outlook on India, if I may sum up.

Yes. The PSAI business.

Yes, okay. Thanks a lot.

Thank you, Ms. Dey. The next question is from the line of [Harshad Parekh] from JPMorgan. Please go ahead.

Hi. Good evening. My question is you have said that you have $138m of cash flow hedges. What is the current mark-to-market position as of June 30, 2009?

We don't have a very significant mark-to-market position. Most of the hedges are in the range of 47 to 50 as an average rate.

Okay.

So there's very little of the mark-to-market. There's less than even 10 crores.

Okay. Thanks a lot.

Thank you. The next question is from the line of Punit Adhia from Mehta Partners. Please go ahead. Mr. Adhia, please go ahead.

Yes. What has been the -- no, there has been a reduction in R&D expenditure in this quarter. Will this be the run rate for the year?

There is an issue of timing, so you shouldn't take just the quarter numbers. Numbers could go up a little.

Okay. So it can be around 6.5% of sales?

Yes, around 6%.

Okay. Okay, thank you.

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

Hi, good evening. First question is on Omeprazole OTC. Prasad, what would be our volume or market share expectation, just some ballpark? Late teens at a minimum, would that be a fair comment?

I don't want to -- we're just launching the product. We're converting customers. The conversion in this private label OTC is a little slower than launching a generic, pure generic. So I'm afraid I can't share more specific details on this product.

Okay. And you just mentioned about some interesting launch in US later this fiscal.

Yes.

Is there anything other than (inaudible)?

We -- there are several products, but it's all depending on the regulatory timelines. As of now, we don't have approvals in hand, but there are several interesting possibilities.

Okay. And these would be low competition dynamics and no litigation?

Yes, yes, yes.

Okay, fantastic. And just one question on Glaxo deal. Was there any compulsion for us to include Russia and CIS geography, given the fact that we are already present? And why not -- why did you not choose to include biosimilars over there?

Russia, we still retain the right to launch other products. So what we launch through GSK will only be incremental to us and their launched brands will be separate brands. So it will be additive overall to the revenue and the business model. Biosimilars are not excluded from the deal.

They too are part of the deal?

It's possible.

Okay. Thank you. That's all from my side.

Yes, thank you.

Thank you, Mr. Baisiwala. The next question is from the line of Rahul Sharma from Karvy Stock Broking. Please go ahead.

I think I missed out on the Russia part. Could you just run me through the volume and the value de-growth which happened in the quarter?

Let me just [flip out] my notes.

I think I'll just read out Satish's script. The secondary prescription sales trends for the generics market in Russia for the two months of April and May, compared to the same period last year, indicated a de-growth of 4% in volumes, 5% in dollar value, and a growth of 34% in ruble value. During these two months, our secondary sales grew by 3% in dollar value, 46% in ruble value terms. However, the volumes were lower than the market and they were at 8%. In June, we've got similar data, where our volumes are far higher than the volume reported by the market.

Okay. And this 5% dollar and 34% ruble is all in volumes?

No. 5% dollar and 34% ruble will be in value.

Okay. Okay, okay. And June, how much was the last figure which you said?

In June, we are seeing a volume -- we are almost close to 0% volume de-growth. The industry is lower by -- at about minus 2% de-growth. And in terms of value, we are higher than the industry. I think we've grown at 18%.

Okay. How is July faring out to be for Russia/CIS?

Too early to talk. It's too early to talk about it.

Okay. Thanks.

Thank you, Mr. Sharma. The next question is from the line of Sonal Gupta of UBS Securities. Please go ahead.

Hi. Thanks for taking my questions. Just look -- continuing with the GSK deal, can you just -- which are the countries, other than Russia/CIS, where you have this sort of a detailed launch option?

Russia is probably the only meaningfully large country where we have a presence and they are present. There are other smaller markets like Venezuela, maybe one or two other countries like Brazil, but we're not very significant in these markets. The only other major market for us would be Venezuela.

Right. And who will be IP owner and incur the registration expense, etc.? Is it going to be shared or how does it --?

If it is specific for a market, the costs will be covered by GSK. If it is something that is just an extension of an existing product, there won't be any additional expenses.

Right, so -- but who holds the IPR going -- or the registration going forward? GSK will hold that?

The brand will be held by GSK.

And the -- but the product, whatever product you're registering -- so if there's not -- later on, is it possible for GSK to source that product from somewhere else?

It's an exclusive arrangement. It's mutually exclusive once products are selected.

So, for those products, GSK cannot procure from anyone else for those markets?

Yes.

Okay. And just -- now, on the Prilosec OTC, I was just wondering as to what's the reason why you've targeted the launch in middle of next quarter, I mean the second quarter?

Well, there are some launch preparations required when you're launching an OTC private label product, which includes packaging, supply chain and a whole lot of other things, which we have now put in place and we will be launching the product shortly.

Okay, great. Thank you so much.

Thank you, Mr. Gupta. The next question is from the line of Alok Dalal of MF Global. Please go ahead.

Yes, thank you. Sir, what kind of recruitment are we seeing on the quality front, quality and manufacturing?

What do you mean, the (multiple speakers)?

I'm not really clear what --

You mean how many numbers are being added?

Yes. I mean in the sense to address the FDA concerns and all.

No.

There's no relation to that, because -- just because of the FDA issue there's no need to add more people.

Okay. But of course your focus on quality will now be much higher as compared to what it was earlier.

No, it's always been high and it remains at a high level.

Okay.

I don't think we have changed anything in our approach as a result of what's happening outside in the marketplace.

Okay. And secondly, what kind of improvement are we seeing on base business, excluding Sumatriptan?

7% was the growth on the base business.

That is on top line, but on the bottom line level?

We are not sharing that kind of detail but --

Okay. Not number-wise, but in general what kind of improvement are we seeing?

So we've mentioned that our gross profit, even without the Sumatriptan, was better than last year.

Okay.

And we also mentioned that our overall SG&A grew by 6% without one-times, so I don't think we're giving more granular information than that at this point in time.

Okay. Thank you, sir.

Melissa, can we restrict the [balance] number of questions to probably balance two questions, please?

Sure, sir. So you want to take the last two questions?

Sure.

Thank you. The next question is from the line of Kartik Mehta of Daiwa Securities. Please go ahead.

Yes, hi. Could you share what is the expected tax rate that we should assume for FY10?

And the second question is, in terms of inventory valuation, if Umang could share, how would you have typically valued the balance inventory of [the metric] that you have, assuming that the second week of August you would expect a fair amount of competition in the sense -- if you could just throw some light on that. Thanks.

So the effective tax rate you can assume for the full year is 17%.

Okay.

On the inventory valuation, the way we do it is we get data of consumption. And this past data of consumption is averaged to say what basically a trend of consumption is. And basis that and the stock statements we get from the distributors, we estimate what the stock adjustment should be.

Yes, but if you could just elaborate, if you can, here. In this particular situation, where a very high value product would be actually going off within, let's say, about 40 days or so from the start of the next quarter --

Yes.

-- just Q2 FY10, so in this case would you still feel that those average prices from your distributors -- would you think therefore actually (multiple speakers)?

No, we don't take average prices. We take average consumption and then base it on what we think the price will be.

So if you -- would you be able to elaborate? Is there any that the expected price differentiation has been adjusted in this inventory?

So we have already mentioned that we expect prices to crash for the product once others enter, and we have -- there is some reserve that we have created, but we are not giving specifics at this point.

In spite of that, we are seeing some increase in inventory actually in dollar terms, at about 5%.

You -- we have said there will be a $15m increase in inventory --

Yes.

-- in this quarter, and that's largely because of the new products that are expected to be launched.

Okay. Thanks.

Thank you, Mr. Mehta. Sir, do you want to take the next question as your last question?

Yes.

Thank you. The last question is from the line of Ranjit Kapadia from HDFC Securities. Please go ahead.

Good evening and congratulations for a good set of numbers. My question relates to SEZ. Our Glaxo deal is going to start up in 12 to 18 months, so is it we can safely assume that all the Glaxo products -- GSK products will be manufactured in SEZ and (multiple speakers)?

No, there's no connection between the two.

And are we planning to transfer any betapharm products to SEZ?

Possible in the future.

Possible in the future but SEZs are a couple of years away, so --

But we've already taken the land, and the construction, as you mentioned, is then going to start.

Yes, yes.

So by next year, by FY11, we can expect SEZ on-stream. And is it possible that at a 12 to 18 month gap GSK products will be shifted there, or --?

I think this is all a logistics issue, which will pan out depending on the product, depending on the market. So there is no general answer that certain markets will be served from the SEZs. As the volumes increase, we'll move into the SEZs.

And from the existing [EU] facilities, also, you can -- you'll be able to move the products?

Yes, we can.

Okay. Thank you so much and all the best, sir.

Thank you.

Thank you, Mr. Kapadia. I would now like to hand the floor back to the management of Dr. Reddy's for closing comments. Please go ahead, sir.

Thank you, Melissa, and thank you, everybody, for joining us on the call. If there are any queries, IR desk will available to resolve them, please. Thank you and good evening.

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